C. P. Loewen Enterprises Limited (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Cattanach J.—Winnipeg, Manito-
ba, April 6; Ottawa, June 27, 1972.
Income tax—Direction of Minister deeming companies
associated—Reason for separate existence of companies,
whether to reduce taxes—Appeal—Income Tax Act, R.S.C.
1952, c. 148, s. 138A.
The Minister directed pursuant to section 138A(2) of the
Income Tax Act that seven companies should be deemed to
be associated with each other in 1965 and 1966 so that only
$35,000 of their combined income was taxable at 18%
instead of 47%. Apart from the Minister's direction four of
the companies were in any event associated with one other
under section 39(4) and the remaining three were also
associated with one other under section 39(4). One of the
three last-mentioned companies appealed from an assess
ment based on the Minister's direction.
Held, on the evidence appellant had discharged the onus
of establishing, as required by section 138A(3)(b)(ii), that
none of the main reasons for the separate existence of each
of the last-mentioned three companies was the reduction of
taxes, and accordingly the Minister's direction under section
138A(2) must be vacated.
Holt Metal Sales of Manitoba Ltd. v. M.N.R. [1970]
Ex.C.R. 612; Doris Trucking Co. v. M.N.R. [1968] 2
Ex.C.R. 501, referred to.
INCOME tax appeal.
Walter C. Newman, Q.C. for appellant.
L. P. Chambers, Q.C. for respondent.
CATTANACH J.—These are appeals from the
appellant's assessments to income tax by the
Minister for its 1964, 1965 and 1966 taxation
years. The assessments were made following
directions by the Minister dated August 16,
1968 pursuant to the provisions of section
138A(2) of the Income Tax Act that the follow
ing companies are deemed to be associated with
each other in their 1965 and 1966 taxation
years;
1. Loewen Holdings Ltd.,
2. C. T. Loewen & Sons (1957) Ltd.,
3. Build-A-Home Co., Ltd.,
4. Loewen Millwork (Canada) Ltd.,
5. Edward J. Loewen Enterprises Ltd.,
6. George F. Loewen Enterprises Ltd., and
7. The appellant herein, C. P. Loewen Enter
prises Ltd.
With respect to the 1964 taxation year
Loewen Millwork (Canada) Ltd., the fourth
company enumerated above, was not included
in the Minister's direction because that compa
ny was not incorporated until 1965.
It is admitted that the first three enumerated
companies were associated with each other in
the 1964 taxation year by virtue of section
39(4) of the Income Tax Act and similarly that
the first four mentioned companies were
associated with each other in the 1965 and 1966
taxation years.
It was also admitted that the last three
enumerated companies, that is, Edward J.
Loewen Enterprises Ltd., George F. Loewen
Enterprises Ltd., and the appellant herein, C. P.
Loewen Enterprises Ltd. were associated with
each other under the provisions of section
39(4).
Section 39(1) of the Income Tax Act provides
that the tax payable by a corporation under Part
I thereof is 18% of the first $35,000 of taxable
income and 47% of the amount by which the
income subject to tax exceeds $35,000. How
ever, subsections (2) and (3) of section 39 pro
vide that when two or more corporations are
associated with each other the aggregate of the
amount of their incomes taxable at 18% is not
to exceed $35,000.
Basically the position of the appellant is that
since the first four corporations are associated
by reason of section 39(4) of the Act, those
four corporations are entitled to the benefit of
the lesser rate of tax of 18% on income in the
amount of $35,000 and since the remaining
three corporations are also associated (but not
with the first four corporations other than by
the Minister's direction) those latter three cor
porations are also entitled to the benefit of the
lesser rate of tax of 18% on income to the
extent of $35,000.
In short the appellant contends that there
should be two bases of $35,000, one for the
first four corporations and the other for the
three remaining corporations whereas it is con
tended on behalf of the Minister that there
should be but one base of $35,000 applicable to
all seven corporations.
It is also admitted and the appeals were
argued on the basis that but for the direction of
the Minister under section 138A while the first
four enumerated corporations, (1) Loewen
Holdings Ltd., (2) C. T. Loewen & Sons (1957)
Ltd., (3) Build-A-Home Co., Ltd. and (4)
Loewen Millwork (Canada) Ltd., are associated
with each other under section 39(4) of the Act
and the three remaining corporations, (1)
Edward J. Loewen Enterprises Ltd., (2) George
F. Loewen Enterprises Ltd., and (3) the appel
lant, C. P. Loewen Enterprises Ltd., are also
associated with each other under section 39(4)
the first group of four corporations would not
be associated with the second group of three
corporations.
The direction of the Minister under section
138A with respect to the 1964 taxation year
deemed all six corporations then existing to be
associated with each other and with respect to
the 1965 and 1966 taxation years that all seven
corporations are deemed to be associated with
each other.
As I understood the position taken by counsel
for the appellant it was that since the first group
of four corporations were associated under sec
tion 39(4) as were the second group of three
corporations, resort cannot be had to section
138A to deem corporations associated which
are already associated by virtue of another sec
tion of the statute.
On the other hand the position taken on
behalf of the Minister was, as I understood it,
that since the three corporations of the second
group which are associated under section 39(4)
are deemed to be associated by the Minister
under section 138A(2) with one of the corpora
tions of the first group, and since the four
companies in the first group are associated
under section 39(4) it follows that the three
corporations of the second group are associated
with the four corporations of the first group by
reason of section 39(5) which provides that
where two corporations are associated, "or are
deemed by this subsection to be associated"
with the same corporation at the same time they
are deemed to be associated with each other.
This being so the blanket direction of the Minis
ter deeming all seven corporations to be
associated with each other is merely a conven
ient means to express on the overall fact. Those
which are associated by virtue of section 39(4)
remain so associated in any event and the Min
ister's direction under section 138A(2) is sur-
plusage, those which are not associated other
wise are deemed to be associated by virtue of
the Minister's direction.
However counsel for the appellant submits
that section 39(5) does not operate as contend
ed by counsel for the Minister for to do so (1)
two corporations must be associated or (2)
deemed by section 39(5) to be associated, with
the same corporation to be deemed to be
associated with each other. He predicates this
argument upon the assumption that no corpora
tion in the second group is associated with any
corporation in the first group (and from this he
excludes the association by virtue of the Minis
ter's direction under section 138A(2)) because
that is a deemed association and not an associa
tion without deeming nor are the corporations
deemed to be associated by virtue of subsection
(5) of section 39.
Therefore as I view the matter, two issues
evolve.
The first issue for determination is whether
one of the main reasons for the separate exist
ence of the corporations here in question was to
reduce the amount of taxes that otherwise
would have been payable.
Section 138A(2) which is applicable to the
1964 and subsequent taxation years reads as
follows:
138A. (2) Where, in the case of two or more corpora
tions, the Minister is satisfied
(a) that the separate existence of those corporations in a
taxation year is not solely for the purpose of carrying out
the business of those corporations in the most effective
manner, and
(b) that one of the main reasons for such separate exist
ence in the year is to reduce the amount of taxes that
would otherwise be payable under this Act
the two or more corporations shall, if the Minister so
directs, be deemed to be associated with each other in the
year.
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 pursu
ant 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 sepa
rate 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 reassessment.
Under this subsection this Court is given the
power to make an independent determination of
the main reasons for the separate creation and
existence of the corporations which the Minis
ter has deemed to be associated.
Under section 138A(2) the justification
required for the exercise of the Minister's direc
tion is that (1) the separate existence of the
corporations herein is not solely for the purpose
of carrying on the business of those corpora
tions in the most effective manner and (2) one
of the main reasons for their separate existence
is the reduction of taxes. This would appear 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 sepa
rate existence of 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
that the separate existence of two or more
corporations is not solely for carrying on busi
ness in the most effective manner. It seems to
me that the findings of the Minister under para
graphs (a) and (b) of section 138A(2) are, in
reality, only one finding to the effect that the
separate existence of two or more 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).
If I should decide this first issue in favour of
the appellant, that is, that a reduction in the
amount of taxes payable was not one of the
main reasons for the separate existence of the
corporations, then that decision would resolve
the appeals.
However should I resolve this issue in favour
of the Minister, that is, that one of the main
reasons for separate existence of the corpora
tions was a reduction in the amount of taxes
that otherwise would have been payable, then I
must consider the second issue which is the
applicability of section 39(5).
To resolve these issues it is necessary to
consider the facts peculiar to these appeals in
detail.
In 1908 Cornelius T. Loewen began a lumber
business at Steinback, Manitoba which he ope
rated in his individual capacity until 1943 in
which year the business was taken over by a
corporation under the name of C. T. Loewen &
Sons Ltd.
Steinback, Manitoba is a small town some
forty miles or so from the city of Winnipeg and
is a most unlikely place in which a business that
was begun to serve the needs of the immediate
community would expand to one of substantial
proportions marketing its products throughout
the prairie provinces, British Columbia and
Western Ontario, but this is what happened
despite disadvantage of location. The town was
not located on the main line of a railroad and is
not on a main highway. It is the centre of an
almost exclusively Mennonite population.
At the beginning Mr. Loewen turned his hand
to any business that would engender a profit,
but over the years concentrated mainly on a
retail lumber and hardware business.
In this business he was joined by his three
sons when they came of age, the oldest of
whom was Edward J. followed by George F.
and Cornelius T. Junior.
Undoubtedly one of the principal reasons for
the success of the business was the industry of
the father and his willingness to turn back to the
business most of the profits derived therefrom.
He apparently lived comfortably but frugally
and devoted his life fully to the development of
the business. It was his ambition to provide a
substantial business to be carried on by his
sons. His example was followed by his three
sons when they took over.
Another factor which contributed to the suc
cess of the business was that the Loewen
family were also Mennonites and as such
enjoyed the good will of the community as well
as a stable labour relationship. These advan
tages would not avail a prospective purchaser
from outside the community.
In 1951 Cornelius T. Loewen suffered a
stroke and became completely paralyzed. He
was bedridden until his death in 1960.
The three sons therefore bought their father's
share of the business for $225,000 payable over
a period of fifteen years and became the three
equal shareholders of the corporation. Because
the sons wanted to expand the business and
needed the capital to do so, it took them the full
fifteen years to discharge their obligation to
their father.
In 1955 Edward, the oldest son, who had
become the manager of the corporation, suf-
fered a severe heart attack. The brothers had an
agreement amongst themselves that the surviv
ing brother would buy the shares of a deceased
brother supplemented by life insurance policies
to achieve that end. The business had prospered
under the management of the three brothers to
such an extent that the insurance was not suffi
cient to purchase the share of a deceased broth
er and because of the policy of devoting all
profits to the expansion of the business as
working capital to that end, the money required
to purchase a deceased brother's share would
have to come from the business and deplete the
working capital essential to the policy of expan
sion. Because of Edward's health no further
insurance on his life could be obtained.
Based upon their experience in paying their
father the three brothers decided that the struc
ture of the business should be reorganized to
simplify the buying out of a deceased brother or
any possible sale to outsiders.
Accordingly C. T. Loewen & Sons (1957)
Ltd. was incorporated to operate the business.
This company purchased the business from C.
T. Loewen & Sons Ltd. and acquired the inven
tory. C. T. Loewen & Sons Ltd. changed its
corporate name to Loewen Holdings Ltd. and,
as indicated by its name, became a holding
company. It retained the land, buildings and
machinery and rented these assets to C. T.
Loewen & Sons (1957) Ltd., the operating com
pany, for an annual rent of 10% of the capital
cost of the assets leased to the operating com
pany. This annual rental began at approximately
$40,000 and increased to $100,000 over the
years.
The three brothers became the equal share
holders of C. T. Loewen & Sons (1957) Ltd.,
the operating company, and in Loewen Hold
ings Ltd.
The three brothers entered into a new buy
and sell arrangement whereby a surviving
brother or brothers could buy the shares of a
deceased brother or brothers held in C. T.
Loewen & Sons (1957) Ltd., the operating com
pany. The estate of the deceased brother would
continue to hold the shares in Loewen Holdings
Ltd. and derive rent and interest therefrom.
This arrangement provided a source of income
to the estate of a deceased brother and because
the investment in the operating company had
been greatly reduced, the amount required to
purchase the shares of a deceased brother was
correspondingly reduced.
The brothers entered the business of prefab
ricated homes and to facilitate the financing of
the purchase of such homes by purchasers,
incorporated a company under the name of
Build-A-Home Co., Ltd. in which they were the
three equal shareholders.
The business originally begun by the father
now consisted of the main business, that of
retail lumber and a woodworking shop.
In 1959 it was deemed advisable to expand
the millwork part of the business. In order to do
so a loan of $350,000 was obtained from the
Manitoba Development Fund, a government
agency. The amount of the loan was increased
by a further $50,000 in 1962. Security was
provided by issues of debentures both by C. T.
Loewen & Sons (1957) Ltd., the operating com
pany, and Loewen Holdings Ltd., the holding
company, and the personal covenants of the
three brothers and their wives.
A large plant was built and occupied in 1960.
With the further loan obtained in 1962 an addi
tion to the plant was constructed.
At this point in time Edward's health had
further deteriorated to the extent that Cornelius
T. took over as general manager of the
enterprise.
The millwork portion of the business pros
pered immediately. Curiously the lumber was
purchased in British Columbia, shipped to
Steinback, Manitoba, wrought there and some
of the finished products were shipped back to
British Columbia and sold there. A branch was
established in Edmonton, Alberta.
It was considered expedient, because of the
inter-provincial scope of the millwork business,
to incorporate Loewen Millwork (Canada) Ltd.
to handle this business in which company the
three brothers became equal shareholders.
At all times these four corporations, Loewen
Holdings Ltd., C. T. Loewen & Sons (1957)
Ltd., Build-A-Home Co., Ltd., and Loewen
Millwork (Canada) Ltd. recognized that they
were associated corporations within the mean
ing of section 39(4) of the Income Tax Act,
filed income tax returns on that basis and were
taxed on that basis. These circumstances lend
irrefutable credence to the submission of coun
sel for the appellant herein that one of the main
reasons for the separate existence of these four
corporations was not the reduction in the
amount of taxes that would otherwise be
payable.
Subsequent to the arrangement in 1957 when
the original corporation became a holding com
pany retaining the fixed assets which were
rented to the operating company, the assets in
the operating company had increased substan
tially. Added to this the operating company had
committed itself to the Manitoba Development
Fund to the extent of $400,000 and had a line
of credit with its bankers upon which it had
drawn about $450,000. Therefore there was a
debt of approximately $850,000 which had to
be met from current profits. Meanwhile the
worth of the operating company, C. T. Loewen
& Sons (1957) Ltd., had increased to $400,000.
In the view of the three brothers they were
faced with the identical problem with which
they were faced in 1957 at which time the fixed
assets were placed in the holding company and
the business in an operating company thereby
facilitating the purchase by the surviving broth
ers of a deceased brother's share in the operat
ing company and the income of the holding
company providing a source of revenue to the
deceased brother's estate.
If anything the situation now faced by the
three brothers was more critical than that faced
and solved as above indicated in 1957.
Edward's health was more critical. Insurance
could not be obtained on his life. There was
now the burden of debt created by the expan
sion of the millwork operation. The worth of
the operating company had grown well beyond
the worth of the business in 1957. As before the
brothers were short of ready cash with which to
purchase the share of a deceased brother
because of the policy of putting the bulk of the
profits back into the business to supply working
capital which was essential to the successful
conduct of the operating company's business
and to cope with the expansion of that business.
Because of the peculiar nature of the enterprise,
that is, its conduct as a family business and its
location in an ethnic community removed from
main transportation routes, the prospect of sale
to outside interests at a price equal to its real
worth was remote, although there was evidence
that offers had been received for integral parts
of the divergent business. It was my impression
that none of these offers was seriously
considered.
It was the opinion of the three brothers that
the business could not be continued by the
surviving brothers in the event of the death of
one of them as a family business. This was also
the opinion of the brothers' accountant advisers
who advised them that if a method were not
devised to meet this situation the business
would come to an end.
Meanwhile the three brothers were advancing
in years. Each had a family the members of
which were reaching maturity. Cornelius, the
youngest brother, had five sons and one daugh
ter, George, the middle brother, had three sons
and Edward, the eldest brother, had four sons.
At a family conference it was ascertained that a
large number of the family expressed the desire
to continue in the business of their fathers,
although some expressed an interest in follow
ing other pursuits. If my recollection is correct I
believe that Edward's sons or some of them
expressed the wish to engage in a different life
work. It was the natural desire of the brothers
to provide for their children's future. For some
that would mean a continuation of the business
as a family enterprise and for those who sought
a different career income from the business
would be the means of preparing for those
careers.
Basically the problem to be solved was how
to deal with the business in the event of the
death of a brother, first to ensure for its con
tinuance as a family business, second to provide
an estate for the brothers' families and lastly to
provide a ready and effective method of segre
gating the businesses making up the whole
enterprise for ready sale to an outsider or for
continuance by the individual brothers if such
became necessary. Accordingly two meetings
were held by the brothers, their accounting
advisers and their legal advisers. I am quite
certain from the evidence that at these meetings
alternative plans were not put forward and dis
cussed as to their relative advantages and disad
vantages. The problem was known to all present
and the desired objectives were also known. It
is my belief that possible solutions to the prob
lem which might have the effect of achieving
the desired ends were put forward and dis
cussed and that from those discussions a plan
evolved. I do not believe that different concrete
and formulated, plans were put forward and
contrasted one with the other. Rather I think
that only one plan evolved and was accepted.
That plan, which was adopted and implement
ed in 1962 is summarized.
Three further corporations were incorporat
ed. They were Edward J. Loewen Enterprises
Ltd., George F. Loewen Enterprises Ltd. and
C. P. Loewen Enterprises Ltd., the appellant
herein. These three corporations I have referred
to previously as the second group of companies
contrasting them with the first group of the four
previously existing corporations. The shares in
each of these three corporations were owned
beneficially for the children of the three broth
ers, as their names appear in the corporate
names, by trustees. As the children came of age
the shares held by them were transferred by the
trustees to the children and those children
joined as trustees for the remaining minor
children.
The trustees were most carefully selected by
the brothers to serve in that capacity. They
were men of certain business acumen but
primarily they were selected by reason of their
high moral and religious principles. They served
without remuneration but were not content to
act merely as nominees. Because of their reli
gious scruples they made it clear that they
would not take part in any nefarious tax avoid
ance scheme. It was only after they were
advised by the three brothers and the account
ancy advisers and satisfied themselves that
such was not the purpose but that the plan was
in furtherance of other legitimate reasons that
the trustees consented to act.
These three corporate entities formed a cor
porate partnership under the firm name and
style of C. T. Loewen & Sons.
The operating company, C. T. Loewen &
Sons (1957) Ltd. sold the business to the corpo
rate partnership, C. T. Loewen & Sons for a
price of $404,000, the net worth of the operat
ing company, so that the worth of the business
of that corporation (apart from the sale price as
an asset) was again reduced to what it was at its
original inception in 1957. The security for the
purchase price was a demand promissory note.
The corporate partnership then operated the
business, the profits from which were shared
equally by the three enterprise corporations,
Edward J. Loewen Enterprises Ltd., George F.
Loewen Enterprises Ltd. and the appellant, C.
P. Loewen Enterprises Ltd. and through those
corporations to the children of the three
brothers.
The three brothers did not own any shares
whatsoever in the three enterprise corporations,
nor did any corporations of which there were
shareholders, but they continued to hold their
shares, in equal proportions in C. T. Loewen &
Sons (1957) Ltd. and Loewen Holdings Ltd.
The corporate partnership leased the fixed
assets from the holding company, Loewen
Holdings Ltd. for the same rental as had C. T.
Loewen & Sons (1957) Ltd. when it was the
operating company. This assured the three
brothers an income from that source. The
brothers, by their wills, left their shares in the
holding company to their respective wives.
C. T. Loewen & Sons (1957) Ltd. then
became a management company. Through the
three brothers, management and direction was
given to the corporate partnership which paid a
fee for that service to the C. T. Loewen & Sons
(1957) Ltd., now the management company.
The three brothers each received a salary
from the management company.
In the result, therefore, the income of each of
the three brothers was reduced to their equal
share of the rental received by the holding
company and their salaries from the manage
ment company. All profits from the operating
corporate partnership eventually went to the
respective families of the three brothers in
equal shares. This arrangement the three broth
ers were willing to accept. Edward was contem
plating complete retirement in any event
because of his failing health and Cornelius, the
youngest brother felt that he had about ten to
fifteen years of active business life remaining.
George would have three years less.
The cost of purchasing a deceased brother's
share in C. T. Loewen & Sons (1957) Ltd. was
frozen at the purchase price of the sale in 1962
to the corporate partnership. Any growth in that
business was thereby ended and the growth was
transferred to the corporate partnership.
In the corporate partnership it was agreed
that should one of the corporate partners with
draw, the remaining partners could purchase the
withdrawing partner's assets from the trustees
for that partner. Mr. Cornelius T. Loewen testi
fied that the remaining corporate partners
would always have twice the amount necessary
to purchase the assets of the withdrawing part
ner. I found some difficulty in following why
this logic was not equally applicable with
respect to the surviving brother of a deceased
brother purchasing the assets of the deceased
brother in C. T. Loewen & Sons (1957) Ltd.
when it was the operating company. The expla
nation appears to be that it was the policy of the
three brothers to take modest salaries for their
own personal needs and that the profits which
would have accrued to them were ploughed
back into the company to provide working capi
tal which was essential to the conduct and
expansion of the business for which reason the
three brothers were always individually short of
ready cash and the amount required to purchase
a deceased brother's share would have to come
from the assets of the company thereby deplet
ing its working capital. Mr. Loewen testified
that since the profits in the operating corporate
partnership were divided three ways the growth
was reduced. From this I assume that the broth
ers were content that the business might remain
static or at least the growth might be retarded
rather than that all profits should be put back
into the operating partnership as had been the
case when they were devoting their energies
and ambitions to expanding the business.
At the meetings concerning the reorganiza
tion of the corporate structure of the enterprise
Cornelius T. Loewen testified that the brothers
were advised by one of their two chartered
accountant advisers that there was the possibili
ty of an income tax saving. That advice must
have been predicated upon the fact that the
original four companies, Loewen Holdings Ltd.,
C. T. Loewen & Sons (1957) Ltd., Build-A-
Home Co., Ltd. and Loewen Millwork (Canada)
Ltd. were associated corporations and as such
these four corporations could have allocated to
them an amount of $35,000 of taxable income
which would be taxable at the reduced rate of
18% rather than 47%.
However, the three enterprise corporations
were also accepted as being associated corpora
tions and similarly those three corporations
could have allocated among them a like amount
of $35,000 of taxable income also taxable at the
reduced rate. These two groups of corporations
were not associated with each other under sec
tion 39(4) of the Act. Section 138A(2) was not
enacted until 1963 applicable to the 1964 and
subsequent taxation years. Accordingly it could
not have been known in 1962 that there was the
possibility of the Minister directing that corpo
rations not associated under the law as it then
existed be deemed to be associated. Since the
corporations in existence prior to 1962 all had
taxable incomes in excess of $35,000 and that
all corporations after the incorporation of the
three enterprise corporations in 1962 and
including those three enterprise corporations
would continue to have taxable incomes in
excess of $35,000, the fact that there would be
a tax saving was almost a certainty.
Mr. Cornelius T. Loewen conceded that he
was well aware of the possibility that there
would be a tax saving but he testified that he
would have been prepared to adopt the forego
ing corporate reorganization even if no tax
saving resulted and he went even further to
state that he would be prepared to pay
increased taxes to secure the benefits that
resulted from the plan. While I believe Mr.
Loewen's testimony in this respect he could not
have been aware at the time the decision was
made that increased taxes could result, although
there would be expenses necessarily resulting
from the implementation of the plan by way of
legal costs and the like.
He did instruct that income tax returns for
the three enterprise corporations should be pre
pared on the basis of taxation at a reduced rate
but indicated that if the returns were not
accepted and assessment was made by the Min
ister at a higher rate he would be prepared to
pay that higher rate and the penalty for late
payment of 6% on the increase on the ground
that he would consider the increased tax as a
short term loan with interest thereon at 6%.
In view of this testimony it appears inconsist
ent that the direction of the Minister under
section 138A(2) and consequent increased
assessment should be opposed but this has no
real significance because if that assessment was
wrong in law the appellant is entitled to object
thereto.
Mr. Loewen candidly admitted that a reduc
tion of tax payable was a reason for adopting
the plan but consistently contended that it was
not the paramount reason.
As I understood the motivating reasons for
the establishment of the separate corporations
outlined by Mr. Loewen and reiterated by his
accountancy advisers, they were,
(1) to ensure the continuance of the busi
ness as a family enterprise,
(2) to provide an estate for the children of
the three brothers and
(3) to facilitate the segregation of the busi
ness into its component parts among the
brothers or their families or to facilitate the
sale of the component parts if such became
desirable.
I do not doubt that these were compelling
reasons present to the minds of the brothers
and their legal and accountancy advisers to
constrain them to select the creation of the
three enterprise corporations, the formation of
the corporate partnership, the sale of the assets
of the former operating company to the corpo
rate partnership, the change of the function of
the former operating company to that of a man
agement company and the retention of the fixed
assets in the holding company which were then
rented by the corporate partnership as a solu
tion to the problems with which they were
faced.
With respect to the first reason advanced that
the purpose was to ensure the continuance of
the business as a family enterprise, the agree
ment among the three brothers that the surviv
ing brothers would purchase the interest of a
deceased brother (a real and imminent possibili
ty) in the operating company, because of its
growth, would require an outlay which the
brothers could not meet from their own
resources or the life insurance so that resort
would be necessitated to the funds in the oper
ating corporation thereby depleting the working
capital to the extent that it would be impossible
to carry on or seriously impair that possibility.
The device of retaining the fixed assets in a
holding company and selling the business to an
operating company worked successfully in
1957.
The sincerity of the three brothers that this
was the motivating reason for their doing this in
1957 rather than a reduction in tax that would
have otherwise been payable is confirmed by
the facts that they acknowledged that the four
corporations existing at that time were associat
ed and they paid tax on that basis. It follows
that this plan would have been adopted at that
time regardless of tax consequences.
In 1962 because of the growth of the operat
ing company the same problem recurred aug
mented by the fact that there were debts to the
Manitoba Development Fund and the bank
which were a first charge on the assets and that
there were now thirteen children whose future
prospects depended upon the family business.
The creation of the three family enterprise
group of companies which formed a partnership
meant that the profits from all the businesses
were equally distributed to the families, an
estate for each of the families was created,
growth went to the partnership, the operating
company provided a continuation of the man
agement, the assets remained in the holding
company and all the surviving brothers had to
do in the event of the death of one of them was
to buy his shares in the management company.
It was, therefore, reasonable to adapt the
same plan which had served its purpose in 1957
to the situation that prevailed in 1962 with the
further embellishments.
That the plan provided an estate for the chil
dren of the three brothers is obvious.
Furthermore that the plan would facilitate the
segregation of the businesses was demonstrated
by subsequent events.
Edward decided that he would withdraw from
the business completely. It was agreed that
George would take over the retail lumber and
hardware business and Cornelius would take
over the millwork business. To do this the part
nership was dissolved and new leases for the
fixed assets were entered into by two of the
enterprise corporations, the appellant, C. P.
Loewen Enterprises Ltd. and George F.
Loewen Enterprises Ltd., with the holding
company.
Similarly the plan would have facilitated the
sale to outside interest if such were possible
and desirable. The likelihood of the sale of the
business as a whole was remote because of its
location and its location in an ethnic communi
ty. No such offers were ever received. There
had been offers for some of the component
parts of the business. Whether such would have
been accepted is doubtful because of the
avowed desire to have the businesses continued
by the children and because, in view of the
debentures outstanding, the return from a sale
to an outsider would have been small.
It is for these reasons that I have concluded
that these reasons were legitimate and compell
ing reasons which influenced the three brothers
in adopting the corporate structures they did in
1962. However this conclusion does not deter
mine the matter. For the appeals to succeed the
appellant must discharge the onus of establish
ing that none of the main reasons for the sepa
rate existence of the corporations was to reduce
taxes.
In Holt Metal Sales of Manitoba Ltd. v.
M.N.R. [1970] Ex.C.R. 612, the present Chief
Justice, then President of the Exchequer Court,
said at page 620:
There were many possible advantages to be gained from
the incorporation of the one or other or both of the appel
lants, which, I am sure, were in the minds of those respon
sible for taking the decision to incorporate them.
He then outlined some of those main advan
tages and continued on page 620 and 622:
... If the evidence were such as to convince me that some
or all of these and other reasons that have been advanced
were sufficiently compelling in the minds of William Holt
and his advisers to constrain them to select the creation of
the appellants in preference to all other possible methods of
achieving the same results, I should have thought that it
might be open to me to conclude that the probable reduction
in income taxes through having three companies instead of
one to enjoy the 18 per cent tax rate was not one of the
"main" reasons for deciding to have three companies
instead of one. An example of a case where other consider
ations dictated the creation of several corporations and the
income tax benefit arising therefrom was only an incidental
benefit, is Jordans Rugs Ltd et al v. M. of N.R. ([1969]
C.T.C. 445). Here, however, no attempt was made to show
that, in the minds of William Holt and his advisers, to
achieve any one or more compelling objectives (such as
conferring property benefits on members of the family) the
only practicable method was the creation of multiple com
panies (and other methods of achieving such objectives
certainly existed); one is left with the conclusion that the
very substantial prospective annual reduction in income tax
must have been, consciously or unconsciously, one of the
main factors that operated on the thinking of William Holt
and his advisers to bring them to elect for this particular
method of reorganization and re-arrangement of William
Holt's affairs in preference to all other alternatives.
Basically as I see it the purpose of the three
brothers was to provide an estate for their chil
dren and incidentally a life work in the continu
ance of the family business should the children
desire.
The other reasons I have mentioned above,
while ends in themselves, are all directed to the
basic ultimate end of providing for the children.
In view of the language of Jackett, C.J.
quoted above it is now incumbent upon me to
consider that in the minds of the three brothers
and their advisers to achieve this objective the
only practicable method was the adoption of the
plan so outlined herein even though other meth
ods may have existed.
For the reasons I have previously mentioned,
I do not think that alternative plans were con
ceived and considered as such at the two meet
ings of the three brothers and their advisers.
Rather I think that the plan adopted evolved as
the most practicable way of achieving the
desired objectives.
There was a provision in the buy and sell
agreement among the three brothers that the
option need not be exercised. I formed the
impression that the three brothers were pos
sessed of high religious and moral principles
and considered that they had a moral obligation
to the children of a deceased brother and that
they would not avail themselves of that escape
provision. Even if they should do so the result
would be a compulsory winding up of the com
pany which none of them wished. Neither did
they wish to sell to a stranger.
At one stage it was suggested that the growth
element could be avoided by the creation of
preferred shares. However on the death of one
of the brothers the other would still be obligated
to purchase those shares. The creation of pre
ferred shares would not have the effect of
"freezing" an estate which is a desirable ele
ment in estate planning. It would not eliminate
the growth element. This is predicated upon the
fact that under the Estate Tax Act the value of
the shares is at the fair market value at the date
of death and the fair market value bears a direct
relationship to the profits. Under the plan
adopted the growth element was directed into
the corporate partnership.
Accordingly I am satisfied that it was the
consensus of the brothers and their advisers
that the plan evolved and adopted was the best
practicable method to achieve the desired end.
The test to be applied in considering the
meaning of section 138A(3)(b)(ii) is set out in
Doris Trucking Co. v. M.N.R. [1968] 2 Ex.C.R.
501 where Dumoulin J. stated at page 505:
... "the proper test is ... if one supposed that all corpora
tions were subject to tax at a flat rate of 50%, as has been
recommended by the Royal Commission on taxation, would
it be expected that these particular operations would have
been carried on by separate corporations".
This test was adopted and applied by Sheppard
D.J. in Jordans Rugs Ltd. v. M.N.R. [1969]
C.T.C. 445.
In short the test amounts to this—if there had
been no tax advantage would the plan have
been adopted in any event?
In I.R.C. v. Brebner [1967] 1 All E.R. 779
Lord Pearce stated at page 781 that the ques
tion whether one of the main objects was to
obtain a tax advantage was a question of sub
jective intention.
After having given careful consideration to all
the evidence adduced, I have concluded that the
intention of the three brothers was to accom
plish purposes other than a reduction in tax
payable and that the plan adopted was the best
practicable to achieve those purposes. The
whole arrangement by which the plan was car
ried into effect was dominated by considera
tions other than tax advantage. It provided con
tinuity of management, it "froze" the assets of
the estates for the children, it facilitated the
re-allocation of the businesses among the broth
ers and their families, and it lessened the load
the surviving brother would have to pay to a
deceased brother's estate. This subjective inten
tion of the brothers is confirmed by the adop
tion of a somewhat similar plan in 1957 which
did not result in a tax advantage.
I might also add that I was influenced in
reaching the conclusion that I have by the evi
dence of Mr. Cornelius T. Loewen and the
manner in which he gave that evidence. I was
convinced that he was a man of strong religious
and moral principles as well as an industrious
and astute business man. He was aware of the
possibility of a tax saving but he also stated that
this was not the dominant factor. The dominat-
ing consideration was to provide for the future
of his children and his brothers' children. That
was the subjective intention. I have accepted
his testimony.
Accordingly I find that a reduction of the
amount of tax payable was not one of the main
reasons for the existence of the three enterprise
corporations, including the appellant herein.
Having so concluded it is not necessary for
me to consider the second issue which is the
applicability of section 39(5) of the Income Tax
Act.
Accordingly the direction of the Minister to
the extent that it deems the first group of four
corporations, namely, Loewen Holdings Ltd.,
C. T. Loewen & Sons (1957) Ltd., Build-A-
Home Co., Ltd., and Loewen Millwork
(Canada) Ltd. are associated with the second
group of three corporations, namely, Edward J.
Loewen Enterprises Ltd., George F. Loewen
Enterprises Ltd. and the appellant, C. P.
Loewen Enterprises Ltd. in the 1964, 1965 and
1966 taxation years to be associated is vacated
and the assessments are referred back to the
Minister for re-assessment accordingly.
It also follows that the appeals are allowed
with costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.