Krag-Hansen v. The Queen, 85 DTC 5330, [1985] 2 CTC 131 (FCTD), aff'd 86 DTC 6122, [1986] 2 CTC 69 (FCA)

Cullen, J:—This is a motion by the applicants for an order pursuant to sections 24 and 52 of the Canadian Charter of Rights and Freedoms. The allegation by the applicants is that subsections 247(2) and (3) of the Income Tax Act infringe or deny the rights of the applicants as guaranteed by the Canadian Charter of Rights and Freedoms and are therefore of no force and effect.

The applicants were deemed to be associated with each other in a taxation year by the Minister of National Revenue pursuant to subsection 247(2) of the Income Tax Act. It is maintained here by the applicants that the language employed in subsection 247(2) of the Income Tax Act is so vague and uncertain, and so subject to discretionary determination, that it cannot be regarded as a law, and secondly, subsection 247(3) does not entitle a taxpayer to a full challenge as the basis upon which the Minister of National Revenue may issue a direction under 247(2).

I cannot accept either argument. All taxpayers have a comprehensive, sophisticated description or definition of the meaning of associated corporations in section 256 of the Income Tax Act, the consequences thereof and some saving provisions. Both the Department of National Revenue and corporations can read the sections and make their own determination whether two or more corporations are associated. In Canada, with the self-assessing system in place, the Minister is quite properly, in my view, given an additional power to deem two or more corporations to be associated with each other. The Minister must satisfy himself on two criteria namely that

(a) the separate existence of those corporations in a taxation year is not solely for the purpose of carrying out the business of those corporations in the most effective manner, and

(b) that one of the main reasons for such separate existence in the year is to reduce the amount of taxes that would otherwise be payable under this Act.

This is subject to challenge by the taxpayer who has but to establish that the main reason for such separate existence in the year was not to reduce the amount of taxes that would otherwise be payable under the Income Tax Act.

The applicants maintain that the words “in the most effective manner'" are vague and uncertain. However, these words have not been a problem for taxpayers or for courts in the past. Counsel for the respondent cited but three recent cases, and there are many, many others, and there seemed to be little difficulty in determining the meaning of these words, nor could it be argued that the taxpayer did not have an opportunity for a full challenge.

Mr Justice Mahoney in The Queen v Arthill Enterprises Limited, [1975] CTC 594; 75 DTC 5419, states at 600 (DTC 5422):

I have considered the cases referred to me by counsel as well as other cases. While each turns on its own facts, the test that has been consistently applied was succinctly stated by Cattanach, J in the Loewen case at page 794 [410, 6308]:

if there had been no tax advantage would the plan have been adopted in any event?

As to challenging the Minister's decision, the applicants suggest they have only half a challenge, whereas the Crown, and I believe quite correctly, emphasizes that the applicants only have to show the move was not made to avoid tax.

Again, the taxpayers have the advantage of rebutting the deeming provision successfully if they can establish that “none of the main reasons for the separate existence of the subject corporation was the reduction of income tax otherwise payable under the Income Tax Act’’, these words quoted from Mr Justice Gibson in Honeywood Ltd et al v The Queen, [1981] CTC 38 at 43; 81 DTC 5066 at 5070.

In Alpha Forming Corporation Limited et al v The Queen, [1982] CTC 425; 83 DTC 5021, Jerome, AC) deals with 247(2)(a) and (2)(b), and I suggest gave no indication he found 247(2)(a) vague or uncertain. At 427 (DTC 5023):

[Analysis]

From a taxation point of view, therefore, the effect of the entry of Jenmari into the crane business was that Alpha, which continued to use the crane as it had previously, incurred rental charges from Jenmari as an operating expense, while Jenmari received rental revenue from Alpha as income which enjoyed small business preferential treatment. In my view, such an obvious tax advantage provided ample justification for the Minister to conclude that in these years, one of the main reasons for the separate existence of the two companies was to reduce tax otherwise payable by Alpha. I accept the submission of counsel for the Plaintiffs that Jenmari was incorporated for reasons entirely unrelated to tax advantage. Indeed, it continues to exist today primarily for that original purpose. The language of section 247, however, does not confine the Minister to the purpose or the year of incorporation. The words in section 247(2)(b) “one of the main reasons for such separate existence in the year” indicate that corporations which have otherwise existed separately may engage in activities in any taxation year which may provide grounds for the Minister to determine them to be associated only in that year, provided of course that they otherwise fall within section 247(2)(a). I find this to be precisely the situation here. Jenmari was originally incorporated so that property which would otherwise have been owned by Alpha could be transferred to Jenmari. That was the purpose at incorporation and continued to be one of the purposes during the years under appeal. Since it was not related to the carrying out of the business of either corporation in a more effective manner, it provided the Minister with the requisite grounds under section 247(2)(a). No grounds existed under section 247(2)(b), however, until Jenmari entered into the crane business in the manner and for the obvious tax advantages which I have outlined. When that occurred, and for as long as it continued, there was ample justification for the Minister to direct, as he did in 1972, 1973 and 1974, that for the purpose of taxation, Alpha and Jenmari be deemed to be associated with each other.

Clearly the Minister must establish that the two prerequisites are in place before exercising his discretion, and in 247(2)(b) reduction of tax must be the main reason.

Clearly the judgment of the ACJ in Alpha indicates how the section works. Failing to do so would enable the taxpayers to manipulate, and to unfairly stop the necessity of paying their appropriate share of taxes; thereby derogating from equality in paying taxes, a certain recipe for disaster in a self-assessing system.

In Ville de Montréal v Arcade Amusements Inc, a judgment of the Supreme Court of Canada delivered on April 24, 1985, Beetz J at page 32 states:

The trial judge found the definitions in s 2 to be sufficiently explicit. Of the cases cited by the parties, he noted in particular the comments of the presiding judge in London Drugs Limited v City of North Vancouver (1972), 24 DLR (3d) 305, from which he cited the following passage:

In my view the wording objected to in the by-law before me does not have that quality of vagueness and uncertainty which is such as to render the by-law invalid in part or in whole. It may be that the by-law here will occasion some difficulty of interpretation. But difficulty of interpretation is not to be confused with vagueness and uncertainty to the point of invalidity.

I consider that the trial judge properly dismissed this argument.

Being satisfied that subsection 247(2) is not vague and uncertain, and being satisfied that the applicants have every necessary opportunity to rebut the deeming determination by the Minister, I am not required to make a ruling pursuant to the applicants’ position that rights of the applicants are violated by the said subsections.

Counsel for the respondent raised the fact that procedurally, the applicants possibly should have filed an appeal under subsection 247(3) of the Income Tax Act which permits the Court to confirm the direction, vacate the direction or vary the direction. I accept that this procedure was available to the applicants but also accept as correct the procedure followed here.

The application is dismissed with costs.

Application dismissed.