Citation: 2007TCC668
Date: 20071101
Docket: 2007-133(IT)G
BETWEEN:
DOW CHEMICAL CANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Mogan D.J.
[1] The Appellant Corporation
was formed on October 1, 2001 when two predecessor corporations amalgamated under
the provisions of the Canada Business Corporations Act. The Appellant’s
first taxation year began on October 1, 2001 and ended on December 31,
2001. When the Appellant filed its income tax return for that first taxation
year, it reported a net loss for income tax purposes of $35,066,100 and a
current-year non-capital loss of $61,604,100.
[2] By Notice of
Reassessment dated June 29, 2004, the Minister of National Revenue (the
“Minister”) adjusted the net income reported by the Appellant for its first
taxation year by including the amount of $30,990,628 identified as “unpaid amounts”. The Appellant
has appealed from that reassessment and claims that the amount $30,990,628
should not be included in computing income for its first taxation year. The
only issue in this appeal is whether the Minister is permitted, under subsection
78(1) of the Income Tax Act, to include the amount $30,990,628 (the
“Disputed Amount”) in computing the income of a newly amalgamated corporation
(the Appellant) for its first taxation year. There is no mid-way point. The
Disputed Amount is either included or excluded.
[3] When the hearing
commenced, counsel for both parties filed a Statement of Agreed Facts
containing 29 numbered paragraphs and a Joint Book of Documents (18 tabs)
containing the documents referred to in the Statement of Agreed Facts (“SAF”).
The SAF is Exhibit 1 and the Joint Book of Documents is Exhibit 2. No witness
was called to give oral testimony. Exhibits 1 and 2 are the only evidence
before the Court. Counsel proceeded directly to argument. Set out below is the
complete SAF as in Exhibit 1:
A. The Parties
1. The Dow Chemical Company (“Dow”) was incorporated in 1897 under the laws of
the State of Michigan and reorganized in 1947 under the laws of the State of Delaware. A
copy of Dow’s Restated Certificate of Incorporation as filed on May 18, 2004 is
cont6ained in the Joint Book of Documents as Tab 1.
2. Dow Chemical Canada Inc.
(“DCCI”) (formerly Dow Chemical of Canada, Limited) was incorporated under the Canada
Business Corporations Act (“CBCA”) on June 5, 1942. A copy of the Letters
Patent incorporating DCCI dated June 5, 1942 is contained in the Joint Book of
Documents at Tab 2.
3. Prior to October 1, 2001, Dow
held all of the shares of DCCI. A copy of DCCI’s shareholder register up to April 30,
1990 is contained in the Joint Book of Documents at Tab 3. For greater certainty,
the parties agree that Dow held all of the shares of DCCI up to October 1, 2001
even though the last entry on Tab 3 is dated April 30, 1990.
4. Union Carbide Corporation
(“UCC”) was incorporated on November 1, 1917 under the laws of the State of New York. A copy of the Restated Certificate of
Incorporation of UCC as filed June 25, 1998 is contained in the Joint Book of
Documents at Tab 4.
5. Union Carbide Canada Inc.
(“UCCI”) (formerly 965089 Ontario Limited and Union Carbide Chemicals and
Plastics Canada Inc.) was incorporated on November 27, 1991 under the lass of
the Province of Ontario. A copy of the Articles of Incorporation of 956089 Ontario Limited [sic]
dated November 27, 1997, copies of all subsequent Articles of Amendment, and a
copy of the Articles of Continuance under the CBCA dated September 10, 2001 are
all contained in the Joint Book of Documents at Tab 5.
6. Union Carbide Canada Finance
Inc. (“UCCFI”) was incorporated on November 18, 1998 under the Alberta Business Corporations Act. A copy of the
Certificate of Incorporation dated November 18, 1998 is contained in the Joint
Book of Documents at Tab 6.
7. On February 6, 2001, Dow acquired
control of UCC (“Acquisition of Control”).
8. Prior to February 6, 2001,
neither Dow nor DCCI was related to UCC or UCCI.
9. On September 10, 2001, UCCI
was continued under the provisions of the CBCA.
10. On October 1, 2001, UCCI and
DCCI amalgamated under the provisions of the CBCA (“Amalgamation”). The
amalgamated entity retained the name Dow Chemical Canada Inc. (Amalco”) and a
copy of the Certificate of Amalgamation and the Articles of Amalgamation dated
October 1, 2001 is contained in the Joint Book of Documents at Tab 7. Amalco is
the Appellant in this appeal.
B. Loan Transaction Giving Rise to
Issue in Appeal
11. On December 28, 1998, UCC and
UCCI entered into an inter-company loan agreement (“Loan”) under which UCCI
could borrow up to $1,000,000,000 ($CDN) from UCC at a rate of interest of
six-month-Libor plus one hundred basis points payable semi-annually. A copy of
the Loan is contained in the Joint Book of Documents at Tab 8.
12. On or about March 30, 1999, UCC
assigned its interest in the Loan to UCCFI (“Assignment”). A copy of the
Assignment is contained in the Joint Book of Documents at Tab 9.
13. At the time UCC and UCCI entered
into the Loan as well as at the time UCC assigned the Loan to UCCFI, each of
UCC, UCCI and UCCFI was related to each other within the meaning of subsection
251(2) of the Income Tax Act (the “Act”).
14. None of the terms of the Loan,
including but not limited to the amount of the Loan, the maturity date of the
Loan, and the amount payable on the maturity of the Loan, were changed as a
result of the Assignment or the Amalgamation.
15. For the taxation year ending December
31, 2000, UCCI deducted interest in the amount of $30,990,627 under paragraph
20(1)(c) of the Act in respect of interest accrued on the Loan
for the 2000 calendar year (2000 Interest Amount”).
16. In the 2001 calendar year, UCCI
had taxation years
(a) from January 1,
2001 to February 6, 2001; and
(b) from February 7,
2001 to September 30, 2001.
17. Amalco’s first taxation year
began on October 1, 2001 and ended on December 31, 2001 (“Amalco’s 2001
Taxation Year”).
18. At all material times, the 2000
Interest Amount was unpaid and remained outstanding.
C. Assessments, Reassessments and
Determinations Leading to the Appeal
19. Amalco mailed its return of
income for purposes of Part I of the Act for its taxation year ending
December 31, 2001 and the Minister of National Revenue received the return of
income on or about July 2, 2002 (the “2001 Filed Return”). A copy of Amalco’s
T2 Corporation Income Tax Return for the taxation year 2001-10-01 to 2001-12-31
is contained in the Joint Book of Documents as Tab 10.
20. In its 2001 Fled Return, Amalco
reported, inter alia, a net loss of $35,066,100 and a current-year
non-capital loss of $61,604,100.
21. On October 25, 2002, the
Respondent issued a Corporation Notice of Assessment in which the Respondent
revised Amalco’s current-year non-capital loss to $61,596,430. A copy of the
Corporation Notice of Assessment dated October 23, 2002 is contained in the
Joint Book of Documents at Tab 11.
22. On June 16, 2004, the
Respondent made adjustments to the 2001 Filed Return and issued a T7W-C
indicating revised net income of $17,156,489 and revised taxable income of nil
for purposes of Part I of the Act. A copy of the T7W-C dated June 16,
2004 is contained in the Joint Book of Documents at Tab 12. One of the adjustments
was the addition of the 2000 Interest Amount referred to in paragraphs 15 and
18 above and this is the adjustment that is under appeal. The Respondent also
made other adjustments to Amalco’s tax under Parts I and I.3 of the Act and
those adjustments are not relevant to this appeal.
23. On June 29, 2004, the
Respondent issued a Notice of Reassessment in respect of Amalco’s 2001 Taxation
Year to reflect the adjustments described in the preceding paragraph
(“Reassessment”). The Reassessment in respect of Amalco’s tax under Part 1 of
the Act indicated nil tax payable. A copy of the Reassessment is
contained in the Joint Book of Documents at Tab 13.
24. On September 28, 2004, Amalco
filed a Notice of Objection to the Reassessment. A copy of the Notice of Objection
is contained in the Joint Book of Documents at Tab 14.
25. On April 5, 2006, the
Respondent issued a Notification of Confirmation by the Minister by which the
Respondent confirmed the Reassessment including the adjustments resulting in
nil tax payable under Part I of the Act. A copy of the Notification of
Confirmation is contained in the Joint Book of Documents at Tab 15.
26. On or about June 30, 2006,
Amalco made a request pursuant to subsection 152(1.1) of the Act for
the Respondent to determine the amount of Amalco’s losses under Part I of the Act
for Amalco’s 2001 Taxation Year. A copy of the request is contained in the
Joint Books of Documents at Tab 16.
27. On July 26, 2006, the
Respondent issued a Notice of Determination of Amalco’s losses for Amalco’s
2001 Taxation Year (the “Determination”). The Respondent determined Amalco’s
current-year non-capital loss to be in the amount of $9,381,511 and that the
amount of the 2000 Interest Amount was one of the items that reduced Amalco’s
current-year non-capital loss for Amalco’s 2001 Taxation Year. A copy of the
Determination is contained in the Joint Book of Documents at Tab 17.
28. On or about August 30, 2006,
Amalco served the Respondent with a Notice of Objection to the Determination. A
copy of the Notice of Objection dated August 30, 2006 is contained in the Joint
Book of Documents at Tab 18.
29. More than 90 days elapsed from
the time Amalco served the Respondent with the Notice of Objection to the Determination
to the time Amalco filed a Notice of Appeal in this Honourable Court.
[4] The documents in
Exhibit 2 which I have read support the facts set out in the SAF. Therefore, I
will decide this appeal only on the SAF subject to certain comments on the
Notices of Objections at Tabs 14 and 18 in Exhibit 2. Because there are no
facts in dispute, the decision will depend upon the interpretation and
application of certain provisions of the Income Tax Act (the “Act”).
In this appeal, the most important provision is paragraph 78(1)(a):
78(1) Where an amount in respect of a deductible
outlay or expense that was owing by a taxpayer to a person with whom the
taxpayer was not dealing at arm's length at the time the outlay or expense was
incurred and at the end of the second taxation year following the taxation year
in which the outlay or expense was incurred, is unpaid at the end of that
second taxation year, either
(a) the amount so
unpaid shall be included in computing the taxpayer's income for the third
taxation year following the taxation year in which the outlay or expense was
incurred, or
(b) … (not relevant)
[5] The purpose of paragraph 78(1)(a) is to limit
the period of time when a deductible expense (like interest, rent or royalty)
may be accrued (and not paid) if a debtor taxpayer and creditor are not at
arm’s length, unless the amount accrued is later paid within a reasonable time.
Under subsection 78(1), the reasonable time is the debtor taxpayer’s two
taxation years following the taxation year in which the deductible expense was
accrued.
[6] Paragraph 11 of the SAF describes a loan agreement
between Union Carbide Corporation (“UCC”) (a large corporation in the USA) and
Union Carbide Canada Inc. (“UCCI”) (an Ontario corporation). Paragraph 12 of the SAF describes the assignment of the
loan agreement by UCC to Union Carbide Canada Finance Inc. (“UCCFI”) (an Alberta corporation). The SAF does not
state who owned the issued shares of UCCI or UCCFI at any time but I infer that
both UCCI and UCCFI were, directly or indirectly, wholly owned subsidiaries of
UCC. In any event, paragraph 13 of the SAF states that UCC, UCCI and UCCFI were
related to each other (i.e. were not at arm’s length) under the Act at
all relevant times.
[7] Because UCCI and UCCFI were not at arm’s length
throughout the calendar year 2000, the Disputed Amount ($30,990,628), accrued
and deducted by UCCI when computing income for 2000, was a deductible expense
that satisfied the conditions of subsection 78(1). In other words, as of
December 31, 2000, the clock was running with respect to UCCI under subsection 78(1)
as to whether it would pay the Disputed Amount before the end of the second
taxation year following 2000.
[8] There were two events which, under the Act,
caused UCCI to have shortened taxation years in the first nine months of the
calendar year 2001. First, Dow Chemical Company (“Dow”) acquired control of UCC on February
6, 2001 (SAF paragraph 7). Under subsection 249(4), acquisition of control of a
corporation changes the end of the taxation year in which control is acquired:
249(4) Where at any time control of
a corporation (other than a corporation that is a foreign affiliate of a
taxpayer resident in Canada and that did not carry on a business in Canada at
any time in its last taxation year beginning before that time) is acquired by a
person or group of persons, for the purposes of this Act,
(a) subject to
paragraph (c), the taxation year of the corporation that would, but for this
paragraph, have included that time shall be deemed to have ended immediately before
that time;
(b) a new taxation
year of the corporation shall be deemed to have commenced at that time;
As a consequence of subsection 249(4), the first taxation
year of UCCI following the calendar year 2000 was the period January 1 to
February 6, 2001.
[9] The second event which caused UCCI to have a shortened
taxation year in 2001 was its amalgamation with Dow Chemical Canada Inc.
(“DCCI”) on October 1, 2001 (SAF paragraph 7). Under paragraph 87(2)(a),
when two or more corporations amalgamate, the taxation years of the predecessor
corporations come to an end at the time of amalgamation.
87(2) Where there has been an amalgamation of two or
more corporations after 1971 the following rules apply
(a)
for the purposes of this Act, the corporate entity formed as a result of
the amalgamation shall be deemed to be a new corporation the first taxation
year of which shall be deemed to have commenced at the time of the
amalgamation, and a taxation year of a predecessor corporation that would
otherwise have ended after the amalgamation shall be deemed to have ended
immediately before the amalgamation;
As a consequence of paragraph 87(2)(a), the second
taxation year of UCCI following the calendar year 2000 was the period
February 7 to September 30, 2001.
[10] The two events which caused UCCI to have shortened
taxation years in the early months of calendar year 2001 are recognized in
paragraphs 7, 10 (first sentence) and 16 of the SAF which state:
7. On February 6, 2001, Dow
acquired control of UCC (“Acquisition of Control”).
10. On October 1, 2001, UCCI and
DCCI amalgamated under the provisions of the CBCA (“Amalgamation”). …
16. In the 2001 calendar year, UCCI
had taxation years
(a) from January 1,
2001 to February 6, 2001; and
(b) from February 7,
2001 to September 30, 2001.
[11] The fact that the Disputed Amount was unpaid and
remained outstanding at all material times (SAF paragraph 18) brings into play
subsection 78(1) with respect to UCCI. The Appellant Corporation was formed on
October 1, 2001 when UCCI and DCCI amalgamated; and the Appellant retained the
name of one of its predecessor corporations. The issue, restated from paragraph
2 above, is whether the Disputed Amount must be included in income in the
Appellant’s first taxation year which was from October 1, to December 31, 2001.
Arguments of counsel
[12] Counsel for the Appellant argued that subsection 78(1)
cannot apply to an amalgamated corporation (like the Appellant) if it is formed
prior to the last day of what would otherwise be the second taxation year
following the taxation year in which a predecessor corporation became indebted
in the circumstances described in that subsection. Within the terms of
subsection 78(1), there is no “third taxation year” of UCCI in which the
Disputed Amount may be included in computing UCCI’s income. Subsection 78(1)
should be interpreted with respect to a particular person (UCCI) for which
three subsequent taxation years can be identified. UCCI did not have three
taxation years after December 31, 2000.
[13] For subsection 78(1) to apply, the debtor and creditor
must be persons “not dealing at arm’s length” at the time the deductible expense
was incurred and at the end of the second taxation year following the taxation
year in which the deductible expense was incurred. On the facts of the appeal,
the Appellant (as a newly amalgamated corporation) cannot have had any
relationship (arm’s length or non-arm’s length) with the creditor, UCCFI, in
the calendar year 2000 when the deductible expense was incurred.
[14] Counsel for the Respondent argued that subsection
87(7), standing alone, is sufficient to uphold the assessment under appeal. The
only relevant part of subsection 87(7) follows:
87(7) Where there has been an amalgamation of two or
more corporations after May 6, 1974 and
(a)
a debt or other obligation of a predecessor corporation that was
outstanding immediately before the amalgamation became a debt or other
obligation of the new corporation on the amalgamation, and
(b)
the amount payable by the new corporation on the maturity of the debt or
other obligation, as the case may be, is the same as the amount that would have
been payable by the predecessor corporation on its maturity,
the provisions of this Act
(c)
shall not apply in respect of the transfer of the debt or other
obligation to the new corporation, and
(d)
shall apply as if the new corporation had incurred or issued the debt or
other obligation at the time it was incurred or issued by the predecessor
corporation under the agreement made on the day on which the predecessor
corporation made an agreement under which the debt or other obligation was
issued, …
[15] In particular, the Respondent relies on paragraph
87(7)(d) to uphold the assessment. Under that paragraph, when a debt of
a predecessor corporation becomes a debt of the amalgamated corporation, other
provisions of the Act apply “as if” the amalgamated corporation had
incurred the debt (i) at the time it was incurred by the predecessor
corporation; and (ii) under the terms of the predecessor corporation’s debt
agreement. Even if the amalgamated corporation is “new”, it stands in the shoes
of its predecessor debtor corporation with respect to the terms of an inherited
debt.
[16] The “provisions of this Act” referred to
immediately after paragraph 87(7)(b) include section 78 which
requires a deductible expense, incurred but not paid, to be included in the
debtor’s income if still unpaid after a reasonable time. It is an important
condition of section 78 that the debtor taxpayer and creditor be “not dealing
at arm’s length” at the time when the expense is incurred and at the end of the
second taxation year following that time.
[17] The Respondent argues that either subsection 251(3.1)
or 251(3.2) will cause the Appellant to be deemed to have been related to its
predecessor corporations (in particular, UCCI) immediately before the
amalgamation.
251(3.1) Where there has been an amalgamation or
merger of two or more corporations and the new corporation formed as a result
of the amalgamation or merger and any predecessor corporation would have been
related immediately before the amalgamation or merger if the new corporation
were in existence at that time, and if the persons who were the shareholders of
the new corporation immediately after the amalgamation or merger were the
shareholders of the new corporation at that time, the new corporation and any
such predecessor corporation shall be deemed to have been related persons.
251(3.2) Where there has been an amalgamation or
merger of 2 or more corporations each of which was related (otherwise than
because of a right referred to in paragraph 251(5)(b)) to each other
immediately before the amalgamation or merger, the new corporation formed as a
result of the amalgamation or merger and each of the predecessor corporations
is deemed to have been related to each other.
Analysis
[18] I find no ambiguity
in section 78. The object and purpose of that section are clear. I do find ambiguity
in section 87. Specifically, it is difficult for me to determine whether the
provisions of paragraph 87(2)(a) and subsection 87(7) impose upon a
newly amalgamated corporation an obligation under paragraph 78(1)(a)
to include an amount in income which, but for the amalgamation, would be
included in the income of a predecessor corporation.
[19] There is significant
merit in the arguments of each party. For the Respondent, subsection 87(7) is
aimed at the circumstances of this appeal where a debt of a predecessor
corporation has become a debt of the amalgamated corporation. Paragraph 87(7)(c)
provides a tax-free rollover for the transfer of the debt to the amalgamated
corporation; and paragraph 87(7)(d) applies “the provisions of this Act”
as if the amalgamated corporation had incurred the debt when it was incurred by
the predecessor corporation. The provisions of this Act would, of
course, include section 78.
[20] The rule in
paragraph 87(2)(a) is worth repeating:
(a) for the
purposes of this Act, the corporate entity formed as a result of the
amalgamation shall be deemed to be a new corporation the first taxation year of
which shall be deemed to have commenced at the time of the amalgamation, and a
taxation year of a predecessor corporation that would otherwise have ended
after the amalgamation shall be deemed to have ended immediately before the
amalgamation;
I note in paragraph (a) that
a taxation year of a predecessor corporation is “deemed to have ended
immediately before the amalgamation” but a predecessor corporation itself is
not deemed to have ended upon amalgamation.
[21] An important
condition in subsection 78(1) is that the debtor of the deductible expense be
not at arm’s length with the creditor at the time the expense was incurred. Subsection
251(3.1) seems to answer the related persons (i.e. non-arm’s length) question
with respect to the Appellant and UCCI “immediately before the amalgamation”
because Dow was the controlling shareholder of both predecessor corporations at
that time, and Dow was the controlling shareholder of the Appellant
“immediately after the amalgamation”. Under paragraph 251(1)(a), related
persons are deemed not to deal at arm’s length; and under paragraph 251(2)(c),
any two corporations are related if they are controlled by the same person.
[22] Immediately before
amalgamation, UCCI and UCCFI were related because they were both controlled by
Dow; and UCCI was deemed to have been related to the Appellant under
subsection 251(3.1) as noted above. Under subsection 251(3), any two
corporations related to the same corporation are deemed to be related to each
other. Therefore, in a hypothetical sense, the Appellant was related to UCCFI
immediately before amalgamation by the operation of subsections 251(3) and 251(3.1).
[23] Under the statutory
provisions reviewed in paragraphs 21 and 22 above, can it be said that the
Appellant, even in a hypothetical sense, was related to and, therefore, not at
arms’ length with UCCFI in the calendar year 2000 when the Disputed Amount was
incurred and accrued? It seems to me that the plain language of subsection
87(7) and the arm’s length provisions of section 251 do not justify such a
determination.
[24] The plain language
of subsection 87(7) covers all debts of a predecessor corporation (on revenue
account and on capital account) which become debts of the amalgamated
corporation. Section 78 is concerned only with deductible expenses when the
debtor taxpayer and the creditor are not at arm’s length. With respect
to all kinds of debt, section 78 is aimed at a narrow target but subsection 87(7)
is aimed at a much wider target. I have no reason to conclude that
subsection 87(7) was drafted with section 78 in mind. Indeed, if subsection 87(7)
was drafted to bring the concept of section 78 within the rules of amalgamating
corporations, I would expect to find additional language in subsection 87(7)
much closer to the language of section 78.
[25] Subsection 78(1)
refers to a debtor taxpayer who “was not dealing at arm’s length” with the
creditor “at the time the expense was incurred”. Although subsection 87(7)
makes no reference to persons not dealing at arm’s length, the rules in
subsections 251(3.1) and (3.2) cause a newly amalgamated corporation to be
deemed to have been related to a predecessor corporation “immediately before
the amalgamation” if certain conditions are met. I am satisfied that the
conditions in subsection 251(3.1) are met; and that the conditions in
subsection 251(3.2) are also met. Therefore, the Appellant is “deemed to have
been related to” (and not at arm’s length with) both UCCI and DCCI immediately
before the amalgamation.
[26] There is, however, a
significant distinction between (i) a deemed non-arm’s length relationship
between the Appellant and each of UCCI and DCCI immediately before the
amalgamation, and (ii) whether the Appellant and UCCFI (the creditor) can be
deemed to have been related persons back in the calendar year 2000, before Dow
acquired control of UCC, and when UCCI and DCCI were at arm’s length. In my opinion,
the “deeming” rules in subsections 251(3.1) and (3.2) do not cause the Appellant
to be related to UCCI or UCCFI back in the calendar year 2000, relatively
remote from the time of amalgamation, when UCCI was very much at arm’s length
with Dow and DCCI.
[27] Following my
interpretation of section 87, I have concluded that this appeal must be
allowed because the Appellant does not satisfy one of the basic conditions in
subsection 78(1). Specifically, the Appellant (upon amalgamation, having
inherited the Disputed Amount as a debt of UCCI) was not related to UCCI or
UCCFI, in fact or by any deeming rule, during the calendar year 2000 when the
Disputed Amount was incurred as a debt of UCCI owing to UCCFI.
[28] There are three
propositions which support the conclusion I have just expressed in paragraph 27.
First, the assessment under appeal is not consistent with the object and
purpose of section 78. Second, there is a distinction between a newly
amalgamated corporation and its predecessor corporations. And third, there is a
gap in the legislation. I will consider these propositions in order.
[29] First, section 78
provides a period of two taxation years within which the debtor taxpayer may in
fact pay the deductible expense before it is included in income for the third
taxation year. See paragraph 78(1)(a). A taxation year of a corporation is
ordinarily 12 months or at most 53 weeks. See subsections 249(1) and
249.1(1). The first two taxation years of UCCI (the debtor corporation) after
December 31, 2000 were shortened by Dow’s acquisition of control of UCC on
February 6, 2001; and by the amalgamation of UCCI and DCCI on October 1, 2001.
See paragraphs 8, 9 and 10 above.
[30] In a hypothetical
sense, if Dow had not acquired control of UCC and if there had been no
amalgamation, UCCI would have had available the calendar years 2001 and 2002 to
pay all or part of the deductible expense to UCCFI before any unpaid amount
could be included in income “for the third taxation year” under paragraph
78(1)(a). The Appellant and Respondent are in agreement that in the
first nine months of 2001, UCCI had two taxation years (SAF paragraph 16).
[31] The Minister relies upon
the change of control on February 6, 2001 and the amalgamation on October 1,
2001 to reset the clock with respect to the two taxation years referred to in
subsection 78(1). The Appellant acknowledges the two abbreviated taxation years
in the first nine months of 2001, but argues (i) that the original debtor
taxpayer in subsection 78(1) did not survive the amalgamation to have a third
taxation year after September 30, 2001 in which any unpaid amount could be
included in income; and (ii) that the Appellant cannot be deemed to have been
related to UCCFI in the calendar year 2000 when the deductible expense was
incurred.
[32] In Placer Dome Canada Ltd. v. Ontario
(Minister of Finance), [2006] 1 S.C.R. 715, the Supreme Court of Canada restated its position
on the interpretation of tax statutes. LeBel J. writing for a unanimous Court
stated at paragraphs 23 and 24:
23 … Where,
as in this case, the provision admits of more than one reasonable
interpretation, greater emphasis must be placed on the context, scheme and
purpose of the Act. Thus, legislative purpose may not be used to
supplant clear statutory language, but to arrive at the most plausible
interpretation of an ambiguous statutory provision.
24 Although
there is a residual presumption in favour of the taxpayer, it is residual only
and applies in the exceptional case where application of the ordinary
principles of interpretation does not resolve the issue: Notre-Dame de Bon-Secours,
at p. 19. …
[33] In my view, the
relevant parts of section 87 admit of more than one reasonable interpretation;
and the application of ordinary principles of interpretation does not resolve
the issue. The assessment under appeal runs against what I regard as the
context, scheme and purpose of section 78 when it (the assessment) allows only
nine months to pay the deductible expense. Also, the assessment runs against
the residual presumption in favour of the taxpayer.
[34] Second, with respect
to the distinction between a newly amalgamated corporation and its predecessor
corporations, I refer to the decision of the Federal Court of Appeal in The
Queen (Appellant) v. Pan Ocean Oil Ltd. (Respondent), 94 DTC 6412. The
corporate taxpayer (“Pan Ocean”) was formed by the amalgamation of two Alberta corporations identified
as “ALBERTA” and “POOL”. The latter
corporation (POOL) was itself formed by a number of mergers through which it
became the holder of certain oil and gas properties inherited from a prior
company. The prior company had incurred Canadian exploration expenses (“CEE”)
prior to 1972. Pan Ocean attempted to deduct certain of those exploration expenses in its 1974 and
1975 taxation years.
[35] In 1971 and 1972,
POOL had deducted in computing income part of the CEE inherited from the prior
company. As such, POOL was a “second successor corporation” within the meaning
of subsection 83A(8d) of the pre-1972 Act. The relevant legislation
(the new post-1971 Act and transitional rule) did not permit the deduction
of CEE by a third or subsequent successor corporation. The issue was whether Pan Ocean was a second successor corporation
and thereby entitled to the CEE deduction.
[36] When allowing the
Crown’s (i.e. Revenue Canada) appeal, Hugessen J.A. writing for the Federal Court of
Appeal, stated at page 6416:
Applying
the law as I understand it to the facts of the present case, it is clear that
this appeal must succeed. It is common ground that POOL was a second successor
corporation and that the amalgamation of POOL and ALBERTA is governed by
section 87. That being so, the respondent is, for tax purposes, deemed to be a
new corporation whose first taxation year is deemed to have commenced at the
time of the amalgamation. As a new corporation, the respondent manifestly is
not POOL, whatever the situation may be under ordinary corporate law
principles. …
[37] I will apply the
above words of the Federal Court of Appeal to the facts of this case. As a
newly amalgamated corporation, the Appellant manifestly is not UCCI.
Accordingly, the Appellant’s first taxation year from October 1 to December 31,
2001, cannot be regarded as UCCI’s “third taxation year” within the meaning of
paragraph 78(1)(a).
[38] Third, is there a
gap in the legislation? Section 87 of the Act establishes rules for the
amalgamation of two or more Canadian corporations. Section 88 of the Act establishes
rules for the winding-up of a Canadian subsidiary corporation into its Canadian
parent corporation. For convenience, some of the rules in section 87 are
incorporated by reference into section 88. The relevant words in paragraph
88(1)(e.2) are as follows:
88(1) Where a taxable Canadian corporation (in this
subsection referred to as the "subsidiary") has been wound up after
May 6, 1974 and not less than 90% of the issued shares of each class of the
capital stock of the subsidiary were, immediately before the winding-up, owned
by another taxable Canadian corporation (in this subsection referred to as the
“parent”) … the following rules apply:
(e.2)
paragraphs 87(2)(c), 87(2)(d.1), 87(2)(e.1), 87(2)(e.3),
87(2)(g) to 87(2)(l), 87(2)(l.3) to 87(2)(u), 87(2)(x),
87(2)(z.1), 87(2)(z.2), 87(2)(aa), 87(2)(cc),
87(2)(ll), 87(2)(nn), 87(2)(pp), 87(2)(rr), 87(2)(tt)
and 87(2)(uu), subsection 87(6) and, subject to section 78,
subsection 87(7) apply to the winding-up as if the references in those
provisions to …
[39] I was concerned with
whether the words in paragraph 88(1)(e.2) “and, subject to section
78, subsection 87(7) apply to the winding-up” might be an indication that the
concept in section 78 was intended to be incorporated into subsection 87(7). After
reviewing submissions from counsel, I have concluded that the phrase “subject
to section 78” is included in paragraph 88(1)(e.2) only because subsection
78(2) contains a specific rule for the winding-up of a corporate taxpayer which
has incurred a deductible expense owing to a non-arm’s length person, and that
expense is unpaid when the corporate taxpayer is wound up. The words in
subsection 78(2) illustrate the Minister’s problem in this appeal:
78(2) Where an amount in respect of a deductible outlay
or expense that was owing by a taxpayer that is a corporation to a person with
whom the taxpayer was not dealing at arm's length is unpaid at the time when
the taxpayer is wound up, and the taxpayer is wound up before the end of the
second taxation year following the taxation year in which the outlay or expense
was incurred, the amount so unpaid shall be included in computing the
taxpayer's income for the taxation year in which it was wound up.
[40] Subsection 78(2)
teaches me that the Act has anticipated the winding–up of a corporate
taxpayer which has incurred but not paid a deductible expense within the
context of subsection 78(1). What is absent from the Act is a
corresponding provision to anticipate the amalgamation of a corporate taxpayer
which has incurred but not paid a deductible expense within the context of
subsection 78(1). There is ample authority for the proposition that the Courts
should not attempt to fill a gap in legislation. See Trans World Oil &
Gas Ltd. v. The Queen, [1995] 1 C.T.C. 2087 at paragraph 32.
[41] When the Appellant
served upon the Minister the Notice of Objection dated August 25, 2006 (Exhibit
2, Tab 18), paragraph 33 of that Objection concluded with the following words:
… Although the 2000 Interest Amount was
unpaid on December 31, 2001, subsection 78(1) requires that it remain unpaid at
the end of the second taxation year, which, in the case of Amalco, ended on
December 31, 2002. The 2000 Interest Amount could then only be included in
Amalco’s third taxation year which ended on December 31, 2003.
[42] During argument, I
asked counsel for the Appellant (who served the Notice of Objection) if his
interpretation of section 87 were to be accepted, would the Appellant ever be
required to include the Disputed Amount in income. He said possibly not but
added, quite rightly, that we did not need to answer that question in order to
decide this appeal. I agree that my question during argument was only
hypothetical. The appeal for the Appellant’s 2001 taxation year is allowed,
with costs, on the basis that the Disputed Amount ($30,990,628) is not to be
included in the computation of income.
Signed at Ottawa, Canada, this 1st
day of November, 2007.
“M.A. Mogan”
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