Date: 20010221
Docket: 2000-1232-IT-G
BETWEEN:
CANADIAN OCCIDENTAL U.S. PETROLEUM CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, A.C.J.
[1]
These are appeals from assessments for the appellant's 1994
and 1995 taxation years. The issue is whether
subsection 17(3) as it read in those years has the effect of
removing the appellant from the operation of
subsection 17(1).
[2]
Section 17 read as follows:
17(1) Where a corporation
resident in Canada has lent money to a non-resident person and
the loan remained outstanding for one year or longer without
interest on the loan computed at a reasonable rate having been
included in computing the lender's income, the corporation
shall be deemed to have received, on the last day of each
taxation year during which the loan was outstanding, interest on
the loan at the prescribed rate computed for the period in the
taxation year during which it was outstanding.
(2)
Subsection (1) does not apply if a tax has been paid on the
amount of the loan under Part XIII.
(3)
Subsection (1) does not apply if the loan was made to a
subsidiary controlled corporation and it is established that the
money that was lent was used in the subsidiary corporation's
business for the purpose of gaining or producing income.
[3]
Subsidiary controlled corporation is defined in section 248
as follows:
"subsidiary controlled corporation" means a corporation
more than 50% of the issued share capital of which (having full
voting rights under all circumstances) belongs to the corporation
to which it is subsidiary.
[4]
Subsection 17(1) has in one form or another been part of
Canadian income tax law since 1934. Subsection 17(3) was put
into the Income Tax Act in 1951.
[5]
The problem in a nutshell is this: in 1988 the appellant loaned
money interest-free to a non-resident wholly owned subsidiary and
renewed the loan in 1993. The money was used throughout the
entire period in the subsidiary's business. On
November 15, 1994 the shares of the subsidiary were
transferred to a sister company so that the non-resident borrower
ceased to be a subsidiary controlled corporation of the appellant
from that date on. The Minister assessed on the basis that the
exception in subsection 17(3) ceased to apply at that
point.
[6]
The appellant contends that the relevant date to determine the
status of the borrower is when the loan was made. The Minister
says that the test is a continuing one to be applied throughout
the period in which the lender seeks to have the exception
apply.
[7]
The agreed statement of facts is as follows
1.
The Appellant was a corporation incorporated under the
Business Corporations Act of Alberta and was an investment
holding company whose principal place of business was 635 -
8th Avenue S.W. in Calgary, Alberta throughout the
period from May 31, 1988 to November 30, 1995.
2.
The Appellant was wholly-owned subsidiary of Canadian Occidental
Petroleum Ltd. ("COPL") until November 30, 1995 and
Canadian Occidental International Petroleum Corporation
("IPC") was a corporation all of the common shares of
which were owned by COPL until December 1, 1995.
3.
At all material times, the Appellant, IPC and COPL were
"taxable Canadian corporations" as defined in
subsection 89(1) of the Income Tax Act ("the
Act").
4.
At all material times until November 15, 1994, CanadianOxy
Holdings B.V. ("B.V.") was resident in the Netherlands
and was wholly-owned subsidiary of the Appellant by reason of the
fact that the Appellant held all of BV's issued and
outstanding common shares having full voting rights under all
circumstances. Accordingly, BV was a "subsidiary controlled
corporation" of the Appellant as defined in subsection
248(1) of the Act until November 15, 1994.
5.
On or about May 31, 1988, the Appellant (then named Canadian
Occidental Services Ltd.) made a loan with a five-year term (the
"Loan") in the amount of $67,547,200 US to BV. On May
31, 1988, BV issued a non-interest-bearing promissory note for
$67,547,200 US (the "Note") to the Appellant.
6.
At maturity of the Note on May 31, 1993, BV reissued the Note to
the Appellant amended so that it was payable upon two days
notice. The Loan remained outstanding throughout the period from
May 31, 1988 to November 30, 1995.
7.
The money lent by the Appellant to BV was used in BV's
money-lending business for the purpose of gaining or producing
income throughout the period from May 31, 1988 to November 30,
1995.
8.
On November 15, 1994, as part of a reorganization of the COPL
group of companies, the Appellant transferred its common shares
of BV to IPC pursuant to subsection 85(1) of the Act in
exchange for Class B preferred shares of IPC. From November 15,
1994 to November 30, 1995, the Appellant held all of the issued
and outstanding Class B preferred shares of IPC which in turn
held all of the common shares of BV. Accordingly, BV was a
"controlled foreign affiliate" of the Appellant as
defined in subsection 17(15) throughout the relevant period.
9.
On November 30, 1995, the Appellant amalgamated with IPC and
continued as IPC. On December 1, 1995, IPC was wound up into
COPL, with the result that BV became a wholly-owned subsidiary of
COPL.
10.
No tax has been paid on the amount of the Loan under Part XIII of
the Act.
11.
On August 26, 1999, the Minister of National Revenue reassessed
the Appellant for its 1994 and 1995 taxation years on the basis
that subsection 17(1) of the Act applied to the Appellant
to deem it to have received interest in the amount of $734,144
and $5,752,312 in respect of the 1994 and 1995 taxation years
respectively, and that subsection 17(3) did not apply because BV
was not a "subsidiary controlled corporation" of the
Appellant from November 15, 1994 to December 1, 1995 and that the
money that was lent was not used by a "subsidiary controlled
corporation" of the Appellant in its business for the
purpose of gaining or producing income during that period.
[8]
It is clear that from November 15, 1994 to November 30,
1995 BV was not a subsidiary controlled corporation of the
appellant.
[9]
The respondent's position is that the non-resident
corporation must be a subsidiary controlled corporation
throughout the entire period in which the exception in
subsection 17(3) is claimed.
[10] I shall
set out what I understand is the basis of this argument, which
was expressed succinctly by Mr. Plourde. He begins with the
unassailable point that the "plain meaning" of words in
a statute must be determined in the context in which they are
found and he relies upon the statement of Binnie J. in a
dissenting judgment in Will-Kare Paving & Contracting v.
Canada, [2000] 1 S.C.R. 915 at 940.
[11] From this
he proceeds to the proposition that subsection 17(3) must be
read together with subsection 17(1).
[12] One could
hardly disagree with these points.
[13] Next, he
moves to the interpretation given to
paragraph 20(1)(c) of the Income Tax Act by
Dickson C.J. in The Queen v. Bronfman Trust,
87 DTC 5059, where he pointed to the distinction
between the original use and the current use of borrowed money,
and stated that it is the current use that is relevant in
determining the deductibility of interest under
paragraph 20(1)(c). From this he analogizes to the
use of the borrowed money by the subsidiary within
subsection 17(3), and says if it is a continuing or current
test under paragraph 20(1)(c) it should be a
continuing or current test under subsection 17(3). I do not
propose to decide the correctness of this link in the
respondent's claim of reasoning. For one thing
section 17 has been amended and for another
paragraph 20(1)(c) and section 17 serve very
different purposes. Attempting to interpret one provision in a
taxing statute by analogy to another one is a precarious and
unreliable enterprise.
[14] Even if I
accepted the respondent's position that the interpretation of
paragraph 20(1)(c) required that a similar continuing
and current interpretation be given to the use of the money in
subsection 17(3) it does not in my view follow, as the
respondent suggests, that a similar interpretation be given to
the other condition in subsection 17(3) relating to the
status of the subsidiary.
[15] The
cardinal rule that a court must follow in interpreting a statute
is that one must read the words and if they are reasonably
comprehensible one need look no further. I was faced with a
problem of interpreting the word "use" in Glaxo
Wellcome Inc. v. The Queen, 96 DTC 1159 (aff'd
98 DTC 6638 (F.C.A.); leave to appeal to S.C.C.
denied), where I followed the observation of Fauteux C.J. in
Ville de Montréal v. ILGWU Center et al., [1974]
S.C.R 59 at 66 where he said:
The legislator is presumed to mean what he says; and there is no
need to resort to interpretation when the wording is clear
...
[16] Here the
wording is perfectly clear:
if the loan was made to a subsidiary controlled corporation
...
[17] In French
the words are:
si le prêt a été consenti à une
filiale controlée
[18] French
and English are linguistic instruments capable of great precision
of expression. Parliamentary drafters are presumed to have
mastered one or both of those languages and to be able to say
what they mean and to mean what they say.
[19] None of
the conditions such, for example, as ambiguity, inconsistency or
absurdity that might warrant applying the rules of interpretation
that have been developed in other cases exist here. There is in
my view no justification for this court to add the words
"and throughout the period in which the loan was outstanding
the borrower continued to be a subsidiary controlled
corporation". The judicial filling of perceived legislative
lacunae to achieve some unspecified policy objective is an
unacceptable usurpation by the court of the legislative
function.
[20] In
Friesen v. The Queen, 95 DTC 5551,
Major J., speaking for the majority of the Supreme Court of
Canada, refused to read into the definition of
"inventory" words that were not there. He said at
page 5556:
The respondent is asking this Court to interpret the definition
of inventory as though it read:
"inventory" [for a taxation year] means a
description of property the cost or value of which is relevant in
computing a taxpayer's income from a business for
[the] taxation year;
The principal problem with the respondent's interpretation
is that the bracketed words do not appear in the definition of
the Income Tax Act. The addition of these words to the
definition effects a significant change to the sense of the
definition. It is a basic principle of statutory interpretation
that the court should not accept an interpretation which requires
the insertion of extra wording where there is another acceptable
interpretation which does not require any additional wording.
Reading extra words into a statutory definition is even less
acceptable when the phrases which must be read in appear in
several other definitions in the same statute. If Parliament had
intended to require that property must be relevant to the
computation of income in a particular year in order to be
inventory in that year, it would have added the necessary
phraseology to make that clear.
[21] The
reasoning in that case is equally apposite here.
[22] If
Parliament wants to add a further condition containing words such
as "throughout the period" it certainly knows how to do
so. The following is a list of provisions of the Income Tax
Act that contain precisely those words:
1.
clause 6(6)(a)(i)(A)
2.
subparagraph 12(11)(i) — under the definition
of "investment contract"
3.
subsection 13(25) — preamble
4.
paragraph 13(25)(b)
5.
paragraph 40(4)(a)
6.
paragraph 66(11.4)(b)
7.
subsection 66(11.5) — preamble
8.
paragraph 66(11.5)(b)
9.
paragraph 89(1)(b) — under the definition of
"Canadian corporation"
10.
paragraph 89(2)(b)
11.
subsection 108(1) — under the definition of
"pre-1972 spousal trust"
12.
subparagraph 110.6(1)(a)(vi) — under the
definition of "qualified farm property"
13.
subparagraphs 110.6(1)(e)(i) and (f)(i)
— under the definition of "qualified small business
corporation share"
14.
subsection 112(2)
15.
paragraph 131(8.1)(a)
16.
paragraph 132(7)(a)
17.
paragraph 138.1(1)(a)
18.
subsection 146(4)
19.
subsection 146.1(5)
20.
subsection 146.3(3)
21.
paragraph 147.1(3)(a)
22.
paragraph 149(1)(o.1)
23.
subparagraph 149(1)(o.2)(ii.1)
24.
subsection 149(5)
25.
subparagraph 187.3(2)(f)(i)
26.
paragraph 189(3)(b)
27.
paragraph 250(1)(d.1)
28.
paragraph 260(1)(c) — under the definition of
"securities lending arrangement"
[23] This is
sufficient to dispose of the matter. However two further points
raised by counsel for the appellant deserve brief mention. The
first is that in 1998 section 17 was substantially amended.
One of the changes was to provide explicitly for the continuing
status and continuing use tests that the respondent contends are
implicit in subsection 17(3) in the years under appeal.
[24] New
subsection 17(8) reads in part as follows: (emphasis
added)
(8)
Subsection (1) does not apply to a corporation resident in Canada
for a taxation year of the corporation in respect of an amount
owing to the corporation by a non-resident person if the
non-resident person in a controlled foreign affiliate of the
corporation throughout the period in the year during which the
amount is owing and it is established that the amount
owing
(a)
arose as a loan or advance of money to the affiliate that the
affiliate has used, throughout the period that began when the
loan or advance was made and that ended at the earlier of the end
of the year and the time at which the amount was repaid,
(i)
for the purpose of earning ...
[25] The short
answer to the contention that I should look to subsequent
legislation as an aid to interpreting prior legislation is that
section 45 of the Interpretation Act prohibits just
that. It reads:
45(1) The repeal of an
enactment in whole or in part shall not be deemed to be or to
involve a declaration that the enactment was previously in force
or was considered by Parliament or other body or person by whom
the enactment was enacted to have been previously in force.
(2)
The amendment of an enactment shall not be deemed to be or to
involve a declaration that the law under that enactment was or
was considered by Parliament or other body or person by whom the
enactment was enacted to have been different from the law as it
is under the enactment as amended.
(3)
The repeal or amendment of an enactment in whole or in part shall
not be deemed to be or to involve any declaration as to the
previous state of the law.
(4) A
re-enactment, revision, consolidation or amendment of an
enactment shall not be deemed to be or to involve an adoption of
the construction that has by judicial decision or otherwise been
placed on the language used in the enactment or on similar
language.
[26] The most
extensive discussion of the rule is found in Mountain Park
Coals Limited v. Minister of National Revenue, [1952]
Ex.C.R. 560. The law is well settled on this point. Indeed
Iacobucci J. in Ikea Ltd. v. Canada, [1998]
1 S.C.R. 196 at 208 treated it as self-evident that
subsequent legislation could not have any bearing on the
interpretation of a prior provision.
[27] Quite
apart from section 45 of the Interpretation Act and
the jurisprudence on the point, there are cogent reasons for not
looking to subsequent legislation as an aid to interpretation.
Different people looking at the same subsequent amendment could
come to precisely the opposite conclusion about its effect. One
person might draw the inference that Parliament was merely making
explicit what was always implicit. Another might conclude that
Parliament was seeking to correct deficiencies in the prior
legislation. Another might conclude that Parliament was intending
to change the law. These uncertainties make subsequent
legislation a wholly unreliable guide to interpretation.
[28] The
provisions of new section 17 are worth looking at if for no
reason other than to see the very different styles of drafting in
the 1950s and the 1990s. Old section 17 was brief and clear.
It is set out in its entirety above. New section 17 has 15
subsections, including four anti-avoidance rules and runs to six
columns.
[29] The
second point has to do with departmental interpretation. In a
published technical interpretation dated April 17, 1991, the
Department of National Revenue said this:
The Department's position is that subsection 17(1)
contemplates an annual and continuous test for purposes of
calculating the interest deemed to be received by the lender
corporation with respect to the loan made to a non-resident
person. It is also our view that subsection 17(3) cannot be
interpreted independently of subsection 17(1). Accordingly, in
determining whether subsection 17(3) of the Act exempts the
application of subsection 17(1) for a particular taxation year,
the borrower must be a subsidiary controlled corporation when the
loan is made and it is necessary to determine on an annual basis
whether during the year the money that was loaned continued to be
used in the subsidiary corporation's business for the purpose
of gaining or producing income and whether the borrower, during
the year, remained a "subsidiary controlled
corporation".
[30] The court
is not bound by departmental practice although it is not uncommon
to look at it if it can be of any assistance in resolving a
doubt: Nowegijick v. The Queen et al.,
83 DTC 5041 at 5044. I might add as a corollary to this
that departmental practice may be of assistance in resolving a
doubt in favour of a taxpayer. There can be no justification for
using it as a means of resolving a doubt in favour of the very
department that formulated the practice.
[31] The part
of the technical interpretation that I have quoted above is, of
course, the interpretation that I have rejected. What is rather
interesting is the fact that, somewhat inconsistently, in another
part of the document, the department uses the same point in time
test for the status of the subsidiary as it rejected here. It was
dealing with the situation where a foreign subsidiary becomes by
amalgamation a subsidiary controlled corporation of the
amalgamated corporation. The department's comment is as
follows:
Additionally as the amalgamation results in U.S. Co becoming a
subsidiary controlled corporation of Amalco, one would tend to
look to the relieving provisions of subsection 17(3). However,
absent a provision similar to subsection 87(7) to deem Amalco to
have made the original loan, as U.S. Co was not a subsidiary
controlled corporation at the time the loan was made,
Amalco/Canco would continue to be subject to the application of
subsection 17(1).
[32] All this
is interesting but quite irrelevant to what has to be decided
here. My only observation is that anyone looking for perfect
consistency in the administrative interpretation of a taxing
statute is in for a disappointment.
[33] The
appeals are allowed with costs and the assessments for 1994 and
1995 are referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that
subsection 17(3) applied to the loan by the appellant to
Canada Oxy Holdings B.V. in those years.
Signed at Toronto, Canada, this 21st day of February 2001.
"D.G.H. Bowman"
A.C.J.
COURT FILE
NO.:
2000-1232(IT)G
STYLE OF
CAUSE:
Between Canadian Occidental U.S.
Petroleum Corporation and
Her Majesty The Queen
PLACE OF
HEARING:
Ottawa, Ontario
DATE OF
HEARING:
February 15, 2001
REASONS FOR JUDGMENT
BY:
The Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF
JUDGMENT:
February 21, 2001
APPEARANCES:
Counsel for the
Appellant:
Roger Taylor, Esq.
Edward Rowe, Esq.
Counsel for the
Respondent:
Paul Plourde, Q.C.
Catherine Letellier de St-Just
COUNSEL OF RECORD:
For the
Appellant:
Name:
Roger Taylor, Esq.
Firm:
Donahue Ernst & Young
Calgary, Alberta
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-1232(IT)G
BETWEEN:
CANADIAN OCCIDENTAL U.S. PETROLEUM
CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on February 15, 2001 at
Ottawa, Ontario, by
The Honourable D.G.H. Bowman, Associate Chief
Judge
Appearances
Counsel for the
Appellant: Roger
Taylor, Esq.
Edward Rowe, Esq.
Counsel for the Respondent: Paul
Plourde, Q.C.
Catherine Letellier de St-Just
JUDGMENT
It is
ordered that the appeals from assessments made under the
Income Tax Act for the 1994 and 1995 taxation years be
allowed with costs and the assessments be referred back to the
Minister of National Revenue for reconsideration and reassessment
on the basis that subsection 17(3) applied to the loan by
the appellant to CanadianOxy Holdings B.V. in those years.
Signed at Toronto, Canada, this 21st day of February 2001.
A.C.J.
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