Oerlikon Aérospatiale Inc. v. R., 99 DTC 5318, [1999] 4 CTC 358 (FCA)

Noel J.A.:

This is an appeal from a judgment by Judge Archambault of the Tax Court of Canada, dismissing the appeal by Oerlikon Aérospatiale Inc. (Oer- likon-Canada or the appellant) against the assessment issued by the Minister of National Revenue under the Income Tax Act! [1] with respect to the 1989 taxation year. [2]

Facts

I refer to the decision of the trial judge for the details of the pertinent facts. For the purposes of the instant appeal, it is sufficient to recall that in 1986, the company Werkzeugmaschinenfabrik Oerlikon-Büherle A.G. (Oerlikon-Büherle) entered into an agreement with the Canadian govern- ment to supply equipment to be used to establish a low-altitude air defence system (ADATS). [3] During the period at issue, Oerlikon-Biiherle Holding Ltd. (Oerlikon-Biiherle Holding) held all of the shares of that company and of Oerlikon-Canada.

Oerlikon-Biiherle granted Oerlikon-Canada a subcontract to assemble one of the components of the system. A comprehensive purchase order was issued listing the equipment Oerlikon-Canada had to deliver under the terms of the contract. It provided that:

Invoices have to be accompanied by corresponding evidence of completion or deliveries....4 [4]

It also included the terms of payment as follows:

Payments for these purchase orders have been carried out since 1986 in form of advance payments. Further payments will be made on financing concepts to be agreed upon between OBH [Oerlikon-Büherle Holding], WO [Oerlikon- Biiherle] and OA [Oerlikon-Canada]. Normally, no single invoices will be paid but invoices will be netted against advanced payments. [5]

According to an agreement also concluded between these three companies at the same time, [6] financing for the activities related to the assembly of the components at issue by Oerlikon-Canada was to come from either Oerlikon-Büherle Holding or Oerlikon-Büherle in the form of advances. The cumulative amount of the advances by one or other of these companies as at December 31, 1989 was $292,834,886. On the same date, the balance of these advances, after deducting the amounts invoiced by Oerlikon-Canada, was $235,585,097.

In 1988, Oerlikon-Canada entered into another agreement with the Martin Marietta Corporation for the manufacture of goods for the American government’s air defence program. The Martin Marietta Corporation also made advances under this contract. As at December 31, 1989, these advances totalled $8,907,076.

According to the balance sheet produced by Oerlikon-Canada for the fiscal year ending December 31, 1989, after deducting the amounts billed for merchandise delivered to its clients, the value of advances was $244,492,1737 [7] Note 4 to the financial statements describes this amount as “Advances from Customers”. [8]

In computing its income under Part I for the 1989 fiscal year, Oerlikon- Canada included the full amount of the advances received during the year, as required by paragraph 12(1)(a) of the Act. In the same computation, however, it deducted $244,492,173 as a reserve in respect of the part of the advances attributable to goods to be delivered or services to be rendered after the end of the year, as provided in paragraph 20(1)(m) of the Act. [9]

Moreover, in computing its capital for the purposes of the tax set out in Part 1.3 of the Act, Oerlikon-Canada chose not to include this amount of $244,492,173, despite the fact it was identified as an advance in its financial statements. [10]

In a notice of assessment issued on March 26, 1993, the Minister of National Revenue added this amount to the computation of Oerlikon-Canada’s capital for its 1989 taxation year. The assessment was confirmed by the Minister and Oerlikon-Canada entered an appeal before the Tax Court of Canada [hereafter the Tax Court].

Issue

The issue to be determined in the instant appeal is whether the Tax Court Judge was justified in finding that the advances totalling $244,492,173 granted to Oerlikon-Canada as of December 31, 1989, and reflected as such in its financial statements, were required to be included in the computation of its capital under Part 1.3 of the Act.

Positions of the parties

According to the appellant, the Tax Court Judge erred in law in finding that only reserves in the accounting sense [11] must be included in the computation of income under Part 1.3. It considers that income tax reserves [12] must also be included and as the effect of paragraph 181.2(3)(b) is to exclude these reserves from the computation of capital, the amount of $244,492,173 must be excluded from this computation, as it was claimed as a reserve under Part I. [13]

According to the respondent, only accounting reserves are contemplated by Part 1.3, and income tax reserves are excluded. [14] Moreover, because the appellant had on hand advances in the amount of $244,492,173 within the meaning of paragraph 181.2(3)(c) as at December 31, 1989, the respondent argues that the Tax Court Judge properly held that this amount should be included in the computation of capital for the purposes of Part 1.3. [15]

As a second ground, the appellant claims that the Tax Court Judge erred in law in finding that the amount at issue constituted “advances” within the meaning of paragraph 181.2(3)(c). It contends that the phrase “loans and advances” in this paragraph refers only to advances which are “loans” in the strict sense of the word and that the advances at issue in the instant case are not of this type. [16]

Decision

The first ground of appeal requires the Court to ascertain the staturory meaning to be given to the word “reserves” under Part 1.3 of the Act. As this is a defined term, one must first turn to this definition. According to subsection 181(1), for the purposes of Part .3, the word “reserves” refers to:

I I]n respect of a corporation for a taxation year, means the amount at the end of the year of all of the corporation's reserves, provisions and allowances (other than allowances in respect of depreciation or depletion) and, for greater certainty, includes any provision in respect of deferred taxes. [emphasis added]

Montant à la fin d’une année d’imposition constitué de l’ensemble des réserves et provisions d’une corporation, y compris les réserves pour impôts reportés. En sont exclus l’amortissement cumulé et les provisions pour épuisement. [mon souligné]

As can be seen, with the exception of depreciation and depletion, this definition is wholly unlimited in scope and suggests at first glance that any amount which forms part of a corporation’s reserves is contemplated by Part 1.3. This would include all reserves and allowances, whether they be accounting reserves or tax reserves. [17]

Subsection 181.2(3) is the only place where the word “reserves” is used in Part 1.3 of the Act; it prescribes how the capital of a corporation is computed. This provision reads as follows:

The capital of a corporation ... for a taxation year is the amount, if any, by which the aggregate of

(a) the amount of its capital stock (or, in the case of a corporation incorporated without share capital, the amount of its members’ contributions), retained earnings, contributed surplus and any other surpluses at the end of the year,

(b) the amount of its reserves for the year, except to the extent that they were deducted in computing its income for the year under Part 1,

(c) the amount of all loans and advances to the corporation at the end of the year,

(d) the amount of all indebtedness of the corporation at the end of the year represented by bonds, debentures, notes, mortgages, hypothecs or similar obligations,

(e) the amount of any dividends declared but not paid by the corporation before the end of the year,

(f) the amount of all other indebtedness (other than any indebtedness in respect of a lease) of the corporation at the end of the year that has been outstanding for more than 365 days before the end of the year, and

(g) where it was a member of a partnership at the end of they year,...

exceeds the aggregate of

(h) the amount of its deferred tax debit balance at the end of the year, and

(i) the amount of any deficit deducted in computing its shareholders’ equity at the end of the year,

(j) any amount deducted under subsection 135(1) in computing its income under Part 1 for the year, to the extend that the amount may reasonably be regarded as being included in the amount determined under any of paragraphs (a) to (g) in respect of the corporation for the year. [emphasis added]

Le capital d’une corporation, ... pour une année d’imposition correspond à l’excédent éventuel du total:

a) du capital-actions de la corporation (ou, si elle est constituée sans capital-actions, de l’apport de ses membres), de ses bénéfices non répartis, de son surplus d’apport et de tout autre surplus à la fin de l’année,

b) de ses réserves pour l’année, sauf dans la mesure où elles sont déduites dans le calcul de son revenu pour l’année en vertu de la partie I,

C) des prêts et des avances qui lui ont été consentis à la fin de l’année,

d) de ses dettes à la fin de l’année sous forme d’ obligations, d’effets, de mortgages, d’hypothèques ou de titres semblables,

e) des dividendes qu’elle a déclarés mais n’a pas versés avant la fin de l’année,

f) de toutes ses autres dettes, sauf celles afférentes à un bail, à la fin de l’année qui sont impayées depuis plus de 365 jours avant la fin de l’année,

g) dans le cas où elle est l’associé d’une société à la fin de l’année...,

sur le total:

h) du solde de son report débiteur d’impôt à la fin de l’année,

1) de tout déficit déduit dans le calcul de l’avoir des actionnaires à la fin de l’année,

j) de tout montant déduit en application du paragraphe 135(1) dans le calcul de son revenu pour l’année en vertu de la partie I, dans la mesure où il est raisonnable de considérer les déductions comme incluses dans l’un des montants calculés en application des alinéas a) à g) relativement à la corporation pour l’année. [mon souligné]

We see that paragraph (b) requires that the “reserves” be included in the computation of the capital except if they were deducted under Part I. In order to properly understand the effect of this exclusion, it is important to know that a reserve under Part I is optional and that it only comes to be if it is deducted under this Part. [18] The effect of paragraph 181.2(3)(b) is therefore to exclude all reserves claimed under Part I from the computation of the capital of a corporation, leaving to be included accounting reserves which have not given rise to deduction for tax purposes. It follows that an accounting reserve which can also give rise to a deduction for tax purposes is excluded from this computation to the extent it has been claimed under Part I. [19]

It is clear from this brief analysis that the word “reserves” as defined in subsection 181(1) includes all of the amounts which constitute a corporation’s reserves, whether they arise under the Act or in accordance with generally acceptable accounting principles. As we have seen, the definition is broad enough to include amounts composed of both of these types of reserves and it would not have been necessary to exclude income tax reserves from the computation of the capital of a corporation under para graph 181.2(3)(b) if these had not been contemplated by this definition. It was therefore not open to the Tax Court Judge to exclude income tax reserves from the definition of the term “reserves” in Part 1.3, as he seems to have done. [20]

Despite this, it is clear that the Tax Court Judge properly held that under paragraph 181.2(3)(b), only accounting reserves which have not given rise to a deduction under Part I must be added to the computation of the capital of a corporation:

[TRANSLATION] The amount of the provision for “accounting” purposes must be added to the capital of the corporation under paragraph 181.2(3)(b) of the Act, except to the extent that it has been deducted for tax purposes. [21]

Counsel for the appellant argued that words would have to be added to paragraph 181.2(3)(b) to give it that meaning, but this is not the case. Even though by including income tax reserves under Part 1.3 only to exclude them from the computation of the capital, Parliament seems to have taken a circuitous route, the fact remains that the result arrived at by the Tax Court Judge follows from a straightforward reading of the relevant provisions, without adding anything whatsoever to them.

In addition to the above, counsel for the appellant argues that the reserves in the amount of $244,492,173 are specifically excluded from the computation of his client’s capital pursuant to paragraph 181.2(3)(b) and that this amount cannot be included anywhere else, for example as “advances” under paragraph 181.2(3)(c). In support of this argument, he cites the rule of construction to the effect that a particular enactment in a statute overrules a more general enactment on the same subject. [22]

I do not believe this rule supports the appellant’s argument. First, subsection 181.2(3) deals with a series of items which must all be included in the computation of a corporation’s capital, each of which is a particular enactment. Accordingly, while it is true that in the instant case paragraphs 181.2(3)(b) and 181.2(3)(c) apply to the same amount, they do so in different respects and give rise to results which can be reconciled in the statutory scheme. [23]

In the alternative, the appellant claims that the amount of $244,492,173 does not constitute “loans and advances” within the meaning of paragraph 181.2(3)(c) and should therefore not be included in the computation of its capital. It considers that the word “advance” can have two meanings: an “advance in the sense of a loan” which refers to a loan in the literal sense of the word, and an “advance in the sense of a payment on account” which refers to an amount to be applied against the price of a contract paid before the contract is performed. [24] It contends that only the concept of “advance in the sense of a loan” is contemplated in paragraph 181.2(3)(c).

On this issue, the appellant suggests that as several provinces levy a tax similar to the one levied under Part I.3 of the Act, it would be useful to consider the interpretation given to comparable provisions in provincial legislation. [25] In particular, it relies on case law which has developed in Quebec under Part IV of the Taxation Act [26] (TA).

On one hand, paragraph 1136(1 )(J) of the TA stipulates that in computing its paid-up capital, a corporation must include the “loans and advances” granted to it. On the other hand, section 1138( 1 ) of the Act provides that the paid-up capital of a corporation shall be reduced by “the amounts of the loans and advances to other corporations”. [27] The appellant cites a long line of cases which have construed these provisions to conclude that it is clear for the purposes of the TA that the phrase “loans and advances” contemplates a lender-borrower relationship. [28]

An overview of the decisions quoted by the appellant indicates that they all involve the same fact situation, namely a corporation which attempted to deduct from its paid-up capital the balance on the selling price of goods sold as “loans and advances to other corporations” within the meaning of section 1138.1 of the TA. In each of these cases, the Quebec courts, including the Court of Appeal on one occasion, found that a balance on a selling price does not give rise to the type of relationship contemplated by section 1138.1; [29] on the other hand, none of these decisions suggests that the relationship at issue here between the appellant and its clients would be excluded.

The Ontario Court of Appeal’s decision in TransCanada Pipelines Ltd. v. Ontario (Minister of Revenue)^ [30] is much closer to the facts of the instant case. In that matter, the Court had to determine whether various payments made by TCPL to natural gas producers under long-term supply contracts?! [31]

could be deducted from the computation of its paid-up capital under paragraph 54(1 )(c) of the Corporations Tax Act?^ [32]

Under those contracts, TCPL had agreed to buy a certain volume of gas every year and to pay for it, even if it was unable to take delivery. These contracts stipulated that if necessary, the surplus payments would be held by the suppliers and credited against subsequent deliveries. Because of an oversupply in the natural gas market in the late 1970s, TCPL was required to make payments which far exceeded the volume of natural gas of which it was able to take delivery.

TCPL attempted to deduct the surplus portion of these payments as “loans and advances” to its suppliers under paragraph 54(1 )(c) of the Ontario legislation. The Ontario Minister of Revenue issued assessments disallowing this treatment. TCPL successfully challenged these assessments both at first instance and on appeal. After a brief analysis, the Court of Appeal emphasized the fact that the payments in question:

...fell within dictionary definitions of “advance” as a “payment [made] beforehand or in anticipation” and a “payment made before ... the completion of an obligation for which it is to be paid”: Dictionary of Business and Finance (1957), p. 9. [33]

and held that these amounts constituted, inter alia, “advances” within the meaning of paragraph 54(1)(c).

The appellant was unable to show how the advances at issue in this case were distinguishable from the advances the Ontario Court of Appeal considered in TCPL. Both cases dealt with payments made in advance for the eventual performance of the resulting reciprocal obligation.

Moreover, there is nothing to support the appellant’s argument that the use of the conjunction “and” in the phrase “loans and advances” in paragraph 181.2(3)(c) indicates that only advances which are “loans” in the strict sense of the word are contemplated by Part I.3. [34] It seems clear that the use of the word “advances” would be redundant if that had been the intention of Parliament.

Neither can the appellant rely on the ejusdem generis rule of construction to limit the scope of the word “advances” in paragraph 181.2(3)(c), as this word is not used in the context of an enumeration that may affect its

ductions of the amounts provided by clauses (a) (b) and (d)... [emphasis

added]

meaning. [35] In fact, the phrase “loans and advances” does not make any of these words predominant. Last, the meaning given to the word “advance” in the Bank Act& [36] is a function of the particular context of this Act and cannot be extended to another Act with a different purpose. [37]

The effect of an advance, be it in the sense of a payment on account or a loan, is to make the amount of money it represents available to the person or corporation which receives it. In the instant case, the advances were an integral part of the financial resources available to the appellant at the end of its 1989 fiscal year according to the financial statements it filed, and nothing either in the legislation or the tax policy which led to its enactment indicates that Parliament intended to exclude advances from the tax under Part 1.3.

Accordingly, the Tax Court Judge properly held that the advances in the amount of $244,492,173 granted to the appellant as at December 31, 1989, and identified as such in its financial statements, were required to be included in the computation of its capital for the 1989 taxation year.

For these reasons, the appeal should be dismissed. There will be no award as to costs as the respondent did not make that request.

Appeal dismissed