Four brothers and an unrelated individual, who were actively involved in a succession of construction projects, through their respective management corporations (of which they and their spouses were employees), each subscribed for 20% of the shares of the particular ‘Operator” (which had no employees) that was formed to carry out each such construction project. Towards the conclusion of the project, a management fee is paid to the management corporations, equivalent to 20% of sales. After noting that this structure appeared to be intended to maximize the small business deductions by the five managementcos, CRA stated:
According … Hughes Homes … 98 DTC 1082 … taxpayers have the burden of demonstrating that the fundamental reasons for the existence of the corporations are not tax-related. … [I]t seems unlikely that the corporate structure was put in place by the Individuals for reasons other than tax:
- … an operating corporation is created and used for each of the projects involving a real business risk;
- the payment of management fees to the management corporations instead of the payment of dividends (if the Operator had paid dividends, the management corporations would have been specified investment business corporations);
- … 4 out of 5 of the individuals are related by blood.