Pratte, J.: —This is an appeal from a judgment of the trial division (Reed, J.) allowing with costs an appeal by the respondent from income tax reassessments of its 1974,1975 and 1976 taxation years.
In reassessing the respondent for those years, the Minister of National Revenue assumed that the amounts that the respondent had claimed, under subsection 135(1) of the Income Tax Act, as deductions on account of payments made by it pursuant to allocations in proportion to patronage,* had to be reduced in accordance with the prescriptions of subsection 135(2).t Madam Justice Reed held that the limit imposed by subsection 135(2) on the deductibility of patronage dividends had no application in this case. Was she right? That is the question to be resolved on this appeal.
The respondent is a co-operative which, at all relevant times, owned and operated an oil refinery in Regina, Saskatchewan, where it carried on the business of producing, refining and marketing petroleum products. It also held, with others, proprietary interests in a number of oil wells in Saskatchewan and Alberta. For reasons that need not be explained, it could not use in its refinery the crude oil produced by the wells in which it had an interest. That crude oil was sold to third parties. The respondent purchased its crude oil requirements from the Alberta Marketing Agency and sold its refined products to Federal Co-operatives Limited, its sole shareholder and member.
It is common ground that the respondent paid patronage dividends to its sole member with respect to the refined products sold to it and that no such payments were made to the purchasers of the crude oil produced by the wells in which the respondent had an interest. In view of this difference of treatment between its various customers, was the respondent prevented by subsection 135(2) from deducting in their entirety the patronage dividends it had paid its member?
In order for subsection 135(2) to apply, the taxpayer must have acted so as to fulfill a negative condition formulated in the following terms:
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 apropriate differences for different types or classes of goods....
The trial judge held that the respondent had not fulfilled that condition. True, the respondent had not made allocations in proportion to patronage in respect of all its customers at the same rate since it had made an allocation in respect of its sole member and had allocated nothing to its other customers. However, in the trial judge's view, that difference was an appropriate difference "for different types or classes of goods".
Counsel for the appellant did not contest the judge's finding that this difference of treatment between the purchasers of crude oil and the purchasers of refined products was appropriate within the meaning of subsection 135(2). His contention was that this was an irrelevant consideration since, in his view, the clause “with appropriate differences for different types or classes of goods" in subsection 135(2) qualifies the phrase “at the same rate" with the result that the clause applies only when allocations in proportion to patronage have been made, albeit at different rates, to all customers. The clause, said counsel, does not apply in a case like the present one where patronage dividends have been paid to only one class of customers. Counsel added that this interpretation was supported by the text of the definition of the phrase “allocation in proportion to patronage” found in paragraph 135(4) which expressly specifies that, in the computation of the allocation, there may be "appropriate differences in the rate for different classes, grades or qualities thereof". The appropriate differences referred to in that definition, according to counsel, are the same as those mentioned in subsection 135(2); in both cases, those differences are limited to differences in the rate at which the allocations are calculated.
These arguments certainly find support in the convoluted language of subections 135(2) and (4). However, as pointed out by the trial judge, they lead to an absurd result, namely, that the deduction of patronage dividends is subject to the limit imposed by subsection 135(2) if no allocation has been made in respect to the particular type of goods sold to a class of customers but is not so limited if an allocation of an insignificant amount has been made with respect to the same goods. In order to avoid that absurdity and ensure that subsection 135(2) attains its obvious object of limiting the deductibility of patronage dividends only when the differentiation between customers is not reasonably attributable to differences in the goods or products that were sold to them, the trial judge concluded that, for the purposes of section 135, there could be a zero allocation or, which comes to the same thing, an allocation at the rate of zero. That interpretation certainly stretches the meaning of the words used in the section. However, it is the only one that is in harmony wih the obvious purpose of the provision and, for that reason, I cannot say that the learned judge erred in adopting it.
I would dismiss the appeal with costs.