Holiday Luggage Mfg. Co. Inc. v. The Queen, 86 DTC 6601, [1987] 1 CTC 23 (FCTD)

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 (amended 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 Luggage 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 subsection 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. corporation. This corporation is called Stradellina (U.S.A.) Inc. Father and son each owns 30 per cent 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 section 256(1) of Income Tax Act. This proposition suggests that any corporation, 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 proposition 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] C.T.C. 2599; 84 D.T.C. 1590, judgment of Tremblay, T.C.J.).

The issue, in any event, may be simply stated. Whenever the Income Tax Act speaks of corporations and categorizes these corporations as being associated with one another, are foreign corporations 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 corporations was found in section 39 of the Income Tax Act. Section 39 prescribed tax rules applicable to corporations generally and, because of the preferential tax rate on threshold income, provided special 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 is 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 which 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 subsection 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 corporations were included in the “association” provision under the Act was International Fruit Distributors Limited v. M.N.R., [1953] Ex.C.R. 231; [1953] C.T.C. 342; 53 D.T.C. 1222, and relating to the taxation year 1949. At that time, the relevant section of the Income Tax Act to which the Exchequer Court had to direct its mind was subparagraph 36(4)(b)(i) of the Act defining “person” as including a corporation. The Court further had to apply paragraph 39(1)(b) of the Act which defines “corporation” as including an incorporated 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 232 (C.T.C. 343):

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 ambiguity 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 appellant’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 ambiguity in its meaning by reason of the use of the term “corporations" in section 36(5). Nor can the appellant derive any assistance from the arm's 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. M.N.R. 55 D.T.C. 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 Limited v. M.N.R., [1972] C.T.C. 107; 72 D.T.C. 6086. In that instance, three Canadian 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 corporations were associated with each other under subsection 39(5) of the Act.

Heald, J. gave short shrift to the many arguments 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 paragraph 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 International Fruit 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] C.T.C. 619; 73 D.T.C. 5036; the Chief Justice, speaking 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 statutory enactments reads as follows (at page 621; D.T.C. 5037):

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 subsection when the section speaks about corporations that are "associated”. It says that “For the purpose of this section* [1] 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.

The Chief Justice could find no conflict between this conclusion and the earlier decision in the International Distributors case (supra). He said:

. . . 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.

There is, in my view, apart from the seeming conflict of interpretation between the two foregoing 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 relationship 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 association of corporations under the 1972 tax reform are essentially the same. The changes 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 grouping 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 putting all the definitions under one roof does not change the more substantive provisions of the Act.

Counsel for the defendant disagrees. He suggests that the logical base for the Court of Appeal’s determination in the Allied Farm Equipment 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 related 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 definitions found in Part XVII apply not only for the particular purposes of certain sections, but to the whole statute. Subsection 251(1) defines what constitutes related persons and related corporations “For the purpose of this Act”, i.e. for all purposes. The non-qualified use of the term “corporation” is now sufficiently generic that any prior ambiguity in statute language is resolved. Furthermore, 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 corporation? 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 determination. 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 per cent of the amount taxable for the year". [Emphasis added.] The language of the statute in this respect is consonant with common sense. Otherwise, it would be tantamount to subjecting a foreign corporation to Canadian income taxes simply on the basis that it is associated with associated Canadian corporations, 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 structure. I have already referred to Part XVII dealing with "Interpretation". I now refer to Part I, subdivision 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 unqualified.

Section 125 sets up the formula for small business deductions available to a Canadian-controlled private corporation. Stradellina (U.S.A.) Inc. might be a Canadian-controlled private corporation 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 otherwise provided, are reduced to nil if the corporation is associated with one or more Canadian-controlled 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 different tax treatments. As is evident from the amounts disclosed for both a corporation’s "business limit” and its “total business limit”, the special 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. Excluded from the ambit is any other associated corporation 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 corporations 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 constituée”. 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 described 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 definitions, 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 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, section 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 indicate 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 premise being that a generalized interpretation of sections 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. M.N.R., [1970] C.T.C. 346; 70 D.T.C. 6271, 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 paragraph 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 page 348; D.T.C. 6273):

. . . 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 Section 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 nonresidents 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 Section 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 Section 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 section 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 Section 20(4).

The Tax Appeal Board case Office Overload Co. Ltd. v. M.N.R., 39 Tax A.B.C. 309; 65 D.T.C. 690, is another attempt by a taxpayer to push for a literal interpretation of the Income Tax Act. The taxpayer had purchased the accounts receivable of a non-resident vendor and the parties had jointly executed a section 85D election which provides special rules for the treatment of accounts receivable by vendor and purchaser 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 business has, in a taxation year, . . . [Emphasis added.]

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 corporaion 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 (D.T.C. 697) 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 interpreted, 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 85D.

A more recent judgment to which appellant’s counsel referred is Oceanspan Carriers Limited v. The Queen, [1986] 1 C.T.C. 114; 85 D.T.C. 5621. 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 operations. In filing its Canadian tax returns, it attempted to avail itself of its non-capital loss carryforward 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 . . . [Emphasis added.]

The taxpayer corporation took the position that section 111 did not expressly indicate that the non-capital loss carry-over was limited to a taxpayer 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 (D.T.C. 5625), 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 necessarily 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 act 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 intended 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 (D.T.C. 5626), were these:

In Bathurst Paper Ltd. v. Minister of Municipal Affairs (1971), 22 D.L.R. (3d) 115 (S.C.C.) at 19 Laskin, J. remarked that, although a change in language on reenactment of a provision must be presumed to have some significance, it does not necessarily follow that a change in substance was intended.

If plaintiff’s assertion is correct, then I would have to conclude that prior to the 1983 amendment a non-resident corporation 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 plaintiff’s 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 taxpayer. 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 Limited case has been appealed 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 corporation, 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 instalments 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 Company Limited and Oceanspan Carriers Limited. 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 "corporation” in section 248, the unqualified use of the same term in section 251, as well as the application of these sections to the whole statute and not as hitherto, to a particular Part, Division or Subdivision 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 conclude 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 contemporary doctrines of statute interpretation is warranted.

In Westminster Bank Ltd. v. Zang, [1966] A.C. 182 at 222; [1966] 1 AÏ E.R. 114 at 120, 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:

.. If those words are in any way ambiguous — if they are reasonably 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 Statutes, (2nd ed. Toronto: Butterworths, 1983) provides 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 written 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 C.T.C. 274; 86 D.T.C. 6138, a decision of the Supreme Court of Canada released on February 28, 1986, Mr. Justice Estey stated as follows:

In Stubart Investments Limited v. The Queen, [1984] 1 S.C.R. 536 at 573-79; [1984] C.T.C. 294 at 313-17 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. [Emphasis added.]

As far as the words go in the Income Tax Act, I find that they are used ina context that is sufficiently unclear or ambiguous that I should not simply take the literal meaning suggested by the defendant and cut off further enquiry. The analysis 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 provisions 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 company bringing itself within the term “taxpayer”, even though the term enjoyed the kind of universality 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 persons 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 “corporation” 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 purposeful and intendment approach to statute language but to do otherwise would merely lead to sophistry. More so, a strict approach, if subsequently 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 support to the more generic observations I have made as to the inherent limits to the statute's applicability, 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 corporations whether they be private or public, resident or non-resident, Canadian or foreign-controlled. 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 corporations”.

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 participation of their individual owners as shareholders of Stradellina (U.S.A.) Inc.

The plaintiffs are also entitled to their costs.

Appeal allowed.