Strayer,
J:—This
is
an
action
by
way
of
an
appeal
by
the
plaintiff
against
an
assessment
made
by
the
Minister
of
National
Revenue
with
respect
to
its
1980
taxation
year.
The
facts
were
agreed
to
be
as
follows.
The
plaintiff
is
a
co-operative
association
duly
incorporated
under
the
laws
of
Alberta,
with
a
membership
of
approximately
1,682.
During
the
year
in
question
the
total
value
of
its
sales
and
services
was
$2,571,144.
Of
this,
$2,339,402
or
91
per
cent
represented
business
done
with
its
members.
Its
business
income,
prior
to
any
payment
of
patronage
dividends,
was
$132,815.
During
this
same
year
it
realized
a
taxable
capital
gain
of
$5,906
from
the
disposition
of
real
property
which
had
been
used
or
held
in
connection
with
the
plaintiffs
business.
While
the
parties
are
agreed
on
the
foregoing
facts
they
have
each
at
various
times
asserted
two
different
ways
of
applying
the
Income
Tax
Act
thereto,
with
the
result
that
four
possible
methods
were
described
in
the
pleadings
and
in
argument.
These
varying
approaches
all
relate
essentially
to
the
application
of
two
sections
of
the
Income
Tax
Act',
section
135
which
deals
with
permissible
deductions
from
the
income
of
co-operative
corporations
of
certain
amounts
paid
out
in
patronage
dividends,
and
section
125
which
allows
small
businesses
a
tax
deduction
equivalent
to
21
per
cent
of
active
business
income.
I
shall
deal
in
turn
with
the
issues
related
to
each
of
these
sections.
Section
135
The
relevant
parts
of
section
135
provide
as
follows:
Deduction
in
computing
income
(1)
Notwithstanding
anything
in
this
Part,
there
may
be
deducted,
in
computing
the
incme
of
a
taxpayer
for
a
taxation
year,
the
aggregate
of
the
payments
made,
pursuant
to
allocations
in
proportion
to
patronage,
by
the
taxpayer
(a)
within
the
year
or
within
12
months
thereafter
to
his
customers
of
the
year,
and
(b)
within
the
year
or
within
12
months
thereafter
to
his
customers
of
a
previous
year,
the
deduction
of
which
from
income
of
a
previous
taxation
year
was
not
permitted.
Limitation
where
non-member
customers
(2)
Notwithstanding
subsection
(1),
if
the
taxpayer
has
not
made
allocations
in
proportion
to
patronage
in
respect
of
all
his
customers
of
the
year
at
the
same
rate,
with
appropriate
differences
for
different
types
or
classes
of
goods,
products
or
services,
or
classes,
grades
or
qualities
thereof,
the
amount
that
may
be
deducted
under
this
section
is
an
amount
equal
to
the
lesser
of
(a)
the
aggregate
of
the
payments
mentioned
in
subsection
(1),
and
(b)
the
aggregate
of
(i)
the
part
of
the
income
of
the
taxpayer
for
the
year
attributable
to
business
done
with
members,
and
(ii)
the
allocations
in
proportion
to
patronage
made
to
non-member
customers
of
the
year.
As
indicated
above,
the
plaintiff
did
nine
per
cent
of
its
business
with
non-mem-
bers
and
91
per
cent
with
its
members.
It
had
actually
paid
patronage
dividends
to
its
members
during
the
year
in
question
in
the
amount
of
$179,668
but
had
paid
no
dividends
to
non-member
customers.
Thus
the
relevant
limitation
on
the
amount
of
patronage
dividends
which
the
plaintiff
could
actually
deduct
from
its
income
is
found
in
subparagraph
135(2)(b)(i).
The
dispute
now
with
respect
to
the
application
of
subparagraph
135(2)(b)(i)
is
as
to
whether
the
allowable
deduction
from
income
should
be
91
per
cent
(that
is,
the
proportion
of
business
done
with
members
in
1980)
of
net
income
(that
is,
business
income
of
$132,815
plus
taxable
capital
gains
of
$5,906)
or
just
of
business
income
($132,815).
Calculated
the
former
way,
the
allowable
deduction
would
be
$126,236.
Calculated
the
latter
way
it
would
be
$120,862.
The
plaintiff,
both
in
its
tax
return
and
in
its
pleadings,
asserts
that
the
former
method
is
correct.
The
Minister
in
his
assessment
also
accepted
that
position
as
correct,
but
in
the
present
pleadings
on
behalf
of
the
Crown
the
defendant
now
asserts
that
the
latter
method
is
correct.
While
the
defendant
now
takes
a
position
which
would
support
a
higher
assessment
than
that
made
by
the
Minister
in
his
assessment
of
July
13,
1981,
the
defendant
does
not
ask
for
an
increase
in
that
assessment
but
only
asks
for
dismissal
of
the
appeal.
As
an
initial
objection
the
plaintiff
argued
that
the
defendant
could
not
appeal
from
its
own
assessment
previously
made
by
the
Minister.
Counsel
cited
in
support
of
this
proposition
Harris
v
MNR,
[1965]
2
Ex
CR
653
at
662
(affirmed
on
other
grounds,
[1966]
SCR
489);
and
R
v
Scheller,
[1976]
1
FC
480
at
497-88
(FCTD).
It
seems
to
me
that
these
cases
are
distinguishable.
In
the
Harris
case
the
Minister’s
assertions
would,
if
accepted,
have
required
the
court
to
order
an
increase
in
the
amount
of
tax
payable.
In
the
present
case
the
defendant
is
not
asking
for
the
tax
to
be
assessed
higher;
it
is
simply
asserting
that
the
appeal
should
fail
because
the
law
if
anything
would
require
a
higher
assessment
than
the
one
against
which
the
plaintiff
appeals.
With
respect
to
the
Scheller
case,
it
does,
I
think,
only
stand
for
the
proposition
that
if
the
Minister
has
admitted
through
the
assessment
that
certain
facts
exist,
he
cannot
later
withdraw
that
admission.
In
the
present
case
a
question
of
law
is
involved
as
to
the
proper
interpretation
of
section
135.
Even
if
the
Minister’s
assessment
were
based
on
a
certain
view
of
the
law
the
court
cannot
be
prevented,
by
this
“admission”
or
otherwise,
from
coming
to
its
own
conclusion
as
to
what
the
law
means.
Counsel
for
the
plaintiff
argued
that
the
failure
of
the
Minister
to
assert
in
the
assessment
or
in
a
reassessment
the
position
now
taken
by
the
defendant
had
the
effect
of
denying
the
plaintiff
administrative
remedies
that
would
ahve
been
available
to
him
such
as
the
filing
of
an
objection.
While
it
is
true
that
the
defendant,
by
not
taking
this
position
until
its
pleading
in
this
court,
did
preclude
the
use
of
these
administrative
remedies,
the
plaintiff
now
has
the
full
opportunity
to
argue
the
issue
in
court
and
I
fail
to
see
where
it
suffered
any
irreparable
prejudice
by
being
obliged
to
deal
with
the
issue
here
for
the
first
time.
With
respect
to
the
issue
itself,
the
plaintiff
refers
to
subparagraph
135(2)(b)(i)
which
provides
that
where
a
co-operative
has
done
some
business
with
nonmembers,
the
permissible
deduction
is
limited
to
“the
part
of
the
income
of
the
taxpayer
for
the
year
attributable
to
business
done
with
members
..
This
phrase
is
defined
in
paragraph
135(4)(d)
as
follows
(d)
[‘‘Income
of
the
taxpayer
attributable
to
business
done
with
members”]
“income
of
the
taxpayer
attributable
to
business
done
with
members”
of
any
taxation
year
means
that
proportion
of
the
income
of
the
taxpayer
for
the
year
(before
making
any
deduction
under
this
section)
that
the
value
of
the
goods
or
products
acquired,
marketed,
handled,
dealt
in
or
sold
or
services
rendered
by
the
taxpayer
from,
on
behalf
of,
or
for
members,
is
of
the
total
value
of
goods
or
products
acquired,
marketed,
handled,
dealt
in
or
sold
or
services
rendered
by
the
taxpayer
from,
on
behalf
of,
or
for
all
customers
during
the
year.
It
is
contended
that
the
term
“income”
here
must
be
taken
in
its
normal
meaning
to
include
the
whole
of
the
net
income
of
the
corporation
including
both
its
“business
income”
and
its
taxable
capital
gains.
The
plaintiff
says
that
in
the
absence
of
some
qualifying
words
the
reference
to
“income”
must
be
taken
to
be
a
reference
to
the
income
of
the
taxpayer
as
computed
in
accordance
with
Part
I
of
the
Act
and
there
is
no
justification
for
reading
into
the
term
“income”
the
word
“business”.
Counsel
for
the
plaintiff
further
pointed
out
that
income
tax
form
TZS(16)
with
respect
to
the
patronage
dividend
deduction
also
confirms
this
interpretation
in
that
it
describes
the
item
to
which
the
percentage
of
member
customer
business
is
to
be
applied
as
“net
income
before
patronage
dividend
deduction”.
It
does
not
refer
to
“business
income”.
This
of
course
cannot
alter
the
legal
position
of
the
parties
but
it
may
be
relevant
to
finding
a
rational
interpretation
for
section
135.
The
defendant,
on
the
other
hand,
asserts
that
one
must
look
at
the
whole
scheme
of
the
Income
Tax
Act
and
if
one
does
so
it
is
apparent
that
the
deductions
referred
to
in
subparagraph
135(2)(b)(i)
can
only
be
made
from
“income
from
business
or
property”
and
therefore
only
such
income
should
be
used
as
a
base
for
calculating,
on
the
basis
of
the
percentage
of
member
business,
the
amount
of
deductible
patronage
dividends.
In
making
this
argument,
the
defendant
contends
that
the
scope
of
deductions
under
subparagraph
135(2)(b)(i)
is
limited
by
sections
18
and
20
of
the
Act.
Section
18
generally
limits‘the
kind
of
deductions
which
may
be
made
“‘in
computing
the
income
of
a
taxpayer
from
a
business
or
property”.
Section
20
provides
in
part
as
follows:
20.
(1)
Notwithstanding
paragraphs
18(l)(a),
(b)
and
(h),
in
computing
the
taxpayer’s
income
for
a
taxation
year
from
business
or
property,
there
may
be
deducted
such
of
the
following
amounts
as
are
wholly
applicable
to
that
source
or
such
part
of
the
following
amounts
as
may
reasonably
be
regarded
as
applicable
thereto:
(u)
such
amounts
in
respect
of
payments
made
by
the
taxpayer
pursuant
to
allocations
in
proportion
to
patronage
as
permitted
by
section
135.
Thus,
the
defendant
argues
that
the
deductions
as
referred
to
in
section
135
must
be
deductions
only
from
income
“from
a
business
or
property”
as
specifically
authorized
by
subsection
20(1).
It
is
further
argued
that,
according
to
section
9
of
the
Act,
income
from
a
business
or
property
is
the
“profit
therefrom”
and
does
not
include
any
capital
gain.
On
the
basis
of
the
foregoing,
then,
the
defendant
appears
to
argue
that
if
section
135
only
authorizes
the
deduction
of
patronage
dividends
from
income
from
business
or
property,
which
does
not
include
capital
gains,
then
the
capital
gains
may
not
be
included
in
the
base
income
of
the
co-operative
to
which
the
percentage
of
member
business
is
applied
in
order
to
calculate
the
deductible
amount
of
patronage
dividends.
The
defendant
further
reinforces
this
argument
by
referring
to
subsection
135(7)
which
provides
that
patronage
dividends
paid
to
the
patrons
of
a
cooperative,
other
than
those
in
respect
of
consumer
goods
or
services,
are
taxable
in
the
hands
of
the
recipient.
The
defendant
argues
that
if
capital
gains
may
also
be
distributed
by
consumers’
co-operatives,
then
they
would
escape
taxation
completely
since
the
patronage
dividends
would
be
deductible
from
the
income
of
the
co-operative
and
would
not
be
taxable
in
the
hands
of
the
recipients
since
they
would
be
distributed
on
the
basis
of
the
recipients’
purchases
of
consumer
goods
and
services.
On
the
other
hand,
capital
gains
of
a
producers’
co-operative
would
be
taxable
in
the
hands
of
the
recipient
producers
because
they
would
not
enjoy
the
exemption
allowed
in
subsection
135(7)
to
purchasers
of
consumer
goods
and
services.
Whether
capital
gains
of
a
co-operative
can
be
included
in
its
income
base
for
the
purpose
of
calculating
deductible
patronage
dividends
is
a
question
which
has
apparently
not
yet
been
authoritatively
answered
in
the
courts.
The
Income
Tax
Act
is,
in
my
view,
far
from
precise
on
the
point.
I
have
come
to
the
conclusion,
however,
that
the
proper
interpretation
of
section
135
is
that
it
allows
the
inclusion
of
capital
gains
in
that
income
base
to
which
the
percentage
of
membership
business
is
applied
in
order
to
calculate
the
deductible
amount
of
patronage
dividends.
More
specifically,
as
regards
the
present
case,
this
means
that
the
plaintiff
was
entitled
to
add
the
taxable
capital
gain
of
$5,906
to
its
business
income
before
patronage
dividend
deduction,
in
the
amount
of
$132,815,
and
apply
to
the
total
of
these
two
figures,
$138,721,
the
percentage
of
business
transacted
with
members,
namely
91
per
cent,
in
order
to
claim
a
total
patronage
dividend
deduction
of
$126,236.
In
reaching
this
conclusion
I
have
started
with
the
wording
of
subparagraph
135(2)(b)(i)
which,
for
present
purposes,
limits
the
deductible
patronage
dividends
to
“the
part
of
the
income
of
the
taxpayer
for
the
year
attributable
to
business
done
with
members’’.
The
income
is
defined
in
paragraph
135(4)(d)
as
“that
proportion
of
the
income"
that
the
value
of
goods
sold,
etc,
to
members
is
of
the
total
value
of
goods
sold,
etc
by
the
co-operative
(that
is,
including
sales
to
both
members
and
non-members).
The
reference
in
this
definition
to
the
goods
sold,
etc,
is
only
for
the
purpose
of
fixing
the
deductible
“proportion’’
of
the
“income’’
of
the
co-operative.
That
“income’’
presumably
is
to
be
calculated
on
the
basis
of
the
general
rules
provided
by
the
Income
Tax
Act.
Section
3
of
that
Act
says
that
the
income
of
a
taxpayer
includes,
inter
alia,
its
taxable
capital
gains.
While
counsel
for
the
defendant
is
no
doubt
correct
in
arguing
that
subsection
20(1)
only
deals
with
deductions
from
income
“from
a
business
or
property’’,
which
would
not
incude
capital
gains,
I
am
not
convinced
that
section
135
is
dependent
on
paragraph
20(l)(u)
for
its
operation.
It
seems
to
me
that
the
main
purpose
of
subsection
20(1)
is
to
create
an
exception
to
the
general
rule
in
paragraph
18(l)(a)
that
a
taxpayer
cannot
deduct
from
his
income
from
a
business
or
property
any
outlay
or
expense
except
to
the
extent
that
it
was
made
or
incurred
for
the
purpose
of
gaining
or
producing
income
from
the
business.
A
patronage
dividend
is
not,
at
least
in
the
normal
sense,
an
expense
incurred
for
the
purpose
of
producing
income.
Therefore
to
the
extent
that
section
18
would
preclude
a
deductible
patronage
dividend
to
reduce
business
income,
section
20
makes
it
possible.
But
section
135
starts
with
the
words
“Notwithstanding
anything
in
this
Part”
(that
is,
Part
I
where
section
20
is
also
found)
and
it
independently
provides
a
general
right
to
deduct
from
income
the
amounts
of
patronage
dividends
as
defined
therein.
It
must
be
kept
in
mind
throughout
that
subsection
135(1)
provides
that
“there
may
be
deducted,
in
computing
the
income
of
a
taxpayer
.
.
.
the
payments
made,
pursuant
to
allocations
in
proportion
to
patronage
.
.
.”.
Similarly,
as
noted
above,
paragraph
135(4)(d)
says
that
the
income
attributable
to
business
done
with
members
“means
that
proportion
of
the
income”
of
the
taxpayer.
The
word
“business”
does
not
precede
the
word
“income”
in
either
of
these
critical
provisions.
As
noted
above,
counsel
for
the
defendant
argued
that
such
an
interpretation
would
mean
that
capital
gains
by
a
consumers’
co-operative
would
never
be
taxable
if
they
were
distributed
to
the
patrons
of
the
co-operative.
I
do
not
find
this
particularly
anomalous.
The
capital
gains
in
question
here
are
relatively
small
in
relation
to
the
volume
of
business
and
are
simply
incidental
to
the
operation
of
the
co-operative
to
its
members.
Similarly,
no
doubt,
a
co-operative
could
earn
other
sums
of
money,
such
as
interest
on
its
bank
accounts,
which
might
find
their
way
into
patronage
dividends.
It
is
unrealistic
to
insist
that
the
only
sums
which
may
be
regarded
as
“income”
for
the
purpose
of
declaring
a
patronage
dividend
are
precisely
those
sums
earned
through
mark-up
in
the
sale
of
goods
to
consumers.
Indeed,
the
Act
does
not
attempt
to
prescribe
that
a
given
consumer
may
only
receive
tax
free
patronage
dividends
of
an
amount
strictly
limited
to
mark-up
on
the
specific
purchases
made
by
him.
Consumer
co-operatives
can
exercise
considerable
discretion
in
categorizing
different
kinds
of
goods
and
assigning
to
each
a
somewhat
arbitrary
percentage
of
patronage
dividend
depending,
perhaps
approximately,
but
not
precisely,
on
the
margin
of
profit
involved
in
handling
different
kinds
of
merchandise.
A
member
of
a
consumers’
co-operative
belongs
in
order
to
acquire
consumer
goods
more
cheaply.
He
might,
to
achieve
a
similar
result,
arrange
with
a
retailer
to
give
him
a
discount
in
return
for
undertaking
to
do
all
business
with
him,
or
he
might
for
example
purchase
from
a
wholesaler
if
he
had
the
proper
connections
to
do
so.
If
instead
he
uses
the
vehicle
of
a
consumers’
co-operative
and
if
in
the
process
of
supplying
his
consumer
needs
at
cost
the
co-operative
incidentally
makes
some
money
which
further
reduces
the
costs
of
doing
business,
that
money
should
be
available
for
distribution
on
a
tax
free
basis
to
the
consumer
just
as
is
the
money
made
from
the
mark-up
on
the
price
of
goods
sold
to
that
consumer.
If
it
is
not
distributed,
then
it
is
of
course
taxable.
Section
125
There
remains
the
question
of
the
proper
basis
for
calculation
of
the
small
business
tax
deduction
as
provided
in
subsection
125(1).
This
subsection
provides
in
part
as
follows:
125.
(1)
There
may
be
deducted
from
the
tax
otherwise
payable
under
this
Part
for
a
taxation
year
by
a
corporation
(other
than
a
corporation
that
carried
on
a
nonqualifying
business
in
Canada
in
the
year)
that
was,
throughout
the
year,
a
Canadian-
controlled
private
corporation,
an
amount
equal
to
21%
of
the
least
of
(a)
the
amount,
if
any,
by
which
the
aggregate
of
(i)
the
aggregate
of
all
amounts
.
.
.
which
is
the
income
of
the
corporation
for
the
year
from
an
active
business
.
.
.
The
plaintiff
now
argues
that
in
computing
“active
business
income”
for
the
purposes
of
this
section,
the
deductible
amount
of
patronage
dividends
(which
I
have
determined
above
to
be
$126,236)
should
be
subtracted
from
the
total
income
of
the
co-operative
corporation.
This
would
leave
a
base
of
$12,485,
(minus
charitable
donations)
on
which
to
apply
the
21
per
cent
prescribed
by
subsection
125(1)
in
order
to
calculate
the
authorized
tax
reduction.
The
plaintiff
contends
that
there
is
no
indication
in
subsection
125(1)
that
the
income
referred
to
therein
can
be
only
business
income,
and
thus
there
is
no
reason
to
calculate
the
permissible
patronage
dividend
deduction
on,
or
to
subtract
it
from,
only
the
business
income
rather
than
the
total
income,
in
establishing
the
base
on
which
the
21
per
cent
can
be
applied.
In
other
words,
the
plaintiff
says
that
section
135
governs
permissible
deductions
both
for
the
purposes
of
determining
the
total
taxable
income
of
the
co-operative
and
for
the
purposes
of
determining
its
active
business
income
under
section
125.
The
defendant,
on
the
other
hand,
argues
that
paragraph
20(l)(u)
applies
in
computing
the
base
figure
for
the
purposes
of
section
125,
so
as
to
limit
the
application
of
the
permissible
patronage
dividend
deduction
so
that
it
may
be
used
to
reduce
only
business
income,
with
the
amount
of
the
permissible
patronage
dividend
deduction
being
calculated
as
the
member-business
percentage
of
that
business
income.
In
the
present
case
on
this
basis
the
permissible
patronage
dividend
deduction
would
be
91
per
cent
of
$132,815,
that
is
$120,862.
This
latter
amount,
deducted
from
the
business
income
of
$132,815,
would
leave
an
active
business
income
of
$11,953
according
to
the
defendant.
I
have
concluded
that
the
defendant’s
position
in
respect
to
the
application
of
section
125
is
correct.
I
do
not
believe
that
the
base
for
calculation
of
the
permissible
patronage
dividend
deduction
from
total
income,
as
provided
in
section
135,
is
in
this
case
the
same
base
as
should
be
used
under
section
125
to
calculate
the
“income
.
.
.
from
an
active
business”
for
the
purpose
of
applying
the
small
business
tax
reduction.
I
am
satisfied
that
when
subparagraph
125(l)(a)(i)
refers
to
“income
.
.
.
from
an
active
business”
it
is
referring
to
“business
income”
as
defined
elsewhere
in
the
Act.
Section
9
provides
that
income
from
a
business
is
the
profit
therefrom
for
the
year.
This
does
not
include
capital
gains
as
such.
Section
18
then
provides
that
certain
outlays
or
expenses
may
not
be
deducted
in
computing
income
from
a
business.
But
subsection
20(1)
provides
that,
notwithstanding
paragraphs
18(l)(a),
(b)
and
(h),
certain
deductions
are
permitted.
As
provided
by
paragraph
20(1
)(u),
among
the
permitted
deductions
are
such
patronage
dividends
calculated
on
the
proportion
of
member-business
as
prescribed
by
section
135.
Because
in
order
to
calculate
the
tax
reduction
as
authorized
by
subsection
125(1)
it
is
necessary
to
use
business
income
as
the
base,
paragraph
20(l)(u)
is
the
appropriate
authority
for
the
deduction
of
patronage
dividends.
In
the
present
case
this
means
that
the
income
on
which
the
permissible
patronage
deduction
must
be
calculated
is
the
business
income
which
is
$132,815.
Applying
to
that
figure
the
percentage
of
member-business
as
required
by
subparagraph
135(2)(b)(i)
the
permissible
patronage
dividend
deduction
from
business
income
would
be
91
per
cent
of
$132,815,
that
is
$120,862.
Then,
to
ascertain
the
income
of
the
co-operative
from
an
active
business,
for
the
purposes
of
calculating
the
tax
reduction
pursuant
to
subparagraph
125(l)(a)(i),
it
is
necessary
to
subtract
from
the
business
income
of
$132,815
the
patronage
dividend
deduction
of
$120,862,
leaving
an
active
business
income
of
$11,953.
The
small
business
tax
reduction
would
then
be
21
per
cent
of
that
amount,
namely
$2,510.
In
reaching
a
conclusion
as
to
the
proper
disposition
of
costs
in
this
matter
I
have
kept
in
mind
that
each
party
has
succeeded
in
part.
I
have
also
noted
that
the
parties
regarded
this
as
a
test
case
in
which
the
decision
might
govern
the
disposition
of
several
other
cases.
ORDER
It
is
therefore
ordered
and
adjusted
that
the
assessment
be
referred
back
to
the
Minister
for
reconsideration
and
reassessment
in
accordance
with
the
principles
set
out
in
the
reasons
for
judgment,
provided
that
no
such
reassessment
shall
exceed
the
amount
assessed
in
the
notice
of
assessment
of
July
13,
1981.
There
will
be
no
costs
awarded.