1056 Enterprises Ltd. v. The Queen, 89 DTC 5287, [1989] 2 CTC 1 (FCTD)

Muldoon, J.:—These reasons apply to eight actions instituted in regard to income taxation, including the case at bar. The others are:

(1) by this plaintiff, allegedly for the taxation year noted in regard to the suit number:

(2) by Paradise Industries Ltd., plaintiff, allegedly for the taxation year noted in regard to the suit number:

In fact each of the plaintiffs respective statements of claim is formulated in the same terms in that each seeks relief by the vacating of notices of reassessment issued by the Minister of National Revenue (hereinafter: the Minister) for all of this plaintiff's taxation years and both of Paradise Industries Ltd.'s taxation years above listed. Since these reasons for judgment will serve for reasons in all of the cases, a copy is to be placed on each of the Court's files in this matter.

The matter in issue in each case is whether or not the plaintiff corporations were associated, pursuant to section 256 of the Income Tax Act, with Northland Drilling & Construction Co. Ltd. (hereinafter: Northland). A secondary issue, which becomes important if such association be adjudged to exist is whether the Minister was statute-barred from effecting any reassessment of the plaintiffs for the taxation years 1978 to and through 1981, as provided in subsection 152(4) of the Act. The plaintiff 1056 Enterprises was, at all material times, officially known as Cantex Engineering & Construction Co. Ltd. (hereinafter: Cantex) having effected a change of name, shown by exhibit 1, on February 28, 1985. The parties’ lawyers and the witnesses all referred to this plaintiff as Cantex.

From the date of its incorporation, February 25,1971, Cantex' shareholdings, in so far as being material to these proceedings, have always been directly vested in John Pankiw (John) for 99 per cent, and his wife Frances Pankiw (Frances) for one per cent. The Minister, however, asserts that more than ten per cent, indeed 50 per cent, of the Cantex shares were indirectly held by John’s brother, William Pankiw (William) who was, at all material times, the virtually sole shareholder of Northland. The defendant relies upon subsection 251(2), paragraph 256(1)(c) and subsection 256(2) of the Income Tax Act. Consequent upon such assertions by the Minister, he

reassessed the plaintiff to tax with respect to its 1978 to 1983 taxation years so as to increase its liability to tax on the basis that "The Small Business Deduction is not applicable due to the Cumulative Deduction Account exceeding the Total Business Limit” with respect to the 1978 taxation year by a calculation of the Small Business Deduction "based upon a /so allocation,"

as the defendant formally admits.

This Court finds and holds that Cantex and Northland, and that Paradise and Northland were never associated under the provisions of section 256 of the Income Tax Act. It may be noted that the parties agree in their pleadings that Paradise, all of whose shares John owned, was so associated with Cantex, and that these two companies have always filed their income tax returns on the basis of their being so associated.

This is a sad story of the increasingly bitter conflict between the brothers Pankiw. It proves the validity of the old adage that "good papers make good friends" and, one might add, could have served to preserve brotherly love in this case, if only the brothers had known what mutual agreement to inscribe on paper. There was no written agreement, there was no enduring oral agreement; and the papers were all futilely inscribed to patch over the widening gulf between the two brothers, and never legally delivered even if some few were signed and sealed, except, in effect, to submit their disagreements to binding arbitration.

The key testimony in the case was that expressed, respectively, by the brothers Pankiw. Unfortunately the Court finds that neither brother has been a wholly credible witness, and so the Court must find the facts and make choices on a rational, probable basis from what was expressed in their respective testimony.

Northland was incorporated in Alberta on January 5, 1961, and for almost a decade, until about 1970 or 1971 according to William, brother John was a nominal incorporating shareholder, as shown in Exhibit 13, a copy of Northland's certificate of incorporation. The material time begins in 1970. John had been working as a professional engineer in the British Columbian ministry of highways, having started as an undergraduate in 1955. By contrast, his brother William averred that he himself had never attained Grade 8 standing, but as with many persons, that lack of high school education did not noticeably impair his knowledgeability and success in business. However when John indicated he was considering going into a private professional consulting practice, Bill suggested, rather that he would sponsor John's going into the construction equipment rental business.

At some time in 1970, Bill testified it was summer, and John said early autumn, the projected business, on a loosely informal partnership basis, was tested, in Penticton, British Columbia. Two items of construction equipment were acquired by William in Northland's name, of which one was shortly thereafter rented out—on an all-found basis. That autumn the brothers discussed and planned the formation of a corporation for the equipment rental business in Penticton. John would resign from the ministry of highways and take charge of the operation. William would provide seed money in the amount of $20,000 and Northland would provide financing to acquire new or additional equipment up to the extent of $125,000. The equipment was to be kept in Northland’s ownership until paid off and then it would be bought by the new enterprise.

The brothers Pankiw orally formed a plan about the shareholding of the new corporation. Initially John would take 49 of 100 shares of the corporation and William would hold 51 shares. After the new company finally paid Northland for the equipment and acquired ownership of it, then the shareholding would be changed to 51 shares for John and 49 shares for William. The venture operated under this oral agreement until a new relationship was established or more probably left hanging, with the incorporation of Cantex in February, 1971. The seed money of $20,000 was duly recorded in the books of Cantex, but no shares were issued to William. The shares, which were issued in March 1971, were divided so that 99 shares were issued to John and 1 share was issued to John's wife, Frances, as earlier noted herein, right from the outset.

Why? The brothers differ markedly in their explanations. William's testimony on this matter (transcript 3: pp. 335 to 337) is so truculently inconsistent with the “Résumé—Verbal Agreement" (Exhibit 25, p. 2), and so illogical, blowing hot and cold about whether he could take shares and thereby spring the trap of associated corporations, or whether such status mattered nothing, so long as William received his shares, that the Court declines to believe him. The version expressed by John is at least consistent, and more probable, and is therefore accepted by the Court. It is corroborated by his wife Frances in her testimony as to neither direct shareholding nor indirect beneficial shareholding ever being intended to be accorded to William. Only William’s testimony was received as contradiction and it is rejected. No other evidence raises a sustainable or any contradictory evidence against John’s version of events. The Court accepts this testimony by John, recorded in the transcript, volume 1, at pages 90 to 93 in these passages:

Q Okay. Now, do you know why no shares were issued to William?

A Yes.

Q What was the reason for that? Or what happened, why?

A In about January of 1971 when I applied for a corporation, and advised William

of that, he advised me, and I believe he came to Penticton to discuss it, and he advised me that he didn't want any shares issued in his name because of what he described the arm's length problem. He referred to that as a tax problem, and therefore he said he didn't want shares issued, and he would like to now change the arrangement, if you will, or the deal. But he would not be a shareholder of Cantex but that he would share in the earnings of Cantex.

Q To what extent would he share in the earnings?

A Well, the extent that he discussed was that we would sort this out down the

line, or down the road.

Q But, were the earnings to be split 80/20, 60/40, 50/50 or what?

A I think the basic understanding was that they would be split 50/50.

Q 50/50?

A Yes.

Q Mr. Pankiw, I'll show you a register of shareholders of Cantex, showing John

Pankiw and Frances Pankiw as shareholders. A share certificate in your name, dated March 11, 1971 for 99 common shares of Cantex, and a share certificate in the name of Frances, also dated March 11, 1971, one share of Cantex. Are those the shares, or copies of the share certificates that you obtained, and is that a true copy of the Register of Shareholders?

A Yes, they are.

(COPY RE. SHAREHOLDERS SHARES, 11 MARCH, 1971 [3 SHEETS] MARKED EXHIBIT 2)

In answer to a question posed by the Court for clarification, John Pankiw answered in this way, which the Court accepts, at volume 1, pp. 99 and 100:

A I don't know what the question was asked, but are you talking about when the

company was incorporated, and we had the understanding at that time that he be paid one-half the earnings.

The manner in which that would be done and so on was left to be sorted out down the road at the time that Cantex had paid William and Northland out. In other words, in future years when the liabilities were covered, or the equipment was paid for, at that time the agreement would be formalized, and exactly as to how that would occur was to be left to that, resolved at that time.

In fact no earnings were ever paid to William but all equipment financing and the $20,000 seed money were repaid to William. The latter was recorded as a loan in the books of Cantex. (Transcript: volume 1, pp. 89 and 90.)

Here is how John, on cross-examination, described his dealings with William. The passages are recorded in volume 2, pp. 156, 157 and 158:

Q Now, I think you said earlier that you never were told that Cantex and Northland

were associated. Were you ever told there was a problem that you could be associated?

A I wasn't told as directly as that. The context in which the discussions took place

were that if things weren't done a certain way then there could be, and I didn't remember the term association, but there could be a higher tax rate.

Q . . . So, were you aware of—well, you knew that your brother saw a problem

right from the moment Cantex was incorporated, that's correct?

A Yes.

Q And you said that it was an arm's length problem, he told you?

A Yes.

Q And from about '74, '75 on, I think you told me in Discovery, you were aware of

the problem?

A Yes, I began to become aware of that, yes.

Q Yes, and is that one of the reasons why in sorting out, trying to finalize your

problems with your brother, you tried to find ways and means of coming to a resolution with your brother without getting into any pitfalls tax-wise?

A What happened was, as we might be aware of by now, I was getting quite

frustrated by the lack of being able to resolve these issues, and Cantex had not been in a position to pay very much tax, because they were buying equipment and so on, and there weren't extra monies available.

And so, despite, from my point of view, despite what the tax ramifications might be, I wanted the matter resolved.

Q Okay, please tell me how it was, because that is how I —when you went through

the years.

A Yes, as I pointed out, when Cantex was formed or incorporated, and Bill didn't

want to take any shares, and we would formalize those matters at a later date, the Wiltse lands were acquired, albeit in Bill's name, and the agreement then was, the agreement was that after Cantex paid out Northland for the equipment, the arrangement, let's call it that, was to be formalized.

Q Yes.

A Once the payments was made, the final payments were made, I asked him for

formalization of the arrangement, if you will, because I wanted to know where I stood.

Q That was some time in 1974?

A 1974.

Now, it is clear that despite William’s insistence at trial that he wanted his shares and he wanted them from day one, he really flinched at insisting because, as he said, in Exhibit 25 at p. 2, he was greatly concerned about the possibility of causing Northland and Cantex to become associated and he

”. . did not know how to acquire these shares without jeopardizing my position with, the Drilling Companies. . . .” (Exhibit 25, p. 2.) Therefore, although the brothers hatched an oral agreement about prospective shareholdings, when the moment of truth, the incorporation, arrived William flinched and, together, they agreed not to agree, but rather to postpone the time for concluding an agreement about Cantex. It is equally clear that John treated William’s provision of equipment and his seed money as loans to be paid off eventually.

If it could be found on the evidence that there was any meeting of minds whatsoever to the effect that William’s interest, if any, in Cantex was secured metaphysically by equitable shareholdings of which it was agreed that John would serve as trustee or other fiduciary, then the plaintiff would have some task to displace the Minister’s contention of William’s indirect ownership of not less than ten per cent of the issued shares of Cantex. But no one, not even William, considered that any of the issued shares belonged to William. He did not want them because of the matter, which he knew well, of association. William’s appreciation of the matter of association is revealed at pp. 359 and 360 of volume 4 of the transcript. He said in Exhibit 25 at p. 2 that he did not know, (despite the advice throughout of his accountants and lawyers), how to acquire these shares. He and his advisers, in common with this Court, did not consider that he indirectly owned any issued shares. Northland certainly did not acknowledge any association under the Act.

Objectively on the evidence, he did not evince such ownership because the matter between him and John was simply and starkly unresolved at the moment shares in Cantex were to be issued—one is tempted to coin the word dis-resolved. It was "the arm's length problem” known, appreciated and raised by William. Their oral agreement was dissolved, frustrated and aborted, and no major agreement seems ever to have been arrived at by them until on August 14, 1981, they made a pragmatic joint submission to arbitration. It is Exhibit "A" to Exhibit 10. Whatever William and John did between the incorporation of Cantex and their agreement to make an end to their disputes through arbitration, did nothing to effect any association between Northland and Cantex or between Northland and Paradise under section 256 of the Act. How could such association arise? The brothers succeeded in avoiding any association of their corporations. There was no conforming with the provisions of that section. William certainly exercised no control over Cantex, and he had no unilateral power to wrench direct or indirect ownership of the issued shares from John and Frances Pankiw, who never agreed to yield any shares to William. Certainly William was powerless to conjure up such ownership as is described in section 256, and even if he could, the Court finds that he always sought to avoid association of the corporations, and that no such association was ever effected pursuant to section 256.

As the business of Cantex prospered and grew, it paid off its obligations to Northland and the loans made by William. But Cantex was expanding beyond the rental business and becoming involved in road building and consulting engineering. Cantex' need for gravel led to the acquisition of the "Wiltse lands", yet another occasion for a point of contention between the brothers. Each asserts that he "found" the land, but nothing substantive turns on that.

John testified that he was unable to finance purchase of that land without help from William. John took an option to gain time to discover if the land could be re-zoned and if a gravel extraction permit could be obtained. John approached William for the financing but the latter asserted that neither John, nor Cantex, nor John and William jointly ought to buy the land. Rather, William insisted, he would buy that land, as a guaranty for his share of Cantex' earnings—as distinct be it noted, from shares of Cantex. It was thereupon understood that John would be entitled to a half interest in the Wiltse lands and William would be entitled to a half of Cantex' earnings. William asked, again, that such understanding be formalized at some indefinite future time. In the meanwhile Cantex could extract gravel and pay royalties.

If as the Minister contends, William indirectly owned up to 50 per cent of the issued shares of Cantex, he could have enhanced the value of his alleged indirectly owned registered shares by permitting the Wiltse lands to become an asset of Cantex, and obtained repayment of the $52,500 purchase price from Cantex as yet another loan made to it. He wanted nothing to do with that proposition. Indeed, William caused Ellis Creek Holdings Ltd. to be incorporated and to take title to the Wiltse gravel land. William obtained shares as consideration for that "tax roll-over". So he testified as recorded in the transcript: volume 4, p. 358. A subsequent proposal for a partnership between Cantex and Ellis Creek was drafted (part of Exhibit 9) but it, too, came to naught. Cantex paid no royalties for the gravel which was in fact extracted for its construction projects. Moreover no portions of Cantex' earnings nor yet any dividends of the corporation were ever paid to William or to Northland.

John certainly felt that something was owed to William and to that end he, and they, explored over the years some means of formalizing the obligation which had been left so undefined. Among those exploration occasions was that which occurred on May 13 and 14, 1975. On the earlier date William and John met in order to iron out last minute details. It seemed that some resolution would at last be effected to articulate their unhappy and thus far inchoate relationship. Various papers were prepared for execution at the offices of Boyle & Company, a solicitors’ firm in Penticton. Mr. Edgar Dewd- ney was the solicitor involved in formulating the documents. The meeting took place on May 14, 1975. Present were William, John, Frances, Mr. Dewd- ney and his associate Richard Thompson, William’s accountant, Ed Roach, and John’s accountant, Dennis Hack. In their respective testimony the brothers accused each other of breaking up the meeting. The result was another abortive attempt to formalize their still inarticulate relationship in regard to Cantex and the Wiltse lands.

It is, however, significant that in May 1975, John and Frances were then prepared to issue 49 shares in Cantex to William. To that aborted end a company resolution and a share certificate, Exhibit 6, were executed as part of the brothers' intended rationalization package, which never came into being because William declined to execute his part of the intended documentation John and Frances testified that Exhibit 6 was completed before the break up. William testified that he learned of that share certificate only from the defendant's counsel and the departmental investigator in November 1987. His solicitors had a copy of the share certificate in their file and William seeks to have the Court believe that he was not told of it. Such withholding of that information from William by his solicitor is possible, but highly improbable. The Court does not accept William’s testimony on that matter. Based on William’s demeanour and his established appreciation of the matter of associated companies, the logical inference is that he would not touch it or even acknowledge the certificate's existence, lest he precipitate the very detriment which he had thus far succeeded in avoiding. Incredibly, William testified upon cross-examination to the following inconsistencies and improbabilities, recorded in the transcript: volume 4 at pp. 368 and 369:

A I wrote a letter to my lawyers demanding my shares.

Q In 1981.

A And '82.

Q In '81 and '82, that's when the arbitration was going on, right?

A Right.

Q But prior to that time you didn't do one thing in the way of any formal sense.

You say that you'd been complaining to John, where are my shares, he denies that. But, I want to ask you, did you have a lawyer write a demand letter, did you make an application in Court to do anything under the B.C. Company Act in any formal way to secure your interest in that company in the way of owning shares? You didn't, did you?

A No, I didn't.

One could go on to analyze the documentary evidence and testimony of William Pankiw without finding any consistent evidence of association of Cantex, Paradise and Northland. His résumé of the oral agreement, Exhibit 25 earlier mentioned, is self-serving and written in his own word as late, at least, as 1976 and probably even more recently, as may be inferred from the last paragraph on page 9. Two aspects of that narration, self-serving as it is, stand out. The first is that William describes his relationship with John in three places, at least, as a partnership. He testified that his educational achievement was such that his terminology is not precise, but his vocabulary in his testimony renders that excuse improbable. The second aspect is what the whole narrative insistently proclaims; from the time he aborted the preliminary oral agreement and balked at becoming a shareholder of Cantex in 1971 through the arbitration proceedings and to the present he has never "owned directly or indirectly in respect of” Cantex or 1056 Enterprises Ltd., any “of the issued shares of any class of the capital stock thereof". The search to rationalize the brothers' relationship proceeded in fits and starts, but no agreement, or legal relationship was ever consumated by which the companies ever became associated within the meaning of the Income Tax Act.

At trial the defendant's counsel formally abandoned in all statements of defence the Minister's basis for reassessment which was pleaded thus:

(g) in his arbitration report, dated July, 1983, P.N. Thorsteinsson found William Pankiw to be a beneficial shareholder in the plaintiff corporation and found that William Pankiw had a 50 per cent interest in the plaintiff corporation;

That abandonment essentially obviated the thrust and utility of the testimony of the defendant's witness, Brian Rodger, senior investigator for the Department of National Revenue in Penticton, British Columbia.

Mr. Rodger did not interview John Pankiw, Mr. Dewdney, Mr. Roach or Mr. Thorsteinsson. He spoke with Mr. Drossos, now Judge Drossos, who was then John's solicitor, only in the offices of Revenue Canada in the presence of the plaintiffs' counsel. Mr. Rodger noted the original oral agreement of the brothers which had been dissolved before the Cantex shares were issued, in favour of some vague indication of some future agreement or rationalization of their interests. Mr. Rodger did not appreciate that fact, but rather concluded that the roughly 50-50 division of shares in Cantex continued all along through the years in issue. Based on that mistake, his conclusion, not unnaturally, was that the companies were associated and had misrepresented the facts in their respective income tax returns. Mr. Rodger did interview William Pankiw and reviewed his affidavit filed on January 9, 1984, in proceedings taken by John and the plaintiff in the Supreme Court of British Columbia for enforcement of the arbitration award rendered by Mr. Thorsteinsson.

That affidavit, a copy of which is Exhibit 26, contains several references to the brothers' business relationship being "a venture" or “a joint venture". Mr. Rodger's cross-examination on that matter, recorded in the transcript: volume 4, p. 444, runs thus:

Q This is filed in the Supreme Court of B.C. on January 9, 1984, and it's signed

January 5, '84. This is the so-called five page affidavit of William Pankiw, and he refers in here in paragraphs 3, 4 and 5 to venture or joint venture. Do you recall that?

A Yes, I recall that.

Q Yes, okay. Did that, did you not perhaps draw any inference from that, counter

to what you had thought?

A During, when I was building up these things, I had an interview with William

Pankiw, and I noted that he had referred to joint venture, and different things. I asked him about joint venture and what he meant by that, and to him, he referred to me that it was just a term he used.

The Court does not infer that Mr. Rodger was too eager to believe the worst, but it is prepared to infer that the worst is what he received from and during his interview with William Pankiw, based on William’s manner of testifying on the various issues and documents, not least his self-worded résumé of the initial oral agreement, Exhibit 25. From William Pankiw’s testimony and demeanour at trial, "just a term he used” appears to be another excuse in the hot-and-cold, shifting inconsistencies of his on-again-off-again descriptions of a relationship in which he wanted shares in Cantex while not wanting such shares lest he be enmeshed in "the arm's length problem", the statutory association of Cantex and Northland.

None of the allegations upon which the Minister proceeded to base the reassessments as if the plaintiffs and Northland were associated corporations withstands the evidence and the weight of evidence before the Court. Corporations cannot be or become associated merely by what their principals thought or might have done. It takes an agreement or declaration or some legally efficacious mechanism or regime to effect the association defined in section 256 of the Act. In effect the Minister was pursuing a will- o'-the-wisp because of the mistaken belief that the brothers' initial oral agreement survived and operated at all material times. It ceased before the brothers could carry it into effect, directly or even indirectly, in regard to the shareholdings in Cantex. It ceased forever, because of William’s refusal to accept shares, with John’s acquiescence or full agreement in such refusal, and no such agreement was ever again forged and consummated. The arbitration proceedings and subsequent Court proceedings do not bear relevantly on this issue.

At trial the defendant's counsel acknowledged that the Minister seeks no penalties against the plaintiffs and further that in so far as misrepresentation is alleged in order to open the otherwise statute-barred years to reassessment, the defendant alleges no fraud on the plaintiffs’ part. The above reasoned finding that there was never any association between the brothers' corporations pursuant to the Income Tax Act, would seem to obviate the need to adjudicate the issue of alleged misrepresentation, under subsection 152(4), which “is attributable to neglect, carelessness or wilful default”. However, if in other proceedings, it be authoritatively held that there was an association, it will be seen from the evidence tendered and testimony expressed herein that the non-reporting of such an association was and is the absolute antithesis of neglect, carelessness or wilful default. It was a deliberate, thoughtful and bona fide non-reporting. John Pankiw and therefore Cantex knew about such association and indeed reported the same in regard to Paradise. Subsection 152(4) protects such conduct, and perhaps only such conduct, where the taxpayer thoughtfully, deliberately and carefully assesses the situation as being one in which the law does not exact the reporting of that which the taxpayer bona fide believes does not exist. Otherwise, no meaning can be attributed to the subsection, which clearly does open that avenue of conduct to the taxpayer. In the event that this issue become a matter of moment, and in order, therefore, to avoid multiplicity of proceedings, the Court now makes this alternative finding: the plaintiff, in filing its returns for the 1978 to 1983 taxation years inclusive, made absolutely no misrepresentation which is or could be attributable to neglect, carelessness or wilful default in filing those returns or in supplying information under the Act. As noted counsel abandoned any allegation of fraud. It is, accordingly, now held that the Minister lacked jurisdiction to reassess the plaintiff to tax with respect to its 1978 to 1981 taxation years inclusive. The same finding is now made, mutatis mutandis, in regard to the Minister's reassessment to tax in the cases of Paradise Industries Ltd.

The said relevant notices of reassessment are accordingly set aside and vacated. For all of the above noted actions of 1056 Enterprises Ltd. and Paradise Industries Ltd., the plaintiffs may present for taxation one cumulative bill of costs, comprehending all taxable disbursements incurred in these actions, with counsel fees to be cumulatively taxed and allowed at 180 per cent of that sum which is allowable for that notionally sole action which proceeded to trial, although all eight actions technically did so proceed, in fact.

The plaintiffs’ solicitors are directed, pursuant to Rule 337(2)(b), to draw an appropriate form of judgment to implement the conclusions of the Court herein. Before submitting such form, the defendant's solicitors are to be consulted for their opinion of it, and, if possible for their approval as to form, if not content. Such directed effort may be included in allowable counsel fees.

Appeals allowed.