T-2260-84
Holiday Luggage Mfg. Co. Inc. (Plaintiff)
v.
The Queen (Defendant)
T-2261-84
Falcon Luggage Inc. (Plaintiff)
v.
The Queen (Defendant)
INDEXED AS: HOLIDAY LUGGAGE MFG. CO. v. CANADA
Trial Division, Joyal J. -Montréal, September 25;
Ottawa, November 17, 1986.
Construction of statutes - Income Tax Act - Every word
in statute must be interpreted in context even in presence of
statutory definitions - Income Tax Act, R.S.C. 1952, c. 148,
ss. 2, 3, 4, 27(1)(e), 39, 44, 85D (as am. by S.C. 1964-65, c. 13,
s. 16), 139(1)(h),(av) - Income Tax Act, S.C. 1970-71-72, c.
63, ss. 2, 111, 115, 123, 125, 150, 157, 248, 250, 251, 256.
Income tax - Associated companies - Foreign corporation
not "corporation" so as to trigger "deemed" provisions of s.
256 of Act - Income Tax Act, R.S.C. 1952, c. 148, ss. 2, 3, 4,
27(1)(e), 39, 44, 85D (as am. by S.C. 1964-65, c. 13, s. 16),
139(1)(h),(av) - Income Tax Act, S.C. 1970-71-72, c. 63, ss.
2, 111, 115, 123, 125, 150, 157, 248, 250, 251, 256.
Holiday Luggage and Falcon Luggage are respectively
owned by one David Saunders and his son Leonard. These two
Canadian companies, under the existing tax rules, are not
associated with each other. Father and son each owns 30% of
the issued shares in an American corporation (Stradellina)
which is neither engaged in business in Canada nor subject to
taxation in Canada.
Revenue Canada contended that due to the participation of
father and son in Stradellina, both plaintiffs were associated
companies under subsection 256(1) of the Income Tax Act. On
that basis the plaintiffs were reassessed as to the small business
deductions under section 125 of the Act. Acceptance of the
position taken by Revenue Canada would lead to the conclusion
that any corporation, Canadian or foreign, linking two Canadi-
an corporations, triggers the "deemed association" of Canadian
corporations with each other. The Minister's contention was
unsuccessfully challenged before the Tax Court of Canada.
Held, there should be judgment for the plaintiffs.
The issue is as to whether, when the Income Tax Act speaks
of corporations and categorizes them as being associated with
one another, foreign corporations—through statutory wording
or by implication—are included in the category.
The issue could not be easily resolved since Parliament's
intention, as expressed in the statute, was unclear.
The original purpose of defining associated corporations was
to place limits upon the corporations entitled to benefit from a
preferred rate of taxation on their threshold income levels. The
clear inference to be drawn from the provisions concerning
associated corporations in the former Act was that the legisla
tion related to taxable corporations. There was no intention to
subject foreign corporations to Canadian income tax simply on
the basis of their being associated with associated Canadian
corporations.
As to the new Income Tax Act of 1972, defendant's argu
ment, that because the definition of "corporation" in subsection
248(1) does not exclude foreign corporations, they are included
in the class of associated or related corporations described in
sections 251 and 256, could not be accepted. It was doubtful
that, in creating its net of "associated" corporations and in
limiting the section 125 preferential tax treatment to a group
composed of canadian—controlled private corporations, Parlia
ment intended to widen the net. Every word in a statute had to
be interpreted in its context. Reference could be made to
various cases where a literal interpretation of the Income Tax
Act was rejected. If the position urged by the defendant were
extended to other factual situations, the result would be repug
nant to the whole scheme of the Act. The Lea-Don case had
closed the door to an off-share company bringing itself within
the term "taxpayer", even though that term enjoyed the kind of
universality the Court was being asked, in the instant case, to
apply to the word "corporation". The purpose of section 256
was not to bring a non-resident corporation not doing business
in Canada within the grasp of "corporation" so as to trigger the
"deemed" provisions of the section. The large meaning given to
"corporation" by the Judge below had been refused by other
courts in dealing with similar terms such as "taxpayer" and
"person". The test in the Allied Farm Equipment case—that
two corporations cannot be associated unless both are subject to
Part I of the Act—was still valid.
CASES JUDICIALLY CONSIDERED
NOT FOLLOWED:
Allied Farm Equipment Ltd. v. Minister of National
Revenue, [1972] F.C. 263; 72 DTC 6086 (T.D.).
APPLIED:
Allied Farm Equipment Ltd. v. Minister of National
Revenue, [1972] F.C. 1358; [1972] CTC 619 (C.A.);
Lea-Don Canada Limited v. Minister of National Reve
nue, [1971] S.C.R. 95; [1970] CTC 346; Office Overload
Co. Ltd. v. M.N.R. (1965), 39 Tax A.B.C. 309; Oceans-
pan Carriers Ltd. v. The Queen, [1986] 1 CTC 114
(T.D.); appealed at [1987] 2 F.C. 171.
DISTINGUISHED:
International Fruit Distributors Ltd. v. Minister of Na
tional Revenue, [1953] Ex.C.R. 231; 53 DTC 1222;
affirmed by (1955), 55 DTC 1186 (S.C.C.).
REVERSED:
Holiday Luggage Manufacturing Co. et al. v. M.N.R.,
[1984] CTC 2599 (T.C.C.).
CONSIDERED:
Westminster Bank Ltd. v. Zang, [1966] A.C. 182; The
Queen v. Golden et al., [1986] 1 S.C.R. 209.
COUNSEL:
Philip F. Vineberg, Q.C. for plaintiffs.
Roger Roy for defendant.
SOLICITORS:
Phillips & Vineberg, Montréal, for plaintiffs.
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 each of the
appellants from a notice of assessment relating to
the small business deductions under section 125 of
the Income Tax Act, R.S.C. 1952, c. 148 (amend-
ed by S.C. 1970-71-72, c. 63). The reassessment
covers the years 1975, 1976 and 1977.
The factual issues are admitted and relatively
simple. The plaintiff, Holiday Luggage Mfg. Co.
Inc., (Holiday) is substantially owned by one
David Saunders. The other plaintiff, Falcon Lug
gage Inc., (Falcon) is substantially owned by
Leonard Saunders, a son of David Saunders. These
two companies, under the existing tax rules, are
not associated with each other. They do not come
within the terms of association as defined in sub
section 256(1) of the Act.
Both David Saunders and Leonard Saunders,
who are of course related to each other under
subsection 251(2) of the Income Tax Act, were at
all relevant times shareholders in a U.S. corpora-
tion. This corporation is called Stradellina
(U.S.A.) Inc. Father and son each owns 30% of
the issued shares in that corporation. Stradellina is
not engaged in business in Canada and is not
subject to taxation in Canada.
Revenue Canada contends that both plaintiffs,
by reason of the participation of father and son in
Stradellina, are associated companies under the
provisions of subsection 256(1) of the Income Tax
Act. This proposition suggests that any corpora
tion, Canadian or foreign, linking two Canadian
corporations, triggers the "deemed association" of
Canadian corporations with each other.
It is an interesting proposition. It is a proposi
tion which, as we shall see, has invited but little
judicial scrutiny under the comparable provisions
of section 39 of the old Income Tax Act. It has
been scrutinized but once under the provisions of
the new Act and that was when the plaintiffs
before me unsuccessfully challenged the Minister's
contention before the Tax Court of Canada (see
Holiday Luggage Manufacturing Co. et al. v.
M.N.R., [ 1984] CTC 2599, judgment of Tremblay
(T.C.J.)).
The issue, in any event, may be simply stated.
Whenever the Income Tax Act speaks of corpora
tions and categorizes these corporations as being
associated with one another, are foreign corpora
tions either through statutory wording or by
implication included or excluded from the
category.
In the years prior to the major tax revisions of
1971-72, the tax treatment given associated corpo
rations was found in section 39 of the Income Tax
Act. Section 39 prescribed tax rules applicable to
corporations generally and, because of the prefer
ential tax rate on threshold income, provided spe
cial rules in the case of associated corporations.
The full text of subsections 39(1),(2) and (3) is as
follows:
39. (1) The tax payable by a corporation under this Part
upon its taxable income or taxable income earned in Canada, as
the case may be, (in this section referred to as the "amount
taxable") for a taxation year is, except where otherwise
provided,
(a) 20% of the amount taxable, if the amount taxable does
not exceed $10,000, and
(b) $2,000 plus 50% of the amount by which the amount
taxable exceeds $10,000, if the amount taxable exceeds
$10,000.
(2) Where two or more corporations are related to each other
in a taxation year, the tax payable by each of them under this
Part for the year is, except where otherwise provided by
another section, 50% of the amount taxable for the taxation
year.
(3) Notwithstanding subsection (2), where two or more
corporations are related to each other, the tax payable by such
one of them as may be agreed by them or, if they cannot agree,
as may be designated by the Minister shall be computed under
subsection (1).
Subsection 39(5) then went on to prescribe the
categories of "associated corporations". This sub
section reads as follows:
39....
(5) When two corporations are related, or are deemed by this
subsection to be related, to the same corporation at the same
time, they shall, for the purpose of this section, be deemed to be
related to each other.
The first judicial test to determine what corpo
rations were included in the "association" provi
sion under the Act was International Fruit Dis
tributors Ltd. v. Minister of National Revenue,
[1953] Ex.C.R. 231; 53 DTC 1222, and relating to
the taxation year 1949. At that time, the relevant
section of the Income Tax Act [S.C. 1948, c. 52
(as am. by S.C. 1951, c. 51, s. 11)] to which the
Exchequer Court had to direct its mind was sub-
paragraph 36(4)(b)(i) of the Act defining "per-
son" as including a corporation. The Court further
had to apply paragraph 127(1)(h) of the Act
which defines "corporation" as including an incor
porated company.
The facts before the Court involved a U.S.
company owning all the issued shares of two
Canadian companies. In terms of the relationship
between corporations provided in the statute, the
issue was whether or not the control by a foreign
company of two Canadian companies made these
Canadian subsidiaries related corporations under
the Act. Thorson P. said it did. His Lordship said
inter alia at pages 232-233 Ex.C.R.; 1223 DTC:
The submission of counsel for the appellant, put shortly, is
that the term "person" in section 36(4)(b)(i) does not extend to
a corporation or, alternatively, does not extend to a foreign
corporation. It was urged that if it was read as extending to a
corporation then section 36(5), which reads as follows:
36(5) When two corporations are related, or are deemed
by this subsection to be related, to the same corporation at
the same time, they shall, for the purpose of this section, be
deemed to be related to each other.
would be unnecessary surplusage, that the specific reference in
it to corporations has the effect of excluding a corporation from
the meaning of the term "person" in section 36(4)(b)(i), that
this creates an ambiguity in its meaning and that such ambigui
ty should be resolved in the appellant's favor.
I am unable to agree. It is not a proper approach to the
construction of the Income Tax Act to regard it as necessarily
consistent in the use of its various terms throughout the Act or
to assume that inconsistency in their use necessarily results in
ambiguity in their meaning.
In my judgment, there is a complete answer to the appel
lant's submission in the definition of "person" in section
127(1)(ab) which reads as follows:
127. (1) In this Act,
(ab) "person" or any word or expression descriptive of a
person, includes any body corporate and politic, and the
heirs, executors, administrators or other legal representatives
of such person, according to the law of that part of Canada
to which the context extends;
As I understand this definition the term "person" in section
36(4)(b)(i) of the Act clearly includes a corporation. Indeed, it
includes "any" corporation and there is no reason for holding
that it does not extend to a foreign corporation such as Pacific
Gamble Robinson Company. I am unable to find any ambigui
ty in its meaning by reason of the use of the term "corpora-
tions" in section 36(5). Nor can the appellant derive any
assistance from the arms length provisions of section 127(5).
The taxpayer appealed to the Supreme Court of
Canada, there being no intermediate Court of
Appeal at that time. The Supreme Court, in a
judgment given from the bench dismissed the
appeal without giving reasons (see International
Fruit Distributors Ltd. v. Minister of National
Revenue (1955), 55 DTC 1186).
And there the matter rested until 1972 when
Heald J., then of the Trial Division of this Court,
was seized of the case of Allied Farm Equipment
Ltd. v. Minister of National Revenue, [1972] F.C.
263; 72 DTC 6086. In that instance, three Canadi-
an corporations were controlled by three different
brothers who collectively controlled a non-resident
U.S. corporation not doing business in Canada.
The three Canadian corporations were not
associated within the terms of subsection 39(4) of
the Act but the Minister of National Revenue
contended that by reason of their association with
the non-resident corporation, the Canadian corpo
rations were associated with each other under
subsection 39(5) of the Act.
Heald J. gave short shrift to the many argu
ments advanced by counsel for the taxpayer
including the restrictive effect of sections 2, 3, 4,
44, subsections 39(1) and (2) and paragraph
27(1)(e) of the Act, all to convince the Court that
a proper construction of subsection 39(5) excluded
from its ambit a foreign corporation. Heald J.
relied on the definition of "corporation" in para
graph 139(1)(h) of the Act which in his mind did
not exclude foreign corporations. He further found
the 1953 Exchequer Court decision in the Interna
tional Fruit Distributors case (supra) to be on all
fours with the case before him and that he was
bound by it. He dismissed the appeal.
The Federal Court of Appeal took a different
view. In its judgment reported at [1972] F.C.
1358; [1972] CTC 619, the Chief Justice, speak
ing for the Court, held that subsection 39(4) by its
terms had no application to determine whether two
corporations were associated unless they were both
subject to tax under Part I of the Income Tax Act.
The Chief Justice's analysis of the relevant statu
tory enactments reads as follows (at pages 1360-
1361 F.C.; 621-622 CTC):
It is common ground that, applying only the tests in section
39(4), the appellant was not, for the purpose of section 39,
"associated" with either of the other Canadian corporations.
On the other hand, if one applied such tests to the appellant
and the United States corporation, those two corporations
would be regarded as "associated" with each other; and, simi
larly, if one applied such tests to either of the other Canadian
corporations and the United States corporation, a similar result
would be achieved. It is at this point that the difference
between the parties arises. The respondent says that section
39(4) is applicable with the result that the appellant and the
other Canadian corporations are associated with the same
corporation—the United States corporation—and it follows
that section 39(5) requires that they "be deemed to be associat
ed with each other". The appellant, on the other hand, says
that, as the United States corporation is not subject to tax
under Part I of the Income Tax Act, section 39(4) cannot be
applied in respect of it and there is therefore no basis for
applying section 39(5).
In my view, the correct answer is to be found by an analysis
of the language of subsection (2), subsection (3), subsection
(3a) and subsection (4) of section 39. Each of the first three of
these subsections sets up a factual case concerning "two or
more" or "a group" of corporations that are "associated"
(which expression does not have any sufficiently precise sense
in the context) and then lays down a rule to determine "the tax
payable by each of them" or "the tax payable by each of the
corporations" falling within the factual case. Section 39(4)
then provides the answer to what is meant in the earlier
subsections when the section speaks about corporations that are
"asssociated". It says that "For the purpose of this section, one
corporation is associated with another" if any of the tests
enumerated therein is applicable.
What this analysis shows is
(a) that the tests found in section 39(4) are only applicable
to determine that corporations are "associated" for the pur
poses of section 39,
(b) that there are three substantive rules in section 39
applicable to corporations that are "associated", and
(c) that each of those rules determines, in certain circum
stances, the amount of "the tax payable" under Part I of the
Income Tax Act "by each of the corporations" that are
"associated". It follows, in my view, that section 39(4) has no
application to determine whether two corporations are
associated unless they are both subject to income tax under
Part I of the Income Tax Act.
The Chief Justice could find no conflict between
this conclusion and the earlier decision in the
International Fruit Distributors case (supra). He
said [at pages 1361-1362 F.C.; 622 CTC]:
In that case, it was argued that the word "person" in the
Income Tax Act did not include a corporation or, at least, did
not include a foreign corporation, and this argument was
rejected. It so happened that the question there was whether
two Canadian subsidiaries of a United States parent were
related under the predecessor of section 39(4)(b) and I have no
doubt that the same result would follow under section 39(4)(b).
I am, therefore, of the view that the United States corpora
tion was not "associated" with the appellant or either of the
other Canadian corporations within the meaning of subsection
(4) of section 39 of the Income Tax Act.
There is, in my view, apart from the seeming
conflict of interpretation between the two forego
ing decisions, a distinction to be made in the
relevant facts of each. In the International Fruit
Distributors case, the Court was facing a situation
where one foreign corporation controlled two
Canadian corporations and the Exchequer Court
decided that these two Canadian corporations
became associated with each other under the terms
of the Act. In the second case, the Federal Court
of Appeal was dealing with three non-associated
Canadian corporations who together controlled a
foreign corporation and decided that on a proper
construction of the statute, their mutual relation
ship to the foreign corporation did not create an
association between them.
Appellants' counsel in the case at bar urges this
Court to apply the Federal Court of Appeal ruling
in the Allied Farm Equipment case and allow the
appeal. Counsel suggests that the substantive
provisions relating to association or deemed asso
ciation of corporations under the 1972 tax reform
are essentially the same. The change which the
new Act have brought about are purely structural
and reflect little more than a draftsman's regard
for conformity in breaking down a voluminous
statute into its several parts. In particular, counsel
refers to the organization of the new Act in group
ing together under Part XVII, "Interpretation",
all the multitudinous definitions of terms many of
which were hitherto scattered on an ad hoc basis
all over the place and which in the 1952 or 1970
revision of the statute had not been included in the
"Interpretation" clauses. Counsel alleged that put
ting all the definitions under one roof does not
change the more substantive provisions of the Act.
Counsel for the defendant disagrees. He sug
gests that the logical base for the Court of
Appeal's determination in the Allied Farm Equip
ment case was the opening words of section 39
which read "For the purpose of this section",
limiting thereby the ambit of the whole scheme. In
other words, section 39 provided its own internal
code respecting associated corporations and relat
ed persons. The Federal Court of Appeal could
find in the language of that code that a foreign
corporation was excluded.
Defendant's counsel states that this no longer
applies. Under the new Act, he says, the defini
tions found in Part XVII apply not only for the
particular purposes of certain sections, but to the
whole statute. Subsection 251(1) defines what con
stitutes related persons and related corporations
"For the purposes of this Act", i.e. for all pur
poses. The non-qualified use of the term "corpora-
tion" is now sufficiently generic that any prior
ambiguity in statute language is resolved. Further
more, the earlier ruling that subsection 39(4)
applied only when the associated companies were
subject to tax under Part I of the old statute is no
longer binding.
The issue is not an easy one to resolve. The
intention of Parliament, as literally expressed in
the statute, is not clear. If the word "corporation"
is unqualified, so is the word "individual". Would
these terms include any corporation or any
individual no matter the locus of either in Canada
or elsewhere? How would the statute affect an
individual resident in Canada who owns a foreign
corporation and whose American brother owns a
Canadian resident corporation? Or again, would
two Canadian corporations be related if one is
owned by a U.S. resident and the other by his son
who resides in the U.K. and together they own a
Bermuda coporation? Would it fly in the face of
common sense to suggest that a literal meaning to
these two terms must apply no matter the
circumstances?
There is no doubt that the original purpose of
defining associated corporations was to limit the
field of corporations enjoying the preferred rate of
taxation on its threshold income level. Subsection
39(3) of the old Act specifically provided that with
respect to associated corporations, the preferred
rate could be made to apply to one of them or
distributed to some or all of them, the distribution
being by way of election or by ministerial determi
nation. The inference is clear that the section is
throughout dealing with taxable corporations i.e.
corporations subject to tax under the Act. This
comes out clearly from the language of the statute
when it provides in subsection 39(2) that "where
two or more corporations are associated with each
other in a taxation year, the tax payable by each of
them under this Part for the year is, except where
otherwise provided by another section, 50% of the
amount taxable for the year". (My emphasis.) The
language of the statute in this respect is consonant
with common sense. Otherwise, it would be tan
tamount to subjecting a foreign corporation to
Canadian income taxes simply on the basis that it
is associated with associated Canadian corpora
tions, which is nonsense.
At the end of 1972, the new Income Tax Act,
(supra) was adopted by Parliament creating not
only some novel dialectical approaches to the tax
system but encompassing the whole in a new struc
ture. I have already referred to Part XVII dealing
with "Interpretation". I now refer to Part I, sub
division b, "Rules Applicable to Corporations",
section 123 et seq.
Section 123 sets out the rate of tax payable by a
corporation upon its taxable income or taxable
income earned in Canada. Obviously, this excludes
a foreign corporation having no income earned in
Canada. Yet the word "corporation" is unquali
fied.
Section 125 sets up the formula for small busi
ness deductions available to a Canadian-controlled
private corporation. Stradellina (U.S.A.) Inc.
might be a Canadian-controlled private corpora
tion but it does not fit within the definition of a
Canadian-controlled private corporation set out in
paragraph 125(6)(a) because it is not a Canadian
corporation.
Subsection 125(2) provides for a corporation's
"business limit" of $50,000 and a "total business
limit" of $400,000, which limits, except as other
wise provided, are reduced to nil if the corporation
is associated with one or more Canadian-con
trolled private corporations. This formula, in my
view, is essentially the same as in subsection 39(2)
of the old statute. Such a "corporation" would
exclude Stradellina (U.S.A.) Inc. It is not subject
to the taxing statute in any event.
Subsections 125(3) and (4) are again similar to
subsections 39(3) and (4) of the old Act. The
sprinkler system for such corporations as are
associated with each other is available either by
election or by ministerial determination. Again,
Stradellina (U.S.A.) Inc. would not be able to
bring itself within the terms of the statute.
There is no doubt that in limiting the small
business deduction to Canadian-controlled private
corporations, as defined in paragraph 125(6)(a),
the issue facing President Thorson in the 1953 case
of International Fruit Distributors (supra) will
never have to be faced again. In that case, the two
Canadian corporations, wholly owned by a U.S.
parent, would not have fitted the definition of
"Canadian-controlled private corporations" and
would not have been entitled to any small business
deductions. Their association together by reason of
common ownership would no longer be relevant.
Subsection 125(2) and subsection 125(3) of the
new Act clearly envisage a situation where two or
more associated corporations are to be given dif
ferent tax treatments. As is evident from the
amounts disclosed for both a corporation's "busi-
ness limit" and its "total business limit", the spe
cial rule applies to small businesses on condition,
however, that these businesses are being run by
Canadian-controlled private corporations.
It will be noted that section 125 is considerably
narrower in scope than was section 39 of the old
statute. The preferential tax rate is now available
only to Canadian-controlled private corporations
as that term is defined in the Act.
Again, if one looks at subsection 125(3) of the
new Act, it is clear that what I have termed "the
sprinkler formula" is only available to associated
Canadian-controlled private corporations. Exclud
ed from the ambit is any other associated corpora
tion because, in any event, such corporation is not
entitled to the preferential tax treatment at all.
I must now return to the key submission of the
defendant to the effect that the plaintiff corpora
tions are associated with each other by reason of
the joint association of their individual owners
with a U.S. company. That submission is based
substantially on the definition of "corporation" as
found in Part XVII "Interpretation", subsection
248(1). "Corporation", says the subsection,
includes an incorporated company. In French, une
"corporation" comprend une compagnie cons-
tituée". The defendant argues that because the
definition does not exclude "foreign" corporations,
such corporations are included in the genus of
associated or related corporations otherwise de
scribed in sections 251 and 256. Therefore, by
virtue of the participating ownership of the father
and son in a foreign corporation, their individual
Canadian-controlled private corporations become
associated with each other.
If the substantive provisions of the Income Tax
Act were as easy to understand as Part XVII
"Interpretation", defendant's arguments might
very well put an end to the discussion. I have grave
doubts, however, that such can be read into the
case before me. I have grave doubts that it was
Parliament's intention in creating its net of
"associated" corporations and in further limiting
its section 125 preferential tax treatment to an
exclusive club made up of Canadian-controlled
private corporations, that it intended to widen the
net. Finally, I have grave doubts that through the
simple expedience of restructuring the statute and
defining "corporation" for "the purposes of the
Act", it gives it a meaning which the Federal
Court of Appeal in the Allied Farm Equipment
case (supra) ruled it did not have.
It is my fundamental view that every word or
every expression in a statute must be interpreted in
its context, even in the face of statutory defini
tions, these definitions being perhaps exercises in
drafting skills but not necessarily determinative of
the issue.
"Person" is defined in section 248 as including
any body corporate or politic. Yet, in the residency
rules under section 250 of the Act, the word
"person" is used in a sense where it very obviously
does not include a body corporate or politic.
Similarly, subsection 251(6), again for purposes
of the Act, speaks of "persons" connected by
blood, marriage or by adoption. It would constitute
a strange nuclear family indeed if its members
included bodies corporate or politic.
Again, "taxpayer" is defined in section 248 for
the purposes of the Act as including "any person
whether or not liable to pay tax". The words
"taxpayer" and "person" in subsection 2(2) or
subsection 2(3) are used interchangeably and yet,
if one examines the provisions of Division D, sec
tion 115 to which section 2 refers, there is no
doubt that the word "person" therein found does
not include a corporation.
The foregoing are only a few examples to indi
cate that statutory definitions of terms contained
in Part XVII "Interpretation" of the Income Tax
Act may be far from conclusive when applied to
the same term found or used elsewhere in an
excessively long and complex piece of legislation.
And so the question must be put again. Does the
word "corporation" in section 248 of the statute
include an off-shore corporation and is there a
legislative intent to straddle Stradellina (U.S.A.)
Inc. with the full weight of a heavy Canadian
statute. If I am required to provide a proper
construction of its provisions, and my main prem
ise being that a generalized interpretation of sec
tions 251 and 256 based on the definition of
corporation in section 248 does not completely
satisfy me, perhaps an ancillary field might be
explored, namely the approach made by courts
when interpreting the meaning of other terms used
throughout the statute.
If one substitutes "taxpayer" for "corporation",
what was said by the Supreme Court of Canada in
Lea-Don Canada Limited v. Minister of National
Revenue, [1971] S.C.R. 95; [ 1970] CTC 346, is
material to the case before me. The appellant in
that case argued that its off-shore parent, a
Nassau corporation, was a "taxpayer" under para
graph 139(1)(av) and within Part III of the old
Income Tax Act. In the event, it would follow that
certain deductions allowed in computing income
were applicable even though the "taxpayer" was
not liable to tax on that amount. Paragraph
139(1)(av) defined "taxpayer" as including any
person whether or not liable to pay tax. On the
strict construction approach, the argument sounds
plausible. The appellant's argument, however, was
found untenable. This is what Hall J. on behalf of
the Court had to say (at pages 99-100 S.C.R.;
348-349 CTC):
The appellant rested its case on the proposition that the Parent
Company was a taxpayer within the meaning of the Income
Tax Act, basing its argument:
(1) on the contention that by virtue of the definition in
s. 139(1) (av), "`taxpayer' includes any person whether or not
liable to pay tax" and the deduction on account of depreciable
property being from income, not from taxable income, is
"applicable" to those whose income is not taxable; and
(2) on the narrower basis that the tax withheld on the rent of
the aircraft due to the Parent Company and remitted to the
respondent under Part III of the Income Tax Act qualified the
appellant as a taxpayer.
The argument that the provisions of the Income Tax Act
authorizing a deduction on account of the capital cost of
depreciable property are applicable to non-residents who are
not subject to assessment for income tax under Part I of the
Act because such deduction is from income is wholly untenable.
It is clear that s. 20(4) is concerned with taxpayers entitled to a
deduction, not with persons who are not subject to assessment
under Part I. A non-resident not carrying on business in
Canada is not a person entitled to such a deduction and
therefore s. 20(4) cannot properly be said to be "applicable" to
him.
The subsidiary argument that the Parent Company must be
considered a taxpayer within the Income Tax Act because
Nassau deducted and remitted to the respondent the withheld
tax above mentioned is also untenable. The withholding tax
provided for by s. 106 of the Income Tax Act is a tax on gross
receipts in Canada by a resident for a non-resident and does not
constitute the non-resident, in this case the Parent Company, a
taxpayer within the meaning of s. 20(4).
The Tax Appeal Board case Office Overload Co.
Ltd. v. M.N.R. (1965), 39 Tax A.B.C. 309, is
another attempt by a taxpayer to push for a literal
interpretation of the Income Tax Act. The taxpay
er had purchased the accounts receivable of a
non-resident vendor and the parties had jointly
executed a section 85D [S.C. 1964-65, c. 13, s. 16]
election which provides special rules for the treat
ment of accounts receivable by vendor and pur
chaser when such accounts are sold as part of a
business to be continued by the purchaser. The
opening words of section 85D read as follows:
85D. (1) Where a person who has been carrying on a busi
ness has, in a taxation year, .... (My emphasis.)
The appellant argued that the non-resident
vendor was "a person" covered by the section and
the fact that such a person was not resident in
Canada, was not carrying on business in Canada
and was not required to file tax returns or to pay
Canadian taxes could have no bearing on the
appellant corporation in availing itself of section
85D.
In dealing with the Office Overload Co. Ltd.
appeal, Mr. W.O. Davis of the Tax Appeal Board
said this at page 320 of the report:
After a careful review and thoughtful consideration of the
evidence adduced and of the provisions of Section 85D of the
Income Tax Act under which this appeal falls to be decided, I
have reached the conclusion that the section taken as a whole,
which, in my opinion, is the way in which it must be interpret
ed, is intended to apply to persons who fall to be taxed or
otherwise dealt with under the provisions of the Canadian
Income Tax Act and who report to the Canadian Government
the income arising from the operation of the business or
businesses whose sale is the central concern of the said section
85n.
A more recent judgment to which appellant's
counsel referred is Oceanspan Carriers Ltd. v. The
Queen, [ 1986] 1 CTC 114. This is a judgment of
Rouleau J. of the Trial Division of this Court. His
Lordship was faced with a situation where the
taxpayer corporation, originally incorporated in
Bermuda and doing business there, subsequently
became a resident corporation in Canada. At the
time it became a resident, the corporation had
accumulated considerable losses out of its opera
tions. In filing its Canadian tax returns, it attempt
ed to avail itself of its non-capital loss carry-for
ward deductions pursuant to paragraph 111(1)(a)
of the Income Tax Act. The opening words of
section 111 read as follows:
111. (1) For the purpose of computing the taxable income
of a taxpayer for a taxation year, there may be deducted....
[My emphasis.]
The taxpayer corporation took the position that
section 111 did not expressly indicate that the
non-capital loss carry-over was limited to a tax
payer who was a resident or carrying on business
in Canada. If the statute does not qualify the term
"taxpayer", there is no reason, it said, why it
should be excluded.
Rouleau J. did not buy that argument. At page
119, he said this:
Thus in determining the phrase "taxation years" within the
meaning of paragraph 111(1)(a) of the I.T.A., it must be
determined in relation to the Act as a whole. The Act necessari
ly imports the concept of jurisdiction by the Minister over the
taxpayer either by residency or through income earned in
Canada. It cannot be sustained that the Minister may impose
his authority over non-resident corporations or over income not
earned in Canada. The mere fact of becoming a resident does
not give the Minister—or Parliament—jurisdiction over the
previous life or conduct of a corporate taxpayer.
His Lordship in that case also had to contend
with further argument that in 1983, subsequent to
the taxation years in question, section 111 had
been amended to expressly exclude non-capital
losses incurred by a non-resident taxpayer from a
business not carried on by him in Canada. The
taxpayer's counsel argued that Parliament intend
ed to plug a statutory loop-hole and that this
factor strongly indicated that the taxpayer's losses
were not excluded for prior years. Rouleau J.'s
comments on this point, at page 120, were these:
In Bathurst Paper Ltd. v. Minister of Municipal Affairs
(1971), 22 D.L.R. (3d) 115 (S.C.C.) at 119 Laskin, J.
remarked that, although a change in language on re-enactment
of a provision must be presumed to have some significance, it
does not necessarily follow that a change in substance was
intended.
If plaintiffs assertion is correct, then I would have to con
clude that prior to the 1983 amendment a non-resident corpora
tion could avail itself of the opportunity to apply non-capital
losses incurred during that period against subsequent taxation
years during which it was resident in Canada.
I am satisfied that the jurisprudence, as well as the statutory
scheme of the I.T.A. prior to the amendment of paragraph
111(8)(c) in 1983, cannot and should not sustain plaintiffs
position. This could lead to an abuse of our taxation system
should I accept this submission. Prior to the amendment, a
non-resident corporation, not carrying on business in Canada,
having substantial losses, could acquire a profit-making
Canadian corporation and deduct prior incurred non-capital
losses in this country to the detriment of the Canadian taxpay
er. This is not contemplated by the I.T.A.; similarly it is
inconceivable that the Minister of National Revenue impose his
jurisdiction on the non-resident corporation not carrying on
business in Canada.
The decision in the Oceanspan Carriers Ltd.
case has been appealed [now published at [1987] 2
F.C. 171] and I should refrain from predicting
what the Federal Court of Appeal will do with it.
For the limited purposes of my enquiry, however,
that case does indicate the difficulties facing
anyone in analysing the meaning of such terms as
"taxpayer", "person" or "corporation" whenever
these terms are found in the statute, keeping in
mind that "person" and "taxpayer" are also
defined in section 248 as being "for purposes of
the Act".
The other avenue worthwhile exploring is what
would be the consequences on the whole scheme of
the Income Tax Act should the interpretation put
forward by the defendant be followed or extended
to other factual situations. If a "taxpayer" by
definition includes any person and "person"
includes a corporation, we need only go through
the various sections of Division B of the Act where,
depending on the context, the taxpayer is not any
person, but is an individual, or it is not an
individual but a corporation. Similarly, subsection
150(1) could be read as imposing on any corpora
tion, no matter where located or where it is doing
business, the obligation to file tax returns. Any
corporation would also have to pay taxes by instal
ments pursuant to subsection 157(1).
Further, any unrestricted meaning to the words
"corporation", or "taxpayer" or "person", to
include residents or non-residents, to include their
doing business or not doing business in Canada or
earning or not earning income in Canada, would
have made winners of Lea-Don Canada Limited,
Office Overload Co. Ltd. and Oceanspan Carriers
Ltd. As is abundantly clear to me, their victory
would have been repugnant to the scheme of the
Act and to the intention of Parliament in adopting
it.
I will concede that the definition of "corpora-
tion" in section 248, the unqualified use of the
same term in section 251, as well as the applica
tion of these sections to the whole statute and not
as hitherto, to a particular Part, Division or Sub
Division of it, might otherwise open the door to an
enquiry on perhaps different grounds from those
facing the Court of Appeal in the Allied Farm
Equipment case (supra). Nevertheless, I must con-
dude that the defendant's argument in that
respect is neither determinative nor conclusive.
It is required therefore to interpret Part XVII of
the Income Tax Act to determine if its provisions
are sufficient to bring a U.S. corporation, not
doing business in Canada, within its reach. In this
respect, a brief look at traditional and more con
temporary doctrines of statute interpretation is
warranted.
In Westminster Bank Ltd. v. Zang, [1966] A.C.
182, at page 222, Lord Reid said:
But no principle of interpretation of statutes is more firmly
settled than the rule that the court must deduce the intention of
Parliament from the words used in the Act ....
This rule has also been expressed as construing
the intention of Parliament by what Parliament
did say and not by what it intended to say.
Lord Reid goes on to state [at page 222]:
If those words are in any way ambiguous—if they are reason
ably capable of more than one meaning—or if the provision in
question is contradicted by or is incompatible with any other
provision in the Act, then the court may depart from the
natural meaning of the words in question. But beyond that we
cannot go.
E. A. Driedger in his text Construction of Stat
utes, (2nd ed. Toronto: Butterworths, 1983) pro
vides at page 87 a somewhat more liberal
approach in the following words:
Today there is only one principle or approach, namely, 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 ....
Professor Driedger's statement of the rule writ
ten in 1983 took another step forward especially
with regard to the doctrine of strict and literal
construction of the Income Tax Act or of any
taxing statute. In The Queen v. Golden et al.,
[1986] 1 S.C.R. 209, Mr. Justice Estey stated as
follows [at pages 214-215]:
In Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R.
536, at pp. 573-9, the Court recognized that in the construction
of taxation statutes the law is not confined to a literal and
virtually meaningless interpretation of the Act where the words
will support on a broader construction a conclusion which is
workable and in harmony with the evident purposes of the Act
in question. Strict construction in the historic sense no longer
finds a place in the canons of interpretation applicable to
taxation statutes in an era such as the present, where taxation
serves many purposes in addition to the old and traditional
object of raising the cost of government from a somewhat
unenthusiastic public. (My emphasis.)
As far as the words go in the Income Tax Act, I
find that they are used in a context that is suf
ficiently unclear or ambiguous that I should not
simply take the literal meaning suggested by the
defendant and cut off further enquiry. The anal
ysis of the statute showing the same word having a
more or less restricted meaning depending upon
contextual considerations raises sufficient doubts
as to the universality of the interpretative provi
sions of the statute and warrants a more restrictive
meaning.
Furthermore, the case law I have cited indicates
to me the care which must be taken in advancing a
purely literal approach to the interpretation of a
statute as arcane in language, construction and
composition as the Income Tax Act. The Lea-Don
case (supra) closed the door to an off-shore com
pany bringing itself within the term "taxpayer",
even though the term enjoyed the kind of univer
sality which I am asked to apply to "corporation".
In the Office Overload case (supra), it was ruled
that the unqualified term "person" as found in
section 85D was "intended to apply" only to per
sons who fall to be taxed or otherwise dealt with
under the Act. In the Oceanspan Carriers case
(supra), it was found that the unqualified term
"taxpayer" did not include a corporation whose
residency in prior years had been abroad.
It is my view that it is not intended in section
256 to bring a non-resident corporation not doing
business in Canada within the grasp of "corpora-
tion" so as to trigger off the "deemed" provisions
of the section. The section is "for purposes of the
Act". I find that such is not one of the Act's
purposes.
Admittedly, my finding requires a more pur
poseful and intendment approach to statute lan
guage but to do otherwise would merely lead to
sophistry. More so, a strict approach, if subse
quently applied to other defined terms, would
bring disharmony if not serious dislocations in the
administration of the Act.
In the Court below, the Honourable Judge
Tremblay stated that a corporation pursuant to
section 248 "includes an incorporated company"
whatever the location of the incorporation. As a
consequence, he ruled that it is that large meaning
which must be considered in construing provisions
of subsections 256(1) and 256(2). With all respect
for the learned judge, it is that large meaning
which our courts have refused to give to similar
terms like "taxpayer", or "person". I should stress
that in the earlier cases I have cited, the problem
facing the courts was identical to the one before
me. Both "taxpayer" and "person" were broadly
defined under Part VII of chapter 148, R.S.C.
1952. Both terms were "for purposes of the Act".
I should also return to section 125 and to the
earlier analysis I made of it. In my view, section
125 provides both corollary and alternative sup
port to the more generic observations I have made
as to the inherent limits to the statute's applicabili
ty, to the need to preserve some harmony in its
several provisions and to assure respect for its
general economy.
The terms of section 125 are no longer of the
brush-stroke variety bringing to the legislative
canvas all corporations and to associate these cor
porations whether they be private or public, resi
dent or non-resident, Canadian or foreign-con
trolled. The section now limits its special tax break
to a special group, namely, Canadian-controlled
private corporations, as that expression is defined
in the Act.
The tax formula is calculated "from the tax
otherwise payable". The association rule is limited
to association "with one or more other Canadian-
controlled private corporation".
It seems to me that the test applied by Chief
Justice Jackett in the Allied Farm Equipment case
may now have greater weight when applied in
connection with section 125. That test is that two
corporations cannot be associated "unless they are
both subject to Part I of the Income Tax Act".
This test is still valid today. Further, if we
analyze carefully the cases which I have cited, it is
the test which imposes residency or income source
rules whenever the otherwise ubiquitous language
of the statute is scrutinized. It is a test which
might very well apply generally.
In conclusion, there should be judgment for the
plaintiffs. The Minister of National Revenue
should be directed to reassess the plaintiffs for
each of the years 1975, 1976 and 1977 on the basis
that they are not associated with each other for the
purposes of section 125 by reason of the participa
tion of their individual owners as shareholders of
Stradellina (U.S.A.) Inc.
The plaintiffs are also entitled to their costs.
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.