The Chief Justice (orally):—This is an appeal from a judgment of the Trial Division, dismissing an appeal from a judgment of the Tax Appeal Board, in so far as it dismissed appeals by the appellant from its assessments under Part I of the Income Tax Act for its 1960, 1961, 1962, 1963 and 1964 taxation years.
The sole question raised in respect of all assessments is whether the appellant, which was a company carrying on business in Canada, was “associated”, within the meaning of subsection 39(2) of the Income Tax Act, with two other corporations, which were carrying on business in Canada, during the taxation years in question, so that it became subject to a higher scale of rates on its taxable income than would be applicable if it were not so “associated”.
Before one can attempt to state the question in issue, it is necessary to attempt to summarize the scheme of section 39 in an understandable but sufficiently accurate way.
Part I of the Income Tax Act imposes an income tax on the annual taxable income of every person resident or carrying on business in Canada (section 2).* Section 39 is the provision that fixes the rate at which that tax is computed in so far as corporations (as opposed to individuals) are concerned. The scheme of section 39 is as follows:
1. Subsection (1) establishes a rate for the first $35,000 taxable incomet and a substantially higher rate for the balance “except where otherwise provided”.
2. Subsection (2) otherwise provides for the case “Where two or more corporations are associated with each other”, by providing that, in such a case, the tax payable by “each of them” is to be computed at the higher rate on all its taxable income.
3. Subsection (3) provides that, notwithstanding subsection (2), “if all of the corporations of a group that are associated” take certain action “the tax payable by each of the corporations” is to be computed in accordance with a formula whereby the benefit of the lower rate on $35,000 is distributed among them and subsection (3a) provides an alternative method of accomplishing the same result where “any of the corporations of a group that are associated” has failed to take such action.
4. Subsection (4) et seq provide a set of very complicated and detailed rules to give a precise meaning to the otherwise vague, if not meaningless, concept of corporations that are “associated” in the first part of the section. Of these subsections, the two with which we are concerned are
(a) subsection (4), which provides that “For the purpose of this section” one corporation is “associated” with another if any of the tests enumerated therein is applicable” and
(b) subsection (5), which provides that “When two corporations are associated, or are deemed by this subsection to be associated, with the same corporation . . .” they shall “for the purpose of this section” be deemed to be “associated” with each other.
I shall now endeavour to indicate the question that has to be decided.
We are concerned here with four corporations, viz,
(a) the appellant, which was resident and carried on business in Canada,
(b) two other corporations that were resident and carried on business in Canada (hereinafter called “the other Canadian corporations”), and
(c) a United States corporation that was not resident and did not carry on business in Canada.
It is common ground that, applying only the tests of subsection 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, similarly, 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 subsection 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 subsection 39(5) requires that they “be deemed to be associated 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, subsection 39(4) cannot be applied in respect of it and there is therefore no basis for applying subsection 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. Subsection 39(4) then provides the answer to what is meant in the earlier subsections when the section speaks about corporations that are “associated”. 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 subsection 39(4) are only applicable to determine that corporations are “associated” for the purposes 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 circumstances, 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 subsection 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.
I may say that I can find no conflict between this conclusion and what was decided in International Fruit Distributors Limited v MNR, [1953] CTC 342; 53 DTC 1222, which decision was upheld, I understand, without written reasons, by the Supreme Court of Canada (55 DTC 1186). 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 paragraph 39(4)(b) and I have no doubt that the same result would follow under paragraph 39(4)(b).
I am therefore of the view that the United States corporation 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. It follows, having regard to a “Special Case” that was filed in the Trial Division, that
1. the appeal should be allowed with costs, in this Court and in the Trial Division;
2. the judgment of the Trial Division should be set aside;
3. the reassessments of the appellant under Part I of the Income Tax Act for the 1960, 1961, 1962, 1963 and 1964 taxation years should be referred back to the respondent for reconsideration and assessment on the basis that the appellant was not associated with Falcon Equipment Company Limited and Northwest Farm Equipment Limited within the meaning of section 39 of the Income Tax Act.