MACDONNEL, C.C.J.:—This is an appeal by Famous Players Canadian Corporation, Ltd., (which I shall hereinafter refer to as the corporation) from an assessment of $200,000.00 in respect of income which it is alleged to have received from its subsidiary companies during the year 1932. No return was in fact filed by the corporation, but the City has assessed the arbitrary sum of $200,000.00 in order that the legal points involved may be decided.
The point in the case is this: The corporation has been assessed for business assessment under sec. 9 of The Assessment Act, R.S.O. 1927, ¢. 238. The corporation contends that, this being. the case, it is not liable to be assessed for income received from its subsidiaries by reason of the provisions of sec, 10(1) (b) of The Assessment Act which reads as follows:
" ‘ Every person although liable to business assessment under section 9 shall also be assessed in respect of any income not derived from the business in respect of which he is assessable under that section.”
It is contended on behalf of the City that all moneys received by the corporation from these subsidiaries represents income from investments and not from the business of the corporation, and that, therefore, the corporation is assessable to the extent of such moneys received for income. The corporation contends that all the moneys received are derived from its business.
Letters patent incorporating the corporation under the laws of the Dominion of Canada were issued on the 23rd of January, 1920. The main object of the corporation is to construct, purchase, manage and maintain theatres. Among the ancillary powers are the following :
il (c) To assist in the promotion, organization, development or management of any corporation or company having similar objects and to raise and assist in raising money and to aid by way of bonus, loan, promise, endorsements, guarantee the payment of the principal and the interest of bonds, debentures or other securities or otherwise, any other theatre company or corporation and to offer for public subscription any shares, stock, bonds, debentures or other securities of any such other company or corporation and to guarantee the payment of dividends or interest on any stocks, shares, debentures or other securities issued by or any other contract or obligation of any such company.
"’(k) To purchase, lease or otherwise acquire the whole or any part of the business, property, franchise, good-will, rights and privileges held or enjoyed by any persons or firm or by any corporation carrying on any business which the company is authorized to carry on or possessed of property suitable for the purposes of this company, and to pay therefor in fully paid-up or partly paid-up preference or ordinary shares of the company, or in the bonds, debentures or other securities of the company or otherwise, and to undertake the liabilities of any such person, firm or corporation, and to exercise the rights, powers and franchises of any corporation whose capital stock is owned by this company in the name of such company or in its own name.
"‘(1) To enter into partnership or any arrangement for sharing profits, union of interests, co-operation, joint adventure, reciprocal concession or otherwise with any company carrying on or engaged in or about to carry on or engage in any business or transaction which this company is authorized to carry on or engage in any business or transaction capable of being conducted so as directly or indirectly to benefit this company, to lend money to, guarantee the contracts of or otherwise acquire shares and securities of any such company, and to sell, hold, re-issue, with or without guarantee or. otherwise deal with the same.
"(m) Notwithstanding the provisions of section 44 of the said Act, to purchase, take or acquire by original subscription or in exchange for the shares, bonds, debentures or other securities of this company or otherwise and to hold, sell, or otherwise dispose of shares, stock, whether common or preferred, debentures, bonds and other obligations in any other company having objects similar in whole or in part to the objects of this company, or carrying on any business capable of being conducted so as directly or indirectly to benefit this company, and to vote all shares so held through such agent or agents as the directors may appoint.’’
It is argued on behalf of the corporation that, pursuant to the powers above set out, it has found it convenient to carry on its business partially through owning and operating theatres itself, and partially through acquiring varying amounts of shares in, and managing, subsidiary corporations all of which, however, do nothing but own and operate theatres. It has set up a complicated organization of subsidiary companies which I shall not attempt to describe in detail. Full information is given in exhibit 4 which was filed at the hearing of the appeal. There are in all 76 subsidiaries, 22 of which are wholly owned by the corporation. In the greater portion of the remainder, 50 per cent of the stock is held. There are only five or six subsidiaries in which varying amounts of stock less than 50 per cent is owned, the smallest holding being 33 per cent.
But this is not the whole story. There are interlocking boards of directors. The directors of the subsidiaries are employees of the corporation, except in nine companies, and in these companies the corporation appears to have virtual control of the policy and management of the companies, by reason of the fact that they hold the franchise arrangements in connection with the supply of pictures, and the subsidiaries are therefore practically dependent upon the corporation in order to operate. In most cases, no separate books are kept of the subsidiary companies. After costs of operation have been paid each week out of the receipts of the theatre, the balance of ‘the theatre bank accounts are turned over to the corporation, and the corporation pays any other liabilities of the subsidiaries. The executive committee of the board of the corporation, which receives no remuneration from the subsidiaries, determines policy, makes all contracts and bookings, fixes admission prices and buys supplies.
A somewhat different arrangement is necessary when there are private shareholders. In these cases separate books are kept by the corporation and a rental is paid by the corporation which is sufficient to pay dividends upon the preferred stock. The remainder of the receipts are then apparently paid over to the corporation.
In addition to the arrangements outlined above there are one or two special arrangements more or less in the nature of partnership agreements as a result of which the corporation obtains a share of the profits or pays a share of the losses of theatre enterprises.
It is contended by the corporation that it is impossible for them to work out a profit and loss statement for each subsidiary as no attempt is made to apportion the administration costs. An example of the difficulty of this is as follows. In 1926 the corporation bought the franchise of the Fox Film Corporation, which was a distributing firm, for $600,000. This franchise enabled it to obtain pictures controlled by the Fox interests which they allowed its subsidiaries to use. No charge of any kind was made to the subsidiaries for this advantage.
Another feature which complicates the situation is the fact that in order to carry out its policy the corporation finds: it advisable to incorporate subsidiary companies for the purpose of purchasing theatres which it subsequently closes, and then pays the carrying charges in order that some of its other theatres may be enabled to operate at a profit.
From the above it may be seen that only a portion of moneys received are in the form of dividends.
It should also be pointed out that the corporation also owns the freehold of, and operates, a great number of theatre properties directly.
It may well be contended on behalf of the corporation that, as the basis of income taxation is that it shall be "profit or gain”? from a trade, profession or calling, etc., and while dividends and interest are included in the word ‘ " income ‘ ’, they are taxable only if they represent profit or gain to the individual (this is understood upon reference to sec. 1(e) of The Assessment Act wherein “‘income’’ is defined) ; also that in any event it should not be taxed upon the gross amount of the receipts from subsidiaries. See Re Stout and City of Toronto (1927) 60 O.L.R. 313. In view, however, of the conclusion which I have reached, it will not be necessary for me to deal with these contentions.
After consideration of the facts disclosed at the hearing and in particular of the provisions of the charter of the corporation, I have reached the conclusion that the corporation is doing nothing else than carrying on the business which it is authorized to do by its letters patent, and that, therefore, the receipts which it is desired to assess are derived from the business of the corporation. It is obvious, of course, that any moneys which it might invest in corporations other than theatre corporations would no doubt be taxable as investments, but none of its subsidiaries are of this class. There is authority for the proposition that profits from a wholly owned subsidiary would be income from the business of the corporation. See Hatch v. London and North-western Railway Company (1899) 15 T.L.R. 246. Also I am advised that the late Judge Denton recently decided in the ease of Re Canadian Paramount Corporation and City of Toronto, that income from a wholly owned subsidiary was income from the business of the corporation. This being the case, I cannot see where it is possible to draw the line with respect to the varying degrees of ownership disclosed in the evidence.
Upon the hearing of the appeal, the City relied upon the decision of The Ontario Railway and Municipal Board in Re City of Toronto and G. T. Fulford Co., Ltd. (1922) 22 O.W.N.
50. In that case it was held that dividends: and accumulated earnings paid to the corporation by its subsidiaries in Australia, Africa and the United States were assessable as income not derived from the business of the corporation. I think, however, that I should distinguish this case upon the grounds that the report of the decision does not show that there was, (a) any central direction or control of the subsidiaries, or (b) any power of the corporation to carry on its business by the purchase of shares in other companies. There is a great difference between a holding company which does nothing but clip coupons and a company such as Famous Players Canadian Corporation. Also the provisions of the charter of the corporation referred to above seem to me to be of paramount importance.
It was also contended that, as the control of the corporation is vested in the Paramount Publix Corporation of New York, the result of allowing the appeal would be to allow the corporation to a large extent to evade taxation. On the other hand, it should be remembered that there are a number of resident shareholders who would in effect be paying double taxation if the assessment were upheld. The advisability of enabling municipalities to reach dividends paid by Canadian subsidiaries of large American enterprises to their parent companies is a matter for the Legislature to decide.
For the reasons indicated, I think the appeal should be allowed and the assessment set aside.
Judgment accordingly.