The Queen v. B & J Music Ltd., 83 DTC 5074, [1983] CTC 50 (FCA)

Thurlow, CJ:—The issue in this appeal is whether the taxable income of the respondent for the taxation years 1972, 1973, and 1974, when the respondent did not qualify for a tax deduction as a Canadian controlled private corporation, must be brought into account in computing its “cumulative deduction account” for the purposes of subsection 125(1) of the Income Tax Act, for the taxation years 1975, 1976 and 1977 when the respondent did qualify as a Canadian controlled private corporation.

Section 125 sets up a statutory scheme entitling Canadian controlled private corporations to certain tax deductions, subject to the limitations set out therein. The section has six subsections the last of which defines, inter alia, the meaning of “cumulative deduction account”. So far as is relevant for present purposes, the definition reads:

125. (6) In this section:

(b) “cumulative deduction account” of a corporation at the end of any taxation year means the amount if any by which the aggregate of

(i) the corporation’s taxable incomes for taxation years commencing after

1971 and ending not later than the end of the particular year, and

The learned trial judge held that the respondent’s 1972, 1973 and 1974 taxable incomes should not be brought into the computation of the respondent’s cumulative deduction account. His view was expressed in the following paragraph from his reasons:

In my view, section 125 of the Income Tax Act is a special section affording “Canadian-controlled private corporation” special tax treatment and it does not in any of its provisions refer to any other corporations; and further Parliament did not legislate in this section to deny the so-called small business deduction to any corporation such as B & J Music Limited which was not in 1971 a “Canadian controlled private corporation”.

I accept the view that section 125 affords Canadian controlled private corporations special tax treatment. That, to my mind, is its purpose but, as I see it, the purpose is to be carried out only to the extent that the language of the section so provides. It is not open to the Court to extend the application of what the section provides by reliance on some supposed but unexpressed intendment.

Even if the word “corporation”, wherever it appears in the section and in particular in the definition of “cumulative deduction account”, is read as referring only to a Canadian controlled private corporation, it appears to me that when it is so read and applied as at the end of each of the taxation years 1975, 1976 and 1977 the definition requires that the taxable incomes of that corporation for the years 1972, 1973 and 1974 be brought into the computation. In order to exclude that income from the computation it would, as I see it, be necessary to amend the definition by adding after the words “corporations taxable incomes” wording such as “while a Canadian controlled private corporation”. This, in my opinion, the Court cannot do.

I would allow the appeal with costs here and in the Trial Division, set aside the judgment of the Trial Division, and restore the assessments.

Clement, DJ [DISSENTING]:—With respect, I am in agreement with the interpretation put on section 125 of the Income Tax Act by Mr Justice Gibson, and I would dismiss this appeal.

Section 125 is directed solely to companies that come within the definition of “Canadian controlled private corporation”. The respondent, having been in business in Canada for a number of years, in June 1974 became such a company by virtue of sale of its shares of capital stock to Canadian owners. Prior to that date, section 125 had no application to it.

The issue in appeal is the amount, if any, properly standing to the credit of the respondent’s “cumulative deduction account” for its taxation year 1975 (being the calendar year). This phrase is defined by paragraph (6)(b) of which the terms relevant to the issue in appeal are:

(b) “cumulative deduction account” of a corporation at the end of any taxation year means the amount, if any, by which the aggregate of

(1) the corporation’s taxable incomes for taxation years commencing after 1971 and ending not later than the end of the particular year,

The question is whether this wording brings into the cumulative deduction account of the respondent, its taxable income earned in 1974 and earlier years.

The deductions allowed to the respondent under section 126 were not available to it until its taxation year 1975 by virtue of the opening words of subsection 1:

125. (1) There may be deducted from the tax otherwise payable under this Part for a taxation year by a corporation that was, throughout the year, a Canadian- controlled private corporation, an amount . ..

Nevertheless, the Minister has imposed on the opening of the account for the taxation year 1975, and subsequently, an accumulation of past taxable income when there was no provision in the Act for the establishment of such an account in those past years, and no benefit available to the respondent could have arisen out of it. It is urged that the use of the word “corporation” in paragraph (6)(b) imports any corporation and bears on any corporate taxable income after 1971; so that the taxable income of the respondent before it came under the provisions of subsection 126 [sic] must be taken into account. I do not agree. The meaning of the word “corporation” must be determined by the context of the whole section in which it is used and, in my opinion, there is no warrant for extension of its operation to a period of time in which the section itself had no operation for the respondent. The opening words of the subsection can mean only a Canadian-controlled private corporation. Subparagraph (6)(b)(i) is addressed to “the corporation”, that is to say the corporation referred to in the opening words of the subsection. The respondent’s first particular year was 1975 under that provision, since it was not qualified for the deduction in previous years by virtue of the opening words of subsection (1).

I am of the opinion that the section can be given its full and fair operation by applying its terms to a corporation in the time span in which a corporation has in fact the qualifying status, and that the wording in question should not be extended backward to transactions in the past so as to affect the fair operation of the provisions of the section, and diminish their intended benefits, in the present.