ANGLO-B.C. Distributors Ltd. v. Minister of National Revenue, [1970] CTC 138, 70 DTC 6105

SHEPPARD, D.J.:—The issue is whether the appellant, Anglo- B.C. Distributors Ltd. and North West Distributors Ltd. were associated companies within the Income Tax Act, Section 39(4) during the taxation years 1962, 1963 and 1964, and in particular whether North West Distributors Ltd. controlled Anglo- B.C. Distributors Ltd. within Section 39(4) (a) or whether both of the companies were controlled by Joseph Lipetz within Section 39(4) (b). Section 39(4) (a) and (b) of the Income Tax Act reads as follows:

39. (4) For the purpose of this section, one corporation is associated with another in a taxation year if, at any time in the year,

(a) one of the corporations controlled the other,

(b) both of the corporations were controlled by the same person or group of persons,

The facts follow:

North West Distributors Ltd. was incorporated in British Columbia on March 29, 1950 and its name changed to the present name in 1951. In the taxation years in question (1962, 1963 and 1964) the voting shares were held as follows:

Joseph Lipetz — 249

Edna Lipetz — 1

In 1961 North West Distributors Ltd., as a result of its advertisement by Lipetz, met Henry John Whyte who was familiar with the steel business and that resulted in an arrangement between Lipetz and Whyte to form a company to engage in the business of importing steel which Whyte would manage and for which Lipetz would provide the moneys by loan. Whyte did not want the North West Distributors Ltd. to have more than 50 per cent of the shares and Lipetz did not want Whyte to have over 40 per cent of the shares as Lipetz was providing the money by loan. After discussion it was arranged between Whyte and Lipetz that the shares in the new company, now the appellant, would be held as follows: to Whyte—40 per cent; to North West Distributors Ltd.—50 per cent, and Lipetz would have the right to designate those who would hold the additional 10 per cent. Lipetz eventually designated Harold Freeman, his personal friend and solicitor, to hold 1 per cent or 5 shares, for which Freeman paid $5, and John B. Lee, a valued employee of North West Distributors Ltd., to hold 9 per cent or 45 shares, for which he, Lee, paid $45. On November 21, 1961 the appellant was incorporated and in the taxation years in question (1962, 1963 and 1964) the shareholders were as follows:

From November 24, 1961 to December 30, 1964 the officers of the appellant were :

President: Joseph Lipetz

Vice-President: Henry John Whyte

Secretary: John B. Lee

and on December 30, 1964 the officers became :

President: John B. Lee

Vice-President: Henry John Whyte

Secretary: Joseph Lipetz

The Minister does not contend that Whyte held any shares for North West Distributors Ltd. or for Lipetz. He contends that Freeman or Lee or both held at least one share for Lipetz or for North West Distributors Ltd. and, therefore, the companies were associated within Section 39(4) (a) or (b). It is agreed that neither Joseph Lipetz or Edna Lipetz are related to Freeman, Lee or Whyte within the meaning of the phrase ‘related persons”? in the Income Tax Act. However, the respondent contends that one share at least was held by Lee or Freeman for North West Distributors Ltd., or for Lipetz, wherefor North West Distributors Ltd. and therefore Lipetz, who controlled the latter company, controlled the appellant.

It is a question of fact as to whether or not any arrangement was made; that was stated in C'.I.R. v. Brebner, [1967] 1 All E.R. 779, by Lord Upjohn quoting from the President of the First Division of the Court of Session at p. 784: “The issue raised in the case is a pure question of fact.’’ If an arrangement be found, a question of law may then arise as to whether such arrangement was sufficient to make the companies associated within the Income Tax Act.

It was open to Whyte, Lipetz and North West Distributors Ltd. so to order their affairs as to make the companies not associated. In Foreign Power Securities Corporation Limited v. M.N.R., [1966] C.T.C. 28 at 51, Noël, J. stated:

I should also add that though there is much to be said in favour of preventing the ingenuity expended by certain people to devise in some cases elaborate and artificial methods of disposing of income in order to avoid the payment of taxes because it thereby increases pro tanto the load of the tax on the shoulders of those who do not desire or know how to use such methods, in the absence of specific legislation to prevent such practices, “every man” (as stated in the words of Lord Tomlin in Duke of Westminster v. C.I.R., [1936] A.C. 1920) :

“is entitled, if he can, to order his affairs so as that the tax attracted under the appropriate Act is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioner of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay more.”

Or as expressed by Lord Sumner in C.I.R. v. Fisher’s Executors, [1926] A.C. 395 at 412:

“My lords, the highest authorities have always recognized that the subject is entitled so to arrange his affairs as not to attract taxes imposed by the Crown, so far as he can do so within the law and that he may legitimately claim the advantage of any express term or of any omissions that he can find in his favour in the taxing acts. In so doing, he neither comes under liability nor incurs blame.”

It would be quite otherwise if the shares were so held as to make the companies associated but pretended that the shares were not so held.

No doubt, the danger of the two companies being held associated was considered and steps may have been taken to have avoided that result. For example, on December 30, 1964 Lipetz resigned as president and became secretary, and Lee, an employee of North West Distributors Ltd., became president of the appellant. That was because of the chartered accountant having been acquainted with a judgment holding the casting vote of the chairman was sufficient to make the companies associated (perhaps M.N.R. v. Dworkin Furs Ltd. et al., [1967] C.T.C. 51), which result was later reversed on appeal. It is probable that before incorporation the danger of the two companies being associated was considered by Lipetz and his solicitor Freeman, but there can be no objection to Lipetz and his solicitor taking the proper steps to avoid the companies being associated. In CIR. v. Brebner, [1967] 1 All E.R. 779 at 784, Lord Upjohn said:

My Lords, I would conclude my judgment by saying only that, when the question of carrying out a genuine commercial transaction, as this was, is considered, the fact that there are two ways of carrying it out,—one by paying the maximum amount of tax, the other by paying no, or much less, tax—it would be quite wrong as a necessary, consequence to draw the inference that in adopting the latter course one of the main objects is for the purposes of the section, avoidance of tax. No commercial man in his senses is going to carry out commercial transactions except on the footing of paying the smallest amount of tax involved. The question whether in fact one of the main objects was to avoid tax is one for the Special Commissioners to decide on a consideration of all the relevant evidence before them and the proper inferences to be drawn from that evidence.

Lipetz, Lee and Freeman have given evidence that there was no arrangement. whatsoever purporting to require the. shareholder to vote his shares or any of them for the benefit of either Lipetz or North West Distributors Ltd. and on the contrary, each of the shareholders Lee and Freeman held his shares absolutely for himself as an investment, that the dividends were received by the registered shareholder and he paid the income tax payable on the dividends so received.

The respondent contended that the shares of Lee and Freeman were cheap, that is, that each holder paid a dollar for each share held by him and 10 per cent of the outstanding shares of the appellant were issued to Lee and Freeman respectively for the cost of $50 and that the purchase of these shares was not an investment. On the contrary, each of the shareholders Lee and Freeman has stated that his shares were purchased as an investment and not in any way held for the benefit of Lipetz or North West Distributors Ltd.

The respondent further contends that Lee was under the control of Lipetz, that is, Lee’s income was dependent upon his salary as an employee of North West Distributors Ltd., by which company he had been employed for some years and, therefore, that company was subject to the control of Lipetz, and that Freeman, being an old friend of Lipetz, and his general solicitor, was to some extent under the control of Lipetz. No doubt Lipetz in selecting Lee and Freeman did consider the fact that he had known them for years and that they were entirely reliable men. Did either Freeman or Lee give any undertaking to Lipetz or to North West Distributors Ltd. as to the shares, and if so, what was the undertaking? Freeman and Lee have each testified that he gave no undertaking which in any way bound the shares and that each by his purchase held his shares absolutely for himself as purported.

The respondent further contended that Freeman’s shares (being in two certificates) were endorsed in blank and a memorandum attached with each share certificate and these were allowed to remain in the same book which contain the minutes. The reason for this is stated by Freeman that because of his personal affairs he had made his will, and the memorandum attached to each certificate was in accordance with the will and with the intention of assisting the executors under his, Freeman’s, will, to deal with the shares promptly. The memorandum supports Freeman’s evidence and also excludes the shares being held for Lipetz or North West Distributors Ltd. because in the event of Freeman’s death, they are to pass either to his brother or Silvers, or Koffman but not expressed subject to any restriction on voting (Ex.A2, Nos. 5 and 6). The memorandum also provides for a proxy in a certain event and there is no limitation on the voting by such proxy at any meeting.

It is contended that some of the details of the evidence of Freeman differs from that before the Tax Appeal Board, but it is to be borne in mind that the appellant was formed in 1961 which is over seven years ago and therefore the precise remembering of all the details is impossible. In this case the question must be considered—who gave the undertaking, Lee or Freeman; to whom given, to Lipetz or to North West Distributors Ltd.; and what was the precise undertaking. There is no direct evidence of such an undertaking given by anyone and any inference to be drawn from the circumstances leaves open the question what was the precise undertaking and who gave it and to whom. On the other hand, each of Freeman and Lee have testified there was no such undertaking and nothing to limit the absolute holding of the shares purchased by him; in that they are supported by the direct evidence of Lipetz. In the result the evidence of Freeman, Lee and Lipetz must be accepted as there is no evidence to the contrary and therefore there was no arrangement by either Lee or Freeman with Lipetz or North West Distributors Ltd. which in any sense bound the shares, or other arrangement than the purchase of the shares absolutely by the respective shareholders. In the result the appeal is allowed with costs to the appellant. The assessment by the Minister is set aside and the matter referred back to be re-assessed according to these reasons.