Décary J.A.:
The Court has before it an appeal from a decision of Judge St-Onge of the Tax Court of Canada confirming the notice of assessment issued by the Minister of National Revenue (the Minister) and disallowing the deduction claimed by the appellant company as a carryover of non-capital losses under subsections 111(5), 87(2.1) and 88(1.1) of the Income Tax Act^ (the Act). Only subsection 111(5) was argued before us, and at the relevant time, before the technical amendments resulting from the revision of federal statutes, it reads as follows:
111. (5) Where, at any time, control of a corporation has been acquired by a person or group of persons, no amount in respect of its non-capital loss or farm loss for a taxation year ending before that time is deductible by the corporation for a taxation year ending after that time and no amount in respect of its noncapital loss or farm loss for a taxation year ending after that time is deductible by the corporation for a taxation year ending before that time except that
(a) such portion of the corporation’s non-capital loss or farm loss, as the case may be, for a taxation year ending before that time as may reasonably be regarded as its loss from carrying on a business is deductible by the corporation for a particular taxation year ending after that time
(i) only if that business was carried on by the corporation for profit or with a reasonable expectation of profit throughout the particular year, and
(ii) only to the extent of the aggregate of the corporation’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....
111. (5) En cas d’acquisition, à date quelconque, du contrôle d’une corporation par une personne ou un groupe de personnes, aucun montant au titre d’une perte autre qu’une perte en capital ou d’une perte agricole pour une année d’imposition se terminant avant cette date n’est déductible par la corporation pour une année d’imposition se terminant après cette date et aucun montant au titre d’une perte autre qu’une perte en capital ou d’une perte agricole pour une année d’imposition se terminant après cette date n’est déductible par la corporation pour une année d’imposition se terminant avant cette date. Toutefois:
a) la fraction de la perte autre qu’une perte en capital ou de la perte agricole, selon le cas, subie par la corporation pour une année d’imposition se terminant avant cette date, et qui peut raisonnablement être considérée comme étant la perte qu’elle a subie dans l’exploitation d’une entreprise, est déductible par la corporation pour une année d’imposition donnée se terminant après cette date,
(i) seulement si cette entreprise a été exploitée par la corporation à profit ou dans une attente raisonnable de profit tout au long de l’année donnée, et
(ii) seulement jusqu’à concurrence du total du revenu de la corporation provenant de cette entreprise pour l’année donnée et — dans le cas où: des biens sont vendus, loués ou aménagés ou des services rendus dans le cadre de l’exploitation de l’entreprise avant cette date — de toute autre entreprise dont la presque totalité du revenu est dérivée de la vente, de la location ou de l’aménagement, selon le cas, de biens semblables ou de la prestation de services semblables; et....
The salient facts can be summed up briefly. Up to April 17, 1987, Panneaux Nortex Ltée (Nortex) manufactured fibreglass panels known as FRP panels and sold them to Manac Inc. Corp. (Manac) for use in the manufacture of boxes for trailers and semitrailers (trailers).
On April 17, 1987, all the shares in Nortex were acquired by 2432-0095 Québec Inc. (2432). At the time, Nortex had non-capital losses of some two million dollars (the losses). Nortex was immediately wound up into 2432 within the meaning of subsection 88(1). On June 22, 1987, Manac was amalgamated with 2432.
Based on the above-mentioned provisions of the Act, Manac claimed a deduction for these losses in the calculation of its taxable income for the 1987 and 1988 taxation years. After the takeover and winding-up of Nortex and its amalgamation with 2432, Manac continued to manufacture FRP panels through its Nortex division. These panels were used in two of the eight types of trailers sold by Manac. The other six types were made of steel and aluminum panels Manac assembled from basic materials it bought.
The judgment under appeal and the parties’ written and oral arguments were exclusively devoted to establishing whether, in the case at bar, the appellant satisfied the requirements of subparagraph 111(5)(a)(ii). The parties assumed that the word “corporation” appearing in several places in subsection 111(5) applied variously to Nortex, Manac and, who knows, even 2432. They also assumed that subsection 111(5) was applicable even though Nortex, the corporation whose losses were at issue, had been wound up, and that the “key other business” mentioned in subparagraph 11 1(5)(a)(ii) could be carried on by a corporation other than Nortex, including Manac.
No submissions were made, by the way, on the possible effect of paragraph 88(1.1)(e) of the Act, which deals with the carryover of a subsidiary’s losses as the result of a winding-up.
Under the circumstances, the Court decided to determine the appeal as though paragraph 111(5)(a) were applicable, without further discussion.
Therefore, in order to succeed, the appellant, had to show that the property it was selling constituted “similar properties” to those Nortex manufactured and that it derived “substantially all” its income “from the sale, leasing, rental or development, as the case may be” of these similar properties.
With respect to the determination of “similar properties”, counsel for the appellant submit that where, as in the case at bar, a company’s business is vertically integrated, there are two possible ways to define the words “similar properties”.
Since the panels are a major component of the end product (the trailer), they could be considered similar to the trailer by reason of their ultimate function. With respect, we do not see how property which loses its identity when incorporated into an end product can be described as property similar to the end product. Although it is true that the expression “similar properties” is not defined in the Act and that the courts interpreting it in light of specific facts do have some leeway, there must still be support for the interpretation in the text of the statute and in the actual situation in which it is being applied. A panel is not a trailer, and if it were to become one it would then cease to be a panel and it would no longer be possible to make the comparison between similar properties required by the Act.
The other way to interpret the term “similar properties” would be to determine in the case at bar that the three types of panels are “similar properties” and that their “development” leads to their incorporation into the end product (the trailer) from the comparison between similar properties required by the Act.
Even accepting for the sake of argument that the steel and aluminum panels Manac assembles are similar to the FRP panels Nortex manufactured, this proposition raises many questions. For example, can the “sale” which was Nortex’s activity in relation to the FRP panels be compared with the “development” which would be Manac’s activity in relation to its three types of panel, when the words “as the case may be” seem to require a comparison between two similar activities? Is it possible to speak of income derived from the “development of similar properties” when, strictly speaking, the income results not from the incorporation or development of the panels, but from the sale of the trailers? Is it still possible to speak of “similar properties” when one type of property (the panels) loses its identity by being incorporated into the other (the trailer)?
In any case, it will not be necessary for us to answer all these questions, because even if the appellant were right in respect of each of them, the evidence has not shown that the income derived from the sale or development of the three types of panels made up “substantially all” Manac’s income. On the contrary, what little information the Court has on this indicates that the income from the deemed sale of the panels would represent at best some 50% of Manac’s income. That is quite clearly not a percentage corresponding to “substantially all”
The appellant submits that the novel interpretations it proposes are consistent with Parliament’s objective. In enacting subsection 111(5), Parliament intended to prevent companies from speculating in companies with losses for the purpose of deducting the acquired companies’ losses rom their own income, and to promote the strengthening or survival of a business in decline. It is agreed in the case at bar that the appellant did not intend to appropriate Nortex’s losses solely to deduct them. That does not qualify the appellant for the deduction, though: in allowing one taxpayer to take advantage of another taxpayer’s losses in exceptional cases, Parliament was very careful to limit the circumstances in which the exception would be applicable. The threshold is high, and the appellant has not met it.
The appeal will be dismissed with costs.
Appeal dismissed.