Allied Farm Equipment Ltd. v. MNR, 73 DTC 5036, [1972] CTC 619 (FCA)

The Chief Justice (orally):—This is an appeal from a judgment of the Trial Division, dismissing an appeal from a judgment of the Tax Appeal Board, in so far as it dismissed appeals by the appellant from its assessments under Part I of the Income Tax Act for its 1960, 1961, 1962, 1963 and 1964 taxation years.

The sole question raised in respect of all assessments is whether the appellant, which was a company carrying on business in Canada, was “associated”, within the meaning of subsection 39(2) of the Income Tax Act, with two other corporations, which were carrying on business in Canada, during the taxation years in question, so that it became subject to a higher scale of rates on its taxable income than would be applicable if it were not so “associated”.

Before one can attempt to state the question in issue, it is necessary to attempt to summarize the scheme of section 39 in an understandable but sufficiently accurate way.

Part I of the Income Tax Act imposes an income tax on the annual taxable income of every person resident or carrying on business in Canada (section 2).* [1] Section 39 is the provision that fixes the rate at which that tax is computed in so far as corporations (as opposed to individuals) are concerned. The scheme of section 39 is as follows:

1. Subsection (1) establishes a rate for the first $35,000 taxable incomet and a substantially higher rate for the balance “except where otherwise provided”.

2. Subsection (2) otherwise provides for the case “Where two or more corporations are associated with each other”, by providing that, in such a case, the tax payable by “each of them” is to be computed at the higher rate on all its taxable income. [2]

3. Subsection (3) provides that, notwithstanding subsection (2), “if all of the corporations of a group that are associated” take certain action “the tax payable by each of the corporations” is to be computed in accordance with a formula whereby the benefit of the lower rate on $35,000 is distributed among them and subsection (3a) provides an alternative method of accomplishing the same result where “any of the corporations of a group that are associated” has failed to take such action.

4. Subsection (4) et seq provide a set of very complicated and detailed rules to give a precise meaning to the otherwise vague, if not meaningless, concept of corporations that are “associated” in the first part of the section. Of these subsections, the two with which we are concerned are

(a) subsection (4), which provides that “For the purpose of this section” one corporation is “associated” with another if any of the tests enumerated therein is applicable” [3] and

(b) subsection (5), which provides that “When two corporations are associated, or are deemed by this subsection to be associated, with the same corporation . . .” they shall “for the purpose of this section” be deemed to be “associated” with each other.

I shall now endeavour to indicate the question that has to be decided.

We are concerned here with four corporations, viz,

(a) the appellant, which was resident and carried on business in Canada,

(b) two other corporations that were resident and carried on business in Canada (hereinafter called “the other Canadian corporations”), and

(c) a United States corporation that was not resident and did not carry on business in Canada.

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 subsections when the section speaks about corporations that are “associated”. It says that “For the purpose of this section,* [4] 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.

I may say that I can find no conflict between this conclusion and what was decided in International Fruit Distributors Limited v MNR, [1953] CTC 342; 53 DTC 1222, which decision was upheld, I understand, without written reasons, by the Supreme Court of Canada (55 DTC 1186). 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. It follows, having regard to a “Special Case” that was filed in the Trial Division, that

1. the appeal should be allowed with costs, in this Court and in the Trial Division;

2. the judgment of the Trial Division should be set aside;

3. the reassessments of the appellant under Part I of the Income Tax Act for the 1960, 1961, 1962, 1963 and 1964 taxation years should be referred back to the respondent for reconsideration and assessment on the basis that the appellant was not associated with Falcon Equipment Company Limited and Northwest Farm Equipment Limited within the meaning of section 39 of the Income Tax Act. SPENCER INVESTMENTS LTD, Appellant,

and

MINISTER OF NATIONAL REVENUE, Respondent.

Tax Appeal Board (R S W Fordham, QC), December 10, 1971.

Income Tax Act, RSC 1952, c 148 — 11(1)(e) — Loans — Reserves for

The appellant company, conducting an investment business with a seat on the Calgary Stock Exchange, set up, and the Minister disallowed, reserves for doubtful debts for its fiscal years ending in 1964 to 1967 inclusive. Appellant had advanced a number of large amounts to two corporations, as well as made a number of so-called loans consisting of the buying of conditional sales agreements from one of the two corporations at a discount.

HELD:

The large advances by appellant constituted lending in the sense of financing. The lending of money being part of appellant’s business, the appeal was allowed, except with respect to the trade paper transactions where no real lending took place but where a relation of vendor and purchaser was created. Appeal allowed in part.

R D Bell for the Appellant.

C D McKinnon for the Respondent.

The Chairman:—Appellant is an Alberta corporation formed in 1949 and, until late in 1967, it was managed by one O L Spencer. It conducted an investment business and had a seat on the Calgary Stock Exchange. In 1967, Spencer and his family moved to Vancouver. All their shares of the appellant’s capital stock were then acquired by members of the family of Victor C Morrison, CA of Calgary, where this appeal was heard in April 1970 and judgment reserved. Assessments made in July 1969 and relating to the taxation years 1964, 1965 and 1967 require reviewing.

In its income tax returns for the said years, the appellant’s business is described as “Financial”. Current assets in 1964 amounted to $316,918.31. It now claims to have conducted “a very active and aggressive business of lending money and dealing in financing with quite a number of people”. This resulted in the setting up, by the appellant, of the following reserves for doubtful debts:

All four reserves were subsequently disallowed by the respondent and hence this proceeding. The only witness heard was Victor Morrison; none was put forward by respondent’s counsel. Thirteen exhibits were filed on behalf of the appellant.

It appears that the sum of $20,000 was advanced to Fabric World and Interiors Ltd in October 1960 through one Harold J Tribe, its progenitor and principal figure. The money was wanted in order to develop a furniture-manufacturing and re-upholstering enterprise that seemed to have good prospects. The advance was to be repaid within seven years and to bear interest at 6% per annum, in the meantime. The full terms were evidenced by a 9-page typewritten agreement (Exhibit A-1). I suppose that this could be called a “loan” although strictly speaking, I think ‘financing’ would be more accurate.

Another transaction, or series of transactions, began on or about 1961 and was with Alberta Stationers & Office Suppliers Ltd (hereinafter called “Alberta Stationers”). It involved an advance of $15,000 secured by a demand promissory note with interest at 1 /2% per month. About two years later, $18,000 was also advanced by the appellant to the same company. Then the interest rate was changed to 15% per annum. The first note could not be produced, but the second was filed as Exhibit A-2. Next, there was reference to a letter dated November 21, 1958 (Exhibit A-3), signed by Alberta Stationers & Office Suppliers Ltd, in which mention is made of certain shareholders’ loans, repayment of which, it was agreed, should be deferred for an unstated time. No figures are given and I do not discern any additional liability to the appellant. Incidentally, Alberta Stationers became bankrupt in September 1966.

Following the recounting of these happenings, there was evidence regarding a number of so-called loans, which I consider were nothing other than the buying of conditional sale agreements from Alberta Stationers at a discount. In other words, a dealing in trade paper such as takes place, for instance, in connection with the sales of thousands of automobiles annually. One such agreement was filed as Exhibit A-4 and shows on its face that Alberta Stationers “sells, assigns, transfers and sets over” all its rights thereunder. There is no real lending in a transaction of this kind; instead the relation of vendor and purchaser becomes created and I so find.

There also were 89 transactions with Wild Rose Leasing Ltd, which leased furniture and office equipment to various law firms and others, by the month. The contracts covering these rental agreements were assigned to the appellant at a discount as in the case of Alberta Stationers.

Paragraph 11(1 )(e) of the Income Tax Act provides that there may be a reasonable reserve for doubtful debts arising from loans made in the ordinary course of business by a taxpayer part of whose ordinary business was the lending of money. Here, I think that it was a part of the appellant’s business to lend money. The Act does not say that it must be solely the appellant’s business, it is well-settled that a corporation may have more than one business. There was no break-down of the relevant figures, but I think that in fixing the correct reserves, the sales of trade paper mentioned should be omitted, as not constituting loans, and only the first several transactions treated as properly being loans.

Cases such as Orban v MNR, 10 Tax ABC 178, and there are a number of them, have little, if any, application in a matter of the present kind. Money-lenders, in the popular meaning of that term, refer to the makers of personal loans — usually more or less small — to numerous individuals and not to the advancing of large amounts to corporations and other commercial ventures. The latter process is a lending, in the sense of financing, and can involve large sums of money.

In the result — and it has seemed unnecessary to discuss all the evidence tendered — I think that the appeal should be allowed in part and the matter referred back to the respondent to adjust the reserves where trade paper is involved in accordance with the above-mentioned findings.

Before parting with this appeal, I may add that these reasons were drafted a number of weeks ago and only untoward circumstances have prevented their being engrossed earlier than now.

Appeal allowed in part.