Minister of National Revenue v. Howson & Howson Limited and Howson & Howson Co. (Cargill) Limited, [1970] CTC 36, 70 DTC 6055

CATTANACH, J.:—These are appeals by the Minister from decisions of the Tax Appeal Board.

The two respondents named in the above styles of cause are companies duly incorporated pursuant to the laws of the Province of Ontario.

The Minister, pursuant to Section 138A(2)* [1] of the Income Tax Act directed that the two named respondents be deemed to be associated with each other in their 1964 taxation years and accordingly assessed the respondents at the rate of tax prescribed by Section 391 [2] of the Income Tax Act as corporations associated with each other.

The respondents objected to their assessments. The Minister confirmed the assessments. The respondents thereupon appealed to the Tax Appeal Board. The Tax Apepal Board allowed the appeals and the Minister now appeals from those decisions.

The present appeals were conveniently heard together by consent because both appeals arose from the identical circumstances and transactions which affect both respondents’ liability to income tax in an identical manner.

These circumstnees and transactions are accordingly outlined.

The only witness who testified was William Frederick Howson, presently the president of the respondent Howson & Howson Limited, but who was the vice-president in 1964, the taxation year in question when his father was the president.

The Howson family has been in the milling business for at least three genarations. The letterhead of the respondent Howson & Howson Limited states that the business was established in 1865. While that statement is substantially true, it is not legally accurate because there was a succession of corporate entities set up to conduct various portions of the overall business.

If my recollection of the evidence is correct, Mr. W. F. Howson’s grandfather and his brother began the operation of a flour and feed mill in Wingham, Ontario as a partnership in 1865.

It is my understanding that Mr. W. F. Howson’s father, Frank R. Howson, then succeeded to that business which was conducted as a partnership with his brother, George W. Howson, but it seems that Frank R. Howson was the dominant partner.

In 1946 Mr. W. F. Howson returned from service in the second world war and entered into the business of the flour and feed mill at Wingham, Ontario in partnership with his father. The partners wished to expand their business and so enlarged the mill at Wingham.

Still in furtherance of their policy of expansion in 1947 they bought a mill at Blyth, Ontario which was then operating exclusively as a feed mill. They started flour milling in conjunction with feed milling at the Blyth mill by the installation of machinery and hiring of personnel which took approximately a year to do.

In 1949 they bought a flour and feed mill in Cargill, Ontario. The flour milling portion of that mill was closed down, the machinery was moved to Blyth and the flour export quota was transferred from the Cargill mill to Blyth mill. The Blyth flour milling was increased and the Cargill mill was restricted to the milling of feed.

In 1950 the mill at Wingham was struck by lightning and completely destroyed. Consideration was given to rebuilding this feed mill or buying out a competitor. The competitor refused to sell and so it was decided to further increase the production capacity of the Blyth mill and retain a retail feed outlet at Wingham.

Mr. Howson testified that all three businesses were carried on by a partnership with separate books kept for each business. From 1946 to 1949 the partners consisted of Mr. W. F. Howson and his father. From 1949 Miss Caroline Wellwood, who was later married and changed her surname to MacDonald, was admitted to the partnership. She was a cousin and had been a secretary in the business for some time. In 1953 an uncle, George

W. Howson, became a partner. If my recollection of Mr. How- son’s testimony is correct, his uncle George was associated with the Wingham retail feed store.

In 1953 three companies were incorporated (1) Howson & Howson Limited, which acquired the Blyth mill, (2) Howson & Howson (Wingham) Limited, which acquired the Wingham retail feed store and (3) Howson & Howson (Cargill) Limited, which acquired the Cargill mill.

The issued shares in Howson & Howson Limited from its incorporation until December 31, 1955 were held as follows:

From December 31, 1955 until April 29, 1959 the shares in Howson & Howson Limited were held as follows:

There was no evidence adduced as to how the shares in Howson & Howson (Cargill) Limited were held.

The issued shares in Howson & Howson (Wingham) Limited, from its incorporation in 1953 until the sale of its assets in 1955 to Howson & Howson Limited were held as follows:

Mr. Johnston is the head miller at the Bly th mill and has held that position for a number of years.

These three companies, Howson & Howson Limited, Howson & Howson (Cargill) Limited and Howson & Howson (Wingham) Limited carried on business until 1956.

In 1956 Howson & Howson Limited purchased the assets of Howson and Howson (Cargill) Limited and Howson & Howson (Wingham) Limited and during the period between 1956 and 1959 the businesses previously carried on by the three companies were carried on by Howson & Howson Limited alone and the charters of Howson & Howson (Cargill) Limited and Howson & Howson (Wingham) Limited were surrendered and those two companies were dissolved.

Mr. W. F. Howson described this as ‘‘regrouping’’, to bring things together to operate as one company and to cut down on “the members of the firm”. By this, I take it, he meant that the three businesses would be amalgamated into one under Howson & Howson Limited and that the shareholdings in that company would be restricted to his own immediate family and that the shareholders in the other two companies would be eliminated. Upon reviewing the shareholding in Howson & Howson Limited as outlined above it apears that Mrs. George W. (Addie) Howson and Mr. Johnston who had held shares in Howson & Howson (Wingham) Limited were eliminated as shareholders and did not become shareholders in Howson & Howson Limited.

It is quite obvious that when Mr. W. F. Howson referred to cutting down the members in the firm, he meant reducing the number of those who were shareholders in all three companies.

Subsequently Miss Wellwood, who was a shareholder in Howson & Howson Limited from 1955 to 1959, ceased to be a Shareholder of that company, presumably upon her marriage and she became a shareholder in Howson & Howson (Cargill) Limited, the other respondent herein.

George W. Howson, an uncle of W. F. Howson, was a minor shareholder in Howson & Howson Limited from 1959 until 1964 when he ceased to be a shareholder.

After 1964 the shareholders in Howson & Howson Limited were five in number, being Mr. W. F. Howson, who held the majority of the common shares, his father whose common share- holding was greatly reduced and W. F. Howson’s three sons who held common shares in equal numbers.

Accordingly, Mr. W. F. Howson accomplished the purpose of concentrating the ownership of Howson & Howson Limited in himself and the male members of his immediate family, that is his father and sons.

In order to compete successfully in the flour market it was decided in 1959 to expand the flour milling capacity of the Bly th mill by the installation of more modern and efficient machinery, thereby increasing the number of bags of flour milled per man hour expended. On the completion of this installation the flour production of the Blyth mill was increased approximately twofold.

The installation of the machinery was done in progressive stages over a period of two years without perceptible interruption in production. The machinery was ordered from England and took time to deliver. The mill would run for about two months to build up sufficient stock to meet the needs of customers, then shut down for two weeks to install a particular machine that had been delivered. The installation work was done by the employees of the company and was completed late in 1961. Minor alterations were made in the building to accommodate the new machinery.

The total cost of this expansion was estimated by Mr. Howson at $100,000 over the two year period, of which $80,000 was the cost of the machinery and $20,000 was the cost of labour. This cost was financed by drawing, as need arose, against a line of credit that Howson & Howson Limited had had for many years with its bank and was repaid from current earnings. The bank did not require security by way of mortgage but apparently relied upon its knowledge of the integrity of its longtime customer.

In 1959 at the time this expansion of the Blyth mill was embarked upon, the other respondent herein, Howson & Howson (Cargill) Limited was incorporated. Howson & Howson Limited thereupon sold the Cargill mill to this newly incorporated company.

However Howson & Howson Limited continued to operate the retail feed store at Wingham until 1962 when that store was sold to Howson & Howson (Cargill) Limited. The shareholding in Howson & Howson (Cargill) Limited was as follows from its

incorporation until May 1961 :

Common Preference

Mary Margaret Howson (wife of

W. Fred Howson)	333	400
Ruby Howson (wife of Frank R. Howson,
the father of W. Fred Howson)	334	400
Caroline Wellwood (cousin of W. Fred
Howson and later Mrs. MacDonald)	333	400
	1,000	1,200

From May 1961 until 1964 the distribution of the shareholding in Howson & Howson (Cargill) Limited changed as follows:

Whereas from 1959 to May 1961 the shares in Howson & Howson (Cargill) Limited were held equally by the three shareholders, from May 1961 forward Mrs. W. Fred Howson became the preponderant majority shareholder.

Mr. W. Fred Howson testified that there were a number of reasons why Howson & Howson (Cargill) Limited (one of the respondents herein) was incorporated in 1959 and the Cargill mill sold to it by Howson & Howson Limited (the other respondent).

What I consider to be the paramount reason he gave was the risk attendant upon the expansion of the flour milling facilities at the Blyth mill.

He testified that the flour milling business was a risky one in confirmation of which he pointed out that a large number of flour mills in the immediate area had gone out of business or had gone bankrupt. He specifically mentioned the failure of mills in 1945 in Wiarton, Carlingford and Goderich, all in very close proximity to Blyth, Cargill and Wingham. During the course of his testimony and in another context, he mentioned that the Blyth mill was the only flour mill in Huron county.

On the other hand, he said that the feed milling business was more stable than the flour milling business. He pointed out that there was a. feed mill in almost every town buying its raw material in its local area and serving that area.

The second reason he advanced for the creation of separate corporate entities, which I believe to be inextricably intertwined with the first reason given by him, was his desire to provide a separate investment for his father’s wife, his wife and his seven children who, in 1964, were in several stages of completing their education. His oldest son, who he hoped would join and carry on the family business, was in agricultural college, and the others were in high school and public school. This reason, as I see it, amounts simply to this, if the flour mill should fail, then there would be the feed mill to fall back upon.

A still further, and third reason, given by Mr. Howson for the establishment of Howson & Howson (Cargill) Limited, was that the business to be conducted by it was radically different from the flour milling business conducted by Howson & Howson Limited at Blyth.

The mill at Blyth was devoted 75% to flour milling and 25% to feed milling. The Cargill mill was devoted exclusively to feed milling. The business at Cargill was conducted on a retail basis, whereas the four milling business at Blyth was conducted on a wholesale basis.

The feed milling business at Blyth mill was not sold to the Cargill mill because it was carried on under the same roof as the flour milling and it would be difficult if not impossible to separate those business activities. Most of the oats and barley for the feed milling operation was bought locally within a twenty mile radius but more recently some western Canadian feed wheat was purchased. This western Canadian grain was shipped from the Lakehead by lakers to Owen Sound, Ontario and trucked to Cargill, a distance of approximately 35 miles. The greater bulk of the wheat for flour was western wheat which was shipped to Goderich, Ontario and trucked from there to Blyth, a distance of 15 to 20 miles. I should also point out that the retail feed store was not sold to the Cargill mill immediately, but was so sold some three years later and in the meantime was conducted by Howson & Howson Limited in conjunction with its flour and feed milling at Blyth. Mr. Howson, in addition to the different nature of the respective businesses and different sources of supply, also mentioned the distances between the mills as a difficulty which dictated the creation of separate entities to conduct the respective businesses. Cargill is 38 miles northerly of Blyth and Wingham lies between about 10 miles north of Blyth. As a further difference, not in the businesses but in their conduct was that Howson & Howson Limited utilized a line of credit with its bank but Howson & Howson (Cargill) Limited did not.

As a fourth and concluding reason for the creation of separate entities, Mr. Howson put forward the reason that if it were decided to sell the Cargill business it would be much easier to sell a smaller business and if it were a self-contained company.

Significantly Mr. Howson did not attribute as a reason for splitting up the enterprise of Howson & Howson Limited the acknowledged reduction in the amount of taxes that would result. In response to direct questions by counsel for the respondents, he stated that the respondent Howson & Howson (Cargill) Limited would have been incorporated even if there had been no tax advantage and that if the present appeals should be decided against the respondents they would continue as separate entities and would not amalgamate the respondents as was formerly the case because, as he put it, they were doing the job for them that they wanted them to do.

Mr. Howson frankly admitted he was well aware of the tax advantage and added that none of the decisions to incorporate the companies I have outlined above were taken without first obtaining the advice of the companies’ accountant and solicitor and the relative advantages and disadvantages were thoroughly considered. I might add that throughout the existence of all the companies the same firm of accountants was engaged.

I reproduce hereunder in tabular form a summary of the sales and net profits of the companies during their existence by the appropriate years and in the case of Howson & Howson Limited the salaries paid to the executives and net profits after salaries were deducted from sales.

HOWSON & HOWSON LIMITED AT BLYTH, WHEN ALL THREE BUSINESSES WERE CONDUCTED BY

	HOWSON & HOWSON LIMITED
Y ear	Sales	Sales	Net Profits	Salaries
1956		$1,394,086.69 $19,042.18 —
1957		1,259,855.18	16,093.56	$ 45,324
1958		1,439,560.99	23,307.70	55,940

HOWSON & HOWSON LIMITED, WHILE EXPANSION OF MILL AT BLYTH IN PROGRESS

Year	Sales	Net Profits	Salaries
1959	$1,334,271.66	$23,972.19	$ 45,422
1960	1,349,188.16	24,172.39	40,000
1961	1,410,449.63	33,278.57	40,504

WHEN EXPANSION COMPLETED AND FLOUR MILLING CAPACITY INCREASED

1962	1,987,917.82	34,416.66	25,302
1963	2,237,199.00	35,948.27	44,044
1964	2,230,850.65	34,653.33	57,410
1965	2,243,849.95	34,631.53	67,899
1966	2,647,210.82	34,967.90	101,917

HOWSON & HOWSON (CARGILL) LIMITED (Respondent)

Year	Sales	Net Profits
1959	$176,426.02	$13,922.00
1960	312,565.85	18,900.00
1961	350,872.35	27,331.36
1962	518,269.15	34,482.70
1963	568,501.39	34,964.08
1964	514,565.28	34,067.78
1965	490,669.93	34,708.05
1966	516,786.06	34,661.45

The taxation rates under Section 39(1) of the Jncome Tax Act were

for the taxation years 1952 and 1953, 18% on the first $20,000 of taxable income and on the excess 47 % ;

for the taxation years 1955, 1956 and 1957, 18% on the first $20,000 and on the excess 45% ;

for the taxation year 1958, 18% on the first $25,000 and on the excess 45 % ;

for the taxation year 1959, 18% on the first $25,000 and on the excess 47 % ; and

for the taxation year 1961 and subsequent years, 18% on the first $35,000 and on the excess 47%.

In the taxation years 1953 to 1955 the net profits of Howson & Howson (Cargill) Limited, Howson & Howson (Wingham) Limited and Howson & Howson Limited, a respondent herein, when the three separate companies existed, were well below the first $20,000 on which the lesser rate of 18% was applicable.

From 1956 to 1958 when Howson & Howson Limited operated all three businesses, the net profits were below the amount of $20,000 in the years 1956 and 1957 and below the amount of $25,000 in the year 1958.

In the years 1959 and 1960 the net profits of Howson & Howson Limited were again below the first $25,000 on which the lesser rate of 18% was applicable as were the net profits of the other respondent herein, Howson & Howson (Cargill) Limited, incorporated in 1959.

In the taxation year 1961 and following years, when the first amount on which a lesser tax rate was applicable, was increased from $25,000 to $35,000 the net profits of both respondents were below the amount of $85,000 except in 1963 when the net profit of Howson & Howson Limited was $35,948. On referring to the summary of net profits of both respondents in the years 1962 onward, it will be observed that those profits are consistently less than the amount of $35,000 by an amount of never roughly more than $500.

Mr. Howson testified that if a year had been profitable the salaries of the officers of Howson & Howson Limited were increased because their efforts and a successful year merited such an increase. However, I cannot escape the conclusion that the salaries paid varied so that the net profit remained at a constant figure just below $35,000.

It was pointed out during the course of the evidence that in many years Howson & Howson Limited did not claim the maximum capital cost allowance permitted but I attach no particular significance to that circumstances because it might not have been advantageous to claim the maximum capital cost allowance in a particular year, but to postpone the claim to a subsequent year and because the net profits, which in this context I relate to taxable income, could be consistently maintained at approximately $35,000 by an adjustment of the salaries paid.

On the basis that the taxable income of each respondent is $35,000, I would roughly compute the tax saving by having two separate companies rather than one to be approximately $11,000 annually.

During the period from 1953 to 1956 when the business was carried on by three companies, each company had a resident manager with Frank R. Howson exercising a general overall supervision. From 1956 until 1959 when all three businesses were conducted by Howson & Howson Limited, the same provision for management prevailed and that provision continued from 1959 to date when Howson & Howson (Cargill) Limited was incorporated and purchased the Cargill mill from Howson & Howson Limited, with the exception that the overall supervision formerly exercised by Frank R. Howson was gradually assumed by his son W. Fred Howson.

By reason of the share ownership, Howson & Howson Limited and Howson & Howson (Cargill) Limited, the respondents, were not associated corporations in the 1964 taxation year now under review within-the meaning of Section 39(4)* [3] of the Income Tax Act. Mr. W. F. Howson frankly admitted that he was aware of the meaning of associated corporations within this section and the tax consequences which flowed therefrom and that the shares in the respective companies were so issued and held to avoid that result.

As intimated before, the shareholders of Howson & Howson (Cargill) Limited were Mrs. Fred Howson, Mrs. Frank R. Howson and Caroline Wellwood who were also the directors and officers of the company. None of the shareholders received dividends from the company. They did not receive salaries or directors’ fees. Mr. Howson testified that they did not need income and the profits were allowed to accumulate. They did attend shareholders’ and directors’ meetings but Mr. Howson testified that matters of policy in the company were determined by his father and himself. The signing authority for Howson & Howson (Cargill) Limited with its bank, was vested in Frank R. Howson and W. Fred Howson, neither of whom were shareholders, directors or officers of that company, Miss Wellwood, who was a shareholder, director and officer and Francis Layman who had been the manager of the Cargill mill since 1951.

Incidentally, Mr. W. F. Howson also mentioned in passing that a reason for the creation of the two corporations in 1959 was the incentive to Mr. Layman to increase efficiency, production and consequently profits with a resultant bonus supplementary to his salary, but he also testified that the payment of bonus was a matter of policy which would be determined by his father and himself. Accordingly, I fail to appreciate how such possible incentive to Mr. Layman can be a valid reason for the establishment of separate corporations.

Because the respondents herein were not associated corporations within the meaning of Section 39(4) of the Income Tax Act, the Minister directed that Howson & Howson Limited and Howson & Howson (Cargill) Limited be deemed to be associated with each other pursuant to Section 138A(2) of the Act and assessed the respondent companies in accordance with Section 39(1) [sic].

In so directing the Minister did so on the basis that he was satisfied that

(1) the separate existence of the companies in the 1964 taxation year was not solely for the purpose of carrying out the business of those companies in the most effective manner, and

(2) one of the main reasons for such separate existence was to reduce the amount of taxes that would otherwise be payable under the Income Tax Act.

In Alpine Furniture Company Limited et al. v. M.N.R., [1969] 1 Ex. C.R. 307; [1968] C.T.C. 532, I had occasion to consider an appeal from a direction of the Minister under Section 138A(2) and said at pages 316, 540 :

An appeal from an assessment made pursuant to a direction by the Minister under Section 138A(2) is provided in subsection (3) which reads in the relevant part thereof as follows:

“138A. . . .

(3) On an appeal from an assessment made pursuant to a direction under this section, the Tax Appeal Board or the Exchequer Court may

(a) confirm the direction;

(b) vacate the direction if

(ii) in the case of a direction under subsection (2), it determines that none of the main reasons for the separate existence of the two or more corporations is to reduce the amount of tax that would otherwise be payable under this Act; or

(c) vary the direction and refer the matter back to the Minister for re-assessment.”

Under this subsection this court is given the power to make an independent determination of the main reasons for the separate creation of the two appellant companies which the Minister has directed should be taxed as associated corporations.

Under Section 138A(2) the justification required for the exercise of the Minister’s direction is that (1) the separate existence of the appellants herein is not solely for the purpose of carrying on the business of those corporations in the most effective manner and (2) one of the main reasons for their separate existence is the reduction of taxes which appears to presuppose two conditions precedent to the exercise of the discretion by the Minister.

However under Section 138A(3) (b) (ii) this court may vacate the direction made by the Minister under subsection (2) if it determines that “none of the main reasons” for the separate existence of the two or more corporations is to reduce the amount of the tax payable and this court is not authorized by Section 138A

(3) to substitute its finding for that of the Minister under Section 138A(2)(a) that the separate existence of two or more corporations is not solely for carrying on the business in the most effective manner. It would seem to me that the findings of the Minister under paragraphs (a) and (b) of Section 138A(2) are, in reality, only one finding to the effect that the separate existence of two corporations is not solely for business purposes and is to reduce taxes for which reason reference is made to Section 138A (2) (b) in Section 138A(3) (b) (ii) and no reference is made therein to Section 138A(2) (a).

By Section 138A(3) this court is authorized on appeal from an assessment resulting from a direction by the Minister to (a) confirm the direction of the Minister, (b) vacate that direction, or (c) vary the direction which is comparable to the court’s power on appeals from assessments to income tax under Section 100(5) of the Act. Notwithstanding the difference in language an appeal under Section 138A(3) is made in the same manner as an appeal under Section 100(5) and is subject to the same principles paramount among which is that the onus is on the taxpayer “to demolish the basic fact on which the taxation rested”.

Thus the issue that emerges for determination is that none of the main reasons for the separate existence of the two respondents herein was to reduce the amount of taxes that otherwise would have been payable.

It was contended on behalf of the respondents that the motivating reasons for the establishment of the separate corporations were those outlined by Mr. W. Fred Howson in his testimony. It was readily conceded that a tax reduction would result and that the respondents were well aware of that tax advantage but it was contended that the motivating reasons were those given by Mr. Howson and that the tax advantage was merely incidental to those reasons and accordingly irrelevant.

The reasons advanced were fourfold,

(1) to obviate the risk inherent in the expansion of the Blyth flour mill,

(2) to provide a separate investment for the wives of Frank R. and W. Fred Howson,

(3) to conduct under different companies businesses that were substantially different and

(4) to facilitate the sale of the Cargill mill if need should arise.

Accepting the premise that these four reasons may well have influenced Mr. W. F. Howson and his fellow directors and shareholders in adopting the corporate structures they did, that premise does not determine the matter. As I have intimated before, for the appeal to succeed, I must be satisfied that none of the main reasons for the separate existence of the two respondents herein was to reduce taxes.

I cannot disabuse my mind of the fact that the risk of expansion involved was minimal. At one point in his testimony Mr. Howson stated that for the flour mill to survive, it was necessary to expand. Howson & Howson Limited had well established and continuing customers. There was no difficulty in financing the expansion which was done against an existing line of credit. Continued and greater success was anticipated following that expansion. This foresight was confirmed by an increase of approximately $1,000,000 in annual sales from 1963 forward.

I accept the testimony of Mr. Howson that the feed milling business is more stable than that of flour milling and accordingly it might be expedient to provide an investment for his wife and his father’s wife in the more secure business and that such a smaller and more secure business might be more saleable if need should arise.

It is also a legitimate reason for the creation of separate corporations that the businesses to be conducted by each corporation are different. I do entertain reservations however as to how necessary it was. These reservations are based upon the facts that the different businesses in different localities had been successfully carried on in conjunction by Howson & Howson Limited for three years and that at all times the day to day management was by local managers and that throughout the overall direction as to policy matters remained vested in Mr. W. F. Howson and his father.

Despite my reservation that the risk foreseen by Mr. Howson consequent upon the expansion of the flour milling was not as great as he anticipated, nevertheless, there is always inherent in any business and any expansion of that business an element of risk which a prudent business man is entitled to safeguard against. Neither do I purport to conclude that the different nature of flour milling and feed milling and the distance between the locations of the three businesses are not valid reasons for the creation of the separate entities here involved and may well have influenced the ultimate decision to create them.

However, the fact that the four foregoing reasons may well have been reasons that entered into the decision to create separate entities does not dispose of the critical issue upon which the present appeals turn which is whether one of the main reasons for doing so was the consequent tax reduction.

This question is one of fact to be decided upon the evidence adduced and the proper inferences to be drawn from that evidence.

The onus is on the respondents to establish that reduction in the amount of income tax that would have been otherwise payable was not one of the main reasons for the separate existence of the respondents. In my opinion the respondents have failed to discharge that onus.

Mr. Howson was fully aware of the tax savings that would be effected. This he admitted candidly. The executive salaries which were taken were so geared that the net profits of Howson & Howson Limited were maintained consistently just below the amounts of $25,000 and $35,000 when those amounts were those on which the lesser rate of income tax was applicable.

All decisions to incorporate companies throughout the history of the Howson family enterprise, were undertaken only after thorough discussion with the accountant who was employed at all material times and w ith legal advisers. There is no question that the tax position was discussed and considered. I should expect that the accountant’s advice was sought and followed with respect to the amounts of the executive salaries to be taken in each year with the effect on net profits in mind as well as the capital cost allowance to be claimed.

After having given careful consideration to all facets of the evidence adduced, I am led to the conclusion that one of the main reasons for the separate corporate existence of the respondents herein was the reduction in the amount of income tax payable.

I have reached this conclusion despite the protestation of Mr. Howson that the reasons for the creation of separate entities were the four reasons of business considerations which he outlined in his testimony and while he knew of the tax reduction which would follow, that was not a reason which influenced the decision to do so. He said that the separate corporations would have been incorporated even if no tax advantage resulted and that if the respondents were deprived of the tax advantage they might enjoy, they would not be amalgamated.

The President of this Court commenting on the phenomenon of the evidence of witnesses with an obvious interest had this to say in Zavadiuk v. M.N.R., [1967] C.T.C. 447 at 450:

I did not find the appellant’s evidence persuasive. He was obviously doing his best to put forward a view of the facts that would support his appeal. His evidence seemed to me to be an example of how a person trying to recall events of the past can persuade himself that he actually remembers facts favourable to himself that did not actually occur. This is not an uncommon phenomenon in the courts and, when it occurs, the person involved has frequently brought himself to the point where he honestly believes what he says.

For the reasons I have outlined, I do not find Mr. Howson’s evidence persuasive. To me it is an example of discarding an unfavourable fact and convincing himself that it did not exist.

I cannot credit that the tax advantage, of which Mr. Howson was well aware, was not one of the main reasons for the separate existence of the respondents, although there were others which entered into the ultimate decision.

I, therefore, confirm the direction of the Minister and allow the appeals with costs.