Date: 20011012
Docket: 1999-746-IT-G
BETWEEN:
GILLETTE CANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Rip, J.T.C.C.
[1]
The issue in these appeals by Gillette Canada Inc.
("Gillette") is whether the appellant, a Canadian
resident corporation, paid or credited in 1989 an amount to
Gillette France SNC ("Gillette France" or
"Partnership"), a partnership with no partner who, at
all relevant times, was resident in Canada and is therefore
liable to pay tax pursuant to section 212 of the Income Tax
Act ("Act"), commonly referred to as Part
XIII tax. [1]
[2]
Paragraph 212(2)(a) of the Act provides that a
non-resident person is required to pay a tax of 25 per cent
on every amount that a corporation resident in Canada pays or
credits, or is deemed by Part I or Part XIV of the Act to
do so, to a non-resident person as a taxable dividend. The
definition of "person" in subsection 248(1) of the
Act does not include a "partnership" and a
partnership is not considered in law to be a person. However, a
deeming provision is contained in paragraph 212(13.1) to permit
the provisions of paragraph 212(2)(a) to apply to a
partnership. Where a Canadian resident "pays or
credits" an amount to a non-Canadian-resident
partnership, that partnership is deemed to be a
non-resident person "in respect of that
payment".[2]
Statement of Agreed Facts
[3]
The appeal proceeded by way of the following Statement of Agreed
Facts:[3]
1. During the period under review, the
Appellant was a corporation resident in Canada and its
headquarters were located at 16700 Trans-Canada Highway,
Kirkland, in the province of Quebec, H9H 4Y8;
2. The Appellant's 1989 taxation
year ended on December 31, 1989;
3. At all relevant times, The Gillette
Company, a U.S. Corporation with its headquarters in Boston,
Massachusetts, was the sole shareholder of the Appellant;
4. At all relevant times, The Gillette
Company was the principal member of the partnership Gillette
France SNC, all other members being wholly-owned subsidiaries of
The Gillette Company;
5. On December 1, 1989, The Gillette
Company was still the principal member of the said partnership,
owning an interest of at least 99%, the remainder being owned by
a wholly-owned subsidiary of The Gillette Company;
6. On May 26, 1987, the
Appellant's parent, The Gillette Company, transferred to the
Appellant a 9.9% interest, said interest being of an estimated
value of CDN $6,160,000.00, in its ownership in Gillette France
SNC, a partnership under French law (the Partnership Interest),
as a contribution of capital in the same amount;
7. As a result of the transfer, the
Appellant's contributed surplus was increased by an
equivalent amount (CDN $6,160,000.00), such amount being later
adjusted to CDN $5,301,600.00 to equal the value of the note
receivable from Gillette France SNC (see paragraph 10 below),
without any corresponding payment being made or liabilities being
assumed by the Appellant in respect thereof;
8. On June 30, 1987, the Appellant
transferred the Partnership Interest to one of its subsidiaries,
Oral B Laboratories SA (Oral B France), in exchange for 46,267
shares of Oral-B France of an estimated value of CDN
$6,160,000.00 (the shares);
9. The net effect of the transactions
described in paragraphs 6 to 8 was that the Appellant's value
was increased by an amount of CDN $5,301,609.00;
10. On November 30, 1989, Gillette
France SNC repurchased the Partnership Interest held by Oral B
France in exchange for a note in the amount of FF 27,761,825 (the
Note) payable by Gillette France SNC to Oral-B France;[4]
11. On November 30, 1989, Oral B
France repurchased 47,618 shares of Oral B France from the
Appellant in exchange for the assignment of the Note;
12. On December 1, 1989, the Note was
converted into an indebtedness (a "loan" according to
Respondent), in the amount of CDN $5,301,600.00, based on an
exchange rate of CDN $1.00 = 5.2365 FF, for a French franc value
of FF 27,761,828 which bore no interest and was payable by
Gillette France SNC to the Appellant at the latest on December 1,
1999, unless otherwise provided by both parties or unless renewed
by the parties under the same conditions;[5]
13. On September 20, 1994, at
Appellant's request, Gillette France SNC repaid the
indebtedness (a "loan" according to Respondent) in full
to the Appellant in the amount of CDN $5,301,609.00;
14. Such indebtedness (a
"loan" according to Respondent), was repaid more than
one year after the end of the Appellant's 1989 taxation
year;
15. In response to a proposed
assessment by the Minister under Part XIII, the Appellant, on
November 21, 1995, requested that the Minister offset the alleged
liability resulting from the Minister's application of
subsection 214(3) of the Income Tax Act, pursuant to
subsection 227(6.1) of the same Act.
16. By Notices of assessment and
re-assessment dated December 30, 1996:
(i) on the one hand (assessment no.
6046076), the Minister levied a Part XIII withholding tax in the
amount of CDN $795,240.00, together with interest in the amount
of CDN $598,645.01 in respect of the Appellant's 1989
taxation year, on the basis that the Appellant became liable for
such tax and interest as a result of the indebtedness (a
"loan" according to Respondent) referred to in
paragraph 10;
(ii) on the other hand (re-assessment no.
6046078), the Minister credited a tax in the amount of CDN
$795,240.00, but not the interest of CDN $598,645.01, in response
to the Appellant's request dated November 21, 1995.
. . . .
Appellant's Position
[4]
Gillette's position, of course, is that it is not subject to
Part XIII tax. Paragraph 212(13.1)(b) of the Act
does not apply since the indebtedness between Gillette and
Gillette France was neither a payment nor a credit, as those
terms are ordinarily defined. These terms refer to situations
where a debtor pays or credits a creditor, not the reverse as in
the facts at bar. The appellant did not "pay or credit an
amount" to the Partnership. The assignment of the
"Oral-B note" to the appellant and the subsequent
conversion of that note to a 10-year indebtedness, the
"Gillette France debt", constitute neither a payment
nor a credit, appellant's counsel submitted.
[5]
The appellant also argued that if it is found that a credit (but
not a payment) did occur, then the deeming portion of paragraph
212(13.1)(b) is of no effect since that provision applies
only to a payment and not to a credit.
[6]
Paragraph 214(3)(a) of the Act also does not
support the assessment: Gillette France is not otherwise a
"taxpayer" and paragraph 212(13.1)(b) cannot be
used to deem Gillette France to be a taxpayer, according to the
appellant. Appellant's counsel argued that absent the deeming
provision of paragraph 214(3)(a), no amount of loan or
indebtedness would be included in computing the income of a
non-resident partnership pursuant to section 15 (and
subsection 56(2)) and no amount would be subject to Part
XIII. He submitted that in any event paragraph 214(3)(a)
does not apply since subsection 15(2) does not require the
inclusion of the amount in Gillette France's income since the
partnership is not "a person connected with a shareholder of
a particular corporation." He also concluded that the
expression "pays or credits an amount" in paragraph
212(13.1)(b) does not contemplate what transpired in the
appeal at bar.
Respondent's Position
[7]
According to the respondent there was a payment or credit made by
Gillette to Gillette France, the Partnership, and therefore
paragraph 212(13.1)(b) deems the Partnership to be a
non-resident person for purposes of Part XIII. Since Gillette
France is deemed to be a person, Gillette France is therefore a
taxpayer, as defined in subsection 248(1), and paragraph
214(3)(a) applies, provided subsection 15(2) applies. On
several occasions respondent's counsel argued that Gillette
France was "a person connected with a shareholder of a
particular corporation" pursuant to subsection 15(2.1) and
therefore subsection 15(2) applied. If subsection 15(2) does
apply, then a dividend would be deemed to have been paid pursuant
to paragraph 214(3)(a) and the dividend would be subject
to Part XIII tax: paragraph 212(2)(a).
[8]
The respondent says that there was a payment or at the very least
a credit since the conversion of the "Oral-B note" to
the "Gillette France debt" was the result of the
exchange of obligations and consideration. Respondent's
counsel argued that the definition of a payment includes
"the transfer of money or a right or the extinguishing of a
right which is equivalent to a payment." The extinguishment
of the "Oral-B note" was the consideration for the new
loan, the "Gillette France debt". Therefore, according
to the respondent, there was an offset of money's worth.
[9]
The respondent argued that the Partnership did not have to
physically repay the "Oral-B note" since it had at its
disposal the new loan money and it used those funds to repay the
assigned note. In the respondent's view the appellant had
granted to the Partnership the right to defer payment of a debt
and that was at least a credit.
[10] If a
credit (but not a payment) is found to have occurred, the
respondent's position is that even if the closing words of
paragraph 212(13.1)(b) refer to a payment, some meaning
must be given to the opening words of paragraph (b) that
deal with a credit as well as a payment. The word
"payment" in the concluding words of the provision must
include both a payment and a credit.
Analysis
[11] Paragraph
214(3)(a) deems amounts otherwise required to be included
in a taxpayer's income by virtue of section 15 (or subsection
56(2)) to have been paid to the taxpayer as a dividend from a
Canadian resident corporation. In the case at bar, a deemed
amount would be the amount of the "Gillette France
debt" if the conditions of subsection 15(2) applies. And if
the conditions of subsection 15(2) applies, then the appellant
would be liable for tax since a dividend would be deemed to have
been paid.
[12] Paragraph
214(3)(a) will apply, for example, when a corporation
confers a benefit on a shareholder (subsection 15(1)) and when a
partnership (other than a partnership each member of which is a
corporation resident in Canada) receives a loan from or becomes
indebted to a corporation and is a shareholder of the corporation
or is connected to a shareholder of that corporation
(subsection 15(2)). Thus, no actual payment or credit need
occur for an amount to be included in income by virtue of the
provisions of section 15 (and subsection 56(2)) and for such
amounts to be deemed to be paid to a taxpayer as a dividend from
a Canadian corporation pursuant to paragraph 214(3)(a).
Once an amount is paid or credited by a person resident in Canada
to a non-Canadian partnership,[6] that partnership is deemed by
paragraph 212(13.1)(b) to be a non-resident person. Absent
any payment or credit, subsection 212(13.1) would not apply. One
must, on the facts of this case, consider paragraph
214(3)(a) to determine whether the transaction in issue
resulted in a deemed payment of a dividend.
Paragraph 212(13.1)(b) -
"Payment" or "Credit"?
[13]
Obviously, if there is a deemed payment of a dividend by a
resident Canadian for purposes of paragraph 214(3)(a),
there would be a payment by that person for purposes of paragraph
212(13.1)(b) and the non-resident partnership would be
deemed to be a non-resident person who is subject to subsection
212(2). If, on the other hand, an analysis of the facts with
regard to subsection 212(13.1) leads to the conclusion that an
actual payment or credit has occurred, then other provisions of
Part XIII, including paragraph 214(3)(a), must be
considered to determine whether the character of that payment or
credit requires a tax to be paid.
[14] The words
"paid", "pays", "payment" and
"credits" all appear in paragraphs 212(13.1)(b)
and 214(3)(a) of the Act. The following
dictionaries define these words:
Black's Law Dictionary[7]
Pay: To discharge a debt by tender of
payment due; to deliver to a creditor the value of a debt, either
in money or in goods, for his acceptance.
Payment: The fulfilment of a promise, or
the performance of an agreement. A discharge of an obligation or
debt, and part payment, if accepted, is a discharge pro
tanto.
In a more restricted legal sense payment is the
performance of a duty, promise, or obligation, or discharge of a
debt or liability, by the delivery of money or other value by a
debtor to a creditor, where the money or other valuable thing is
tendered and accepted as extinguishing debt or obligation in
whole or in part. Also the money or other thing so delivered.
The Oxford English Dictionary, 2d ed.[8]
Pay: 5.a. To give, deliver, or hand over
(money, or some other thing) in return for goods or services, or
in discharge of an obligation; to render (a sum or amount
owed).
The Canadian Law Dictionary[9]
Pay: A fixed and definite amount given as
compensation for services. To discharge a debt by money. However,
the term may also mean the delivery and discharge of a debt or
other obligation or goods . . . .
70 Corpus Juris Secundum[10]
Payment: In its legal sense, "payment" may be
defined as the discharge in money or its equivalent of a debt or
obligation; it involves the actual or constructive delivery by a
debtor to his creditor of money or its equivalent, with the
intent thereby to extinguish the debt, and the acceptance thereof
by the creditor with the same intent.
Le Nouveau Petit Robert - Dictionnaire de la
langue française[11]
Paiement: Action de payer, exécution d'une
obligation. . . . Facilités de
paiement. crédit.
Article 1553 of The Civil Code of Quebec
defines "payment" as follows:
|
Payment means not only the turning over of a sum of
money in satisfaction of an obligation, but also the actual
performance of whatever forms the object of the
obligation.
|
Par paiement on entend non seulement le versement
d'une somme d'argent pour acquitter une obligation,
mais aussi l'exécution même de ce qui est
l'objet de l'obligation.
|
The word "credit" is defined as follows:
The Oxford English Dictionary[12]
9.a. Trust or confidence in a buyer's ability and
intention to pay at some future time, exhibited by entrusting him
with goods, etc. without present payment.
10.a. . . . A sum placed at a person's
disposal in the books of a Bank, etc., upon which he may draw to
the extent of the amount; any note, bill, or other document, on
security of which a person may obtain funds. . . .
12. . . . a. The acknowledgement
of payment by entry in an account.
Black's Law Dictionary[13]
. . . The correlative of a debt; that is, a
debt considered from the creditor's standpoint, or that which
is incoming or due to one. That which is due to a person,
as distinguished from debit, that which is due by him.
. . . [R]ight granted by a creditor to a debtor to
defer payment of debt or to incur debt and defer its payment.
In La Compagnie Minière Québec Cartier v.
M.N.R.,[14]
the word "credit" is defined as:
[A]n operation by which someone puts a sum of money at the
disposal of someone else.
[15] The
language of paragraph 212(13.1)(b) does not require
or suggest that the word "pay" should be limited to a
creditor and debtor relationship, which was raised by
appellant's counsel. The limiting factor is the requirement
by the fisc to fit any amount paid or credited into one of the
different types of payments that is subject to withholding by
Part XIII of the Act. Where money or money's worth is
delivered in order to discharge an obligation, in my view that is
a payment for the purposes of paragraph 212(13.1)(b).
[16] The
definition of the word "credit", however, by its very
name suggests a creditor-debtor relationship. Funds or
goods must either have been received by the debtor or be
available to the debtor with the understanding that the debtor
may defer immediate payment. An extension of a loan by a creditor
to a debtor comes within the meaning of the word
"credit". The word "credit" in paragraph
212(13.1)(b) refers to something more than a mere
accounting entry. As L'Heureux-Dubé J. stated in
Hickman Motors Limited v. The Queen:[15]
. . . The law is well established that accounting
documents or accounting entries serve only to reflect
transactions and that it is the reality of the facts that
determines the true nature and substance of transactions:
[citations omitted]. . .
[17] In the
appeal at bar there was more than a simple loan transaction
between the appellant and the Partnership. The appellant took an
assignment of a note payable by the Partnership, i.e., the
"Oral-B note". The assignment itself of the
"Oral-B note" (by Oral-B France to the appellant)
for shares was neither a credit nor a payment of the debt
evidenced by the note for the purposes of paragraph
212(13.1)(b) because there was no debtor-creditor
relationship as between the Partnership and the appellant and the
assignment did not involve the discharge of an obligation by the
debtor, i.e. the Partnership.
[18] The next
question is whether the actual conversion of the Oral-B note to
the Gillette France debt is a payment or credit. The appellant
argued that the conversion of the note payable resulted in the
Partnership being indebted to the appellant and the respondent
argued that the result was a loan between the parties. In my
view, if the conversion resulted in an indebtedness then there
was no payment or credit since no debtor-creditor
relationship was created. On the other hand, if the conversion
resulted in a loan between the appellant and the Partnership then
there was a payment or credit since the granting and advance of
the funds created a debtor-creditor relationship.
[19] The words
"indebted" and "loan" are defined in The
Oxford English Dictionary,[16] as follows:
Indebted: 1. Under
obligation on account of money borrowed; owing money; in dept.
. . .
2. Under obligation to another on account of some
liability incurred or claim unsatisfied; liable for some omission
of duty, an unfulfilled promise, etc.; bound.
Loan: 2.a. A thing
lent; something the use of which is allowed for a time, on the
understanding that it shall be returned or an equivalent
given.
[20]
Black's Law Dictionary[17] defines the term "loan" to include:
"(1) the creation of debt by the lender's payment of or
agreement to pay money to the debtor or to a third party for the
account of the debtor. . . ."
[21] For the
purposes of the appeal at bar, a loan requires the creation of a
debt with the understanding that the debt will be repaid. There
is no requirement that money actually be exchanged where a new
advance is made in order to extinguish a previous debt.[18] The question before
me, therefore, is whether the conversion of the note payable
resulted in the creation of a debt or, in other words, a
loan.
[22] The
common Book of Documents[19] introduced at trial contains, among other things,
three documents in which the appellant, or parties related to it,
refer to the converted debt as a loan. At Tab 9 a letter dated
December 15, 1989 from the appellant to the Partnership, which
both the Partnership and the appellant signed, states in
part:
We remind you that Oral B Laboratoires has assigned to our
company, on November 30, 1989, the debt that it owns vis a vis
your company of 27 761 825 FF, in compliance with the last
reduction of the capital of Gillette France and the subsequent
redemption of the entire interest of Oral B Laboratoires
therein.
Therefore, as agreed by our companies, we can confirm that it
has been decided, by our board, for the proper conduct of
Gillette France's business and funds management, that the
consideration of such a debt shall be substituted in a long term
loan settled as hereinafter provided:
. . .
[23] At Tab 16
of the Book of Documents is a copy of a fax, dated September 19,
1994, from the Partnership to GILFIN (which I understand means
Gillette France, a related entity) regarding a transfer to the
appellant. It is noted that:
(Reimbursement urgently requested by Gillette Canada of a loan
granted by them in 1989).
[24] At Tab 17
of the Book of Documents is a confirmation, dated
September 20, 1994, by the Gillette North American Cash
Management Center to the appellant of payment made to the
appellant's account by Gillette France. The notation
regarding the source of the remittance states in part:
Gillette Fr loan repmt
[25] The words
contained in the above documents do not in and of themselves
create a loan. How people describe something does not make it so.
Calling a horse a dog does not make the horse a dog. The words,
however, do indicate the parties' intent. The December 15,
1989 document suggests that the parties intended the appellant to
extinguish the assigned note payable in exchange for a loan of
the same amount with agreed terms.
[26] I agree
with the respondent that the conversion of the Oral-B debt
to the Gillette France debt constituted a payment. The conversion
created a debt. As part of the debt conversion the appellant
delivered money's worth to the Partnership in order to
discharge its obligation. In any event, there was at least a
credit since on the conversion of the "Oral-B
note" to the Gillette France debt the appellant made
available to the Partnership funds to repay the note with the
understanding that the repayment was deferred.
[27] The
appellant argued that if it is found that a credit, but not a
payment, was made by the appellant, then the deeming portion of
paragraph 212(13.1)(b) does not apply since it only
applied to a payment. Paragraph 212(13.1)(b) provides that
". . . the partnership shall be deemed, in respect
of that payment, to be a non-resident
person."
[28] The
appellant relied on MacMillan Bloedel Limited v. The
Queen[20] to
argue that the Court could not add terms to, or fill in gaps in,
legislation. In MacMillan Bloedel the parties agreed there
was a drafting error in the legislation to the extent that the
required calculation was nonsensical. The error had been
subsequently corrected. The case dealt with the question as to
how far the court could go in construing legislation by adding or
ignoring words to achieve the result which the Crown said was
intended. McNair J. stated at page 343:
. . . Moreover, I am of the opinion that any
judicial power of rectification with respect to legislation ought
only to be exercised in the rarest of circumstances, that is,
where absolutely necessary to achieve the clear manifestation of
legislative intent in the face of obstacles created by very minor
and patently obvious imperfections of language. To fill the gap
by writing in the words "or on the volume" would
constitute, in my opinion, an arbitrary and unwarranted intrusion
on the role of Parliament.
[29] The
respondent argued that the court must give meaning or sense to
the deeming provision in paragraph 212(13.1)(b) so that
even if the second part only referred to a payment, some meaning
must be given to the first part which dealt with a credit. The
respondent relied on Trans World Oil & Gas Ltd. v. The
Queen,[21] to
argue that some meaning must be given to each word used in
legislation. In Trans World the issue involved the method
of calculation for foreign accrual property income. After
discussing the differences contained within the calculations,
Bowman T.C.J. (as he then was) stated at page 266:
. . . Even if there are lacunae or anomalies -
and there may well be - it is not the function of this
court, by reading words into or out of the regulations, to
attempt to fill the former or correct the latter. As Chief
Justice Isaac said in The Queen v. Coopers and Lybrand
Limited [94 DTC 6541] (August 19, 1994,
A-1280-92) "These [established principles of
statutory interpretation] are not invitations to Courts to ignore
other well-established rules of construction, such as that which
requires Courts to construe statutes so as 'to ascribe some
meaning to each word used by the legislature,' Atco v.
Calgary Power, [1982] 2 S.C.R. 557 at 569."
[30]
MacMillan Bloedel is distinguishable from the appeal at
bar. The interpretation required in the appeal at bar does not
involve legislation that is nonsensical without the addition of
words. The interpretation deals with the meaning that should be
ascribed to the word "payment" as used in the second
part of paragraph 212(13.1)(b). Since paragraph
212(13.1)(b) begins by referring to a person who
"pays or credits an amount" and later refers to
"that payment", it is clear in my view that the latter
must refer to the amount that the person either pays or credits.
The deeming provision in paragraph 212(13.1)(b) applies to
an amount either paid or credited by the appellant to the
Partnership.
[31] Paragraph
212(13.1)(b) applies to deem the Partnership to be a
non-resident person for the purposes of Part XIII since
Gillette paid or credited an amount to the Partnership.
Paragraph 214(3)(a) -
"taxpayer"?
[32] Since I
have determined that on conversion of the Oral-B note to
the Gillette France debt there was a payment or credit for the
purposes of paragraph 212(13.1)(b) of the Act, I
need not consider the matter of the existence of a deemed payment
in paragraph 214(3)(a). Paragraph 212(13.1)(b)
deems the Partnership to be a non-resident person for the
purposes of Part XIII of the Act and, as such, the
Partnership is included in the definition of a
"taxpayer".[22] The result is that paragraph 214(3)(a) applies
to the Partnership as a taxpayer where subsection 15(2) applies
to require an amount to be included in the Partnership's
income.
[33] Paragraph
214(3)(a) requires "an amount to be included in
computing a taxpayer's income" and "that amount
shall be deemed to have been paid to the taxpayer." I agree
with the appellant that ordinarily a partnership is not a
taxpayer and subsection 96(1) does not deem a partnership to be a
taxpayer; subsection 96(1) only provides that a partnership
is a separate person in order to compute the income or loss of
each partner. Paragraph 212(13.1)(b) suggests that a
partnership is not normally a person or taxpayer: a deeming
provision is required in order to treat a partnership as a
separate person. Paragraph 214(3)(a) cannot be used to
deem a payment or credit to be made to a partnership for the
purposes of paragraph 212(13.1)(b) of the Act.
[34] Was it
Parliament's intent that paragraph 214(3)(a) of the
Act would not apply to partnerships? Paragraph
214(3)(a) refers to subsections 15(1), 15(2) and 56(2).
Subsection 56(2) requires an amount to be included in a
taxpayer's income and therefore does not apply to a
partnership in any event. Subsection 15(1) requires an amount to
be included in a shareholder's income and therefore
may apply to partnerships. Subsection 15(2) was amended in 1983
to require an amount to be included in a debtor partnership's
income.
[35] A review
of the history of paragraph 214(3)(a) of the Act
may be helpful.[23] Paragraph 214(3)(a) was amended in 1977 to
replace "shareholder" with "taxpayer". This
amendment may have brought into question whether paragraph
214(3)(a) still applied to a non-resident partnership that
was a shareholder. The 1983 amendment to subsection 15(2) to
include a partnership as a debtor compounded this
uncertainty.
[36] Since the
1977 amendment to the Act replacing
"shareholder" with "taxpayer" in paragraph
214(3)(a) was made at a time when subsection 15(1) applied
to partnerships that were shareholders, one may reasonably infer
that Parliament did not intend paragraph 214(3)(a) to
apply to partnerships. Paragraph 214(3)(a) was not amended
when subsection 15(2) was amended to apply to debtor
partnerships.
[37] Paragraph
214(3)(a) cannot apply to a partnership unless paragraph
212(13.1)(b) deems the partnership to be a
non-resident person and this requires a transaction where
there is a payment or credit.
[38] The
appellant submits that subsection 15(2) does not apply in the
circumstances of this appeal since the provision was not meant to
apply where the funds in issue were previously obtained from a
shareholder as a contribution of capital and subsequent events
converted that contribution into an indebtedness. In essence, the
appellant argues that the indebtedness in question should be
treated as part of a series of transactions that commenced in May
1987.
[39] In my
view, the transactions preceding the "Oral-B note" and
its conversion to the "Gillette France debt" are not
relevant. The issue is whether in 1989 there was a loan or
indebtedness outstanding between the parties to which subsection
15(2) applied.
[40] The
Partnership is not a shareholder of the appellant and therefore
in order for subsection 15(2) to apply, the Partnership must be
connected to a shareholder of the appellant (i.e. the parent,
"Gillette Boston").
[41] The
respondent's view is that a partnership is a person for the
purposes of subsection 15(2) of the Act. Counsel submitted
that prior to the addition of the word "partnership" to
subsection 15(2), it was arguable whether income under subsection
15(2) was part of the computation of partnership income under
subsection 96(1).However, the addition of the
word "partnership" to subsection 15(2) was "to be
sure" that it was, said counsel. He relied on The Queen
v. Lachance[24] for the proposition that where a deeming
provision refers to a specific provision and that specific
provision refers to another provision, the deeming action carries
through from the specific provision to the other provisions. The
respondent argued that due to the deeming provision in subsection
96(1) or paragraph 212(13.1)(b) through paragraph
214(3)(a), the Partnership was a "person" for
the purposes of subsection 15(2) of the Act.
[42] I do not
agree. In Lachance the issue was whether the language of
subsection 96(1) prevented the deeming provision in subsection
96(1.1) from applying. Subsection 96(1.1) deems a taxpayer who
has ceased to be a partner for the purposes of subsection 96(1)
to be a partner. Lachance is distinguishable from the
appeal before me since subsection 96(1.1) (i.e. the deeming
provision) cautions that it applies "for the purposes of
subsection (1) . . ." and other specific
provisions, none of which is relevant to the appeal at bar. In
fact, paragraph 212(13.1)(b) applies only for the purposes
of Part XIII and subsection 15(2) was amended in 1983 to apply to
partnerships. In amending subsection 15(2) the legislator was of
the view that subsection 96(1) could not be relied on to ensure
that subsection 15(2) applied to partnerships.
[43] A
partnership is clearly distinguished from a person in subsection
15(2) and I must give effect to that distinction. Subsection
96(1) cannot be relied on to treat a partnership as a person
where subsection 15(2) specifically refers to a partnership. A
court must give meaning to the word "partnership"
within subsection 15(2) and cannot ignore the distinction made by
Parliament. Subsection 15(2) not only refers to a partnership, it
also excludes certain partnerships from being subject to the
provision.[25] To
read "partnership" into the word "person"
would ignore the clear wording of the legislation refining or
specifying which partnerships were excluded from the grasp of the
provision.
[44] Also,
since paragraph 212(13.1)(b) applies for the purposes of
Part XIII, this deeming provision cannot be used, through the
application of paragraph 214(3)(a) to deem Gillette France
to be a person for the purposes of subsection 15(2) in Part I.
Again, subsection 15(2) must be interpreted by distinguishing
between a person and a partnership.
"Connected with a Shareholder"
[45]
Subsection 15(2.1) provides that "for the purposes of
subsection (2), a person is connected with a shareholder
. . . ." I have held that "person"
and "partnership" are not the same in subsection 15(2).
The use of the word "person" in subsection 15(2.1)
also does not include a partnership. To the extent that it
applies, subsection 96(1) cannot be construed as a definition
section for the purposes of defining words in section 15 where a
charging provision (i.e. subsection 15(2)) clearly distinguishes
between a person and a partnership.
[46]
Respondent's counsel argued that once the word
"partnership" was added to subsection 15(2) to
"clarify" the provision or ensure that it applied to
partnerships, the word "partnership" was no longer
required in subsection 15(2.1) since subsection 96(1) applied to
deem the partnership to be a person for the purposes of all of
section 15. Again, here, counsel relied on the deeming
provision in paragraph 212(13.1)(b) and its
flow-through of paragraph 214(3)(a) to argue that
the Partnership was a "person" for the purposes of
subsection 15(2.1). Counsel submitted that once subsection 15(2)
applied to partnerships, Parliament did not have to go any
further since every provision that referred to subsection 15(2)
would include partnerships. If the word "person" in
subsection 15(2.1) did not include a partnership, counsel
suggested, then subsection 15(2.1) would operate to deprive all
the parts of subsection 15(2) referring to a partnership of any
meaning.
[47]
Respondent also relied on the history of the changes to
subsections 15(2) and 15(2.1). For loans made prior to April 1,
1977, subsection 15(2) provided that:
Where a corporation has . . . made a loan to a
shareholder, the amount thereof shall be included in computing
the income of the shareholder . . . .
[48] In 1977[26] there was a
significant amendment to subsection 15(2) and subsection 15(2.1)
was added.[27]
[49] The 1983
amendment to subsection 15(2)[28] included a "partnership" as one of
the debtors who must add an amount to its income. The addition of
the concept of a "connected person" was added in 1977
at a time when a "partnership" was not included as one
of the debtors to whom the provision applied. The respondent
argued that since the addition of a partnership as a debtor and
of the concept of a connected person occurred at the same time,
subsections 15(2) and (2.1) should be read in their entire
context to find that in subsection 15(2.1) a "person"
must include partnerships. This argument is based on the
incorrect assertion regarding the timing of the amendments.
[50]
Respondent's counsel submitted that if subsection 15(2.1) did
not refer to partnerships then part of subsection 15(2) is
meaningless when it refers to a partnership connected with a
shareholder. This "meaningless" argument is also based
on the premise that subsection 15(2.1) became law in 1977 at the
same time that a partnership was added as a debtor in subsection
15(2). However, in 1977, subsection 15(2) only referred to a
person and a person who was connected with a shareholder. There
was no reference to a partnership. Therefore, in 1977, when
subsection 15(2.1) was added, the section did have meaning. In
1982, when Parliament decided to "clarify" the
application of subsection 15(2), the following technical notes
were provided:
. . . Subsection 15(2) at present applies where the
loan is to a person who is a shareholder of a corporation or a
person who does not deal at arm's length with the
shareholder. A further amendment to subsection 15(2) clarifies
that it applies in certain circumstance where the debtor
is a partnership, a member of a partnership or a beneficiary of a
trust. [emphasis added] [29]
[51] Of course
the phrase "applies in certain circumstances" is vague
as to its meaning but it does indicate that Parliament did not
intend that subsection 15(2) was to apply to debtor partnerships
in all circumstances.
[52] Since
subsection 15(2) clearly distinguishes between a person and a
partnership and subsection 15(2.1) defines when a person is
connected for the purposes of subsection 15(2), it follows that
subsection 96(1) cannot be relied on to deem a partnership to be
a person for the purposes of either subsection 15(2) or 15(2.1).
Therefore, subsection 15(2.1) does not apply to a partnership
since the provision only refers to a person.
[53] Where
subsection 15(2.1) does not apply for the purposes of determining
whether a partnership is connected to a shareholder, the word
"connected" must be interpreted in order to determine
the meaning of the relevant portion of subsection 15(2). The
appellant referred to the meaning of the word
"connected" in Black's Law Dictionary:[30]
Joined; united by junction, by an intervening substance or
medium, by dependence or relation, or by order in a series.
The term "connected", argued the appellant, was an
imprecise term which would, in the absence of a specific and
clear definition, be very difficult to give application in the
context of subsection 15(2).
[54]
Respondent's counsel declared that "if we construe the
word 'person' in subsection 15(2.1) as referring only to
a person, not necessarily to a partnership, it renders part of
15(2), or the enactment, completely meaningless when it's
referred in 15(2) to a partnership connected to a
shareholder." However, one must consider whether a
corporation that was a member of a partnership could be connected
to the partnership.
[55] In the
everyday meaning of the word "connected", Gillette
Boston is clearly joined to the Partnership since it held a
substantial interest (99.9%) in the Partnership. The everyday
meaning does not specify any requirement for a percentage of
ownership, but where one entity owns, or has an interest in,
almost all of the other entity (whether or not it is a legal
entity) it is easy to find that there is a connection.
Nevertheless, whenever the word "connected" is used
within the Act the method to determine whether two parties
are connected is always specific.[31]
[56] If one
accepts respondent's argument that subsection 96(1) can be
used to treat the Partnership as a separate person, Gillette
Boston (as a corporation) is connected to the Partnership (as a
separate person). However, if one considers the legal nature of a
partnership, is it possible for a partner to be connected to a
partnership in which the partner is a member? In other words, can
Gillette Boston (as a corporation) be connected to itself (as a
partner of the Partnership)? In Madsen v Canada,[32] the Federal
Court of Appeal discussed the interaction of the fiction of
subsection 96(1) and the legal nature of partnership
transactions. The issue in Madsen was whether paragraph
69(1)(a) applied to a partnership since the parties
involved were "related persons" pursuant to section
251. Linden J.A., at paragraph 16, began by discussing how the
capital cost allowance regime applied to partnerships and he went
on to state:
In my view, the foregoing 'regime' implies nothing
more than a notional construction for calculating a
taxpayer's tax liability. It is a purely administrative
convenience necessary to sustain the Act's view of the
partnership as a conduit or vehicle for taxpayers.
In this way, the fiction of a partnership as an entity
separate from the partners is temporary and does not extend to
colour the true legal nature of transactions at the time they are
entered into by a partnership.
[57] Linden
J.A. found that under partnership law, the sale of the property
took place between the seller and a partner of the partnership on
behalf of the partnership. Since both the seller and the partner
were "persons" and "taxpayers" and were
controlled by the same person, the partnership was related to the
seller pursuant to section 251 and therefore paragraph
69(1)(a) applied.
[58]
Subsection 96(1) cannot be used to treat the Partnership as a
separate person for the purposes of determining whether Gillette
Boston and the Partnership are connected. Based on the everyday
meaning of the word "connected" and on partnership law,
Gillette Boston cannot be connected to itself as a partner of the
Partnership. As well, since subsection 15(2.1) does not apply to
partnerships and the Act does not provide another method
to determine whether a partnership is connected to a shareholder,
Gillette France is not connected to Gillette Boston. Paragraph
214(3)(a) of the Act does not apply.
[59]
Accordingly, Gillette did not pay or credit an amount on which an
income tax was payable under Part XIII of the Act and
Gillette was not required to remit any Part XIII tax to the
Receiver General for Canada on behalf of a non-resident
person pursuant to section 215 of the Act. The appeals are
allowed with costs.
[60] The
appellant was assessed and credited amounts of interest as stated
in notices of assessment dated December 30, 1996, that is,
reassessment no. 6046076 and reassessment no. 6046078, as
set forth in paragraph 16 of the Statement of Agreed Facts. Since
I have held that Gillette ought not to have been assessed Part
XIII tax in the first place, I fail to see the reason for the
appellant to be assessed any interest resulting from its failure
to pay Part XIII tax. Interest is only due where there is an
underlying tax liability that is unpaid: section 161. Here, there
is no Part XIII tax liability.
[61] I would
normally vacate reassessment no. 6046076. However, it may be that
the reassessment includes interest for the appellant's 1989
taxation year that is unrelated to the Part XIII tax. Therefore,
I shall refer both assessments back to the Minister for
reconsideration and reassessment on the basis the appellant is
not liable for the Part XIII tax for its 1989 taxation year and,
as a consequence, no interest is payable with respect to any Part
XIII tax previously assessed for 1989.
[62]
Counsel's arguments at trial were almost wholly devoted to
whether the appellant is liable for Part XIII tax. If either
counsel is of the view that I have misconstrued the interest
issue, the parties still have thirty days from date of these
reasons to make written representations. I shall sign formal
judgment in these appeals after the thirty days have elapsed.
Signed at Ottawa, Canada this 12th day of October 2001.
"Rip"
J.T.C.C
COURT FILE
NO.:
1999-746(IT)G
STYLE OF
CAUSE:
Gillette Canada Inc. and
Her Majesty the Queen
PLACE OF
HEARING:
Montreal, Québec
DATE OF
HEARING:
January 15, 2001
REASONS FOR JUDGMENT BY: The Hon.
Judge Gerald J. Rip
DATE OF
REASONS:
October 12, 2001
APPEARANCES:
Counsel for the Appellant: Pierre Barsalou
Mélanie Lemelin
Counsel for the
Respondent:
Pierre Cossette
COUNSEL OF RECORD:
For the
Appellant:
Name:
Pierre Barsalou
Barristers & Solicitors
Firm:
Barsalou Auger
1002 Sherbrooke Street West, Suite 2420
Montreal, Québec H3A 3L6
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
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