Corporation A.A.A. S.A. v. MNR, 92 DTC 1805, [1992] 1 CTC 2476 (TCC)

Tremblay, T.C.C.J.—;

1. Point at issue

This appeal was heard at Montreal, Quebec, on September 28, 1989.

Reading the originating pleadings, namely the notice of appeal and the reply to the notice of appeal, has enabled this Court to determine the point at issue. Specifically, the question is whether the appellant, a Venezuelan corporation which disposed of shares in 7575 Trans Canada Realities Inc., is entitled in computing its income for the 1987 taxation year to:

(1) claim the Quebec provincial abatement;

(2) refuse to pay interest of approximately [s/c]

(1) [sic] claim the Quebec abatement; it argues that the capital gain was also taxed by Quebec;

(2) [sic] not pay interest of $22,967.12 charged by the respondent, an amount which it regarded as excessive;

(3) not pay a penalty of $18,527.75, which is 5 per cent of the unpaid tax, because of late filing, since in issuing the certificate authorizing it to sell the shares the respondent accepted an irrevocable bank guarantee of $291,250.

Further, the late filing was allegedly due to uncontrollable circum- stances.The tax return was sent to Venezuela for approval and signature and took longer than expected.

The respondent disallowed the Quebec abatement as the appellant did not meet the legal condition of having a permanent establishment in Quebec or elsewhere in Canada.

On the interest, the respondent maintains that she had calculated this correctly and it amounted to $17,651.12, not $22,967.12.

Finally, the respondent also argues that the penalty for late filing was correctly calculated as the appellant filed its tax return on September 18, 1987 instead of July 15, 1987.

2. Burden of proof

2.01 The appellant has the burden of showing that the respondent's assessments are incorrect. This burden results from several judicial decisions, including a judgment of the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182.

3. Facts

3.01 The appellant is a non-resident corporation whose head office is in Caracas, Venezuela.

3.02 The appellant, which describes itself as an investment corporation, has a financial year which begins on January 16 and ends on January 15 of the following year.

3.03 The appellant held all the shares of 7575 Trans Canada Realties Inc. (hereinafter "Trans Canada") until January 16, 1986, the date on which 10,000 shares of that company were transferred.

3.04 The appellant corporation also holds the only share in 2333-0392 Quebec Inc. which was issued on the market (Exhibit A-8) 2333-0392 Quebec Inc. was incorporated solely to act as an intermediary in possible transactions or operations the appellant might have to engage in (S.N., pages 36-38 and 39).

3.05 Mr. Peter Light has been involved with the appellant corporation since spring 1985.He had responsibility for making various bank transactions, receiving correspondence on the company's affairs, acting as the appellant's counsel and, finally, carrying out certain commercial transactions when he was expressly authorized to do so (S.N., pages 26-27 and 32-33).

3.06 The appellant has no physical location from which its activities are conducted. The appellant's place of business is the same as the address of Peter Light's office (S.N., page 55).

3.07 Trans Canada's principal activity is operating a rental building located in Montreal. This building is the company's principal asset (S.N., pages 63-64).

3.08 On May 27, 1985 the appellant granted Maria Mestre and Alvaro Mestre Jr. a power of attorney giving them the capacity to administer and take control of the affairs of Trans Canada (Exhibit A-9). The evidence did not show that Maria and Alvaro Mestre immediately took control of Trans Canada's affairs.

3.09 Trans Canada was in fact administered by Mr. Robert Demers until fall 1985. From that time onward, a firm of accountants known as Pfiffer & Pfiffer took control of the management of the building. However, most decisions on managing the building were made by Mr. Peter Light until the Trans Canada shares were transferred on January 16,1986 (S.N., pages 70-71).

3.10 Mr. Robert Demers had for some years an option allowing him to acquire all the shares in Trans Canada.This option was given to him by the appellant (S.N., pages 42 and 44-46).

3.11 On January 16, 1986, Mr. Robert Demers finally decided to exercise the option. The exercising of this option led to a transfer of all Trans Canada's shares in return for the sum of $1,075,000.

The shares which were the subject of the transfer were sold to Robert Demers through 2333-0392 Quebec Inc. The latter company had acquired them from the appellant the same day, namely January 16, 1986 (Exhibits A-10 and A-11).

The appellant reported the profit resulting from the sale of the shares as a capital gain and was assessed as such.

3.12 A notice by a non-resident of Canada concerning the disposition of taxable Canadian property (Revenue Canada Form T-2062) was issued by the appellant on January 17, 1986 (Exhibit A-6).

3.13 A bank guarantee of some $291,250 was also filed by the appellant on October 16, 1986 (Exhibit A-1).

3.14 A certificate with respect to the disposition of property by a non-resident of Canada (Revenue Canada Form T-2068) was issued by the Deputy Minister of National Revenue on October 27, 1986 (Exhibit A-5).

3.15 The transfer of all Trans Canada's shares to Mr. Robert Demers was the only transaction engaged in by the appellant in the year at issue (S.N., pages 54-55).

3.16 Mr. Alvaro Mestre Sr. allegedly stated, in a letter to the Department of National Revenue, that the appellant had no permanent establishment or permanent residence in Canada (Exhibit I-2).

3.17 The appellant filed its tax return with the respondent on September 18, 1987, a little over two months after the deadline specified by the Act, which in the appellant's case was July 15, 1987.

3.18 The appellant reduced its tax payable in its tax return by 10%, as it thought it was eligible for the provincial abatement. The respondent rejected the claim for such a deduction.

3.19 On November 12, 1987 the respondent received a payment of $209,439 from the appellant and a new bank guarantee of $81,000.

3.20 A late filing penalty was calculated by the respondent and imposed on the appellant on the unpaid tax in accordance with the Act, as follows:

Calculation of penalty:

5% X $264,681.98:	$13,234.10
+ 1% x $264,681.98 x 2-month delay:	5,293.62
Total:	$18,527.73

4. Act—Case law and doctrine—Analysis

4.01 Act

4.01.1 The principal provisions of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") involved in the instant appeal are subsections 2(3), 116(3), (4) and (5), 124(1) and 238(2), paragraphs 124(4) (a) and 150(1) (a), and sections 157, 162, and 253. Other provisions are also involved, namely article 1139 of the Civil Code of Lower Canada (hereinafter referred to as the “ Civil Code") and sections 400, 401 and 402 of the Income Tax Regulations (hereinafter referred to as the "Regulations") These provisions will be cited in the analysis if necessary.

4.02 Case law

The case law and doctrine applied are as follows:

1. Richard Kinsella: H.H. Silver and Economic Laboratories, [1977] C.S. 466-467;

2. Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536; [1984] C.T.C. 294; 84 D.T.C. 6305;

3. Black's Law Dictionary, 1990, 6th ed., St. Paul, Minnesota, West Publishing Co., at pages 188 and 1428;

4. Driedger, E.A., Construction of Statutes, 1983, 2d ed., Butterworths;

5. Beaudoin [sic], Jean-Louis, Les Obligations, 1989, 3rd ed.,Éditions Yvon Blais;

6. L'Heureux, Nicole, Le droit bancaire, 1988, Collection monographies juridiques, Editions Revue de droit de l'Université de Sherbrooke;

7. Jobin, Pierre-Gabriel, Traité de droit civil: le louage de choses, 1989, Editions Yvon Blais.

4.03 Analysis

4.03.1 The issue between the parties involved in the instant case will have to be discussed in two parts. First, this Court will have to determine whether the appellant corporation could be entitled to the deduction for a provincial abatement in its financial year ending on January 15, 1987. Second, this Court Will have to rule on the legality of the penalty imposed on the appellant as the result of a two-month delay in filing its tax return.

4.03.2 Merits of the provincial abatement deduction

4.03.2(1) A review of the main enactments regarding the provincial abatement brings out the true nature of the concept of” taxable income earned in the year in a province", mentioned in section 124 of the Act:

124. (1) There may be deducted from the tax otherwise payable by a corporation under this Part for a taxation year an amount equal to 10% of the corporation's taxable income earned in the year in a province.

124. (4) (a) "taxable income earned in the year in a province" means the amount determined under rules prescribed for the purpose by regulations made on the recommendation of the Minister of Finance.

Part IV of the Income Tax Regulations, and in particular subsection 400(1), defines this concept:

400. (1) For the purposes of paragraph 124(4) (a) of the Act, a corporation's "taxable income earned in the year in a province" means the aggregate of the taxable incomes of the corporation earned in the year in each of the provinces.

However, a corporation's taxable income in a province depends on whether it has a permanent establishment there.

Subsections 402(1) and (2) of the Regulations enacts this concept of a "permanent establishment" and paragraphs 400(2) (a) and (b) define it:

402. (1) Where, in a taxation year, a corporation had a permanent establishment in a particular province and had no permanent establishment outside that province, the whole of its taxable income for the year shall be deemed to have been earned therein.

(2) Where, in a taxation year, a corporation had no permanent establishment in a particular province and [sic] had no permanent establishment outside that province, the whole of its taxable income for the year shall be deemed to have been earned therein.

400. (2) For the purposes of this Part and subsection 112(2) of the Act, "permanent establishment” means a fixed place of business of the corporation, including an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop or a warehouse, and

(a) where the corporation does not have any fixed place of business it means

the principal place in which the corporation's business is conducted;

(b) where a corporation carries on business through an employee or agent, established in a particular place, who has general authority to contract for his employer or principal or who has a stock of merchandise owned by his employer or principal from which he regularly fills orders which he receives, the corporation shall be deemed to have a permanent establishment in that place;

Since the appellant is a non-resident corporation, reference must be made to the taxing subsection, 2(3) of the Act, which governs non-residents:

2. (3) Where a person who is not taxable under subsection (1) for a taxation year

(a) was employed in Canada,

(b) carried on a business in Canada, or

(c) disposed of a taxable Canadian property,

at any time in the year or a previous year, an income tax shall be paid as hereinafter required upon his taxable income earned in Canada for the year determined in accordance with Division D.

It thus appears from these provisions that, in order to qualify for the provincial abatement, a non-resident corporation must have a permanent establishment in the province.

Additionally, in order to have a permanent establishment in a province, it seems clear that no [sic] corporation must "conduct business”, "carry on business”, “have a stock of merchandise" or "have a principal who receives [sic] orders" there (subsection 400(2) cited above).

To calculate a non-resident corporation's gross receipts and taxable income in a province, subsections 402(3) and (4) of the Regulations (which it is not necessary to cite) state that "merchandise sold”, 'merchandise manufactured", merchandise produced", “a proportion of salaries paid" and services rendered" shall be taken into account.

It thus follows from this legislation as a whole that the existence of “ taxable income earned in the year in a province" (subsection 402(2)) is directly connected with the existence of a permanent establishment in a province operating a business. However, section 253 of the Act gives an extended meaning to the expression "carrying on a business":

253. Where, in a taxation year, a non-resident person

(a) produced, grew, mined, created, manufactured, fabricated, improved, packed, preserved or constructed, in whole or in part, anything in Canada whether or not he exported that thing without selling it prior to exportation, or

(b) solicited orders or offered anything for sale in Canada through an agent or servant whether the contract or transaction was to be completed inside or outside Canada or partly in and partly outside Canada,

he shall be deemed, for the purposes of this Act, to have been carrying on business in Canada in the year.

4.03.2(2) appellant's position

The appellant's position is relatively straightforward.

Thus, counsel for the appellant argues that the presence of the appellant's agents in Quebec indicates the existence of a permanent establishment in that province in view of the fact that [anything was] offered. . . for sale" (253(b)), which is a very wide term including company shares. These passages from the appellant's oral argument (stenographic notes) clearly summarize its position:

[Translation] “1 respectfully submit that Corporation A.A.A. S.A. had many representatives here and many agents, (at page 141)

We had certain elements this morning, we had certain elements of proof, Your Honour. These elements were the actions of its various agents, 7575 Trans Canada Realties, Alvaro Mestre Jr. and Maria Mestre, 2333-0392 Quebec. (at page 149)

Then, Your Honour, there is perhaps the word [sic] "carry on business” that we want to determine, that we want to define. For this I would refer you to section 253. (at page 151)

So I think that [253(b)] applies: "offered anything for sale in Canada. . .”, that the contract or operation must have taken place in Canada or outside Canada, or partly in Canada and partly outside Canada.

In my submission, it can be described as having carried on business in Canada. It had an agent. In my submission, this closes the loop, Your Honour.

It had a permanent establishment in Canada in a province. It probably even had several. It had probably not thought of having one some years ago." (at page 153)

4.03.2(3) Analysis of facts in evidence regarding legislation

4.03.2(3) (a) The evidence is that Trans Canada is a subsidiary of the appellant (3.03). A subsidiary is not a branch of the appellant representing it in carrying on business.

A branch and a subsidiary are defined as follows in Black's Law Dictionary (para. 4.02(3)) :

Branch. Division, office, or other unit of business located at a different location from main office or headquarters.

Subsidiary corporation. One in which another corporation (i.e., parent corporation) owns at least a majority of the shares, and thus has control. Said of a company more than 50 percent of whose voting stock is owned by another.

As can be seen, a subsidiary is a corporation independent of the parent company.

4.03.2(3)(b) The fact that Mr. Robert Demers, and subsequently an accounting firm (3.09), administered the building held by Trans Canada, the subsidiary, cannot make them successive agents for the appellant, the parent company.

4.03.2(3)(c) Mr. Peter Light, an attorney, had some authority received from the appellant which could even extend to engaging in commercial transactions if he was expressly authorized to do so (3.05).

However, no evidence of commercial transactions was produced. The nature of Mr. Light's purely intermittent work does not correspond to the breadth that must be given to the meaning [sic] "carrying on business”. According to the evidence, his authority was connected primarily with managing Trans Canada (3.09).

4.03.2(3)(d) The evidence is that the appellant's only activity in 1987 is the sale of Trans Canada shares to 2333-0392 Quebec Inc. on January 16, 1986. The latter resold them to Mr. Robert Demers on the same day, which was the first day of the 1987 fiscal year.Any earlier activity was thus part of the 1986 fiscal year (3.02, 3.04, 3.05, 3.10 and 3.11). In fact, 2333-0392 Quebec Inc. was only a shell company to transfer the shares to Mr. Demers. There was no evidence that the appellant intended to make this company in any way responsible for managing a business.

4.03.2(3)(e) The authority conferred on Maria Mestre and Alvaro Mestre in May 1985 also concerned only the management of Trans Canada, the subsidiary (3.08).

4.03.2(3) (f) In summary, the evidence of these agents or employees does not meet the conditions stated in paragraph 400(2)(b) of the Regulations (cited above, 4.03.2(1)) as a basis to get the provincial tax abatement.

First, the authority must clearly indicate that the corporation is carrying on a business through the agent, and second, the agent must have the power to contract on behalf of the corporation in connection with the business.

4.03.2(3)(g) As to paragraph 253(b) of the Act, which provides that to carry on a business it will suffice to have "offered anything for sale” in Canada through an agent or servant, the appellant alleges that what was offered was Company's shares and that as it was itself an investment company, it was natural to regard this as carrying on a business.

First, no evidence was presented about any investments apart from the transaction involving the sale of Trans Canada's shares. Can one transaction be regarded as carrying on a business? That is possible if it is an adventure in the nature of trade within the meaning of the word "business" defined in section 248 of the Act, which "includes an adventure or concern in the nature of trade"; but how can the appellant argue that it carried on a business in 1987 with the sale of Trans Canada shares when it itself declared the profit from this sale as a capital gain? (3.11 in fine)

Is this not an admission that the sale of the said shares cannot be regarded as Carrying on a business?

4.03.2(3) (h) Conclusion regarding provincial abatement

On the basis of the foregoing reasons this Court can dismiss the appellant's appeal regarding the provincial abatement deduction. The Minister of National Revenue was accordingly right in refusing to allow the appellant to use this deduction in its financial year ending January 15, 1987.

4.03.3 Whether the penalty is valid

The legality of the penalty imposed on the appellant is the second part of the issue raised in the instant case. This penalty arises from a two-month delay in filing the appellant's return (para. 3.17).

A. General scheme of section 116

4.03.3(1) Understanding the appellant's position requires a brief review of the procedure to which non-resident corporations disposing of taxable Canadian property are subject. The procedure set up by section 116 of the Act requires any non-resident corporation to file a notice with the Minister of National Revenue within ten days of disposing of taxable Canadian property. This notice must contain a description of the property disposed of, the name and address of the purchaser of the said property, the adjusted cost base of the property sold and the disposition price. The non-resident corporation must also pay a certain sum of money or furnish the Minister of National Revenue with security acceptable to the Minister in order to receive a certificate. Such certificate allows the purchaser of the taxable Canadian property to be relieved of any liability for tax payable by the non-resident corporation as a result of the disposition of the said property.

B. Appellant's argument

4.03.3(2) The appellant's argument is therefore that the security which it provided (3.12, 3.13 and 3.14), when it disposed of the Trans Canada shares, constitutes payment of the tax owed to the Minister of National Revenue as a result of this transaction. The appellant goes on to say that the late payment of the tax owed is due to the negligence and bad faith of the Minister of National Revenue in realizing his security. The Minister, it argued, would have been able to realize his security on October 16, 1986, the date on which the initial bank guarantee was filed (3.13). These passages taken from pages 119,123,126 and 127 of the oral argument (stenographic notes) briefly indicate the appellant's position on the penalty imposed upon it:

[Translation] Was there unpaid tax: is it what has to be decided today in this case? If there is unpaid tax, there is a penalty; if there is no unpaid tax, there is no penalty.

The principle is clear in section 116 of the Income Tax Act, Your Honour. Without a certificate, the non-resident can go away, take his money, take off, go to Venezuela and say to the Department of Revenue: it's your problem.

So, he thumbs his nose at the Department and says: I don't want to hear about it. Will they go after him in Caracas, Venezuela?—Never.

The taxpayer voluntarily says: right, I have to make a declaration, a notice, I have to give a security or pay. Well, fine, I will do so. It observed the Act, it dealt with the officials, there was a lengthy correspondence, the bank was brought in, security was given that it would be paid the same day if necessary, the Minister issued his certificate. The Minister was satisfied with the arrangement because it was in keeping with the Act. (S.N., page 119)

In the bank security it states that the Minister just has to send a notice and say ”I want to be paid”. He is paid. That is why I say that this guarantee amounts to a payment. They said to the Minister: "When you want to be paid, ask, you will be paid, the money is there". (S.N., page 123)

The bank cannot be late paying, it just needs to wait until the Minister tells it: “Pay me”. He says to himself: “ Well, I won’t take payment immediately, I will earn some interest. I will have a penalty if it decides to file late. As soon as it files late, I will make more money".

My reasoning may be a bit ridiculous, Your Honour, because I do not think the government is deliberately acting that way. However, in this case that is more or less what happened. The Minister was not concerned. He just had to say to the bank: “ Well, listen, pay me", and they would have paid him, the bank would have paid, it was the bank which had the duty to pay, it was no longer the taxpayer.

So, I submit that the Minister cannot claim anything from the taxpayer in this regard. The taxpayer has made his payment. (S.N., pages 126-27)

C. Respondent's argument

4.03.3(3) The respondent, for her part, appeared to rely on the wording of section 162 of the Act to impose a penalty on the appellant for the late filing of its tax return.The mere presence of a delay in filing a return thus leads to the imposition of a penalty. The quantum of this penalty is fixed in accordance with the tax due and unpaid on the date the return was filed. The absence of exemption clauses applicable to the appellant corporation's failure to file a return within the period prescribed in section 150 of the Act would make the penalty imposed on the appellant legal.

D. Analysis of act and case law

4.03.3(4) In this Court's opinion the appellant's position is inadmissible. A review of the wording and scheme of section 116 of the Act have [sic] persuaded this Court that the legislator never intended to enact means of making payment through this provision.

4.03.3(5) This position is based on the rule of interpretation stated by Estey, J. at page 578 of Stubart Investments Ltd: (paragraph 4.02(2)). The rule of interpretation that must apply in tax matters is the same as the modern rule of interpretation, mentioned at page 87 of the text by E.A. Driedger titled Construction of Statutes (paragraph 4.02(4)). That rule reads as follows:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

4.03.3(6) The Supreme Court of Canada accordingly favours a method of interpretation based on an overall assessment of various types of factors. It is thus an approach which inclines toward assessing the structure and terminology conferred on disputed provisions. At the same time, a search for the purpose behind the said provisions will be made to enable the courts to arrive at the true meaning of the disputed legislation.

4.03.3(7) The application of this method to interpreting subsection 116(4) of the Act first requires that the structure of the provision be analyzed. Subsection 116(4) reads as follows:

116. (4) Where a non-resident person who has sent to the Minister a notice under subsection (3) in respect of a disposition of any property has

(a) paid to the Receiver General, as or on account of tax under this Part payable by him for the year, 25 percent of the amount, if any, by which the proceeds of disposition of the property exceed the adjusted cost base to him of the property immediately before the disposition, or

(b) furnished to the Minister security acceptable to the Minister in respect of the disposition of the property,

the Minister shall forthwith issue to the non-resident person and the purchaser a certificate in prescribed form in respect of the disposition.

In this connection, it seems clear that the legislator wishes to give a nonresident corporation disposing of taxable Canadian property two options. It is thus apparent that the payment of a certain sum of money is not the only way of obtaining a certificate. The provision of security acceptable to the Minister of National Revenue is an equally valid way of meeting the conditions for obtaining the said certificate. It is thus doubtful that subsection 116(4) of the Act actually contemplates only one situation, namely simple payment of the tax owed to the Minister of National Revenue, as counsel for the appellant suggested (S.N., page 98).

4.03.3(8) The terminology used in paragraph 116(4) (b) of the Act is also a factor indicating the true scope of the disputed subsection. The ordinary meaning of the word secure" generally implies protecting someone or something against the occurrence of some harmful or unexpected event. Why, in such a case, did Parliament use the word "security" if the sole purpose of subsection 116(4) of the Act was the payment of tax owed by the non-resident corporation?

This Court is of the view that such lack of coherence in the drafting of this subsection cannot be attributed to the legislator.

4.03.3(9) To complete the analysis of subsection 116(4) of the Act, the Court must determine the intent behind this section. Subsections, 116(3), (4) and (5) of the Act are particularly important in determining the ultimate purpose of the disputed subsection. The relationship of these provisions to each other clearly indicates that section 116 of the Act is designed to establish a procedure by which the Minister of National Revenue can recover the tax debt owed to him by a non-resident corporation.

The taking of such precautions by the legislator is readily understandable. Non-resident persons earning employment or business income in Canada are not subject to the procedure of section 116. The reason is that such persons are in a position which makes the collection of tax payable relatively easy for the Minister of National Revenue. That is not the case with a non-resident person disposing of a taxable Canadian link [sic] (other than depreciable or excluded property (116(1)). Consequently the setting up of strict requirements can only reduce tax evasion attempts by non-resident corporations disposing of taxable Canadian property.

Accordingly, any person covered by section 116 of the Act must file a notice with the Minister pursuant to subsection 116(3) of the Act. Failure to file such a notice will subject the offender to the penalties enacted under subsection 238(2) of the Act. Subsequently, any person who has filed a notice will have to give the Minister of National Revenue security for the payment of the tax debt resulting from the disposition of taxable Canadian property. That security may take the form of a deposit of money or a bank guarantee. Subsection 116(5) of the Act enacts a type of personal guarantee which makes the purchaser of taxable Canadian property liable for the tax debt resulting from the capital gain by the non-resident corporation. It is also worth mentioning that paragraph 116(5)(b) of the Act enacts that the purchaser's personal guarantee will end when the foreign corporation receives the certificate regarding disposition of property by a non-resident. Such a certificate will generally be issued promptly following the filing of the security required from a non-resident person under subsection 116(4) of the Act.

Analysis of section 116 of the Act clearly shows that the intention behind subsection 116(4) of the Act had more to do with a security than with the simple payment of tax owed. This Court is therefore persuaded that this subsection is intended only to ensure the payment of tax payable by a non-resident as the result of disposition of taxable Canadian property.

4.03.3(10) It is also worth noting that civil law, which must be applied in the instant case, considers that only payment in cash can extinguish such a duty to remit a sum of money or any other object. Article 1139 of the Civil Code is the legislative basis of this rule.

In this connection, the courts and commentators have many times indicated the conditions that must be met for the payment of a debt to be legally valid. There has been extensive commentary on the legal validity of payment by cheque.

First, at page 371 of his text (para.4.02(5)), Jean-Louis Beaudoin [sic] says the following:

[Translation] 617. on the question of quality, the solvens extinguishes the obligation by giving the creditor the amount owed in currency, that is, coins and notes issued by the Bank of Canada. However, for practical reasons payment in coins, nickel or copper, is only authorized up to certain amounts determined by law. The creditor is never required to accept a cheque in place of payment in cash and mere delivery of this negotiable instrument does not constitute payment, since to complete the operation the recipient must wait until the debtor's bank has actually paid the amount.

In his book on civil law, dealing with the hire of things (paragraph 4.02(7)), Pierre-Gabriel Jobin makes equally relevant observations at pages 209 and 210 of his volume:

[Translation] 76. In strict law, the payment of a debt in cash is made only in Canadian currency. It follows that the hirer is never required to accept payment in any other form. If he agrees to accept payment by cheque, the debt is not actually paid until the bank on which it is drawn pays the cheque.

Nicole L'Heureux sets out clearly what the delivery of a cheque means in legal terms. She says the following at page 267 of her text (paragraph 4.02(6)):

[Translation] The delivery of a cheque by a debtor to his creditor does not constitute payment within the meaning of the Civil Code, unless it is payment conditional on cashing of the cheque by the recipient.

The case law does not depart from the observations just mentioned. The decision in Richard Kinsella (paragraph 4.02(1)) reiterates this rule, where Poitras, J. says the following, at page 467:

[Translation] As, of itself, a bill of exchange makes no transfer of money, the delivery of a cheque cannot be regarded as payment. The payment therefore only took place when the cheque was cashed.

By analogy, the respondent argues that merely delivering a security cannot constitute payment in full of the tax owed by the appellant. The judicial and academic discussions mentioned above, in her submission, are just as applicable to a security which had not been realized on by the Minister of National Revenue. Accordingly, in the opinion of counsel for the respondent, the absence of any form of realization on the security provided by the appellant could not amount to payment extinguishing the debt contracted to the Minister of National Revenue.

The rigour of such reasoning is beyond question. It is thus an argument which supports the interpretation this Court has given to subsection 116(4) of the Act.

4.03.3(11) The application of the interpretation method favoured in Stubart Investments Ltd. (paragraph 4.02(2)) to the disputed provision and analysis of the legal validity of the appellant's position indicate the true meaning of section 116 of the Act. The appellant's argument that the penalty imposed on it is without basis must consequently be dismissed. In this Court's opinion it is legally unacceptable to argue that the security provided to the Minister under subsection 116(4) of the Act amounts to payment of the tax owed by the nonresident person.

This Court therefore considers that the filing of a sum of money or providing of a security under subsection 116(4) of the Act are suspensive payments of the tax payable to the Minister of National Revenue. Realizing the securities will give legal force to the payments and so extinguish the debt incurred to the Department when the taxable Canadian property was disposed of. However, it is still essential that an income tax return be filed to allow the Minister of National Revenue to determine the amount of tax payable by the nonresident person.

4.03.3(12) An important part of the appellant's argument, however, is that the Minister's negligence in realizing the security provided is the principal cause of the assessment of the penalty. The weakness of such a position lies in the fact that the Minister may only realize a security provided if an income tax return is filed.

4.03.3(13) The extent of the functions the Minister of National Revenue must perform and the special nature of each taxpayer's tax situation in part explain why it is essential that everyone be responsible for filing a tax return. In such circumstances, it seems entirely unreasonable to this Court to impose on the Minister the burden of calculating the amount of tax payable by each nonresident corporation which disposes of taxable Canadian property. Such a corporation may well have taxable income other than from the realization of a capital gain. Additionally, the calculation of deductions which a corporation is entitled to is quite often complex. This Court may thus assume that in the absence of clear terms to this effect, the legislator certainly did not intend to treat the filing of a sum of money or security as equivalent to the payment of tax, making it unnecessary for the non-resident person to file an income tax return. Clearly, the legislator cannot be assumed to have wished to create confusion, chaos and loss of control over its own system for collecting tax payable unless it used clear and unequivocal terms.

4.03.3(14) This Court is of the view that the wording of subsection 116(4) of the Act does not clearly enact that securities filed constitute pure and simple payment which reduces the tax debt of the non-resident persons once they are filed. It is also striking to note that subsection 116(4) of the Act makes no mention of the possible existence of additional tax payable by the non-resident person. There is also no mention of the possibility of reimbursing the difference between the tax payable and the amount filed as a security.

A comparative analysis of subsection 116(4) of the Act and the exceptional procedures introduced by section 157 of the Act can only demonstrate that the appellant's position does not apply. Section 157 of the Act, which enacts a procedure that departs from the one generally adopted by the Minister of National Revenue to collect tax payable, makes exceptional provision for the payment of tax before an income tax return is filed. It thus provides for the periodic payment of tax instalments. The purpose of this section is to provide for periodic collection of corporate income tax in a manner comparable to the deduction each employer makes from his employees’ wages. There can thus hardly be any doubt that the periodic payment of such amounts is a legally valid payment of the tax payable by these corporations. It is also worth noting that corporations making such instalment payments must still file a return so that the Minister can collect any balance of tax payable. Paragraph 157(1) (b) of the Act enacts, finally, how such balance of tax will be paid.

It is therefore clear from this comparative analysis that subsection 116(4) of the Act is simply too vague and ambiguous to be a basis for claims of partial payment of tax before the income tax return is filed.

4.03.3(15) It is also essential to note that the filing of an income tax return is still necessary despite the fact that certain provisional instalments may have been paid to the Minister of National Revenue. Thus, the filing of a return would also have been necessary even if the interpretation of subsection 116(4) of the Act suggested to the Court by the appellant had been found acceptable by the Court.

4.03.3(16) This Court is therefore of the view that the filing of an income tax return is a necessary control mechanism in the effective operation of the system for collecting tax owed to the Minister of National Revenue. It is possible that certain taxpayers, such as the appellant corporation, can demonstrate the simplicity of the components of their taxable income. It is also possible that certain legal mechanisms could have enabled the Minister to ensure that the taxpayer's debt was paid. Such possibilities are unfortunately not covered by the Income Tax Act, which requires every person to file an income tax return. Realization of the security held by the Minister was therefore conditional on receipt of such a return.

E. Conclusion regarding penalty

4.03.3(17) It is thus essential to apply the full force of section 162 of the Act. The evidence is that the return was filed nearly two months after the deadline set by paragraph 150(1)(a) of the Act (paragraph 3.17). The calculation of the penalty imposed is thus entirely valid.

4.04 For all these reasons, this Court considers that the respondent validly refused to allow the appellant the provincial tax abatement.The penalty imposed as a consequence of the late filing of the appellant's return is also valid.

5. Conclusion

The appellant's two grounds of appeal are accordingly dismissed.

Appeal dismissed.