The Queen v. Guaranty Properties Ltd., 90 DTC 6363, [1990] 2 CTC 94 (FCA)

MacGuigan, J.A.:—The neat question in this case is whether an income tax reassessment is invalid because it is issued in the name of a company which has already amalgamated with other companies to form a new corporation.

The trial judge in this case so held, on February 11, 1987, and the Minister of National Revenue ("the Minister"), unable to issue a corrected reassessment because the four-year statutory limitation period expired before he became aware of the problem, has appealed to this Court on two grounds: (1) that the notice of reassessment was valid in law; (2) that, in the alternative, it was amendable since the respondent was in no way prejudiced by the error.

The skeleton facts, taken from the agreed statement of facts ([1987] 1 C.T.C. 242; 87 D.T.C. 5124 at pages 244-45 (D.T.C. 5125-26)) are as follows: (1) Forest Glenn (Dixie) Limited (called “Dixie” by the parties) was incorporated in 1963; (2) for the taxation year in question, the 1976 taxation year, the Minister sent a notice of assessment in 1977; (3) on May 31, 1978, Dixie and several other companies amalgamated pursuant to the laws of the Province of Alberta to form Forest Glenn (Dixie) Limited (called "Forest Glenn” by the parties to distinguish it from the identically named Dixie); (4) on November 28, 1980, there was a second amalgamation, this time between Forest Glenn and three other companies and pursuant to the laws of Ontario, to form Guaranty Properties Limited ("Guaranty Properties"); (5) the Ontario Ministry of Consumer and Commercial Relations sent a copy of the articles of amalgamation to the Minister the same day, and all subsequent tax returns filed by both Forest Glenn and Guaranty Properties clearly referred to the amalgamation, but somehow the fact that a second amalgamation had taken place never became known to the Minister's officials dealing with Dixie's 1976 tax return; consequently (6) the Minister's notice of reassessment of June 23, 1981, following his reassessment of tax payable for Dixie's 1976 tax year, and his notice of confirmation of that reassessment on February 25, 1982, were both directed to Forest Glenn, in complete ignorance of the second amalgamation. No similar problem arose concerning Dixie's 1977 and (shortened) 1978 tax returns only because the Minister was fully informed in time to send reassessments for those years to Guaranty Properties within the limitation period.

The relevant law is contained principally in subsection 87(1) and paragraph 87(2)(a) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended ("the Act"):

Amalgamations

87.(1) In this section, an amalgamation means a merger of two or more corporations each of which was, immediately before the merger, a taxable Canadian corporation (each of which corporations is referred to in this section as a "predecessor corporation") to form one corporate entity (in this section referred to as the "new corporation") in such manner that

(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the merger becomes property of the new corporation by virtue of the merger.

(b) all of the liabilities (except amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger become liabilities of the new corporation by virtue of the merger, and

(c) all the shareholders (except any predecessor corporation) of the predecessor corporations immediately before the merger receive shares of the capital stock of the new corporation by virtue of the merger.

otherwise than as a result of the acquisition of property of one corporation by an other corporation, pursuant to the purchase of such property by the other corporation or as a result of the distribution of such property to the other corporation upon the winding-up of the corporation.

Rules Applicable

(2) Where there has been an amalgamation of two or more corporations after 1971 the following rules apply:

Taxation Year

(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.

The analysis and conclusion of the learned trial judge was as follows at page 249-50 (D.T.C. 5130-31):

The purpose of section 87 of the Income Tax Act is to provide the applicable rules where two or more Canadian corporations are amalgamated. From an income tax aspect, the complete code on amalgamation is to be found in section 87 of the Act. The general scheme of the section is to treat the amalgamated corporation as a continuation of the predecessor corporations standing in their place with respect to assets, liabilities, surpluses and other tax oriented accounts. However, the amalgamated corporation is, for most purposes of the Act, a new corporation, although in certain limited cases the amalgamated corporation is deemed to be the continuation of a predecessor corporation.

Subsection 87(1) defines an amalgamation for the purposes of the Income Tax Act. It is essentially a corporate transaction and each of the provincial companies acts and the federal corporation legislation provide for statutory amalgamation. Although the definition of amalgamation for income tax purposes would cover most statutory amalgamations, it should be remembered that this definition is independent of the federal and provincial corporate statutes. Subsection 87(1) defines amalgamation as follows . . .

Counsel for both parties have made submissions that the Court make a finding that Forest Glenn either ceased to exist or did not cease to exist at the time of the second amalgamation on November 28, 1980. I have carefully considered the arguments and submissions of both parties and I am of the opinion that the question of whether predecessor corporations cease to exist upon amalgamation for the purposes of the Income Tax Act is not determinative of the issue at hand.

The key factor here is the treatment afforded by the Income Tax Act to the liabilities of predecessor corporations. The subsection 87(1) definition of amalgamation as quoted above, and in particular paragraph (b), requires that all of a predecessor corporation's liabilities immediately before the amalgamation become liabilities of the new corporation. In other words, whether or not the predecessor corporation continues to exist, it is plain and obvious that it no longer continues to have liabilities attached to it, at least for income tax purposes. In order for a transaction to qualify as an amalgamation under subsection 87(1) therefore, the amalgamated corporation must assume all liabilities of the predecessor corporation.

Accordingly, prior to the amalgamation on November 28, 1980 there is no question that it was Forest Glenn who was liable for the reassessment of Dixie’s 1976 taxation year. Forest Glenn had assumed that liability at the time of the first amalgamation on May 31, 1978. Thereafter, Dixie had no liabilities for income tax purposes. Similarly, at the time of the second amalgamation on November 28, 1980 Guaranty Properties assumed all of Forest Glenn's liabilities, including the rent for Dixie’s 1976 taxation year. It matters not whether Forest Glenn ceased to exist as a legal entity or whether it didn’t. The point is that the amalgamation, which fell within the definition of amalgamation in subsection 87(1) of the Act, meant that pursuant to paragraph 87(1)(b) all of the liabilities of the predecessor corporation, Forest Glenn, immediately before the merger became liabilities of the new corporation, Guaranty Properties, by virtue of the merger. Therefore, after November 28, 1980 liability could no longer be affixed to Forest Glenn for the rent of Dixie’s 1976 taxation year. That is, in my opinion, the legislative scheme contained within the Income Tax Act as it pertains to amalgamation.

Accordingly, I agree with the plaintiffs that the only party who could be reassessed for Dixie’s 1976 taxation year after November 28, 1980 was Guaranty Properties.

The appellant argued that the trial judge erred in concluding that section 87 of the Act constitutes a complete code on amalgamations and urged that the section had to be seen in the context of the general corporate law on amalgamation.

It was said that under corporate law the consequences of amalgamation vary, depending upon the applicable jurisdiction. Under the corporate statutes of provinces like Quebec and Manitoba, amalgamating corporations cease to exist upon amalgamation and a new entity is created in the form of the amalgamated corporation, which is separate and distinct from the amalgamating corporations: Fawcett & Grant Ltd. v. M.N.R. (1965), 38 Tax A.B.C. 249; 65 D.T.C. 313 (T.A.B.). However, the result of amalgamation effected under the Canada Business Corporations Act or The Business Corporations Act of Ontario was said to be that no "new" corporation is created nor are the amalgamating corporations extinguished. The authorities cited for this proposition were two cases decided by the Supreme Court of Canada on the same day, Witco Chemical Company, Canada, Ltd. v. The Corporation of Oakville, [1975] 1 S.C.R. 273 ; 43 D.L.R. (3d) 413 and The Queen v. Black and Decker Manufacturing Company Ltd., [1975] 1 S.C.R. 411; 43 D.L.R. (3d) 393.

In Black and Decker an amalgamation had taken place under the Canada Corporations Act, R.S.C. 1970, c. C-32, section 137 of which read in part as follows:

137.(1) Any two or more companies to which this Part applies may amalgamate and continue as one company.

(13) Upon the issue of letters patent pursuant to subsection (11), the amalgamation agreement has full force and effect and

(a) the amalgamating companies are amalgamated and are continued as one company (in this section called the "amalgamated company") under the name and having the authorized capital and objects specified in the amalgamation agreement; and

(b) the amalgamated company possess all the property, rights, assets, privileges and franchises, and is subject to all the contracts, liabilities, debts and obligations of each of the amalgamating companies.

(14) All rights of creditors against the property, rights, assets, privileges and franchises of a company amalgamated under this section and all liens upon its property, rights, assets, privileges and franchises are unimpaired by the amalgamation, and all debts, contracts, liabilities and duties of the company thenceforth attach to the amalgamated company and may be enforced against it.

The Supreme Court, reversing the Ontario Court of Appeal, explained that section this way (per Dickson, J., as he then was, at 416-17 (D.L.R. 396-97)):

[I]t would seem that the Court [of Appeal] accepted, as a first step, the proposition that the "new" company, i.e. the amalgamated company, is a different, separate and distinct company from the “old” companies, i.e. the amalgamating companies. Whether an amalgamation creates or extinguishes a corporate entity will, of course, depend upon the terms of the applicable statute, but as I read the Act, in particular s. 137, and consider the purposes which an amalgamation is intended to serve, it would appear to me that upon an amalgamation under the Canada Corporations Act no "new" company is created and no “old” company is extinguished. The Canada Corporations Act does not in terms so state and the following consideratons in my view serve to negate any such inference: (i) palpably the controlling word in s. 137 is “continue”. That word means "to remain in existence or in its present condition"—Shorter Oxford English Dictionary. The companies "are amalgamated and are continued as one company" which is the very antithesis of the notion that the amalgamating companies are extinguished or that they continue in a truncated state; (ii) the statement in s. 137(13)(b) that the "amalgamated company possess all the property, rights . . ." If corporate birth or death were envisaged, one would have expected to find, in the statute, some provision for transfer or conveyance or transmission of assets and not simply the word "possesses", a word which re-enforces the concept of continuance . . . (vi) if Parliament had intended that a company by the simple expedient of amalgamating with another company could free itself of accountability for acts in contravention of the Criminal Code or the Combines Investigation Act or the Income Tax Act, I cannot but think that other and clearer language than that now found in the Canada Corporations Act would be necessary.

In reversing the Ontario Court, the Supreme Court adopted the view expressed by Kelly, J.A. of the same Court in Stanward Corporation v. Denison Mines Ltd., [1966] 2 O.R. 585; 57 D.L.R. (2d) 674 at 592 (D.L.R. 681):

What we have here is an amalgamated company into which, simultaneously, two amalgamating companies have fused along with their assets and liabilities. Under this fusion, and by virtue of its statutory implementation, it may be said, broadly, that the amalgamated company acquired the assets and assumed the liabilities of the two component companies . . .

The language of s. 96 is in my opinion unambiguous in providing that the two amalgamating companies shall continue as one company. While it may be difficult to comprehend the exact metamorphosis which takes place, it is within the legislature's competence to provide that what were hitherto two shall continue as one.

In analyzing the different ways in which companies are put together, Dickson J. stated (at 421 (D.L.R. 400)):

[I]n an amalgamation a different result is sought and different legal mechanics are adopted, usually for the express purpose of ensuring the continued existence of the constituent companies. The motivating factor may be the Income Tax Act or difficulties likely to arise in conveying assets if the merger were by asset or share purchase. But whatever the motive, the end result is to coalesce to create a homogeneous whole. The analogies of a river formed by the confluence of two streams, or the creation of a single rope through the intertwining of strands have been suggested by others.

He then concluded (at page 422 (D.L.R. 400-401)):

The effect of the statute, on a proper construction, is to have the amalgamating companies continue without subtraction in the amalgamated company, with all their strengths and their weaknesses, their perfections and imperfections, and their sins, if sinners they be. Letters patent of amalgamation do not give absolution.

It was this notion, that “amalgamating companies continue without subtraction in the amalgamated company," (which was also applied by the Supreme Court to The Business Corporations Act of Ontario, R.S.O 1970, c. 53 in obiter in Witco), that became the principle of the appellant's case.

The respondent (correctly, in my view) did not dispute that the appellant was right "from a strict corporate law point of view,” but contended this general corporate law was negatived by the language of section 87 of the Income Tax Act. As support for this contention, the respondent drew the Court's attention to the Interpretation Bulletin issued by Revenue Canada, Taxation ("the Department") as IT-474 on March 30, 1981, and particularly to the following paragraphs:

New Corporation

10. Notwithstanding corporate law which in most jurisdictions provides that the corporate entity formed as a result of an amalgamation is a continuation of the predecessor corporations rather than a new corporation, paragraph 87(2)(a) states that such entity is deemed to be a new corporation for the purposes of the Act. A number of the points discussed below arise from this deeming provision. Where the provisions of paragraph 87(2) (a) produce unintended consequences which are unfavourable to the taxpayer, the Corporate Rulings Directorate of the Department is prepared on a case by case basis to consider whether relief is appropriate.

Objections, Appeals and Refunds

30. Where an assessment has been received by a predecessor corporation prior to amalgamation and

(a) where the predecessor corporation has filed a notice of objection prior to amalgamation, the new corporation will possess the rights consequent upon the filing of a notice of objection and will be able to appeal to the Tax Review Board or the Federal Court within the time limits set out in sections 169 or 172, or (b) where the predecessor corporation has commenced an appeal prior to amalgamation, the new corporation will be able to continue the appeal.

31. Where an assessment or reassessment of a predecessor corporation is to be made after amalgamation, the assessment will be issued to the new corporation which will have the same rights as the predecessor corporation to file a notice of objection and to appeal the assessment.

32. Refunds in respect of tax paid by a predecessor corporation to be made after the amalgamation will be issued to the new corporation.

The respondent also relied on the testimony of the Department's auditor responsible for the reassessment that, had he known the true state of affairs, he would have reassessed Guaranty Properties, not Forest Glenn (Transcript at pages 72-73):

Q. Let's get to the heart of it, Mr. Delavigne. Had you known on June the 23rd of the November 1980 amalgamation, you wouldn't have re-assessed Forest Glenn, would you?

A. No.

Q. You would have re-assessed Guaranty Properties, wouldn't you?

A. That's right.

Q. Because that's the way you are told to do it, isn't it?

A. Yes.

Q. That's what the IT Bulletin says, isn't it?

A. Yes.

Q. And you [are] aware that the IT Bulletin states that, "Notwithstanding what any provincial law may provide, for the purposes of the Income Tax Act, upon an amalgamation, a new corporation is deemed to exist.” Isn't that correct?

A. Yes.

Q. And you are told not to re-assess the predecessor corporation, aren't you?

A. We are told to re-assess in accordance with the interpretation bulletin.

Q. You are told not to re-assess the predecessor corporation, aren't you?

A. Yes.

In support of its use of administrative policy and interpretation, the respondent relied on the case law, as most recently stated by Wilson, J. for the Supreme Court in Mattabi Mines Ltd. v. The Minister of Revenue (Ontario), [1988] 2 S.C.R. 175 at 195-96, 87 N.R. 300 at 323:

Crucial to a resolution of this issue is an understanding of the legal effect of administrative practice as publicized in Interpretation Bulletins. As already mentioned, the latter are not authoritative sources for the interpretation of taxing statutes. As Cattanach, J., put it in Southside Car Market Ltd. v. The Queen, [1982] 2 F.C. 755 (FD.), at p. 770, “an interpretation is not law until so interpreted by a court of competent jurisdiction”. The same judge noted in Stickel v. Minister of National Revenue, [1972] F.C. 672 (T.D.), at p. 684, that "(t)he Deputy Minister does not have the power to legislate”. Interpretation Bulletins, however, do have some persuasive force where there is an ambiguity in the legislation.

It is, therefore, necessary to focus on provisions of the Act, and particularly on the language of section 87.

* * *

The respondent's case is based in great measure on the opening words of paragraph (a) of subsection 87(2), which read as follows: “(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 . . .”. It is said that it logically follows, from deeming the corporate entity formed as a result of the amalgamation to be a new corporation for the purposes of the Act, that the Act must also deem that, for purposes of the Act, the predecessor corporations which amalgamated to form the new corporation have ceased to exist.

Given that section 87 contains certain other deeming provisions which expressly provide for the “continuation” of predecessor corporations in the form of a new corporation, it was submitted that, unless otherwise specifically provided in section 87, the predecessor corporations upon an amalgamation cease to exist for tax purposes. None of these "continuation provisions" provide for the reassessment of a predecessor corporation.

The respondent's position is supported by the decision of the Tax Appeal Board in Scott v. M.N.R. (1966), 41 Tax A.B.C. 37; 66 D.T.C. 306 at 308, where, after setting out the predecessor provision to paragraph 87(2)(a), assistant chairman Fordham [1] said:

[Although the provincial law reads to the contrary and hard as it may seem, our federal income tax legislation explicitly provides that the outcome of an amalgamation shall be deemed to be a new company. Deemed seems to be a favourite verb in income tax legislation. The word has been held to be conclusive in its import and immune to any attempted modification of its effect. Its use in the Act affords another instance of the proposition that black may be white, if Parliament so legislates.

The respondent also attempted to rely on Fawcett & Grant, supra, but that case deals with the corporate law of Quebec, and I find the language of the Quebec statute too different from that of section 87 to be helpful.

Unfortunately for the respondent's analysis of paragraph 87(2)(a), it seems to me that the purpose Parliament had in mind was not to bring amalgamating corporations to an end but merely to give them a deemed year-end and the new corporation a deemed year-beginning. The words “shall be deemed to be a new corporation" are immediately followed by the clause "the first taxation year of which shall be deemed to have commenced at the time of the amalgamation." This subsequent clause I find to be a defining or restrictive relative clause, which limits the scope of the antecedent principal clause to the combined concept expressed by the two clauses. The amalgamated corporation is deemed new in that its first taxation year commences at the time of the amalgamation. To have created a non-defining or non-restrictive relative clause, the Parliamentary drafter would, at the very least have had to insert a comma after “a new corporation," or otherwise vary the syntax. [2] The principal effect of paragraph 87(2)(a) is that, for income tax purposes the amalgamated corporation is deemed to be a new taxpayer with a fresh taxation year as of the date of amalgamation. In sum, nothing in the paragraph evinces an intention on the part of Parliament to deem that the amalgamating taxpayer ceased to exist, much less that it should be relieved of liability for its own income taxes prior to the date of amalgamation.

That the paragraph, indeed the entire section, deals with the computation of income is also an inference to be drawn from the fact that it falls under division B of Part I of the Act which deals with the computation of income, as opposed to Part A, which is concerned with liability for tax. As the appellant pointed out, it is Part A (section 2 of the Act) that constitutes the charging section.

Section 87 applies only where an amalgamation has taken place among “taxable Canadian corporations" and according to (“in such manner that") the three conditions specified in subsection 87(1). Since subsection 87(1) by its terms does not apply to all amalgamations, but only to certain members of that class, it seems apparent to me that it derives its notion of amalgamation from elsewhere, which can mean only from the corporate law relevant to the particular corporations in question.

Apparently (the point was asserted by both parties but argued by neither), in Quebec amalgamating corporations cease to exist with the creation of the new entity, so that it is separate and distinct from the amalgamating corporations. But Witco, with its incorporation of Black and Decker reasoning, established that under The Business Corporations Act of Ontario no separate and distinct corporation is created in the amalgamated corporation, nor are the amalgamating corporations extinguished.

It may be noted that by its initial words subsection 87(1) is limited in its effect to the whole of section 87 (“In this section”), which would tend to negative any legislative ambition to establish a complete code on amalgamations for income tax purposes. The larger words, “for the purposes of this Act,” found in paragraph 87(2)(u) cannot extend the narrower intention of the initial words. They must rather be interpreted as legitimizing the use of the deemed taxation years there recognized for all computations under the Act.

It should also be noted that the verb "become" as found in paragraph 87(1)(b) (“all of the liabilities . . . of the predecessor Corporations immediately before the merger become liabilities of the new corporation by virtue of the merger") does not necessarily imply transfer of liabilities but means rather to come into being, without any implication as to whether the source of its liabilities also retains responsibility for them. [3]

I would therefore conclude that section 87 of the Act does not purport to establish a code on amalgamations, and that, having reference to subsection 197(4) of the Ontario Business Corporations Act, R.S.O. 1970, c. 53 as amended by S.O. 1979, c. 36, s. 16, as judicially interpreted, [4] predecessor corporations in an amalgamation do not cease to exist but remain jointly liable with their successor corporation for the liabilities they carried at the time of the amalgamation.

In the light of my decision on this issue, I find it unnecessary to consider the appellant's alternative argument.

The respondent requested that, in the event of the appellant's success on the merits, there should be no order as to costs, since the Court would then be pronouncing against the Department's previous conduct as manifested through its administrative interpretation and practice. However, that consideration is counter balanced in my mind by the fact that Forest Glenn's original reasons for objection to the Minister’s notice of reassessment make no reference at all to the section 87 issue herein presented.

The appeal will therefore be allowed with costs here and below and the judgment of the trial judge set aside; the reassessment of Forest Glenn (Dixie) Limited with respect to its 1976 taxation year is valid.

Appeal allowed.