A-280-74
Massey Ferguson Limited (Appellant)
v.
The Queen (Respondent)
Court of Appeal, Urie and Le Damn JJ. and
MacKay D.J.—Toronto, November 2 and Decem-
ber 13, 1976.
Income tax—Appeal from re-assessment—Whether loan by
resident to non-resident so as to come within purview of s.
19(1)—Whether legal rights and obligations between parties
adversely affected so as to constitute a sham—Whether legiti
mate business purpose for involving third party—Income Tax
Act, R.S.C. 1952, c. 148, ss. 19(1) and (3) and 139(1)(aq).
Plaintiff claims that an interest-free loan by it to its subsidi
ary V for the purpose of providing its non-resident subsidiary P
with working capital was a legitimate business transaction
creating enforceable rights and obligations between it and V
and interest thereon should therefore not be deemed income
pursuant to section 19(1) of the Act. Plaintiff claims that P was
in any event a subsidiary controlled corporation within the
meaning of section 139(1 )(aq) so that section 19(3) applied to
remove the transaction from the purview of section 19(1).
Held, the appeal is allowed. The evidence shows that the
appellant's intention was to make an interest-free loan to V so
that V could loan that amount to P and not itself directly make
a loan to P. Thus the parties intended to create and did create a
legally enforceable creditor-debtor relationship between the
appellant and V and a legally enforceable creditor-debtor rela
tionship between V and P. The evidence further shows that
there was a legitimate business purpose for involving V in the
transaction since one of the reasons for V's existence was to
enable it to loan money to its subsidiaries and the appellant's
subsidiaries, the funds for so doing being acquired by borrow
ing from the appellant. The choice of a means of carrying out a
transaction that eliminates the liability to pay tax is legitimate
if the transaction is a bona fide commercial one as it was in this
case. It is therefore unnecessary to deal with the appellant's
other submissions.
Inland Revenue Commission v. Brebner [1967] I All E.R.
779 and Snook v. London & West Riding Investments,
Ltd. [1967] I All E.R. 518, applied. M.N.R. v. Leon
[1977] 1 F.C. 249, distinguished.
APPEAL from income tax re-assessment.
COUNSEL:
S. E. Edwards, Q.C., and D. H. Martin for
appellant.
N. A. Chalmers, Q.C., and C. T. A. MacNab
for respondent.
SOLICITORS:
Fraser & Beatty, Toronto, for appellant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
rendered in English by
URIE J.: This is an appeal from a judgment of
the Trial Division dismissing with costs the appeal
of the appellant from a decision of the Tax Review
Board, wherein the learned Trial Judge dismissed
the appellant's appeal from a re-assessment for
income tax for the appellant's 1967 taxation year.
The notice of re-assessment dated May 30, 1969
revised the appellant's income for the relevant
taxation year to include therein, inter alia, deemed
interest income in the sum of $31,956.
The facts leading to the revision are relatively
simple and may be summarized as follows:
The appellant is a Canadian resident corpora
tion which is the parent company of a multi
national group engaged primarily in the manufac
ture and selling of agricultural machinery, con
struction machinery and diesel engines. During the
1967 taxation year the appellant was the beneficial
owner of all of the issued shares of Verity Plow
Limited (hereinafter referred to as "Verity").
Verity at all material times was one of three
non-operating subsidiary Canadian corporations,
its sole function being, according to the evidence,
to hold investments in, and assist in providing
loans to, other companies within the Massey Fer-
guson group.
Verity throughout the same taxation year held
all the outstanding shares of Perkins Engines Inc.,
(hereinafter referred to as "Perkins"), a company
duly incorporated pursuant to the laws of the State
of Maryland in the United States of America and
having its head office in Farmington, Michigan.
Perkins was at all material times engaged in the
business of selling and servicing diesel engines,
manufactured by another subsidiary of the appel
lant. Verity had in 1960 acquired the shares of
Perkins with funds provided by the appellant. The
appellant's books of account in 1967 showed the
loan to Verity for the purchase of the shares and
the books of account of Verity reflected the loan
from the appellant for the acquisition of the
shares.
Perkins in 1967 found itself in need of additional
working capital and it was ultimately determined
by certain officers of the appellant that Perkins
should be provided with the needed funds in the
amount of $1,000,000 (U.S.) interest free by the
appellant's providing the funds necessary for the
loan to Verity.
The sole issue in the case is to determine wheth
er or not the appellant loaned the $1,000,000 to
Verity following which Verity loaned those funds
to Perkins or whether the loan was made directly
by the appellant to Perkins. The importance of
determing how the loan was made arises by reason
of subsections 19(1) and 19(3) of the Income Tax
Act which in 1967 read as follows:
19. (1) Where a corporation resident in Canada has loaned
money to a non-resident person and the loan has remained
outstanding for one year or longer without interest at a reason
able rate having been included in computing the lender's
income, interest thereon, computed at 5% per annum for the
taxation year or part of the year during which the loan was
outstanding, shall, for the purpose of computing the lender's
income, be deemed to have been received by the lender on the
last day of each taxation year during all or part of which the
loan has been outstanding.
(3) Subsection (1) does not apply if the loan was made to a
subsidiary controlled corporation and it is established that the
money that was loaned was used in the subsidiary corporation's
business for the purpose of gaining or producing income.
The appellant takes the position that all the
evidence points to the fact that it was the appel
lant's intention to loan the money to Verity and to
cause Verity to loan the money to Perkins, and
that, in fact, that intention was carried out. The
loan was not a direct one from the appellant to
Perkins but was, rather, a loan by it to its wholly-
owned Canadian resident subsidiary, Verity, so
that subsection 19(1) limited as it is to loans by a
resident Canadian corporation to a non-resident
person, including, of course, a corporation, had no
application to the transaction. If that is the case
the inclusion of the deemed interest in the notice of
re-assessment was in error and the re-assessment
should be set aside. On the other hand, the
respondent supports the judgment of the Trial
Judge wherein he held that the real transaction
was a loan from the appellant to Perkins which
while it was a non-resident corporation, was not a
subsidiary controlled corporation, within the defi
nition of that term as set out in section 139(1) (aq)
of the Act, of the appellant, so that section 19(3)
could not apply to remove the transaction from the
purview of section 19(1). In the respondent's view,
therefore, the re-assessment was correct and
should stand.
Before proceeding with consideration of the rele
vant facts, it should, perhaps, be pointed out that
the evidence is clear that Perkins received the
proceeds of the loan from the New York agency of
the Canadian Imperial Bank of Commerce which
had been directed by the appellant to transfer the
money to Perkins, debiting the appellant's account
in the City of New York. There were recorded in
the appellant's accounting records on or about the
time the advance was made, entries showing a loan
to Verity on March 29, 1967 in the amount of
$1,000,000 (U.S.). Verity's accounts, which were
approved by the directors and shareholders of
Verity, showed receipt of the proceeds of the loan,
a liability therefor to the appellant, and the
making of a loan in the same amount to Perkins on
the same date. Perkins' financial reports to the
appellant show its liability to Verity for the loan.
Subsequently, in 1969 when the appellant pur
chased from Verity all of its shares of Perkins,
Perkins' indebtedness to Verity was assigned by
the latter to the appellant. It was conceded by the
respondent that the proceeds of the loan were used
by Perkins for the purpose of gaining or producing
income.
The evidence, however, shows that Verity was
not a company actively engaged commercially or
industrially, its sole function being to hold shares
in, and make advances to, other companies in the
group controlled by the appellant. Verity did not
have any employees apart from those employed by
the appellant. Employees of the appellant served as
directors of Verity and any work necessary to
carry out its functions was performed by
employees of the appellant. Neither did Verity
have a bank account of its own.
The learned Trial Judge reviewed the evidence
and came to the following conclusion with respect
to the first branch of the appellant's submissions.
It is well established that, in considering whether a particular
transaction brings a party within the terms of the Income Tax
Act its substance rather than its form is to be regarded, and
also that the intention with which a transaction is entered into
is an important matter under the Act and the whole sum of the
relevant circumstances must be taken into account.
On the whole of the relevant circumstances here present, I
am satisfied that it was clearly the plaintiff's intention to lend
the one million dollars directly to Perkins. Verity played very
little part in the transaction except in a nominal way. There
was no legitimate business purpose for involving Verity. The
only reason, and Mr. Sherman was quite frank in admitting
this, was in an attempt to keep the transaction outside section
19(1). I have thus concluded that the substance of subject
transaction, notwithstanding the form thereof, was a loan from
the plaintiff to Perkins, a non-resident corporation, so as to
make applicable the provisions of section 19(1) of the Act.
There can be no doubt that the general princi
ples applicable in determining liability for income
tax under the Income Tax Act were correctly
stated by the learned Trial Judge. However, in my
view, in applying those principles to the facts
adduced in evidence, he did not draw the proper
inferences therefrom in holding, firstly, that it was
the appellant's intention to lend $1,000,000, inter
est free, direct to Perkins; secondly, that there was
no legitimate business purpose for involving
Verity, and thirdly, that notwithstanding its form
the substance of the transaction was a loan from
the appellant to Perkins.
I shall deal with the first and third of these
findings together for the sake of convenience. It
should first be observed, I think, that what is at
issue here involves the interpretation on the one
hand of an agreement to lend money and, on the
other hand, an agreement to borrow that money
and to repay it. Speaking generally, an agreement
whether formally documented or evidenced in
some other fashion, is not enforceable unless the
parties evince an intention to create legal
relations.' Where there is a formal contract, it
would be unusual to find that there was no inten
tion to create such legal relation but where, as in
this case, there is no formal contract, regard must
be had to all of the evidence to ascertain whether
or not the parties intended such relations to be
created and whether or not they were successful in
doing so.
' Halsbury's Laws of England, 4th ed. V. 9, p. 175.
In this case there was no formal agreement
setting forth the terms of an agreement to lend
money either to Verity or to Perkins. However, the
appellant adduced evidence of conversations, let
ters, memoranda, accounting records, financial
statements and corporate minutes with a view to
establishing the nature of the agreement between
the parties involved. There can be no doubt that
this evidence establishes that originally it was con
templated that the $1,000,000 loan was to be
made by the appellant to Perkins. However, it is
equally without question that the transaction as
originally contemplated changed at the moment
that the appellant's general tax manager at the
material time, Mr. Sherman, met with its Treasur
er, Mr. Blair and the latter's assistant, Mr. Wleu-
gel, for the purpose of advising the latter on the
tax implications of the proposed loan by the appel
lant to Perkins. At that meeting, Mr. Sherman
gave the advice contained in the following excerpt
from his testimony.
Q. Mr. Sherman, the second paragraph of the letter contains
one sentence:
As agreed with you and Mr. Sherman, we will proceed
as follows.
Was there a meeting prior to the sending of this memo?
A. Yes, there was a meeting with Mr. Blair and Mr. Wleu-
gel and myself and at that meeting I was asked to fulfil
my responsibilities and I pointed out, as my colleagues
knew, that Perkins Inc., was not a subsidiary of Limited
and that, if a loan was made free of interest, as was
contemplated directly by Massey Ferguson Limited to
Perkins Inc., there was some doubt about whether it
would fall within the exemption provided within section
19(3) because it was a subsidiary. Consequently, I recom
mended to remove the doubt that loan should be made by
Verity Plow and these gentlemen, who were both officers
of both companies, accepted my recommendation and it
was agreed and then documented by Mr. Wleugel who
signed this memo to the effect that the loan was to be
made to Perkins by Verity or, as Massey Ferguson short
hand has it in this memorandum, "via Verity".
From that moment on, it can be seen that the
original proposal changed and the intention
became for the appellant to loan $1,000,000 inter
est free to Verity, one of its resident Canadian
subsidiaries and for Verity to lend that sum to
Perkins. All the documentation leads to that con
clusion, commencing with the memorandum dated
February 27, 1967, to which Mr. Sherman
referred in his testimony, the relevant part of
which reads as follows:
Agrotrac via CIBC is presently lending Perkins Engines Inc.,
$300,000 at 6% per annum interest. It has been decided to
provide Perkins U.S. with an additional loan of $700,000 and
Perkins Canada a loan of $250,000—both of medium term
character.
As agreed with you and Mr. Sherman, we will proceed as
follows:
1.) MF Limited will lend Perkins U.S.A., U.S. $1,000,000
via Verity Plow at no interest charge on March 26, 1967.
3.) Perkins Inc. will, upon receipt of the loan, repay CIBC's
loan of $300,000 in full (plus accrued interest).
At least to some extent, the difficulty in which
the appellant finds itself, which has led to these
proceedings, was caused by the imprecise language
used in this underlying memorandum. In particu
lar, the phrase "via Verity" seems to indicate that
Verity's role was indeed minor in the transaction
and that the phrase "MF Limited will lend to
Perkins ..." shows the true nature of the transac
tion. But the term "via" was used, as Mr. Sherman
testified, as "Massey Ferguson shorthand" to show
the routing of the loans. This memorandum seems
to confirm that this is so since it was used not only
to indicate the way the new loan to Perkins was to
be made, but also to show how an existing loan by
Perkins from the Canadian Imperial Bank of
Commerce had originated from Agrotrac, a
Panamanian subsidiary of the appellant. The evi
dence discloses that the $300,000 original loan had
been derived from funds "loaned" to the bank by
Agrotrac and the bank had in turn loaned the
same amount to Perkins. That is the loan from
"Agrotrac via CIBC" as described in the memo
randum. It seems to me then, that the meaning of
the term is explained in the document itself and
tends to support the appellant's contention that
while it provided the original source of the money
for the $1,000,000 loan it was not intended that it
would be the lender thereof to Perkins.
Other letters and memoranda adduced in evi
dence also tend to confirm this intention. No
useful purpose would be served by my detailing
that evidence nor to set out in detail the account
ing and other records of the appellant, of Verity
and of Perkins which reflect the carrying out of
this intention. Suffice it to say that a fair reading
of the whole leads inevitably to the conclusion that
the parties intended to create, and did, in fact,
create firstly a creditor-debtor relationship be
tween the appellant and Verity and secondly, a
creditor-debtor relationship between Verity and
Perkins.
Thus the real question requiring determination
in this appeal is whether or not those relationships
and the legal rights and obligations arising there
from, were adversely affected for the purpose of
deciding the applicability of section 19(1) of the
Income Tax Act, because (a) the admitted reason
for Verity making the loan was to avoid the
application of section 19(1) to the transaction; (b)
the proceeds of the loan were paid directly to the
ultimate borrower, Perkins, rather than by Verity,
and (c) no formal documentation, other than the
aforementioned book entries, was prepared as evi
dence of the loan. With the greatest respect for the
contrary opinion of the learned Trial Judge, nei
ther the relationships, nor the rights and liabilities
were thus adversely affected by any of the alleged
defects.
The whole development of commercial law over
the centuries is replete with examples of the
Courts recognizing that business men do not
always depend on expert documentation to prove
the true characterization of their transactions.
Rather, they tend to achieve their desired ends,
particularly when the relationships between them
are close, in informal and expeditious ways which
perhaps are abhorrent to lawyers. In doing so they
run the risks inherent in such a practice of deter
mining their respective rights. Frequently no dif
ficulties ensue, but if they do, in the absence of
contracts or other documents, Courts must deter
mine the intention of the parties and the nature of
the obligations imposed on them by reference to
credible evidence of another kind. That is what is
required of the Court in this case and the inference
I draw from the facts as found by the Trial Judge
is that enforceable legal rights and obligations
were created by the advance of the money by the
appellant. Where those rights and obligations lie
must be ascertained from the evidence. That clear
ly discloses that there was imposed on Perkins the
liability to repay to Verity the money it received
directly from the appellant. Similarly, Verity,
another separate legal entity, at some unspecified
date became liable to repay the money advanced to
it by the appellant, although that money never
actually came into its possession. On the evidence,
the appellant had no creditor-debtor relationship
with Perkins and thus had no right to demand
repayment of $1,000,000 from Perkins but it did
have that right as against Verity. If that is the case
then, it seems to me, not only is the form of the
initial part of the transaction a loan by the appel
lant to Verity but that also is the substance of the
transaction. I think therefore, that the learned
Trial Judge erred when he inferred from the facts
as he found them that, in substance, the transac
tion was a loan by the appellant to Perkins.
In so far as the finding of the Judge that there
was no legitimate business purpose for involving
Verity in the transaction is concerned, I must
again respectfully disagree with him. Since this is
an inference to be drawn from ascertained facts I
think that this Court, as is any Court of Appeal in
such circumstances, entitled to substitute its view
for that of the Trial Judge. I believe that for the
reasons that follow, we are in a position to make
such a substitution.
Verity had been incorporated in 1957 apparent
ly as a successor to a long-time subsidiary of the
appellant, for the purpose of holding investments
in and making loans to other companies in the
Massey Ferguson group. Mr. Sherman described
these activities in evidence as follows:
MR. MCDOUGALL: Q. Can you describe the type of busi
ness carried on by Verity Plow and its predecessor since
1957?
A. Yes. I should perhaps explain that the books of the
company in the early days were not easy to locate, so I
was forced to have recourse to the minute book, and I had
one of my colleagues prepare a brief summary for my
information of the transactions referred to in the minute
book and the transactions essentially involved the acquisi
tion and disposal of investments in other Massey Fergu-
son companies, the making of loans to other Massey
Ferguson companies and the repayment of loans.
Q. I show you a document entitled "Material from Minute
Book". Is that summary to which you referred?
A. Yes.
Q. Mr. Sherman, I interrupted you to put that Exhibit to
you, so perhaps you might continue with your description
of the type of transactions carried on by Verity Plow
Limited in the period to which I referred, having refer
ence to Exhibit 3?
A. Yes. They involved, as I already mentioned, the type of
transaction which is in the interests of the Massey Fergu-
son group of companies. They involved the acquisition of
shares, disposal of shares and making of loans and the
repayment of loans. Perhaps I could mention, since loans
are involved, that there is a reference to 25 million
Argentine peso being loaned to an Argentine subsidiary
wholly-owned by Massey Ferguson ....
Q. Where do you see that?
A. Second item on page 2, June, 1961. I think that that
really is a summary of what they have done. There is a
reference in April of 1969 to Perkins Engines Inc.
Q. All right. What is the purpose, or what is Limited's
purpose in having non-operating companies, as you have
referred to them?
A. At the time when these companies were carrying on these
transactions from 1957 to approximately 1969 or `70,
they had a very necessary—they served a very necessary
purpose. Massey Ferguson Limited at that time had
borrowed some money secured by an indenture and this
indenture provided that, once Massey Ferguson Limited
had acquired the shares in any other company, these
shares were locked in. They were owned by Limited and
could not be disposed of without the prior concurrence of
the bond holders. This made operating difficult, made it
difficult to make business transactions without a delay
while the management of the company approached the
bond holders and got the necessary approvals. So, from
the time that this indenture was entered into, Massey
Ferguson Limited followed the practice of having its
subsidiary companies, primarily Bain Wagon and Verity
Plow, acquire these subsidiary shares and hold them. This
was not in any way forbidden by the terms of the trust
indenture and it was in order perfectly then, if there were
any need to move the ownership of these shares to
another company to do so without any delay caused by
having to approach the bond holders.
There was a second purpose, and that is that, in many
jurisdictions there has to be more than one shareholder so
that when Massey Ferguson Limited acquired effective
control of the shares of a subsidiary company, this was
normally handled by having all but one to five shares
owned by Massey Ferguson Limited and then the subsidi
ary companies would each acquire one share, so as to
make them shareholders in the corporation.
This evidence is uncontradicted and certainly
demonstrates that there were, in 1967, valid busi
ness reasons for Verity's continued existence, not
the least important of which, for the purpose of
deciding the issue in this case, was that of loaning
money to its subsidiaries. Moreover, on the basis of
other evidence, there is no question of the necessity
for placing in the Perkins treasury further funds to
meet its working capital requirements. It was
conceded by the respondent that the borrowed
money was used for that purpose.
Thus, the legitimacy for the existence of Verity
cannot be an issue. Its holding of all of the out
standing shares of Perkins was part of the reason
for its existence and the loan of money to Perkins
was a legitimate part of its business of lending
money to other Massey Ferguson subsidiaries.
However, the learned Trial Judge, despite these
facts, concluded that the only purpose for interpos
ing Verity in the transaction was "in an attempt to
keep the transaction outside section 19(1)." He
was of the opinion, further, that the intervention of
Verity was a sham.
I am unable, with respect, to agree with this
view of the transaction. As I have said, the evi
dence discloses that one of the reasons that Verity
was in business was to lend money to Massey
Ferguson subsidiaries and there is some evidence
derived from its financial statements to show that
it did so, not only in the case at bar, but also in
other cases. The money for such purpose was
acquired, in other cases, as well as in this, by
borrowing from Verity's parent, the appellant.
Neither the existence of the corporate entity, nor
the business in which it was engaged was in any
way a sham.
That being so, was something done in the case at
bar which made the loan transaction a sham as the
Trial Judge has found? In general, it may be
stated that if there are two ways in which a
transaction may be carried out, one of which
involves a liability for the payment of tax, and the
other of which results in a reduction or elimination
of such a liability, then, if the transaction is other
wise a bona fide commercial one, there is no
reason for not adopting the tax saving method.
That principle is stated succinctly in Inland Reve
nue Commission v. Brebner [1967] 1 All E.R. 779
by Lord Upjohn at page 784, as follows:
My lords, I would conclude my judgment by saying only that,
when the question of carrying out a genuine commercial trans
action, as this was, is considered, the fact that there are two
ways of carrying it out,—one by paying the maximum amount
of tax, the other by paying no, or much less, tax—it would be
quite wrong as a necessary consequence to draw the inference
that in adopting the latter course one of the main objects is for
the purposes of the section, avoidance of tax. No commercial
man in his senses is going to carry out commercial transactions
except on the footing of paying the smallest amount of tax
involved.
In this case the appellant adopted a method of
lending money for bona fide purposes in a manner
which obviated the risk of having included in its
income deemed interest on the loan, which if it had
been included, would have increased its taxable
income. To do so did not, in my view, make the
transaction a sham. Support is found for this view,
in the well-known passage from the judgment of
Lord Diplock in Snook v. London & West Riding
Investments, Ltd. [ 1967] 1 All E.R. 518 at 528,
reading as follows:
As regards the contention of the plaintiff that the transac
tions between himself, Auto-Finance, Ltd. and the defendants
were a "sham", it is, I think, necessary to consider what, if any,
legal concept is involved in the use of this popular and pejora
tive word. I apprehend that, if it has any meaning in law, it
means acts done or documents executed by the parties to the
"sham" which are intended by them to give to third parties or
to the court the appearance of creating between the parties
legal rights and obligations different from the actual legal
rights and obligations (if any) which the parties intend to
create. One thing I think, however, is clear in legal principle,
morality and the authorities (see Yorkshire Railway Wagon
Co. v. Maclure (1882), 21 Ch. D. 309; Stoneleigh Finance, Ltd.
v. Phillips [1965] 1 All E.R. 513; [1965] 2 Q.B. 537, that for
acts or documents to be a "sham", with whatever legal conse
quences follow from this, all the parties thereto must have a
common intention that the acts or documents are not to create
the legal rights and obligations which they give the appearance
of creating. [The emphasis is mine.] 2
The legal rights and obligations to which I have
earlier referred were created in this case in the
manner contemplated by all three parties. The
condition necessary to find a transaction to be a
sham, namely, not in fact to have created the legal
rights and obligations which appear to have been
created, thus was not present, with the result that
the learned Trial Judge erred, in my view, in
finding that it was a sham. The legal rights and
obligations having been created and the bona fides
of Perkins' need for the money advanced not
having been challenged the loan to Verity by the
appellant took it outside the purview of section
19(1).
As I see it, reaching this conclusion is not
inconsistent with the decision of this Court in
M.N.R. v. Leon [1977] 1 F.C. 249. In that case it
was held that there was no bona fide business
2 This passage was cited with apparent approval in M.N.R. v.
Cameron [I974] S.C.R. 1062 at 1068.
purpose, merely a tax purpose for the interposition
of the management company whose role was at
issue in that case. Moreover, it was said that in
ascertaining whether or not there is a bona fide
business purpose it is the particular agreement or
transaction in question to which the Court must
look for the answer. In the view of the Court in the
Leon case, a company may be incorporated for
legitimate business purposes but may engage in a
transaction at sometime thereafter which has no
such purpose and which is a sham because of it. In
the Leon case that was what the transaction there
in issue was found to be.
I am not at all sure that I would have agreed
with the broad principles relating to a finding of
sham as enunciated in that case, and, I think, that
the principle so stated should perhaps be confined
to the facts of that case. In any event, for the
reasons heretofore given, I do not think that there
was the slightest bit of evidence upon which a
finding of sham could have been made in this case.
Moreover, the facts in this case in other critical
areas are so different from those found in Leon
that it is, in my view, distinguishable. Verity had
been incorporated and carried on business for
sound reasons. For apparently quite proper pur
poses, Verity became the owner of all of the issued
shares of Perkins. Both were part of the large
group of Massey Ferguson companies. Long after
wards, Perkins informed the appellant of its need
of additional working capital and when it was
satisfied that there was truly such a need, discus
sions ensued as to how this best could be legally
accomplished. There were two ways at least in
which it could be done, in one of which there was
an inherent risk of attracting tax, i.e. by making
the interest free loan directly from the appellant to
Perkins, where, if the latter were found not to be a
"subsidiary wholly-owned corporation" of the
appellant within the meaning of section
139(1)(aq) of the Act, that risk could be trans
posed into an actual tax liability under section
19(1). The other method eliminated that risk by
having Verity lend the money since Perkins was its
"subsidiary wholly-owned corporation" and, the
latter being a non-resident corporation, section
19(3) became applicable to the loan. That was the
method chosen after the business decision to loan
the money to Perkins had been made, following
which, in due course, the debtor rights and obliga
tions came into existence.
If no question of tax were involved not the
slightest criticism could have been levelled against
any of the parties concerned. It was simply a
question of a parent company, Verity, borrowing
money for the purpose of lending it to its wholly-
owned subsidiary.
Contrast this with the factual situation in the
Leon case. As I understand it, the sole purpose for
the interposition of the management companies, as
held in the concurrent findings of the Trial Judge,
and the Court of Appeal, was to reduce the person
al liability for income tax of the brothers Leon, by
diverting money otherwise payable directly to
them for management services, through companies
individually controlled by each of them. That deci
sion was consciously made for no other purpose
than avoidance of tax and differs in that way
materially from this case where the decision taken
was to make a necessary loan to a member of a
large group of companies, followed by the decision
as to which company would lend the money. The
incidental effect of the choice made was to elimi
nate the risk of an increase in the appellant's
taxable income—in my view, a sound business
decision. But the important thing is that the under
lying decision was not a decision taken solely for
tax considerations. That business decision having
been made, the method whereby it was made took
advantage of the fact that Perkins belonged to
Verity, that Verity, inter alia, loaned money to
subsidiaries and that its own subsidiary was the
entity which needed money. Since the result could
avoid the possible application of section 19(1),
naturally, this was the method adopted.
For all of these reasons, therefore, I am of the
opinion that the appeal should be allowed. It is
thus unnecessary for me to deal with the appel
lant's other submissions.
The judgment of the Trial Division should be set
aside and the re-assessment should be referred
back to the respondent to exclude therefrom the
deemed interest income in the taxation year 1967,
in the sum of $31,956. The appellant should be
entitled to its costs both in this Court and the Trial
Division.
* * *
LE DAIN J.: I agree.
* * *
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.