Amelia Rose (Appellant)
v.
Minister of National Revenue (Respondent)
Court of Appeal, Jackett CJ., MacKay and
Sweet D.JJ.—Toronto, January 31 and
February 1, 1973.
Income tax—Personal corporation—Partnerships—Corpo-
ration member of partnership carrying on active business of
managing apartment blocks—Onus of proof—Income Tax
Act, s. 68(1).
The A Co. was one of eight companies (the O companies)
which through another company owned all the voting shares
in the C Co. Several large apartment blocks acquired by C
Co. in May 1965 were managed by C Co.'s directors until
they were sold in June 1966. Appellant, who was a share
holder in the A Co., was assessed to income tax for 1965
and 1966 on the basis that the A Co. was a personal
corporation within the meaning of section 68(1) of the
Income Tax Act on the ground that it did not at any time in
those years carry on "an active financial, commercial or
industrial business" within the meaning of that enactment.
Appellant alleged that after November 1, 1965, C Co.'s
directors managed the apartment blocks not on behalf of C
Co. but on behalf of a partnership composed of the eight O
companies and another company under the terms of the
management contract, and that A Co. as a member of the
partnership was thus carrying on "an active financial, com
mercial or industrial business", viz. providing management
services.
Held, affirming Collier J., while an active business is
carried on by a partnership if it is carried on by employees
of the partnership on its behalf even though the partners are
corporations, the appellant, in this case, had failed to estab
lish that the contract for the management of the apartment
blocks was executed before C Co. sold the apartment blocks
or that the partnership ever authorized C Co.'s directors to
carry on the partnership business.
APPEAL from Collier J. [1971] F.C. 408.
COUNSEL:
W. D. Goodman, Q.C. and Franklyn E.
Cappell for appellant.
G. W. Ainslie, Q.C. and L. R. Olsson, Q.C.
for respondent.
SOLICITORS:
Goodman and Carr, Toronto, for appellant.
Deputy Attorney General of Canada,
Ottawa, for respondent.
JACKETT C.J. (orally)—This is an appeal from
a decision of the Trial Division [[1972] F.C.
408] dismissing an appeal from the appellant's
assessments under Part I of the Income Tax Act
for the 1965 and 1966 taxation years, which
assessments were based on the view that an
Ontario company, Amrose Enterprises Limited
(hereinafter referred to as "Amrose"), was a
personal corporation within the meaning of sec
tion 68(1) of the Income Tax Act during those
years.
The sole attack made on the assessments by
the appellant, who was a beneficial owner of
certain shares in Amrose, was an attack on the
correctness of the view that that company was a
personal corporation during the years in ques
tion. The importance of the issue so raised
arises from section 67(1) of the Income Tax
Act, which provides that "The income of a
personal corporation whether actually distribut
ed or not shall be deemed to have been dis
tributed to, and received by, the shareholders as
a dividend on the last day of each taxation year
of the corporation".
The meaning of the expression "personal cor
poration" for the purposes of the Income Tax
Act is determined by section 68(1) of the Act,
which reads as follows:
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 remuner
ations, annuities, royalties, interest or dividends, or
(iv) estates or trusts; and
(c) did not carry on an active financial, commercial or
industrial business.
It is common ground that the conditions in
paragraphs (a) and (b) of section 68(1) were
satisfied in so far as Amrose is concerned for
the 1965 and 1966 taxation years. The only
question to be determined on this appeal, in
respect of each of the taxation years in ques
tion, is, therefore, whether Amrose, at any time
in the taxation year, carried on an active finan
cial, commercial or industrial business.' If, in
either year, Amrose carried on such a business
for any part of the year, then Amrose was not a
personal corporation for that year and the
appeal succeeds for that year. In that event, no
question as to quantum arises as the parties are
agreed with reference thereto. If Amrose did
not carry on such a business at any time in one
of those years, Amrose was a personal corpora
tion for that year and the appeal fails for that
year.
In effect, therefore, the sole question in this
appeal, in respect of each of the taxation years
in question, is whether the appellant has, in the
Trial Division, discharged the onus of proving
that Amrose, at some time in the taxation year,
"carried on an active financial, commercial or
industrial business".
It will be sufficient, for the purpose of
explaining how that issue arises, to summarize
the state of affairs in terms that, while they may
oversimplify matters, will, I hope, be sufficient
ly accurate for that purpose.
Amrose is one of a group of eight closely held
companies generally referred to in the record as
the Oelbaum companies. The shares of each of
the eight companies belonged to one or more
different descendants of a man by the name of
Oelbaum or a spouse of such a descendant. In
each of the matters that are involved in this
appeal, where these companies were embarked
on investments or undertakings together, the
share of Amrose in relation to the interest of the
whole group was 11.25 out of 50. In the matters
that are involved in this appeal, the Oelbaum
group were interested in conjunction with a
company or companies the shares of which
belonged to members of a family by the name of
Reichmann and the two families operated in
such matters on a fifty-fifty basis.
Commencing in May or June of 1965, the two
groups, through another company, owned all the
voting shares in Central Park Estates Limited,
which company owned property that included
several large apartment blocks. Under an
arrangement with the non-voting shareholders
of Central Park Estates Limited, the companies
belonging to the two families supplied all the
directors for Central Park Estates Limited and,
between them, controlled that company includ
ing the management of the apartment blocks.
The directors so supplied consisted of three
individuals from each of the families.
While, under the arrangement with the non
voting shareholders, the directors had no right
to be paid for the services rendered by them in
conducting the management of Central Park
Estates Limited, it was contemplated at the time
that Central Park Estates Limited acquired the
properties in question, in May 1965, that a
partnership (owned fifty per cent directly or
indirectly by each family) would be established
to supply management services to Central Park
Estates Limited for a consideration to be deter
mined in accordance with the going rate; and,
under the arrangement with the non-voting
shareholders, this would have been unobjection
able. No such partnership was, however, estab
lished in May 1965; instead, commencing at that
time, the directors, of whom only five were
active, carried on the management of the apart
ment blocks, as part of the management of
Central Park Estates Limited, with a staff con
sisting of employees of Central Park Estates
Limited, of whom five were office employees
and the remainder were the employees required
to perform the necessary work in and around
the properties. Moreover, while no partnership
had been formed, commencing in May, 1965,
the trade name Central Park Management Com
pany was used in connection with the apartment
management operations and, in particular, the
bank accounts used were in that name.
In fact, the individuals who were the directors
of Central Park Estates Limited continued to
manage that company's apartment blocks until
June 1966, when the apartment blocks were
sold. It is common ground that the directors
were performing such management functions as
directors of the company until November 1,
1965. After November 1, 1965, however,
according to the appellant, the directors were
not managing this branch of the business of
Central Park Estates Limited as directors of
that company but on behalf of a partnership,
known as Central Park Management Company,
consisting-- of the Oelbaum group -of companies-
and a Reichmann company, with which partner
ship Central Park Estates Limited entered into a
contract for management services. (The appel
lant's position is that such a partnership came
into existence on November 1, 1965 and that
the management contract was entered into on
the same day.)
What the appellant contends is, in effect, that,
from November 1, 1965 until May, 1966,
Amrose was one of nine partners that were
supplying management services to Central Park
Estates Limited, that that constituted the carry
ing on of "an active financial, commercial or
industrial business", and, as that period falls
partly within Amrose's 1965 taxation year and
partly within its 1966 taxation year, it follows
that Amrose was not a personal corporation for
either of those years.
It does not seem to be in doubt that the
reason for the scheme under which the corpora
tions in question would be constituted a partner
ship to undertake management services for Cen
tral Park Estates Limited was to achieve tax
advantages for the individuals owning the
shares of some or all of those corporations.'
While this does not affect the result actually
achieved by what was done, it does, in my view,
warrant a very careful appraisal of the evidence
when considering whether what was projected
with that end in view was actually carried out.
As I appreciate it, there are several questions
that have to be answered in the appellant's
favour before she can succeed. In the first
place, were the management services in respect
of the apartment blocks actually carried out for
Central Park Estates Limited by a partnership
of which Amrose was a member during the
period from November 1, 1965 to May, 1966?
Secondly, even assuming that such a partner
ship carried out such services for Central Park
Estates Limited, can that be characterized as
the carrying on of an "active" business within
the meaning of section 68(1) of the Income Tax
Act? Thirdly, assuming that the partnership car
ried on an active commercial business, does it
follow, as a matter of law, that Amrose carried
on an active commercial business within the
meaning of section 68(1)(c)?
The learned trial judge assumed "that a part
nership, 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". In other
words, he assumed, without deciding, that the
answers to the first two questions that I have
raised are favourable to the appellant. Having
made that assumption, he then found "on the
evidence" that Amrose did not carry on "an
active commercial business."
The learned trial judge makes that finding "on
the evidence" as follows:
None of the shareholders in Amrose had anything to do
with the management of the complex. Admittedly the appel
lant's husband did contribute to the activities of the partner
ship, 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 apart
ment 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 partnership agreement
and under the law of Ontario and other common law juris-
dictions Amrose subjected itself to the liability of an
individual partner (for example, to third persons) does not to
me convert Amrose from an inactive commercial business to
an active one. [Pages 415, 416]
I have difficulty in accepting the learned trial
judge's manner of reaching this result. For the
purpose of deciding whether Amrose carried on
an active business, I do not see the relevance of
what Amrose's shareholders did or did not do in
the operation of the business. I have no doubt
that a company can carry on an "active" busi
ness even though none of its shareholders have
anything to do with the business except, as
shareholders, to elect directors, and, as direc
tors, to employ the management team. An active
business is carried on by a corporation, in my
view, if it is carried on, on behalf of the corpo
ration, by officers and servants duly employed
by the corporation. It follows, in my view, that a
partnership consisting of corporations carries on
an active business, if such a business is carried
on, on behalf of the partnership, by officers and
servants duly employed to act on behalf of the
partnership.
On the other hand, I am satisfied, as I will
now explain, that the facts relied on by the trial
judge lead to his conclusion in this case because
when they are considered in the context of the
whole matter, on the evidence that has been put
before the Trial Division, the balance of proba
bility is that the "partnership" did not perform
management services for Central Park Estates
Limited.
As I understand the appellant's case, it was
incumbent on the appellant to establish
(a) that on or about November 1, 1965, the
nine family corporations formed a partnership
called "Central Park Management Company",
(b) that on or about the same time, Central
Park Estates Limited entered into a contract
with the partnership under which the partner
ship was to manage the apartment blocks,
(c) that the partnership thereupon authorized
the five active directors to act for it in carry
ing out the management services under that
contract, and
(d) that, commencing November 1, 1965, the
five active directors carried on the manage
ment of the apartment blocks on behalf of the
partnership and not as directors of Central
Park Estates Limited.
In my view, the appellant has failed to make
out that case because it has not established that
the contract between the partnership and Cen
tral Park Estates Limited for the management of
the apartment blocks was executed before that
corporation sold their blocks. That contract
could not have been executed prior to May 31,
1966. It was not until that day that the directors
of Central Park Estates Limited passed a resolu
tion authorizing the president and treasurer of
the company to execute "the Agreement dated
the 1st day of November, 1965 between the
Company and Central Park Management Com
pany hereinbef ore referred to in connection
with the management of the apartment buildings
owned by the Company" and, in June 1966,
those buildings were sold. There is no evidence
that the contract was executed in the meantime
and it must be remembered that the onus of
proof was on the appellant.'
Furthermore, as it seems to me, there is a
complete absence of any evidence that the part
nership ever authorized the five directors to
carry on the partnership business. There is noth
ing in the partnership articles as to how the
partnership business is to be carried on. This is
probably not necessary in the case of a partner
ship whose partners are individuals because it
may well go without saying that the partners in
such a case will themselves do what is neces
sary. In a case where the partners are corpora
tions, however, I should have thought that,
before individuals can carry on business on
behalf of the partnership, they must have some
authority from the corporate partners and that it
would ordinarily be given by way of corporate
resolutions. Even assuming corporate resolu
tions are unnecessary, at least the responsible
officers of all the corporate partners should
have given the necessary authority either in
writing or verbally. There is no evidence of any
such authority having been given in this case
and, having regard to the way that the appel
lant's case was presented, I have no doubt that,
if any such authority had been given, it would
have been proven.
As I appreciate the evidence in this case, the
five individuals in question, believing that a
partnership agreement had been executed and
knowing that there was intended to be a serv
ices agreement, decided in their own minds that
they would act on behalf of the partnership in
performing the services to be provided under
that agreement. In my view, where corporations
are involved and the existence of such relation
ship is important as against third persons such
as the Revenue, this is not sufficient.
It may well be that, after Central Park Estates
Limited subsequently executed the back-dated
services contract and after the corporate part
ners accepted payment as though they had per
formed the services under that contract, the
situation was the same, as among the parties, as
though everything had been regularly done on
November 1, 1965. In other words, as among
the parties, the services would then be regarded
as having been performed by the five directors
on behalf of the partnership and not as directors
and as having been performed by the partner
ship under the management contract even
though that contract did not exist at the time
that they were rendered. However, in my view,
no such back-dating of transactions can affect
the fact that, during the period from November
1, 1965 to June, 1966, there was no services
contract and no relationship between the part
nership and the five directors.
In other words, the fact is that the partnership
did not carry on any business during the rele
vant period. It is that fact, and not some ex post
facto arrangement that is relevant to the
application of section 68(1)(c).
Having concluded that the partnership did not
carry on business during the relevant period, it
is not necessary to consider the other questions
to which I have referred.
For the above reasons, I am of opinion that
the appeal should be dismissed with costs.
* * *
MACKAY and SWEET D.JJ. concurred.
To put the question in the statutory language, it is
whether "during the whole of the taxation year in respect of
which the expression is being applied" Amrose "did not
carry on an active financial, commercial or industrial
business".
2 This seems to be the purport of evidence given, on
cross-examination, by the appellant's husband, who was the
principal witness for the appellant.
That part of the Minutes of Meeting of Directors of
Central Park Estates Limited held on May 31, 1966, in so
far as they are material to this matter, reads as follows:
Management of Apartment Buildings—
The Chairman then advised the meeting that on the 1st
day of November, 1965 the Company had engaged the
services of Central Park Management Company to assume
responsibility for the management of the various apart
ment buildings owned by the Company. The arrangements
concluded with Central Park Management Company pro
vided for remuneration to be paid at the rate of five per
cent of gross rentals received. The Chairman further
submitted to the meeting an Agreement dated the 1st day
of November, 1965 between the Company and Central
Park Management Company setting forth the terms of the
management arrangements. Before the motion was put to
a vote, all of the directors declared their interest in
Central Park Management Company. However, the Chair
man reported that the Agreement between the Company
and Central Park Management Company in respect of the
management of the buildings had been contemplated and
authorized in the original agreement between the Compa
ny, S. Reichmann & Son Limited and Webb & Knapp
(Canada) Limited in connection with the acquisition of
Flemingdon Park. ON MOTION duly made, seconded and
unanimously carried, it was
RESOLVED
1. That the Agreement dated the 1st day of November,
1965 between the Company and Central Park Manage
ment Company hereinbefore referred to in connection
with the management of the apartment buildings owned
by the Company be and the same is hereby approved and
the President and Treasurer of the Company be and they
are hereby authorized to execute the aforementioned
Agreement on behalf of the Company and to affix thereto
the corporate seal of the Company.
It is to be noted that while the Chairman advised the
meeting that, on November 1, 1965, the Company had
"engaged" the services of the partnership, he does not state
that the partnership had commenced to perform the serv
ices. Furthermore, what was obtained from the Directors
was authority to execute the agreement not ratification such
as would have been appropriate if the agreement had been
implemented as though it were in force from some earlier
time.
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.