[1993] 1 F.C. 622
T-1582-89
Hickman Motors Limited (Plaintiff)
v.
Her Majesty the Queen (Defendant)
Indexed as: Hickman Motors Ltd. v. Canada (T.D.)
Trial Division, Joyal J.—Ottawa, July 15, 1992 and January 6, 1993.
Income tax — Income calculation — Capital cost allowance — Corporate reorganization to show financial support for associated company — Subsidiary wound up into parent — Four days later plaintiff selling assets of wound-up company — Writing off against income undepreciated capital cost of subsidiary thereby reducing 1985 and 1986 incomes to nil — Sourcing limitation in Income Tax Act, s. 20 and business purpose limitation in Regulations, s. 1102(1)(c) indicating to claim capital cost allowance, taxpayer must establish acquired assets for purpose of making profit from business — Quick turnover indicating no intention of earning income from assets — S. 88(1.1) preserving principle of continuing business being carried on by parent.
This was an appeal from reassessments which varied the plaintiff’s income tax payable for 1985 and 1986. The plaintiff carried on business as a General Motors car and truck dealership. It was associated with four other companies. A subsidiary of one of those associated companies was a heavy equipment dealer. In response to pressure from a major supplier of that subsidiary, a corporate restructuring was undertaken to show financial support for the subsidiary. Two weeks after the plaintiff purchased all the shares of the subsidiary, the business was wound up into its parent, the plaintiff. Four days later the plaintiff sold all of the assets, net of liabilities, of the wound-up subsidiary to a newly incorporated company. The plaintiff wrote off the undepreciated capital costs of the subsidiary against its income, thereby reducing its 1985 and 1986 incomes to nil. The defendant disallowed the capital cost allowance claimed in 1984 and varied the income tax payable for 1985 and 1986 on the ground that the plaintiff had not acquired the assets for the purpose of gaining or producing income. The plaintiff objected on the ground that it was not required to show that the assets were acquired for the purpose of gaining or producing income, as the assets were transferred as part of a business reorganization pursuant to subsections 88(1) and 88(1.1), and alternatively the plaintiff did acquire and use the assets to gain or produce income. The plaintiff argued that in any event section 88 provides an automatic roll-over whereby on the winding-up of a wholly-owned subsidiary into its parent, all of the rights and obligations, including the losses of the subsidiary, are transferred to the parent. It does not impose an income-producing condition. The defendant confirmed the reassessments.
Income Tax Act, subsection 20(1) provides that in computing income from business or property, there may be deducted such part of the capital cost or such amount in respect of the capital cost as is allowed by regulation. Income Tax Regulations, paragraph 1102(1)(c) deems that the classes of depreciable property in Schedule II shall not include property that was not acquired to gain or produce income.
Held, the appeal should be dismissed.
The sourcing limitation in section 20 as well as the business purpose limitation in paragraph 1102(1)(c) indicate that the plaintiff must establish that it acquired such assets for the purpose of making a profit from a business it is carrying on to claim capital cost allowance in respect of the assets. Whether there is a business purpose must be ascertained from a consideration of all the facts and circumstances surrounding the acquisition. The short turnover period of four days was a clear indication that there was neither an intention nor any more than a notional attempt to earn income from the assets acquired on the winding-up. The capital cost of the assets of a heavy equipment dealer is not applicable to the income of the plaintiff’s business of automotive sales and services which it carried on in its 1984 taxation year.
The principle of a continuing business being carried on by a parent is preserved in subsection 88(1.1). It gives strength to the proposition that the roll-over provisions are only triggered when the capital assets transferred from a subsidiary to a parent are used in the parent’s business, a condition not met in this case. Such an interpretation is also consonant with the more generic principle underlying capital cost allowances that capital assets may be depreciated only when used in the business. Having found that the assets involved could not have been realistically used in the plaintiff’s business, the statutory condition has not been met.
STATUTES AND REGULATIONS JUDICIALLY CONSIDERED
Income Tax Act, R.S.C. 1952, c. 148, s. 11.
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 20(1)(a), 88(1) (as am. by S.C. 1973-74, c. 14, s. 27; 1980-81-82-83, c. 48, s. 48), (1.1) (as enacted by S.C. 1977-78, c. 1, s. 43; as am. by S.C. 1984, c. 1, s. 39), 111, 172(2) (as am. by S.C. 1980-81-82-83, c. 158, s. 58), 245 (as am. by S.C. 1986, c. 6, s. 124), 248(1).
Income Tax Regulations, C.R.C., c. 945, ss. 1100(15), 1102(1)(c).
CASES JUDICIALLY CONSIDERED
DISTINGUISHED:
Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536; [1984] CTC 294; (1984), 84 DTC 6305; 53 N.R. 241.
CONSIDERED:
Bolus-Revelas-Bolus Ltd. v. M.N.R., [1971] C.T.C. 230; 71 D.T.C. 5153 (Ex. Ct.); Holiday Luggage Mfg. Co. v. Canada, [1987] 2 F.C. 249; [1987] 1 C.T.C. 23; (1986), 86 D.T.C. 6601; 8 F.T.R. 94 (T.D.); Oceanspan Carriers Ltd. v. Canada, [1987] 2 F.C. 171; [1987] 1 C.T.C. 210; (1987), 87 D.T.C. 5102; 73 N.R. 91 (C.A.); Lea-Don Canada Limited v. Minister of National Revenue, [1971] S.C.R. 95; (1970), 13 D.L.R. (3d) 117; [1970] C.T.C. 346; 70 D.T.C. 6271; Greenberg v. Commissioners of Inland Revenue (1971), 47 T.C. 240 (H.L.); Inland Revenue Commissioners v. Westminster (Duke of), [1936] A.C. 1 (H.L.).
AUTHORS CITED
Alpert, Howard J. “Winding-Up Under Section 88” (1974), XXII Can. Tax J. 98.
Arnold, Brian J., et al. (eds.) Materials on Canadian Income Tax, 8th ed. Don Mills, Ont.: R. de Boo, 1989.
Beam, Robert E. and S. N. Laiken. Introduction to Federal Income Taxation in Canada: Commentary and Problems, 1990-91 ed. Don Mills, Ont.: CCH Canadian Limited, 1990.
Driedger, Elmer A. Construction of Statutes, 2nd ed. Toronto: Butterworths, 1983.
Gilmour, Arthur W. Income Tax Handbook, 1978-79, 27th ed. Toronto: R. de Boo, 1979.
Harris, Edwin C. “Winding-up (Subsection 88(1))” (1980), 32 Can. Tax Found. 102.
Krishna, Vern. The Fundamentals of Canadian Income Tax: an Introduction, 3rd ed. Toronto: Carswell, 1989.
APPEAL from income tax reassessments disallowing capital cost allowance claimed by a parent against its income based on the undepreciated capital costs of a subsidiary wound up into the parent. Appeal dismissed.
COUNSEL:
James R. Chalker for plaintiff.
Roger Taylor and André LeBlanc for defendant.
SOLICITORS:
Chalker, Green & Rowe, St. John’s, Newfoundland, for plaintiff.
Deputy Attorney General of Canada for defendant.
The following are the reasons for judgment rendered in English by
Joyal J.: This is an appeal by way of Statement of Claim pursuant to subsection 172(2) of the Income Tax Act [S.C. 1970-71-72, c. 63 (as am. by S.C. 1980-81-82-83, c. 158, s. 58)] from two notices of reassessment, dated September 26, 1988, which varied the plaintiff’s income tax payable for the taxation years 1985 and 1986.
BACKGROUND
The plaintiff Hickman Motors Limited (hereinafter Hickman), along with associated companies, Hickman Holdings Limited (hereinafter Holdings), Trio Holdings Limited (hereinafter Trio), A.E. Hickman Company Limited (hereinafter A.E.), and Hickman Equipment (1985) Limited (hereinafter Equipment 85), carries on business in the province of Newfoundland and has its principal place of business in St. John’s.
At one time, Hickman Equipment Limited (hereinafter Equipment), not to be confused with Equipment 85, was a wholly-owned subsidiary of A.E. Its principal business was in the leasing of heavy equipment. Its losses and liabilities were reflected in the consolidated financial statements of the parent. The management at Hickman thought it necessary to correct this situation by disassociating the two companies so as to make A.E.’s financial situation more attractive to suppliers and purchasing groups.
It is stated that John Deere Limited, which was the major equipment supplier for Equipment, was pressuring the Hickman group to display its financial support for Equipment. In order to achieve this end, a corporate restructuring was undertaken by the plaintiff and the associated group, consisting of the following transactions:
1. On December 14, 1983, Holdings caused the incorporation of Trio as its wholly-owned subsidiary;
2. On December 15, 1983, A.E. invested $860,000 in redeemable preference shares of Trio;
3. On December 15, 1983, Trio acquired from A.E. all the outstanding shares of Equipment for $1;
4. On December 16, 1983, Trio invested $860,000 in redeemable shares of Equipment;
5. On December 14, 1984, all shares of Equipment were sold by Trio for $860,000 to the plaintiff;
6. On December 28, 1984, Equipment was voluntarily liquidated and wound up into its parent, the plaintiff;
7. On January 2, 1985, Trio caused the incorporation of Equipment 85, and invested $860,000 in the common shares;
8. On January 2, 1985, all the assets, net of liabilities of Equipment were sold by the plaintiff to Equipment 85 for the consideration of $860,000.
As a result of the winding-up of Equipment, there was transferred to the plaintiff $876,859 of non-capital losses of Equipment and the undepreciated capital cost balance of $5,196,442, of which $2,029,942 was claimed by the plaintiff as capital cost allowance in respect of the taxation year 1984.
In its 1984 income tax return, the plaintiff reported a loss of $1,251,682 and non-capital losses carried forward from 1981, 1982, 1983 and 1984 for total non-capital losses carried forward to 1985 of $2,131,912.
In its 1985 income tax return, the plaintiff reported a net income of $985,527 and applied against that amount a similar amount of non-capital losses, thereby yielding nil taxable income.
In its 1986 income tax return, the plaintiff reported a net income of $989,460 and applied against that amount a similar amount of non-capital losses, thereby yielding nil taxable income.
By notices of reassessment dated September 26, 1988, the defendant disallowed the capital cost allowance claimed by the plaintiff in 1984, and accordingly varied the plaintiff’s income tax payable for the taxation years 1985 and 1986 on the ground that the assets were not acquired by the plaintiff for the purpose of gaining or producing income.
By notice of objection dated December 21, 1988, the plaintiff objected to the defendant’s reassessment on the ground that it was not required to show that the assets were acquired for the purpose of gaining or producing income, as the assets were transferred as part of a business reorganization pursuant to subsections 88(1) [as am. by S.C. 1973-74, c. 14, s. 27; 1980-81-82-83, c. 48, s. 48] and 88(1.1) [as enacted by S.C. 1977-78, c. 1, s. 43; as am. by S.C. 1984, c. 1, s. 39] of the Act, and alternatively, if such a purpose was necessary, the plaintiff did in fact acquire and use the assets to gain or produce income.
By notice of confirmation, dated April 27, 1989, the defendant confirmed the reassessments on the ground that there was no non-capital loss for the 1984 taxation year that was deductible in computing the taxable income for the 1985 and 1986 taxation years.
THE DEFENDANT’S CASE
The defendant alleges that the claim by the plaintiff for the deduction of capital cost allowance was properly disallowed on the following grounds:
1. No portion of the capital cost of the property acquired in the winding-up was wholly applicable or could reasonably be regarded as applicable to the income from the plaintiff’s business in its 1984 taxation year within the meaning of paragraph 20(1)(a) of the Act;
2. The property acquired in the winding-up was not acquired by the plaintiff for the purpose of gaining or producing income from its business, and hence was deemed not to be depreciable property by paragraph 1102(1)(c) of the Regulations [Income Tax Regulations, C.R.C., c. 945]; and
3. In any event, to the extent that any portion of the capital cost allowance deduction by the plaintiff was in respect of property used for the purpose of earning leasing revenue, subsection 1100(15) of the Regulations required its reduction to practically nil, as the amount of the plaintiff’s income for the year from leasing the property was insignificant.
THE PLAINTIFF’S CASE
The plaintiff takes the position that the transaction entered into late in December of 1984 fully complies with the expressed provisions of subsections 88(1) and 88(1.1) of the Income Tax Act. The assets involved were transferred in the course of a business reorganization of the kind contemplated in that section. They were transferred for the purposes of gaining income and were in fact used for such purposes.
In any event, argues the plaintiff, section 88 of the Act provides for automatic roll-over provisions whereby on the winding-up of a wholly-owned subsidiary into its parent, all of the rights and obligations, including of course the losses of the subsidiary, are transferred to the parent. That is all that section 88 provides and it should be unnecessary to establish that the acquired assets produced income.
Further, says the plaintiff, nothing in its course of action was an abuse of rights under the Act. The plaintiff dutifully followed the method and procedure laid down in the Act and is therefore entitled to all of its relieving provisions.
THE APPLICABLE LAW
The provisions of the Act cited to me by counsel for the parties are as follows:
Subsection 88(1.1):
88. …
(1.1) Where a Canadian corporation (in this subsection referred to as the “subsidiary”) has been wound-up and not less than 90% of the issued shares of each class of the capital stock of the subsidiary were, immediately before the winding-up, owned by another Canadian corporation (in this subsection referred to as the “parent”) and all the shares of the subsidiary that were not owned by the parent immediately before the winding-up were owned at that time by a person or persons with whom the parent was dealing at arm’s length, for the purpose of computing the taxable income of the parent and the tax payable under Part IV by the parent for any taxation year commencing after the commencement of the winding-up, such portion of any non-capital loss, restricted farm loss or farm loss of the subsidiary as may reasonably be regarded as its loss from carrying on a particular business (in this subsection referred to as the “subsidiary’s loss business”) and any other portion of any non-capital loss of the subsidiary from any other source for any particular taxation year of the subsidiary (in this subsection referred to as the “subsidiary’s loss year”), to the extent that it
(a) was not deducted in computing the taxable income of the subsidiary for any taxation year of the subsidiary, and
(b) would have been deductible in computing the taxable income of the subsidiary for its first taxation year commencing after the commencement of the winding-up, on the assumption that it had such a taxation year and that it had sufficient income for that year,
shall, for the purposes of paragraphs 111(1)(a), (c) and (d), subsection 111(3) and Part IV,
(c) in the case of such portion of any non-capital loss, restricted farm loss or farm loss of the subsidiary as may reasonably be regarded as its loss from carrying on the subsidiary’s loss business, be deemed, for the taxation year of the parent in which the subsidiary’s loss year ended, to be a non-capital loss, restricted farm loss or farm loss, respectively, of the parent from carrying on the subsidiary’s loss business, that was not deductible by the parent in computing its taxable income for any taxation year that commenced before the commencement of the winding-up, and
(d) in the case of any other portion of any non-capital loss of the subsidiary from any other source, be deemed, for the taxation year of the parent in which the subsidiary’s loss year ended, to be a non-capital loss of the parent that was derived from the source from which the subsidiary derived the loss and that was not deductible by the parent in computing its taxable income for any taxation year that commenced before the commencement of the winding-up,
except that
(e) where, at any time, control of the parent or subsidiary has been acquired by a person or persons (each of whom is in this section referred to as the “purchaser”) such portion of the subsidiary’s non-capital loss or farm loss for a taxation year ending before that time as may reasonably be regarded as its loss from carrying on a particular business is deductible by the parent for a particular taxation year ending after, that time
i) only if throughout the particular year and after that time that business was carried on by the subsidiary or parent for profit or with a reasonable expectation of profit, and
ii) only to the extent of the aggregate of
(A) the parent’s income for the particular year from that business and, where properties were sold, leased, rented or developed or services rendered in the course of carrying on that business before that time, from any other business substantially all the income of which was derived from the sale, leasing, rental or development, as the case may be, of similar properties or the rendering of similar services, and
(B) the amount, if any, by which
(I) the aggregate of the parent’s taxable capital gains for the particular year from the disposition of property owned by the subsidiary at or before that time, other than property that was acquired from the purchaser or a person who did not deal at arm’s length with the purchaser,
exceeds
(II) the amount, if any, by which the aggregate of the parent’s allowable capital losses for the particular year from the disposition of property described in sub-clause (I) exceeds the aggregate of its allowable business investment losses for the particular year from the disposition of that property.
Subsection 20(1):
20. (1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:
(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation;
Subsection 1100(15) of the Regulations:
1100.…
(15) Notwithstanding subsection (1), in no case shall the aggregate of deductions, each of which is a deduction in respect of property of a prescribed class that is leasing property owned by a taxpayer, otherwise allowed to the taxpayer under subsection (1) in computing his income for a taxation year, exceed the amount, if any, by which
(a) the aggregate of amounts each of which is
(i) his income for the year from renting, leasing or earning royalties from, a leasing property or a property that would be a leasing property but for subsection (18), (19) or (20) where such property is owned by him, computed without regard to paragraph 20(1)(a) of the Act, or
(ii) the income of a partnership for the year from renting, leasing or earning royalties from, a leasing property or a property that would be a leasing property but for subsection (18), (19) or (20) where such property is owned by the partnership, to the extent of the taxpayer’s share of such income,
exceeds
(b) the aggregate of amounts each of which is
(i) his loss for the year from renting, leasing or earning royalties from, a property referred to in subparagraph (a)(i), computed without regard to paragraph 20(1)(a) of the Act, or
(ii) the loss of a partnership for the year from renting, leasing or earning royalties from, a property referred to in subparagraph (a)(ii), to the extent of the taxpayer’s share of such loss.
Paragraph 1102(1)(c) of the Regulations:
1102. (1) The classes of property described in this part and in Schedule II shall be deemed not to include property
…
(c) that was not acquired by the taxpayer for the purpose of gaining or producing income;
FINDINGS
It is quite evident that the situation facing the Court cannot be wholly explored without reference to the purpose behind the several transactions in which the Hickman group of companies became involved and which culminated in the plaintiff acquiring the assets and liabilities of Equipment, and turning them over to Equipment 85 some four days later.
As previously stated, the plaintiff’s reorganization was undertaken in order to satisfy John Deere Limited of the plaintiff’s financial support for one of its associated companies, namely Equipment. The purpose was achieved by having the plaintiff, which enjoyed good financial stability, hold the assets and liabilities of Equipment. I may observe here that if this had marked the end of the several transactions, the issue might not have reached the Court.
In fact, however, Equipment 85 was then incorporated for the purpose of purchasing these same assets and liabilities from the plaintiff. According to the evidence, the plaintiff, a General Motors dealer in cars and trucks, had no intention of carrying on the business of a heavy equipment dealer, which had been Equipment’s mainstay and which Equipment 85 was to inherit.
It is also noted that capital cost allowances otherwise claimable by Equipment were not available to it.
It might therefore be inferred that the scheme was merely tax-driven and that there was no legitimate business purpose involved. There might follow from this inference that the tax avoidance provision of section 245 [as am. by S.C. 1986, c. 6, s. 124] of the Act is brought into play. Neither party, however, has submitted arguments in favour of or against the application of that particular provision of the Act. There is therefore no need to examine that issue any further.
There is need, nevertheless, to go more thoroughly into the more fundamental concept of capital cost allowances. A deduction in that account is found in subsection 20(1) of the Act. A deduction on account of business or property is allowed thereunder as is wholly or partly applicable to “that source” and is deductible as to such part of the capital cost or such amount in respect of the capital cost as is allowed by regulation.
Paragraph 1102(1)(c) of the Regulations appears to be consonant with the sourcing provision of section 20 where the classes of depreciable property found in Schedule II are deemed “not to include property … that was not acquired by the taxpayer for the purpose of gaining or producing income”.
The sourcing limitation in section 20 as well as the business purpose limitation in paragraph 1102(1)(c) would indicate to me that for the plaintiff to claim capital cost allowance in respect of the assets, it must establish that it acquired such assets for the purpose of profit from a business it is carrying on.
It is well-settled law that a determination of whether there is or is not a business purpose is an objective test which must be ascertained from a consideration of all the facts and circumstances surrounding the acquisition. In Bolus-Revelas-Bolus Ltd. v. M.N.R., [1971] C.T.C. 230, Gibson J. of the Exchequer Court reviews at some length the available case law on that point and he refers to section 11 of the Act [R.S.C. 1952, c. 148], as it then was, providing for the deductibility of capital cost allowances, and for the condition attached to that provision under paragraph 1102(1)(c) of the Regulations.
In the case of the plaintiff before me, it is difficult to see how the assets of a John Deere franchise owned and operated by Equipment were used in the business of the plaintiff to produce income. The evidence discloses that the plaintiff’s sales in 1984 were in excess of $75 million, and a meagre 1.9% of these sales were attributed to leasing. The mere fact that these assets were available for leasing does not, in my respectful view, affect the real purpose of the acquisition. I should find that the short turnover period of some four days is a pretty clear indication that there was neither an intention nor, for practical purposes, any more than a notional attempt to earn income from the assets acquired on the winding-up. In such circumstances, it would appear to me that paragraph 1102(1)(c) of the Regulations is a bar to the plaintiff’s claims.
I should also refer to paragraph 20(1)(a) of the Act. There again, the deductibility refers to the sourcing principle. It is evident to me that the capital cost of the assets is not applicable to the income of the plaintiff’s business of automotive sales and services which it carried on in its 1984 taxation year.
There is left the plaintiff’s reliance on section 88 of the Act. This is plaintiff’s strongest argument. The plaintiff emphasizes that this subsection creates an automatic roll-over in the winding-up of the subsidiary by the parent. It is a statutory provision allowing the transfer of all rights and obligations and on a reading of it, it does not impose an “income-producing” condition.
With due respect for the imagination and skill of all those involved in the several transactions which occurred, a closer analysis of the more pertinent provisions of that subsection leads me to a different conclusion. The provisions are as follows:
88 (1.1)
…
(c) in the case of such portion of any non-capital loss … of the subsidiary as may reasonably be regarded as its loss from carrying on the subsidiary’s loss business, be deemed, for the taxation year of the parent … to be a non-capital loss … of the parent from carrying on the subsidiary’s loss business
…
except that
(e) where, at any time, control of the parent or subsidiary has been acquired by a person or persons … such portion of the subsidiary’s non-capital loss … for a taxation year ending before that time as may reasonably be regarded as its loss from carrying on a particular business is deductible by the parent for a particular taxation year ending after that time
(i) only if throughout the particular year and after that time that business was carried on by the subsidiary or [ho]parent for profit or with a reasonable expectation of profit
Paragraph 88(1.1)(e) clearly creates a restriction as to the deductibility of non-capital losses when a change of control of either the subsidiary or the parent has taken place. In those circumstances, the parent, in order to benefit from such a deduction, must show that it continued to carry on the loss business for profit. Furthermore, such deduction can only be applied against income from the same business that generated it or from any other substantially similar business. (See Arnold, McNair and Young, Materials on Canadian Income Tax (1989), Richard De Boo Publishers, at page 817.) This provision is indicative, in my view, that the element of business purpose is maintained, and presumably it is maintained to put beyond the pale what would otherwise be purely artificial transactions.
Subsection 88(1.1) does not clearly require elsewhere that the parent must have acquired the assets for the purpose of producing income. However, paragraph 88(1.1)(c) can be interpreted as adding another restriction to the deductibility of such losses where it states “… be deemed … to be a non-capital loss … of the parent from carrying on the subsidiary’s loss business …”. Section 111 of the Act provides the same restriction to the deductibility of non-capital losses. In the present case, the evidence shows that the plaintiff could not have been carrying on the business of Equipment for the brief period it owned Equipment’s assets.
It seems to me, therefore, that the principle of a continuing business being carried on by a parent is preserved in that particular enactment. At least it gives strength to the proposition that the roll-over provisions are only triggered off when the capital assets transferred from a subsidiary to a parent are used in the parent’s business, a condition which I have found on the facts has not been met.
Such an interpretation is also consonant with the more generic principle underlying capital cost allowances under the Income Tax Act that capital assets may be depreciated only when used in the business.
Admittedly, the issue before me is far from clear cut. According to plaintiff’s counsel, the provisions of section 88 of the Act are there for a purpose, i.e. a consolidation of financial statements which would otherwise be denied. Subsection 88(1.1) may be given a literal interpretation so as to allow to the plaintiff the capital losses claimed. As mentioned earlier, the company groups went through a meticulous series of transactions to achieve what was described as a business purpose, and in so doing, the plaintiff found itself in the enviable position of writing off against income the undepreciated capital costs of its subsidiary and thus reducing its income to nil. The matter, as argued by counsel, should rest there.
The application of subsection 88(1.1) of the Act has not hitherto been the subject of judicial scrutiny in the context of the circumstances before me. Subsection 88(1.1) itself, together with that group of statutory provisions in the Act relating to corporate reorganizations, make difficult reading. It has been suggested, not without merit, that they cover by way of statutory verbal language what are essentially abstract accounting formulae to lend consistency and conformity to what are essentially the rigors of finite calculations or to what some might call numbers crunching.
Comments by tax experts in various papers do not provide ready answers either. I have had occasion to refer to any number of them. I have gone through the article on winding-up published in the Report of Proceedings of the Thirty-Second Tax Conference (1980), at pages 102 et seq.; Vern Krishna’s analysis of capital cost allowance in The Fundamentals of Canadian Income Tax: an Introduction, Third Edition, 1989, Carswell, at page 355; Howard J. Alper’s article on winding-up in the Canadian Tax Journal, Volume XXII, 1974, at page 98; Gilmour’s Income Tax Handbook 1978-79, 27th Edition, at page 341; Introduction to Federal Income Taxation in Canada: Commentary and Problems by Beam and Laiken, 1990-91 Edition, C.C.H. Canadian Limited, at page 133; Materials on Canadian Income Tax, by Arnold, McNair and Young, 8th Edition, at page 815; Interpretation Bulletin IT-302R2, May 23, 1986.
Although most of the foregoing deal with non-capital losses rolled-over by a subsidiary to its parent, an issue which is not a matter for debate before me and which in any event the defendant has fully allowed, I have found no route to enlightenment when dealing specifically with undepreciated capital cost allowances, except with regards to a parent which used the capital assets for purposes of its business or as an ongoing concern.
CONCLUSION
This is not the first time that a Court has faced difficulties in dealing with various provisions of the Income Tax Act. Generally, it may be said that whenever any particular provision of the Income Tax Act is scrutinized, its meaning must be construed in a manner not only consistent with other singular provisions to which that provision applies, but with the more general provisions of the statute. This rule has now been fixed in contemporary law and is articulately expressed by E. A. Driedger in his Construction of Statutes, Second Edition, at page 87:
Today there is only one principle or approach, namely, that the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.
Although it is an obvious challenge to apply this rule to the abstruse and esoteric language of section 88, it nevertheless seems to me that the technical approach urged by the plaintiff must be consonant and consistent with the more generic provisions of the statute. I conclude that the specific processes found in subsection 88(1.1) with respect to the roll-over of assets and liabilities can only be applied in light of the other provisions of the Act which I have cited. To do otherwise would simply result in artificiality and create an imbalance or non-conformity in the application of the more generic provisions of the statute which Parliament had no intention of creating. I also note that whereas subsection 88(1) contains a “notwithstanding any other provision of this Act” clause, subsection (1.1) does not.
A similar situation faced the Court in Holiday Luggage Mfg. Co. v. Canada, [1987] 2 F.C. 249 (T.D.), when the word “corporation” was given a restricted geographical meaning not otherwise found in the statutory definition of the word in subsection 248(1) of the Income Tax Act.
The same kind of issue faced the Federal Court of Appeal in Oceanspan Carriers Ltd. v. Canada, [1987] 2 F.C. 171, where it was determined that a non-resident without income from Canadian sources is not a “taxpayer” within the otherwise broad definition of the word in subsection 248(1) of the Income Tax Act. It is also akin to a similar finding made by the Supreme Court of Canada in Lea-Don Canada Limited. v. Minister of National Revenue, [1971] S.C.R. 95, when a non-resident not carrying on business in Canada was found not to be a “person” entitled to a deduction on account of the capital cost of depreciable property.
It follows that a court should be wary of countenancing an ingenious application of a particular statutory provision which goes against the grain as it were of the more general principles underlying the whole scheme of Canadian taxation. This kind of curial discipline was aptly expressed by Lord Reid in Greenberg v. Commissioners of Inland Revenue (1971), 47 T.C. 240 (H.L.), as cited in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536 [at pages 560-561]:
We seem to have travelled a long way from the general and salutary rule that the subject is not to be taxed except by plain words. But, I must recognise that plain words are seldom adequate to anticipate and forestall the multiplicity of ingenious schemes which are constantly being devised to evade taxation. Parliament is very properly determined to prevent this kind of tax evasion, and if the Courts find it impossible to give very wide meanings to general phrases the only alternative may be for Parliament to do as some other countries have done and introduce legislation of a more sweeping character, which will put the ordinary well-intentioned person at much greater risk than is created by a wide interpretation of such provisions as those which we are considering.
This is not to suggest that section 88 of the Act is a trap to any taxpayer who decides to follow that route. On the other hand, we are not dealing here with an accumulation of capital losses, but with the transfer of capital assets where depreciation allowances are statutorily limited to those capital assets used in the business. Unless found to be used in the business, no capital loss allowances may be claimed. Having found that the assets involved could not have been realistically used in the plaintiff’s business, the statutory condition has not been met. In this connection, I note that there are deeming provisions in paragraph 88(1.1)(b) regarding deductibility in the subsidiary’s hands in its deemed taxation year, and an assumption that during that year, it had sufficient income. It is my view, however, that that clause must be read in the light of paragraph 88(1.1)(c) which refers to the parent “carrying on the subsidiary’s loss business”. In any event, I should construe the terms of the winding-up provision as requiring, as an overriding condition, that any deduction on account of depreciable assets may be allowed when such assets are used in the business.
I am also aware of the comments of Wilson J. in the Stubart case (supra) at page 540, that the sole business purpose of a transaction might be a tax purpose without inviting a reassessment. This endorses or recognizes Lord Tomlin’s dictum in Inland Revenue Commissioners v. Westminster (Duke of), [1936] A.C. 1 (H.L.), at page 19, to the effect 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.
The reasons for judgment of Estey J. in the Stubart case also endorse this principle. Estey J. found that the scheme under which the parent taxpayer and its subsidiary made it possible for one company to use the other company’s tax losses was provided for in the statute. As in the case before me, there was no doubt as to the transfer to the subsidiary of all the parent’s assets and liabilities. As is not the case before me, the tax loss company did carry on the acquired business through an agency agreement between the two related companies. The transfer of the tax losses covered an indeterminate period and the business of the transferor was carried out by the transferee for some three years.
It must be remembered also that in the Stubart case, the issue was whether, in the absence of sham or artificiality, a transaction could be set aside on the more fundamental grounds of an absence of a bona fide business purpose. Such is not the case before me.
If, in the case at bar, the plaintiff fails the business purpose test, it is not in the sense of the expression used by Estey J. in the Stubart case. It is in the sense used in the statute itself when it deals with “sourcing” under section 20 of the Act, or with “gaining or producing income” stipulated in section 1102 of the Regulations.
This is to find that in essence, under the Act, the claimed capital losses by the plaintiff, arising from the subsidiary’s capital cost allowances, are simply not available to it in the years in which they were claimed. I would submit that this conclusion pays full respect to the opinions elaborated by the Supreme Court of Canada in the Stubart case and is not in conflict with the decision of that Court.
I would therefore dismiss the plaintiff’s appeal with costs and confirm the defendant’s reassessments.