Stubart Investments Ltd. v. The Queen

Stubart Investments Ltd. v. The Queen
Collection
Supreme Court Judgments
Date
1984-06-07
Report
[1984] 1 SCR 536
Case number
16623
Judges
Ritchie, Roland Almon; Beetz, Jean; Estey, Willard Zebedee; McIntyre, William Rogers; Wilson, Bertha
On appeal from
Federal Court of Appeal
Subjects
Taxation
Notes
SCC Case Information: 16623
Decision Content
SUPREME COURT OF CANADA
Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536
Date: 1984-06-07
Stubart Investments Limited Appellant;
and
Her Majesty The Queen Respondent.
File No.: 16623.
1983: November 23 and 24; 1984: June 7.
Present: Ritchie, Beetz, Estey, McIntyre and Wilson JJ.
ON APPEAL FROM THE FEDERAL COURT OF APPEAL
Taxation — Income tax —Tax reduction scheme — Subsidiary G eligible for loss carry forward — Sub­sidiary S's assets transferred to subsidiary G — Busi­ness managed by subsidiary S but profits transferred to subsidiary G — Whether or not subsidiary S can avail itself of subsidiary G's loss carry forward — Income Tax Act, R.S.C 1952, c. 148, s. 137, now 1970—71-72 (Can.), chap. 63 as amended, s. 245.
Appellant's sister subsidiary, Grover Cast Stone Co., incurred substantial losses recognized under the Income Tax Act for the purpose of the Act's carry-forward provisions. Effective January 1966, appellant sold its assets to Grover and, concurrent with the agreement of purchase and sale, Grover appointed appellant by a separate agreement as its agent to carry on business for and to the account of Grover. Appellant then carried on the business on Grover's behalf and, at the end of the fiscal years for 1966, 1967 and 1968, paid the net income realized from the business over to Grover. Grover, in turn, reported that amount in its corporate tax return. National Revenue reassessed appellant, set aside the entry transferring the net income to Grover and charged it back to appellant's taxable income. Appellant appealed this reassessment but the Tax Appeal Board, the Federal Court (Trial Division) and the Federal Court of Appeal all upheld it. At issue is whether a corporate taxpayer with the avowed purpose of reducing its taxes can establish an arrangement whereby future profits are routed through a sister sub­sidiary in order to avail itself of the latter corporation's loss carry-forward. Two subsidiary issues dealt with whether or not the transaction was a sham, and whether or not it was incomplete. The Crown advanced no argument based on s. 137 of the Income Tax Act.
Held: The appeal should be allowed.
Per Beetz, Estey and McIntyre JJ.: A transaction cannot be disregarded for tax purposes solely on the basis that it was entered into by a taxpayer without an independent or bona fide business purpose. Guidelines for a court faced with this interpretative issue could be discerned. Where the facts reveal no bona fide business purpose for the transaction, s. 137 may be found to be applicable depending on all the circumstances of the case. Where s. 137 does not apply, the older rule of strict interpretation of a taxation statute as modified by the courts in recent years prevails but will not assist the taxpayer where the transaction is (a) legally ineffective or incomplete or (b) a sham within the classical defini­tion. The formal validity of the transaction may also be insufficient where (a) the setting in the Act of the benefit or allowance sought clearly indicates a legislative intention to restrict that benefit to rights accrued prior to the arrangement adopted by the taxpayer for tax purposes; (b) the provisions necessarily relate to an identified business function; (c) the "object and spirit" of the benefit or allowance sought is defeated by the procedures blatantly adopted by the taxpayer to synthe­size a tax saving device, even though the transactions might not meet the level of "artificiality" in s. 137. Otherwise, where the substance of the Act, when the clause in question is contextually construed, is clear and unambiguous and there is no prohibition in the Act which embraces the taxpayer, the taxpayer shall be free to avail himself of the beneficial provision in question.
The transaction here was not a sham. It was not constructed to create a false impression and the appearance created by the documentation was the reality. The concept of a sham transaction does not extend to include either a transaction that might be reversed or an otherwise valid transaction entered into between parties not at arm's length.
The sale and transfer of the business was complete in law. Arguments to the contrary which were based on information filed under The Corporations Information Act, the absence of duplicate licensing, and the party issuing T-4 slips, had no consequence in law concerning the completeness of the sale. There was no commitment or enforceable agreement to reverse the sale.
Per Ritchie and Wilson JJ.: The transaction was effectual and not a sham because it created the legal relations between the parties which the parties intended to create. The business purpose test is a distinct test from that of sham but is inapplicable because of its incompatibility with the longstanding principle that a person might order his affairs so as to attract the least tax liability-a principle too deeply entrenched in Canadian law to be rejected in the absence of clear statutory authority. No such authority was advanced here.
Gregory v. Helvering, Commissioner of Internal Revenue, 293 U.S. 465 (1934); Knetsch v. United States, 364 U.S. 361 (1960); Cridland v. Commissioner of Taxation (Cth) (1978), 52 A.L.J.R. 96; Dominion Bridge Co. v. The Queen, 75 DTC 5150; Lagacé v. Minister of National Revenue, [1968] 2 Ex. C.R. 98; Minister of National Revenue v. Leon, [1977] 1 F.C. 249; Massey-Ferguson Ltd. v. The Queen, [1977] 1 F.C. 760, considered; W.T. Ramsay Ltd. v. Inland Revenue Commissioners, [1981] 2 W.L.R. 449; Com­missioners of Inland Revenue v. Burmah Oil Co., [1981] T.R. 535; Furniss (Inspector of Taxes) v. Dawson, [1984] 1 All E.R. 530, distinguished; Atinco Paper Products Ltd. v. The Queen, [1978] CTC 566; Rose v. Minister of National Revenue, [1973] F.C. 65; Bradford (Borough of) v. Pickles, [1895] A.C. 587; Inland Revenue Commissioners v. Duke of Westmin­ster, [1936] A.C. 1; Kocin v. United States, 187 F.2d 707 (1951); Goldstein v. Commissioner of Internal Revenue, 364 F.2d 734 (1966); Berkey v. Third Avenue Railway Co., 244 N.Y. 84 (1926); Singer v. Magnavox Co., 380 A.2d 969 (1977); Greenberg v. Commissioners of Inland Revenue (1971), 47 T.C. 240; Richardson Terminals Ltd. v. Minister of National Revenue, 71 DTC 5028; FA and AB Ltd. v. Lupton (Inspector of Taxes), [1971] 3 All E.R. 948; Inland Revenue Com­missioners v. Brebner, [1967] 1 All E.R. 779; The Queen v. Esskay Farms Ltd., 76 DTC 6010; Produits LDG Products Inc. v. The Queen, 76 DTC 6344; The Queen v. Alberta and Southern Gas Co., [1978] 1 F.C. 454; Snook v. London and West Riding Investments, Ltd., [1967] 1 All E.R. 518; Minister of National Revenue v. Cameron, [1974] S.C.R. 1062; Foreign Power Securities Corp. v. Minister of National Reve­nue, 66 DTC 5012; Levene v. Inland Revenue Commis­sioners, [1928] A.C. 217; Partington v. Attorney-Gen­eral (1869), L.R. 4 H.L. 100; The King v. Crabbs, [1934] S.C.R. 523; Lumbers v. Minister of National Revenue (1943), 2 DTC 631, aff'd [1944] S.C.R. 167; W. A. Sheaffer Pen Co. v. Minister of National Reve­nue, [1953] Ex. C.R. 251; Ransom v. Higgs (1974), 50 Tax Cas. 1; Susan Hosiery Ltd. v. Minister of National Revenue, [1969] 2 Ex. C.R. 408; Minister of National Revenue v. Shields, [1963] Ex. C.R. 91, referred to.
APPEAL from a judgment of the Federal Court of Appeal dismissing an appeal from a judgment of the Federal Court (Trial Division), 81 DTC 5120, dismissing an appeal from a judgment of the Tax Appeal Board dismissing an appeal from the Department of National Revenue reassessments. Appeal allowed.
P. B. C. Pepper, Q.C., and M. J. Penman, for the appellant.
William Hobson, Q.C., Jagg Gill, and Susan Van der Hout, for the respondent.
The reasons of Ritchie and Wilson JJ. were delivered by
WILSON J.-I agree with my colleague Mr. Justice Estey that the transaction involved in this appeal was an effectual transaction and that it was not a sham. Indeed, I cannot see how a sham can be said to result where parties intend to create certain legal relations (in this case the purchase and sale of a business and a nominee arrangement to operate it) and are successful in creating those legal relations.
As I understand it, a sham transaction as applied in Canadian tax cases is one that does not have the legal consequences that it purports on its face to have. For example, in Susan Hosiery Ltd. v. Minister of National Revenue, [1969] 2 Ex.C.R. 408, Mr. Justice Gibson found a purported employees' pension plan to be a mere "simu­late" that was "masquerading" as a pension plan; the actions of the taxpayers in question "never established a pension plan, nor any relationship of trustee, cestui que trust, nor any other legal or equitable rights or obligations in any of the parties and none of the parties intended at any material time that there should be any" (pp. 420-21). In Minister of National Revenue v. Shields, [1963] Ex.C.R. 91, Mr. Justice Cameron held that an alleged partnership agreement between the taxpayer and his son was "not a reality, but a mere simulate agreement" (p. 114); the parties never intended that it should give rise to a partnership and in law it did not do so. And in Minister of National Revenue v. Cameron, [1974] S.C.R. 1062, Mr. Justice Martland declined to find a contract for services between an employer and a company incorporated by his former employees to be a sham because "the legal rights and obliga­tions which it created were exactly those which the parties intended" (p. 1069).
I am also of the view that the business purpose test and the sham test are two distinct tests. A transaction may be effectual and not in any sense a sham (as in this case) but may have no business purpose other than the tax purpose. The question then is whether the Minister is entitled to ignore it on that ground alone. If he is, then a massive inroad is made into Lord Tomlin's dictum that "Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be": Inland Revenue Commissioners v. Duke of Westminster, [1936] A.C. 1, at p. 19: Indeed, it seems to me that the business purpose test is a complete rejec­tion of Lord Tomlin's principle.
The appellant would clearly be liable to pay tax on the income from the flavourings business if the business purpose test is part of our law since it is freely admitted that the saving of tax for the Finlayson conglomerate was the sole motivation for the transaction. In my opinion, the Federal Court of Appeal in Minister of National Revenue v. Leon, [1977] 1 F.C. 249, characterized a transaction which had no business purpose other than the tax purpose as a sham and was in error in so doing. I do not view that case as introducing the business purpose test as a test distinct from that of sham into our law and, indeed, if it is to be so viewed, I do not think it should be followed. I think Lord Tomlin's principle is far too deeply entrenched in our tax law for the courts to reject it in the absence of clear statutory authority. No such authority has been put to us in this case.
For these reasons I concur in my colleague's disposition of the appeal.
The judgment of Beetz, Estey and McIntyre JJ. was delivered by
ESTEY J.—The issue in this case is whether a corporate taxpayer, with the avowed purpose of reducing its taxes, can establish an arrangement whereby future profits are routed through a sister subsidiary in order to avail itself of the latter corporation's loss carry-forward.
The facts are, for a tax proceeding, quite straightforward. The holding company, Finlayson Enterprises Limited, referred to for convenience hereafter as the 'parent company', incorporated the appellant in 1951. In 1962, the appellant purchased the assets of Stuart Brothers Company Limited which carried on the business of manufac­turing and selling food flavourings and related products (sometimes for brevity referred to as 'the business'). The appellant, at the time of this purchase, changed its original name to Stuart Brothers Limited in order to take advantage of the value of that name and the associated goodwill in the market. In 1969, the appellant again changed its name to the present name, Stubart Investments Limited.
The parent company, amongst its other subsidi­aries, owned all of the shares of Grover Cast Stone Co. Ltd. (hereinafter referred to as 'Grover') which carried on the business of manufacturing and selling precast concrete products. By 1965, Grover had incurred substantial losses which were recognized as losses under the Income Tax Act, R.S.C. 1952, c. 148, now 1970-71-72 (Can.), c. 63, as amended, for the purpose of the carry-forward provisions under the Act. In 1966, the tax advisers of the parent company established a plan whereby the assets of the appellant would be sold to Grover with effect January 1, 1966. Concurrent with the agreement of purchase and sale of these assets, Grover would appoint, by a separate agreement, the appellant as its agent to carry on the business for and to the account of Grover.
The contract of purchase and sale of the assets and business of the appellant to Grover was com­pleted by the registration, pursuant to the laws of the Province of Quebec, of a transfer of the real estate in the City of Montreal; registration of trade mark assignments in the Trade Marks Office in Ottawa; registration of a registered user agreement in Ottawa whereby Grover appointed the appellant as the registered user of the trade marks purchased by Grover from the appellant; registration of a debenture given by Grover to the appel­lant as security for the unpaid purchase price for the assets so purchased and sold; amendment of the Letters Patent of Grover under the laws of the Province of Quebec so as to authorize and qualify Grover as purchaser of these assets to perform the contract of purchase; registration under the laws of the Province of Quebec of a Trust Deed of Hypo­thec, Mortgage and Pledge in favour of Canada Permanent Trust Company whereunder the latter company issued a debenture secured against Grov­er's Quebec assets, including real estate; passage of a Resolution by the Board of Directors of Grover authorizing the guaranty by Grover of the parent company's indebtedness to the Bank of Nova Scotia in the amount of one million dollars, which indebtedness had formerly been guaranteed by the appellant under a debenture charging the assets of the appellant; the issue by Grover of a debenture in favour of the Bank of Nova Scotia in replacement of the debenture theretofore issued by the appellant and held by the said bank (all of which documents were registered in appropriate public registry offices in the Province of Quebec); and by establishing in the appellant's records a separate set of books and accounts in which were recorded the entries relating to the conduct of the business thereafter carried on by the appellant for the account of Grover.
After this agreement of purchase and sale had been so performed and closed, the appellant pro­ceeded to carry on the business on behalf of Grover, and at the end of each of the fiscal years 1966, 1967 and 1968, the appellant paid over to Grover the net income realized from the business. Grover, in turn, reported this income under the Income Tax Act in its corporate tax returns for these three years. The Department of National Revenue subsequently reassessed the appellant, setting aside the entry transferring the net income to Grover, and charging such net income back to the taxable income of the appellant. It is from these assessments that this appeal was taken.
The Tax Appeal Board rejected the appeal on the ground that the transaction in question was a sham. It would appear that the Tax Appeal Board (as it was then named) reached this conclusion largely because (in the words of then Chairman, His Honour Judge K.A. Flanigan):
... in the Finlayson group of companies there were sufficient common directors and officers in Stuart Brothers Limited and in Grover to reverse those overt acts at any time that it suited them.
The Trial Division of the Federal Court [78 DTC 6414] dismissed the appeal because testimo­ny tendered on behalf of the appellant revealed that:
When the tax loss on Grover has been fully utilized the business carried on by Stuart Brothers will be sold by Grover to Stuart Brothers.
Grant D.J. considered this to be "an obligation on the part of Grover to reconvey the assets to Stu­bart [the appellant] when the Grover [tax] loss had been absorbed ...."
The Federal Court of Appeal [81 DTC 5120] dismissed the appeal by the appellant on the basis that the sale between the appellant and Grover was incomplete. The Court found it unnecessary to determine that the transaction was a sham. Indeed, the Court, speaking through Urie J., stated, with reference to the avowed purpose of the transaction:
It was admitted that the transactions were entered into for the purpose of utilizing the tax losses accumulated by Grover. That it itself is not a reprehen­sible, let alone an illegal, act since every person is entitled to organize his affairs in such a manner as to minimize or eliminate taxes so long as he does so within the limitations imposed by the law.
In the view of the Federal Court of Appeal, however, the transaction was incomplete because no part of the inter-company purchase price was ref­erable to goodwill; the three licences required to carry on the business under the Excise Tax Act, R.S.C. 1952, c. 99, remained in the name of the vendor, the appellant; the information returns filed under The Corporations Information Act, R.S.O. 1960, c. 72, as amended, by Grover described its business as "the manufacture and sale of precast concrete products" without mention of the food flavouring business; the vendor-appellant con­tinued to show its name on the business premises where the business was carried on; the appellant continued to pay water services and business taxes with reference to those premises; the appellant filed T-4 slips with the Department of National Revenue for the employees of the business; and no notice was sent out to trade creditors, lessors, employees, customers and suppliers of the change of ownership in this business. In relying upon one of its earlier decisions, the Court (per Urie J. in Atinco Paper Products Ltd. v. The Queen, [1978] CTC 566, at pp. 577-78) considered its obligation:
... to ensure that everything which appears to have been done, in fact, has been done in accordance with appli­cable law. ... If the transaction can withstand that scrutiny, then it will, of course, be supported. If it cannot, it will fall. That is what happened here.
The Court then concluded that the appellant had failed to "show that the transaction was in all respects a complete, real transaction".
No section of the Act was isolated by the Attor­ney General of Canada as clearly authorizing the assessments which gave rise to these proceedings. Assuming for the moment there is no sham, the respondent asks the Court to find, without express statutory basis, that no transaction is valid in the income tax computation process that has not been entered into by the taxpayer for a valid business purpose. The respondent asserts that by definition, an independant business purpose does not include tax reduction for its own sake.
The Attorney General of Canada submits that, in any case, the Federal Court of Appeal was correct in holding that the purported transfer was incomplete and can thus be disregarded for tax purposes as an ineffectual transaction. The princi­pal authorities upon which the Department relies for this latter proposition are Atinco, supra, and Rose v. Minister of National Revenue, [1973] F.C. 65 (F.C.A.)
In 1951, the Act was amended to prohibit the consolidation of separate corporate operations in reporting income under the Income Tax Act, supra. The result of this amendment was that a corporate proprietor carrying on business through more than one corporate vehicle loses the right an individual proprietor enjoys of blending profitable and unprofitable operations so as to pay income tax only on the resultant net incomes. After 1951 management of a corporate group could not direct­ly merge, blend or meld the operations in two or more subsidiary corporations for the purpose of reducing the tax payable by the corporate group as a whole. In contrast, an individual proprietor with an equally diverse commercial undertaking can do so because only one taxable entity is involved.
The simple question, therefore, is whether a corporate group can avail itself of a tax loss in one of the family subsidiaries by rerouting the income from another corporate member into that subsidi­ary. Clearly, the corporation can do so by buying assets from any business, corporate or unincorpo­rate, and putting these profit-generating assets into a company with an accepted loss position. The purchase of the shares of another company which has a loss carry-forward might prevent its utiliza­tion by the purchaser. With that we are not here concerned. If the taxpayer can expand an existing business to create earnings to make use of a loss carry-forward, then one must find some prohibi­tion in the Act to say that the purchase of such additional assets may not come through a non-arm's length transaction; apart from s. 137 which has not been relied upon by the respondent here. To this consideration I will return.
The main issue is as already set forth, but there are two subsidiary issues.
1. A sham transaction: This expression comes to us from decisions in the United Kingdom, and it has been generally taken to mean (but not without ambiguity) a transaction conducted with an ele­ment of deceit so as to create an illusion calculated to lead the tax collector away from the taxpayer or the true nature of the transaction; or, simple deception whereby the taxpayer creates a facade of reality quite different from the disguised reality. The Court of Appeal here found it unnecessary to determine whether or not the transaction was a sham. The Court also found that the taxpayer announced its purpose from the outset, entered into legally binding contracts of implementation, registered several closing documents in public reg­istries in the provincial registries of Ontario and Quebec, and in federal registries in Ottawa, and entered into an enforceable security arrangement between Grover and the Bank of Nova Scotia. It was further determined by the Court of Appeal that every step required to create legally binding relationships with reference to transfer of the cor­porate assets of the appellant, including its trade marks, and to the retirement of its indebtedness to the Bank of Nova Scotia, was taken by the appel­lant. Grover, it was found, had performed all essential acts to place absolute beneficial ownership of the assets in Grover, including trade marks, and Grover did everything necessary to assume the indebtedness of the appellant to the Bank of Nova Scotia. The Court of Appeal found no element of deceit present.
2. The application of s. 137 of the Income Tax Act, supra, (s. 245 in the new Act): This is an anti-tax avoidance section which states that no "disbursement" which "artificially" reduces the income of a taxpayer shall be taken into account in determining tax liability. The section provides in part as follows:
137. (1) In computing income for the purposes of this Act, no deduction may be made in respect of a disbursement or expense made or incurred in respect of a transaction or operation that, if allowed, would unduly or artificially reduce the income.
While it is at least arguable that this section covers the "disbursement" by the appellant of the profits earned for the account of Grover in the operation of the business, the Attorney General of Canada expressly, in response to a question from the Court during the hearing of the appeal, said that the Crown was not relying upon s. 137. Clearly the cheque transferring the profit from the appellant to Grover at the end of the year is a disbursement, and it is a disbursement the deduction of which leaves no taxable income in the appellant from the business. The Crown does not advance this argu­ment in this appeal presumably in the hope that the tax liability of the appellant will be founded on the "genuine business purpose" principle or the "abuse of rights" principle which are said to form part of the taxation principles in the laws of the United Kingdom and the United States and elsewhere, and which the respondent submits are equally applicable in the interpretation of the Income Tax Act of Canada, supra.
Returning then to the main issues in this appeal, the respondent asserts the right to tax here on two bases:
A. The transfer is, in any event, incomplete, and therefore should be disregarded and the transferor and transferee taxed according to their respective positions as though this transaction had not taken place.
B. Canadian cases have already established the principle recently stated in the United Kingdom in Ramsay v. Inland Revenue Commis­sioners, infra, in Commissioners of Inland Revenue v. Burmah Oil Company, infra, and in Furniss (Inspector of Taxes) v. Dawson infra, namely, that a transaction without a valid business purpose is not to be taken into account in the computation of liability for tax under the Income Tax Act.
A. Incomplete Transaction
It is acknowledged that the transferor, the appellant, and the transferee, Grover, completed thirty legal steps in the transfer of the business to Grover. These included the contract of purchase and sale, the implementing documentation all of which has been enumerated above. The purchase price for the business was paid by the assumption by Grover of the secured indebtedness of the appellant to the Bank and by the issuance of secured notes. The respondent did not question the appellant's assertion that the Bank of Nova Scotia, on the default of Grover, would have had the clear right in law to recover from the transferred assets the unpaid balance of the debt assumed by Grover on the purchase of the business from the appellant. Nevertheless, the Crown says that the following matters were not attended to in relation to the transfer of assets between the parties to the contract and that, therefore, the contract of purchase and sale was not completed:
(i) In filing its annual return for the years 1966 to 1968 under The Corporations Information Act, supra, that is, in the years after the sale, Grover answered the question: "Generally the undertaking that the corporation is actually carrying on," as follows: "manufacture and sales of precast concrete products". No mention is there made of the business of the appellant which had been acquired by Grover. It is, of course, at least arguable that the question invit­ed the answer given because, by a contract with the appellant entered into at the time of the purchase of the assets and referred to by all parties as the "nominee agreement", Grover had appointed the appellant as its agent to carry on the business in trust for and to the account of Grover. The appellant stated in answer to the same question that its business was the "manufacture and sale of essential flavourings and oils". In filing its income tax return for the same years, Grover completed the tax form as follows: "Nature of business-manufacture of Precast Concrete Products and Food Flavours". Both forms appear to have been correctly completed by both companies, and nothing misleading or incomplete results therefrom. In any event, this step has nothing to do with the implementation of the agreement of purchase and sale, and not by the remotest argument could it be said to have reversed the closing of the transaction of purchase and sale or in any way made it less than complete from a legal viewpoint.
(ii) The appellant, in the conduct of the business prior to the sale in 1966, held licences under the Excise Act, supra, s. 10, of which provides:
10. No person, unless thereunto licensed, shall carry on any business or trade subject to excise or use any utensil, machinery or apparatus suitable for carrying on any such trade or business, ... The appellant held such a licence at the time of the transfer of its business to Grover. The appel­lant continued to hold such a licence for the asserted reason that the appellant, as the nominee of Grover, continued to carry on the business which entailed the use of the equipment requiring the licence. Arguably, the statute might require that a licence be held by both Grover and the appellant. The fact that the appellant held the licence or the fact that Grover didn't take out a duplicate licence would, in my respectful view of the statute, have no impact whatever on whether or not the appellant has completed the transfer of its assets to Grover. There is no relationship in law advanced by the respondent to explain how the failure to have two licences, or the holding of one licence by the nominee appellant, would somehow invalidate, or at least render imperfect, the transfer of assets and assumption of liabilities so completely documented and properly registered as set out above.
(iii) In its factum, the Crown makes reference to the fact that T-4 slips were completed by the appellant under the Income Tax Act of Canada for the employees engaged in the conduct of the business. In this Court, no oral argument was advanced on this ground. In the Federal Court of Appeal, Urie J. remarked upon the signifi­cance of this fact as follows:
There is further disclosed in the evidence a number of instances from which it might be concluded that not only did Stuart carry on the flavourings business in fact but represented that it was so doing. Just a few examples of many support this view ....The appel­lant was shown as the employer of the employees in the flavourings business in the "Return of Remunera­tion Paid" filed with the Department of National Revenue and in the T-4 slips issued to employees.
The workers were employed by the appellant in the course of carrying on the business "for the account of Grover". The Income Tax Act requires the employer to deduct from wages and salaries at source the applicable taxes and to remit the moneys so withheld to the Minister of National Revenue. The Income Tax Act also requires the person making the deductions to issue evidence of such deductions to the employees so that credit may be claimed for taxes withheld. Vide Income Tax Act, supra, s. 47, as amended to 1968. It is clear from an examination of the transfer documents and the documents of implementation of the transfer agreement, and particularly the nominee agreement, that the parties to these agreements intended that the appellant would carry on the business for the account of Grover, and profit derived therefrom would accrue to Grover. The parties so performed these agreements. The appellant, in doing so, also acted in compliance with the tax statute in withholding taxes from, and issuing T-4 slips to, employees. I can see no consequence at law of the type claimed in the Crown's factum which would in any way indi­cate that the contract of purchase and sale of this business was somehow rendered incomplete by the performance by the appellant of its statutory obligation under the tax statute.
(iv) Perhaps related to the submission that the sale in question was incomplete and thus is to be disregarded for tax purposes, is the finding in at least two of the courts below that, by reason of the relationship between the parties, the busi­ness would be returned to the appellant when Grover's tax loss was fully spent. The Federal Court Trial Division referred to the sale in these words:
... such an obligation on the part of Grover to reconvey the assets to Stuart when the Grover loss had been absorbed in reducing the Stuart income tax, when coupled with the facts set out in the Judgment appealed from, is convincing evidence that the direc­tors of both companies never contemplated the transaction as a transfer of the Stuart assets nor a genuine sale.
This reference is apparently to the memo of the solicitor for the appellant company to which reference has already been made, and which stated in part that when the tax loss has been fully utilized, "the business carried on by Stuart Brothers will be sold by Grover to Stuart Brothers". There is nothing in the record which amounts to an enforceable agreement or undertaking to reverse the sale, or even a commitment by an officer of either the appellant or Grover to do so. In the event, no such transfer occurred as the business was sold by Grover to an independ­ent third party.
In 1969, Grover sold the business to a stran­ger. The sale included all assets and goodwill. The appellant was not a party vendor to the contract, nor did the lengthy agreement stipu­late any participation by the appellant in the closing documents. The purchaser paid in excess of two million dollars for the business and took conveyances and assignments only from Grover as the vendor. Both the parent, Finlayson Enterprises Limited, and the appellant joined in the agreement as third parties "in order to induce the purchaser to enter into the agreement" and "to be bound by all of the indemnities, warran­ties, representations and agreements made herein", and to agree to change the corporate name of Stuart Brothers Limited. All the assignments and conveyances delivered on closing in 1968 were executed by Grover alone in favour of the "purchaser" whose name in the closing docu­ments, unlike the contract, was Givaudan Lim­ited. In fact, the appellant, as already stated, did change its name, and the purchaser, by a new incorporation or a change of name of an existing corporation, adopted the corporate name Givau­dan Stuart Brothers Limited. Like the appellant in 1962 and Grover in 1966, the purchaser in 1968 adopted a name incorporating 'Stuart', obviously in order to facilitate the retention of the goodwill attaching to that name in the market. Faced with this commercial reality, it is difficult to see how the transaction between Grover and the appellant was incomplete.
At the time of the 1966 sale to Grover, Grover wished to continue the use of the name of the appellant in connection with the business for a second reason. There were serious claims outstanding in the courts against Grover in an action brought in connection with its cement business, and the testimony in the record reveals that it was desirable "to make the transfer as inconspicuous as possible" in order not to encourage Grover's adversaries in continuing the litigation, "so long as it was legally binding". This litigation was ultimately settled.
In my view, these facts and circumstances all lead inexorably to the conclusion that the transfer and sale of the business by the appellant to Grover in 1966 was, in law, fully complete. Grover became the owner of the business, and the appellant operated the business on behalf of and for the account of Grover.
B. Business Purpose Test
What then is the law in Canada as regards the right of a taxpayer to order his affairs so as to reduce his tax liability without breaching any express term in the statute? Historically, the judi­cial response is found in Bradford (Borough of) v. Pickles, [1895] A.C. 587, where it was stated:
If it was a lawful act, however ill the motive might be, he had a right to do it. If it was an unlawful act, however good his motive might be, he would have no right to do it. [Per Lord Halsbury L.C., at p. 594.]
No use of property, which would be legal if due to a proper motive, can become illegal because it is prompted by a motive which is improper or even malicious. [Per Lord Watson, at p. 598.]
In the field of taxation itself the traditional posi­tion was re-echoed in Inland Revenue Commis­sioners v. Duke of Westminster, [1936] A.C. 1, at pp. 19c20, where it was stated:
Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unap­preciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.
In the courts of the United States a different philosophy was developed in the oft-cited judg­ment in Gregory v. Helvering, Commissioner of Internal Revenue, 293 U.S. 465 (1934). The United States Supreme Court considered the Revenue Act of 1928, which, at least in 1934, contained no clause of a type generally referred to as an "anti-tax avoidance provision". The Court, in setting aside a plan of reorganization carried out by the taxpayer, did so by asserting that the proper principles applicable in construing a taxa­tion statute required such a result. Justice Suther­land, in giving the opinion of the Court, stated at pp. 469-70.
When subdivision (B) speaks of a transfer of assets by one corporation to another, it means a transfer made "in pursuance of a plan of reorganization" of corporate business; and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find? Simply an operation having no business or corporate purpose—a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner.
[…]
The whole undertaking, though conducted according to the terms of subdivision (B), was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because the transaction upon its face lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.
The taxpayer was improperly invoking a tax allowance authorized by the legislature. By an improper application of the legislative measure, the taxpayer gains no rights to the claimed benefit which would otherwise be obtainable under the statute. The element of sham crept into the language of the court and it is not clear whether, absent this element, the result would be the same. This is not the case with which we are faced. The Act is silent on the subject; and there are general provisions in the Act dealing with artificial transactions.
The same taxation philosophy was espoused by the Supreme Court of the United States in 1960 in Knetsch v. United States, 364 U.S. 361 (1960), where the Court concluded that the transaction was a sham which created no indebtedness within the meaning of the then version of the Internal Revenue Code. Mr. Justice Brennan, for the majority, concluded that the taxpayer could not rely upon formal documents "without regard to whether the transactions created a true obligation to pay interest" (at p. 367). The Court was there construing an amendment which was said to have been enacted to "close a loophole" in respect of interest deductions. The word "sham" is used in a confusing sense, and at p. 369 in his judgment, Justice Brennan appear