A-225-74
Norman Leon (Appellant)
v.
Minister of National Revenue (Respondent)
Court of Appeal, Heald and Ryan JJ. and
MacKay D.J.—Toronto, March 10; Ottawa, June
28, 1976.
Income tax—Company under control of taxpayer—Assess-
ment for income in fees paid to companies—Whether company
personal corporation—Income Tax Act, s. 68.
Appellant was associated with other taxpayers in various
branches of a furniture business, directed by them through the
limited partnership, Ablan Leon Distributors. The latter
employed five companies to perform services (in three cases
expressly managerial). None of the companies had any
employees of significance, other than the taxpayers who con
trolled them, and they lacked some of the usual facilities of a
business. For the years 1968 and 1969 the Minister assessed
each of the taxpayers for the fees paid by Ablan Leon Distribu
tors to the employed companies. Appellant, and the other
taxpayers, claimed that they performed services for, and were
paid salaries by, the employed companies. The position of the
taxpayers was upheld by the Tax Review Board. On appeal, the
Trial Division allowed the appeal against Norman Leon (appel-
lant), holding that he controlled a company which had entered
into an agreement with Ablan Leon Distributors to do public
relations work. His services to this company extended far
beyond such work, to management. The amount paid to him by
this company included managerial services. The items of pay
ment by Ablan Leon Distributors to the company were all for
services performed by Norman Leon, who had failed to dis
charge the onus of proving that the assessment erred in treating
the items as income in his hands. Norman Leon appealed.
Held, the appeal is dismissed. The complete absence of any
bona fide business purpose for the interposition of Nor-Mar
into the provision of appellant's services to Ablan Leon Dis
tributors is sufficient to stamp that transaction a sham, and
prevents appellant from succeeding. While there were certain
bona fide business purposes, to establish such purpose for the
incorporation of the entity being interposed is not sufficient. It
must also be established that there was a bona fide business
purpose for the transaction or agreement into which the entity
is being interposed. It was lacking here. And, the findings of
the Trial Judge with respect to factual differences distinguish
ing appellant's case from those of the other taxpayers are
justified, and are an additional reason for dismissal.
APPEAL.
COUNSEL:
R. E. Shibley, Q.C., M. L. O'Brien and G. J.
Corn for appellant.
N. A. Chalmers, Q.C., and J. Weinstein for
respondent.
SOLICITORS:
Shibley, Righton & McCutcheon, Toronto,
for appellant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
rendered in English by
HEALD J.: This is an appeal from a judgment of
the Trial Division', the effect of which was to
restore the re-assessments issued by the respondent
in respect of the 1968 and 1969 taxation years of
the appellant. By an order made on consent, all
relevant evidence adduced at the trial of the action
between the Minister of National Revenue and
Ablan Leon (1964) Limited (Court File A-226-74)
applies to this action.
The appellant is a nephew of the five Leon
brothers, (Anthony, Lewie, Edward, George and
Joseph, who were involved in Court Action A-226-
74 referred to supra) being the son of an older,
deceased Leon brother. Appellant has been
engaged in the furniture business for about 25
years. Prior to 1956, he assisted his father on a
part-time basis while at school, and subsequently
was employed in the furniture business carried on
by his uncles Anthony, Lewie, Edward and
George, in stores located in Welland, Fort Erie,
Port Colbourne and Niagara Falls. During the
period from 1956 to October of 1962, the appel
lant owned, managed and operated the Fort Erie
store as a sole proprietor. During this same period,
the appellant also continued to assist his uncles in
their furniture business operations by managing
certain stores in the Niagara area. In October of
1962, Nor-Mar Projects Limited (hereafter Nor-
Mar) was incorporated. The appellant at all ma
terial times was the president of Nor-Mar and
owned substantially all of the issued and outstand
ing shares in the capital of Nor-Mar.
1 [1974] 2 F.C. 708.
The items at issue in this appeal are the pay
ments by Ablan Leon Distributors of $8,000 in
1968 and $39,000 in 1969 to Nor-Mar, which, by
the re-assessments earlier referred to, the Minister
deemed to be income of the appellant.
It is the Minister's position that Norman Leon,
having devoted his full time during the 1968 and
1969 taxation years to the management, supervi
sion, overseeing and superintending of the opera
tions of certain stores of Ablan Leon Distributors,
became entitled to receive the above-stated
amounts from Ablan Leon Distributors for his
services; and that Ablan Leon Distributors, at his
request, paid those amounts to Nor-Mar.
It is the appellant's position, on the other hand,
that during the 1968 and 1969 taxation years, he
was employed by and received a salary from Nor-
Mar and that company had an arrangement with
Ablan Leon Distributors to provide management
services to Ablan Leon Distributors for which
services it received management fees. The appel
lant further submits that, as an employee of Nor-
Mar, he devoted time to the management, super
vision, overseeing and superintending of the opera
tions of certain stores of Ablan Leon Distributors
and that Nor-Mar was paid the above-stated
amounts for said services.
The learned Trial Judge, on the evidence before
him, made findings of fact, inter alia, which I
summarize as follows:
(a) Nor-Mar had no employee of significance
other than the appellant who controlled it.
(b) Nor-Mar was without some of the common
and usual facilities of a business.
(c) The person actively performing services for
Ablan Leon Distributors was Norman Leon. That
which was important to the business of Ablan
Leon Distributors was the services of Norman
Leon, the appellant herein, as distinguished from
Nor-Mar.
(d) One difference between the Norman Leon
matter on the one hand, and the Anthony Thomas
Leon, the Lewie Leon and the Edward Leon, on
the other hand, was that Norman Leon was not a
shareholder of Ablan Leon (1964) Limited.
(e) The sole purpose of the interposition of Nor-
Mar was to reduce the liability for income tax of
Norman Leon and those in control of Ablan Leon
(1964) Limited were willing to co-operate with the
appellant Norman Leon to that end.
It is interesting to observe that the learned Trial
Judge found in the case of Norman Leon, as well
as in the case of Anthony, Edward and Lewie, that
the sole purpose of the interposition of the respec
tive management companies was to reduce the
liability for income tax of Norman, Anthony,
Edward and Lewie. Notwithstanding this identical
finding of fact, the learned Trial Judge found for
the individual taxpayers in the case of Anthony,
Edward and Lewie while finding for the Minister
in the case of Norman.
Quite apart entirely from several factual differ
ences which distinguish the case of Norman Leon
from those of Anthony, Edward and Lewie Leon,
it is my view that the complete absence of a bona
fide business purpose for the interposition of Nor-
Mar into the provision of Norman Leon's services
to Ablan Leon Distributors is sufficient to stamp
that transaction a sham and is a circumstance
which prevents the appellant from succeeding in
this appeal.
There can be no doubt, on the evidence in the
case, that there were a number of bona fide busi
ness purposes for the incorporation of Nor-Mar as
indicated by the several other business activities
engaged in by it. However, as I said in my judg
ment in the cases of Anthony, Edward and Lewie
Leon (Court Files No. A-232-74; A-233-74;
A-234-74), it is not enough to establish a bona fide
business purpose for the incorporation of the entity
being interposed, it is also necessary to establish a
bona fide business purpose for the transaction or
agreement into which the entity is being interposed
and that bona fide business purpose is lacking in
the case of Norman Leon as it was in the cases of
Anthony, Edward and Lewie Leon. Therefore, on
this ground alone, the appeal must be dismissed.
I said earlier that there were several factual
differences distinguishing the case of Norman
Leon from those of Anthony, Edward and Lewie
Leon. The learned Trial Judge dealt with those
factual differences at pages 720, 721, 722 and 723
of his judgment as follows:
Nor-Mar Projects Limited, entered into an employment
agreement, dated the 1st day of May, 1964 in which the named
employers were the same as in the Anthony Thomas Leon, the
Edward Leon and Lewie Leon matters. The Nor-Mar Projects
Limited agreement is not the same as the agreement in those
three other matters.
The services to be rendered by Nor-Mar Projects Limited as
set out in its employment agreement are:
1. Leon shall employ Nor-Mar to take charge of and be
responsible for all promotion and public relation work which
may be required in connection with the operation of any
stores owned at this date or may be hereafter acquired.
2. Nor-Mar shall devote its full time and effort to properly
complete and fulfill all duties which are normally allocated
to a person or corporation charged with promotion and
public relations work and specifically in connection with
stores engaged in the business herein above referred to.
3. Nor-Mar shall be fully responsible for all decisions which
shall be made as to any promotion or public relation activi
ties but in the event there may be a conflict between Leon
and Nor-Mar as to a particular course of conduct or opera
tion in connection with any of the stores, the decision of Leon
shall always prevail.
Accordingly the total responsibility of Nor-Mar Projects
Limited had to do with promotion and public relations and
nothing else.
I find that the services which were performed by Norman
Leon went far beyond the services (promotion and public
relations) which Nor-Mar Limited was to supply pursuant to
its agreement. I find that Norman Leon also managed, super
vised, oversaw and superintended the operations of some stores.
It might also be pointed out that the respondent's pleading
indicates that the services actually performed by Norman Leon
were more than matters relating to promotion and public
relations.
Paragraph 4 of the reply to notice of appeal in the Norman
Leon matter is:
With respect to paragraphs 3 and 4 of the Notice of Appeal,
the Respondent says that he, as an employee of Nor-Mar
Projects Limited devoted time to the management, supervi
sion, overseeing and superintending of the operations of
certain stores of Ablan Leon Distributors and Nor-Mar
Projects Limited was paid for those services the sum of
1968 — $ 8,000.00
1969 — $39,000.00
Of course the Nor-Mar Projects Limited agreement did not
provide for supply of services for "the management, supervi
sion, overseeing and superintending of the operations of certain
stores".
The provision for remuneration of Nor-Mar Projects Limited
in accordance with its agreement was:
Nor-Mar shall be paid for the above services the sum of
twelve hundred and fifty dollars ($1,250.00) per month and
it shall in addition be paid a bonus based on the volume of
sales achieved in the said stores or any of them, such bonus
to be worked out and completed in accordance with a
subsequent agreement between the parties hereto.
The "above services" referred to in the remuneration provi
sion would, of course, be the promotion and public relations
work which Nor-Mar Projects Limited was to supply. It would
not be for managing, supervising, overseeing and superintend
ing the operations of stores.
It is not to be assumed that the services rendered by Norman
Leon in managing, supervising, overseeing and superintending
operations were done or intended to be done gratuitously. One
is impelled to the conclusion that the items of payment by
Ablan Leon Distributors which are in issue, namely $8,000 in
the taxation year 1968 and $39,000 in the taxation year 1969,
were for all services performed by Norman Leon including
those which were managerial.
If there were services wholely within the category of promo
tional and public relations along with the managerial services
so as to indicate what might be the appropriateness of an
apportionment between them no attempt was made at such
apportionment. In my opinion the onus for establishing both a
right to apportionment and what the apportionment should be
would rest on the respondent. He had not met that onus.
I find that the respondent, Norman Leon, has not discharged
the onus which is on him to establish that the position of the
appellant in connection with the assessments in the Norman
Leon matter, the basis for making them or the appellant's
relevant assumptions were wrong.
The appeal of the Minister of National Revenue in the
Norman Leon matter is allowed. The assessments by the
appellant in that matter are restored. The appellant will have
his costs in that matter here and below.
In my view, the above findings of the learned
Trial Judge are justified on the evidence before
him and represent an additional reason for dis
missing the appeal.
For the foregoing reasons, the appeal is dis
missed with costs.
* *
RYAN J.: I concur.
* * *
MACKAY D.J.: I agree.
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.