Amelia Rose (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Collier J.—Toronto, October 14
and 15; Ottawa, November 10, 1971.
Income tax—Personal corporations—Company silent
partner in apartment management business—Whether a
"personal corporation"—Income Tax Act, secs. 67(1),
68(1)(c).
Mrs. Rose was the controlling shareholder of a company
that was a silent partner in a partnership of eight companies.
In 1965 and 1966 these companies carried on an active
business of managing a number of apartment buildings in
Toronto.
Held, since Mrs. Rose's company did not itself carry on
an active business in 1965 and 1966, it was a "personal
corporation" within the definition of s. 68 of the Income
Tax Act and its income for those years must therefore be
deemed to have been distributed to its shareholders as
provided by s. 67(1).
INCOME tax appeal.
W. D. Goodman, Q.C. and F. Cappell for
appellant.
L. R. Olsson and J. S. Gill for respondent.
COLLIER J.—This is an appeal by the appel
lant from two assessments by the respondent
Minister in respect to her income for the years
1965 and 1966. The Minister included in the
computation of the appellant's income the sum
of $33,911.28 for the year 1965 and the sum of
$111,993.66 for the year 1966 on the basis that
these amounts were deemed to have been dis
tributed to and received by the appellant as a
shareholder of a personal corporation pursuant
to s. 67(1) of the Income Tax Act'. Her person
al income tax levied for those years was accord
ingly increased.
The appellant was a shareholder in a compa
ny called "Amrose Enterprises Ltd." (I shall
hereafter refer to it as "Amrose").
I set out here the definition of "personal
corporation" as it appears in s. 68(1) of the
Income Tax Act.
68. (1) In this Act, a "personal corporation" means a
corporation that, during the whole of the taxation year in
respect of which the expression is being applied,
(a) was controlled, whether through holding a majority of
the shares of the corporation or in any other manner
whatsoever, by an individual resident in Canada, by such
an individual and one or more members of his family who
were resident in Canada or by any other person on his or
their behalf;
(b) derived at least one-quarter of its income from
(i) ownership of or trading or dealing in bonds, shares,
debentures, mortgages, hypothecs, bills, notes or other
similar property or an interest therein,
(ii) lending money with or without securities,
(iii) rents, hire of chattels, charterparty fees or remu
nerations, annuities, royalties, interest or dividends, or
(iv) estates or trusts; and
(c) did not carry on an active financial, commercial or
industrial business.
Counsel for the appellant agrees that in the
years in question Amrose fell within paragraphs
(a) and (b) of the subsection. The dispute here
is in respect to par. (c). The appellant contends
Amrose did carry on an active commercial busi
ness in 1965 and 1966; the Minister takes the
opposite view.
An outline of the facts is necessary.
Prior to the spring of 1965 Webb & Knapp
(Canada) Ltd. had substantially constructed a
large apartment building complex in the city of
Toronto known as Flemingdon Park. There
were eight buildings and a total of approximate
ly 880 suites. Webb & Knapp (Canada) Ltd.
appeared to be in financial difficulties and two
families, the Reichmann family and the Oel-
baum family decided to acquire a controlling
interest in the apartment complex.
In the evidence, these two families were
referred to as "The Oelbaum Group" and the
"Reichmann Group". The Oelbaum Group was
comprised of eight family companies, as fol
lows: Amrose Enterprises Ltd., Adro Ltd.,
Mirican Enterprises Ltd., Marnette Invest
ments Ltd., Debcan Investments Ltd., Juron
Enterprises Ltd., Mirmark Enterprises Ltd. and
Kosim Enterprises Ltd.
The principals in each of these companies
were as follows: Amrose—the appellant Amelia
Rose, an Oelbaum; Adro—Barrie Rose, hus
band of the appellant; Mirican—Annette Cohen,
one of the Oelbaum family; Marnette—Marshall
Cohen, husband of Annette; Juron—Ronald
Oelbaum; Debcan—the wife of Ronald Oel-
baum; Mirmark—Judith Oelbaum; and Kosim—
two female members of the Oelbaum family.
In the years 1965 and 1966 Barrie Rose's
principal occupation was with Acme Paper
Products Ltd. as was Ronald Oelbaum's. Mar-
shall Cohen's principal occupation in the years
in question was the practice of law.
The Reichmann Group, for the purposes of
this judgment, consisted of Albert Reichmann,
Paul Reichmann and Ralph Reichmann. The
main occupation of Albert and Paul was in the
business of a company called Olympia & York
Developments (1964) Ltd. Ralph Reichmann
was apparently not very active.
In the purchase of an interest in Flemingdon
Park, the Reichmann Group primarily acted
through a company called S. Reichmann & Sons
Ltd., and in the early transactions, this company
acted on behalf of the Oelbaum Group as well.
In the spring of 1965 a purchase agreement
was made with Webb & Knapp (Canada) Ltd.
(Ex. 3). The agreement provided a company
would be formed in which Webb & Knapp held
50% of the shares (these were non-voting
shares) and the Oelbaum and Reichmann
Groups held the other 50%. Ultimately the com
pany was formed under the name Central Park
Estates Ltd. Exhibit 3 provided that Central
Park Estates Ltd. could enter into certain man
agement and development agreements, which I
shall refer to later. The directors of Central
Park Estates Ltd. were the three Reichmanns,
and Barrie Rose, Ronald Oelbaum and Marshall
Cohen, representing the Oelbaum Group.
I do not think it necessary to refer to the
financial arrangements for the purchase, other
than to say they were ultimately completed.
In an agreement setting out the interests of
the Reichmann Group and the Oelbaum Group
(Ex. 4, dated May 3, 1965) paragraph 6 provid
ed in part:
6. A new partnership will be established to conduct the
management of various finished buildings situate in Flem-
ingdon Park as contemplated in the Management Agree
ment. This partnership will be owned again fifty per cent by
the Reichmanns and fifty per cent by the Oelbaums .. .
A further agreement dated June 28, 1965
provided, in part, that Central Park Estates Ltd.
could employ the Reichmann and Oelbaum
Groups to manage the apartment project and
fees equal to the going rates charged by reputa
ble property managers in the city of Toronto
would be paid. This agreement went on to pro
vide that Central Park Estates Ltd. could
employ any other company or partnership to
manage the property, even though shareholders,
officers or directors of Central Park Estates
Ltd. might have an interest in the company or
partnership so employed.
Still another agreement dated June 23, 1965
was introduced in evidence as Ex. 8. It set out
the relationship between Central Park Estates
Ltd. and the various other companies involved,
including the Oelbaum companies. Article VI
provided that a new partnership, known as Cen
tral Park Management Co. would be estab
lished, owned 50% by the Reichmann Group
and 50% by the Oelbaum Group, and all rights
of management under the prior agreements
would be assigned to the partnership.
In describing the various documents earlier
referred to, I have endeavoured to summarize
those portions I deem relevant to this appeal
and I have substituted, where necessary, names
of companies that were ultimately used, though
those names were not used in the particular
agreement.
To summarize and amplify somewhat, at this
point:
1. The Reichmann and Oelbaum Groups
acquired, through Central Park Estates Ltd.,
control of Flemingdon Park.
2. The Oelbaum Group of family companies
held a 25% interest in Central Park Estates
Ltd.; the Reichmann companies held 25%;
Webb & Knapp (Canada) Ltd. held 50%, but
had no voting powers.
3. The directors of Central Park Estates Ltd.
were at all times Paul Reichmann, Albert
Reichmann, Ralph Reichmann, Barrie D.
Rose, Ronald Oelbaum and Marshall A.
Cohen.
4. The Directors were not entitled to any
remuneration from Central Park Estates Ltd.
(It should be noted that certain of the Oel-
baum family companies had no direct
representation on the Board, for example,
Mirmark and Kosim).
5. A partnership to manage the project was
contemplated.
For some time after these agreements were
entered into, Central Park Estates Ltd. itself
managed the property. It employed approxi
mately twenty-five people; twenty-two were
engaged in various maintenance and service
functions; five were full-time people: the apart
ment complex supervisor, two bookkeepers and
two clerks. Most of these employees had been
taken over from Webb & Knapp (Canada) Ltd.
Barrie Rose, the main witness on behalf of
the appellant, testified that Central Park Estates
Ltd. managed the property up to November
1965 through what he termed an "Executive
Committee". This Committee consisted of the
two active Reichmann brothers, Ronald Oel-
baum, Marshall Cohen and himself (the active
directors of Central Park Estates Ltd.). I accept
Mr. Rose's evidence that this Committee met as
required, perhaps once a week, although the
business appears to me to, have been done infor
mally. Mr. Rose estimated he spent approxi
mately ten hours a week on these matters. The
members of the Executive Committee were not
paid for their services. The detailed work in
respect to the management and maintenance of
the apartment complex was done by the
employees of Central Park Estates Ltd., for
merly, as I have said, employees of Webb &
Knapp (Canada) Ltd.
In November of 1965 a formal partnership
agreement was drawn up. There were nine part
ners: the Reichmanns (Reichmann Realty Ltd.)
and the eight Oelbaum family companies. The
name of the partnership was Central Park Man
agement Co. and its alleged purpose was to
conduct and carry on the business of managing
and administering apartment buildings. The
agreement is dated November 1, 1965.
By an agreement, ostensibly dated the same
day, Central Park Estates Ltd. agreed to retain
the partnership as manager of the apartment
complex for a fee of 5% of gross rental
receipts. Mr. Rose was not positive that all
parties signed this agreement or the partnership
agreement on the date in question: he was rea
sonably sure that Amrose and Adro had.
In fact this management contract did not
obtain formal approval in the minutes of the
Board of Directors of Central Park Estates Ltd.
until May 31, 1966, at which time the controll
ing interest held by the company had been or
was about to be sold. As Mr. Goodman for the
appellant pointed out, this does not necessarily
mean a contract had not been entered into
before that date.
Mr. Olsson, counsel for the Minister also
pointed out that it was not until June 1, 1967,
almost a year after the controlling interest was
sold and long after the principals had any part
in management that an amending agreement
was signed by all the parties in their various
capacities, whereby S. Reichmann & Sons Ltd.,
who under the original agreements held the
management rights, formally assigned those
rights to the members of the partnership in the
percentages agreed upon.
After the formation of the partnership, the
direction or management of the property was in
fact carried on by the same five individuals who
composed the former Executive Committee.
They met as before, although not as frequently.
The four senior employees, previously men
tioned, (the superintendent, two bookkeepers
and a clerk) were transferred to the payroll of
the partnership, but the remainder of the
employees continued on the payroll of Central
Park Estates Ltd. Mr. Rose testified manage
ment was conducted from offices leased by the
partnership from one of the Reichmann compa
nies, whereas formerly an office had been main
tained at the apartment complex itself.
The evidence was very vague as to whether
there was any separate telephone number for
the partnership itself, or whether the tenants
knew these management services were being
provided by a new entity. Some of the invoices
referred to at trial indicated that suppliers billed
not only Central Park Management Co., but at
times Central Park Estates Ltd. or Flemingdon
Park Holdings Ltd., an affiliate of Webb &
Knapp (Canada) Ltd.
My impression of the evidence is that the
ordering of supplies and payment of accounts
fundamentally went on as before, although new
bank accounts had been created in the name of
the partnership.
According to its financial statements there
was a profit of $2,359.05 for the fiscal year
ending November 30, 1965 and $21,931.42 for
the fiscal year ending November 30, 1966.
These net profits were distributed to the various
members of Central Management Co. in the
proportions set out in the management agree
ment (Ex. 10).
The partnership ceased to operate in the
summer of 1966 when Central Park Estates
Ltd. sold its controlling interest. It was formally
discontinued in 1969.
The appellant's position in argument is as
follows:
1. The management of the apartment com
plex was an active commercial endeavour.
2. Central Park Management Co. was a part
nership in fact and in law and carried on an
"active commercial business".
3. Amrose, as one of the members of the
partnership therefore carried on an active
commercial business.
Counsel for the Minister argued that the evi
dence as to the existence of an actual partner
ship or management organization separate and
apart from Central Park Estates Ltd. (in effect,
the owner), was inconclusive. He further con
tended that if there were an active commercial
business carried on by anyone it was not carried
on by Amrose. Other arguments were raised by
counsel for the Minister, but in view of the
conclusion I have come to, I do not think it
necessary to deal with them.
No doubt the Oelbaum and Reichmann
Groups, from the early stages in 1965, contem
plated the possibility of a partnership being
formed to manage the apartment properties,
even if its main usefulness might at some stage
be for tax-saving benefits. I shall assume that a
partnership, in fact, was formed which included
Amrose and these other family companies and
that the partnership carried on in the fiscal
years 1965 and 1966, a small commercial busi
ness sufficient for it to be characterized as
active rather than inactive or passive.
What was the situation in respect to Amrose?
Mr. Rose, in answer to a question, agreed the
only thing Amrose itself did in respect to the
management of the apartment complex was to
join the partnership.
In my view the real question is not whether
Central Park Management Co. carried on an
active commercial business, but whether
Amrose did within the meaning of s. 68(1)(c).
On the evidence, I find that Amrose did not.
None of the shareholders in Amrose had any
thing to do with the management of the com
plex. Admittedly the appellant's husband did
contribute to the activities of the partnership,
but he personally was not a shareholder in
Amrose. He was unsure whether or not he was
an officer of Amrose in 1965, and he conceded
he may not have been an officer until May of
1966. His family company, Adro, was a share
holder. Mr. Rose was personally paid some
salary by Amrose in 1965 and 1966, but this
remuneration, in my view, was primarily for
services to Amrose other than those relating to
his contribution to the management of the
apartment complex.
I do not think the activities of the appellant's
husband and Adro confer any different status
on Amrose within the meaning of s. 68(1)(c) of
the Income Tax Act.
The mere fact that by virtue of the partner
ship agreement and under the law of Ontario
and other common law jurisdictions Amrose
subjected itself to the liability of an individual
partner (for example, to third persons) does not
to me convert Amrose from an inactive com
mercial business to an active one.
A number of cases were cited including Stekl
v. M.N.R. [1956-60] Ex.C.R. 376, Finning v.
M.N.R. [1961] Ex.C.R. 403 and Larry Smith v.
M.N.R. [1970] D.T.C. 6344. The latter two in
particular considered par. (c) of s. 68(1). As I
read them, their outcome largely depended on
their particular facts, as I think the outcome
here must depend primarily on the particular
facts.
The appeal is dismissed with costs.
1 67. (1) The income of a personal corporation whether
actually distributed or not shall be deemed to have been
distributed to, and received by, the shareholders as a divi
dend on the last day of each taxation year of the
corporation.
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.