Deneschuk Building Supplies Ltd. v. The Queen, 96 DTC 1467, [1996] 3 CTC 2039 (TCC)

Brulé J.T.C.C.: — This hearing involved a motion brought by the Appellant under Rule 58(1 )(a) of the Tax Court of Canada Rules which reads as follows:

58(1) A party may apply to the Court,

(a) for the determination, before hearing, of a question of law raised by a pleading in a proceeding where the determination of the question may dispose of all or part of the proceeding, substantially shorten the hearing or result in a substantial saving of costs...

and the Court may grant judgment accordingly.

Facts

The facts of the case are not in dispute. They are as follows:

This case deals with the association and hence the allocation of the $200,000 business limit among four corporations: Deneschuk Holdings Limited (“DHL”), D-5 Holdings (“D-5”), Deneschuk Construction Limited (“DCL”) and the Appellant.

Pursuant to subsection 125(3) of the Income Tax Act (the “Act”) in 1990, DHL and D-5 filed the prescribed form (“Form T2013”), allocating the $200,000 business limit between them as associated corporations. $174,971 was allocated to DHL and $24,964 was allocated to D-5 leaving $65 of the $200,000 total unused ($174,971 + $24,964 = $199,935).

In 1990, the Appellant and DCL also filed a Form T2013. The Appellant and DCL claimed they were associated corporations and allocated the $200,000 business limit entirely to the Appellant.

In 1990 and 1991, the Minister of National Revenue (the “Minister”) assessed all four corporations’ 1990 taxation years.

In December of 1993, the Minister reassessed the Appellant’s 1990 taxation year and deemed all four corporations to be associated, which determination was not opposed by the Appellant. The reassessment was based on the following allocation:

At no time did the Minister provide notice in writing that a Form T2013 was required to allocate the $200,000 business limit.

In 1995, the Appellant and the three other corporations filed another Form T2013, this time allocating the entire $200,000 business limit to the Appellant. By this time, DHL, D-5 and DCL were statute barred.

Issue

The basic issue is whether the Minister has the right in Section 125 of the Act to allocate the business limit amongst the four corporations, or must it be allocated as specified in the Form T2013 filed in 1995.

Analysis

There does not appear to be any decided cases pertaining to subsections 3 or 4 of section 125. If there is no legal precedent, then it becomes necessary to turn to the rules of interpreting statutes. The Supreme Court of Canada recently considered such an interpretation in the case of Friesen v. R., (sub nom. Friesen v. Canada) [1995] 3 S.C.R. 103, [1995] 2 C.T.C. 369, 95 D.T.C. 5551 his majority decision, Major, J. put forth the “plainmeaning rule” as the correct approach to the interpretation of the Act. He stated at page 113 (C.T.C. 373, D.T.C. 5553):

In interpreting sections of the Income Tax Act, the correct approach, as set out by Estey, J. in Stubard Investments Ltd. v. R. [84 D.T.C. 6305], [1984] 1 S.C.R. 536, is to apply the plain-meaning rule. Estey, J. at page 578 relied on the following passage from E.A. Driedger, Construction of Statutes (2nd ed. 1983), at page 87:

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.

The principle that the plain meaning of the relevant section of the Income Tax Act is to prevail unless the transaction is a sham has recently been affirmed by this Court in Canada v. Antosko, [1994] 2 S.C.R. 312. lacobucci, J., writing for the Court, held at pages 326-27 that:

While it is true that the courts must view discreet sections of the Income Tax Act in light of the other provisions of the Act and of the purpose of the legislation, and that they must analyze a given transaction in the context of economic and commercial reality, such techniques cannot alter the result where the words of the statute are clear and plain and where the legal and practical effect of the transaction is undisputed: Mattabi Mines Ltd. v. Ontario (Minister of Revenue), [1988] 2 S.C.R. 175, at page 194; see also Symes v. Canada, [1993] 4 S.C.R. 695.

I accept the following comments on the Antosko case in P.W. Hogg and J.E. Magee, Principles of Income Tax Law (1995), subsection 22.3(c) “Strict and purposive interpretation”, at page 453-54:

It would introduce intolerable uncertainty into the Income Tax Act if clear language in a detailed provision of the Act were to be qualified by unexpressed exceptions derived from a court’s view of the object and purpose of the provision … [The Antosko case] is simply a recognition that “object and purpose” can play only a limited role in the interpretation of a statute that is as precise and detailed as the Income Tax Act. When a provision is couched in specific language that admits of no doubt or ambiguity in its application to the facts, then the provision must be applied regardless of its object and purpose. Only when the statutory language admits of some doubt or ambiguity in its application to the facts is it useful to resort to the object and purpose of the provision.

The first step in this case, then, should be an examination of the specific language of the Act.

With reference to the Act, one must look at subsection 125(1) which reads in part:

There may be deducted from the tax otherwise payable under this Part for a taxation year by a corporation that was, throughout a taxation year, a Canadian- controlled private corporation, an amount equal to 16 per cent of the least of

(c) the corporation’s business limit for the year.

This provides that a Canadian-controlled private corporation may deduct from its tax otherwise payable 16 per cent of its active business income, but the upper limit is its “business limit”. There is no issue in this case of whether the Appellant qualifies for the 16 per cent entitlement; the issue is what is the business limit for the Appellant?

Subsection 125(2) provides the meaning of “business limit”. It reads:

(2) Interpretation of “business limit”. For the purposes of this section, a corporation’s “business limit” for a taxation year is $200,000 unless the corporation is associated in the year with one or more other Canadian- controlled private corporations in which case, except as otherwise provided in this section, its business limit for the year is nil.

In this case we are dealing with associated corporations, so unless another provision of the Act provides associated corporations with an amount of business limit, subsection 125(2) sets the amount of the business limit at nil. This is the default.

Subsection 125(3) provides an exception to the rule. It reads:

(3) Associated corporations. Notwithstanding subsection (2), if all of the Canadian-controlled private corporations that are associated with each other in a taxation year have filed with the Minister in prescribed form an agreement whereby, for the purposes of this section, they allocate an amount to one or more of them for the taxation year and the amount so allocated or the total of the amounts so allocated, as the case may be, is $200,000, the business limit for the year of each of the corporations is the amount so allocated to it.

This provision specifies two criteria that must be satisfied before associated corporations are permitted any amount of business limit.

Those criteria are:

1. All of the associated corporations must file an agreement in the prescribed form.

2. This agreement must allocate to one or more of the associated corporations amounts that total $200,000.

If those criteria are satisfied, then each of the corporations will have a business limit equal to the amount allocated to it. On any “plain-meaning” reading of the provision, then, if the criteria are not satisfied, then we are back at the default position in subsection 125(2), namely, that the business limit for each corporation would be nil.

Subsection 125(4) provides another exception to the default in subsection 125(2). It reads:

(4) Failure to file agreement. If any of the Canadian-controlled private corporations that are associated with each other in a taxation year has failed to file with the Minister an agreement as contemplated by subsection (3) within 30 days after notice in writing by the Minister has been forwarded to any of them that such an agreement is required for the purpose of any assessment of tax under this Part, the Minister shall, for the purpose of this section, allocate an amount to one or more of them for the taxation year, which amount or the total of which amounts, as the case may be, shall equal $200,000, and in any such case, notwithstanding subsection (2), the business limit for the year of each of the corporations is the amount so allocated to it.

This provision creates a system whereby if certain events occur the Minister must allocate the $200,000 amongst the corporations. Those events in chronological order are:

1. The Minister gives written notice to any of the associated corporations that an agreement as contemplated by subsection 125(3) is required.

2. Thirty days after this notice all of the corporations have not filed an agreement as contemplated by subsection 125(3).

If those events occur, then the Minister must allocate the $200,000 amongst the associated corporations. On a “plain-meaning” reading of the provision, if the events do not occur, then we again would be back at the default position of a nil business limit.

What is made clear in this provision is that the Minister’s discretion in this matter is very carefully circumscribed. When the above events take place, he must allocate the $200,000 amongst the corporations since the imperative “shall” is used. His only discretion is to the amount to be allocated to each corporation. There is nothing to suggest the Minister is given the authority to make an allocation unless there has not been a Form T2013 filed within thirty days of written notice.

Appellant’s position

This is simply that within the scheme of the Act, the Minister is required to make a written request for a Form T2013. Only if no form is provided to the Minister within thirty days can there be made an allocation of the business limit. Counsel argues that the Minister is not otherwise empowered to make an allocation.

As there is no question of the validity of the Form T2013, form filed in 1995, counsel submits that the Minister must accept the allocation of $200,000 to the Appellant and reassess on that basis.

Respondent's position

Counsel for the Minister made several arguments, most of which were unconnected. In summary, these are as follows:

1. DHL and D-5 filed a Form T2013 which left $65 to be allocated to the Appellant. The four corporations could have filed a Form T2013 before the 1990 taxation year became statute-barred for DHL and D-5. Now the bulk of the $200,000 is gone and only $65 remains.

2. Under subsection 152(7) of the Act, the Minister is not bound by information provided by a taxpayer. The Form T2013 filed in 1995 falls within “information” and therefore the Minister is not bound by the allocation.

3. The Minister is not bound to allow any deduction claimed by a taxpayer, but rather, he may consider it and if appropriate, allow or disallow it.

4. The Minister’s failure to give a written request for a Form T2013 to be filed is an irregularity, informality, error or omission as contemplated by section 166 and therefore does not render the reassessment invalid.

Argument No. 1

This argument is somewhat difficult to decipher. I believe what counsel is arguing is that when a group of associated corporations file a Form T2013 but leave out one or more of the associated corporations, they “use up” the portion of the $200,000 business limit they have allocated. When the year becomes statute-barred for one or more of the corporations, the amount allocated to them becomes final. Those corporations reassessed by the Minister are then limited to only as much of the $200,000 that remains.

In this case DHL and D-5 in 1990 allocated all but $65. Since those corporations’ tax returns are now statute-barred, by counsel’s argument, the Appellant is left with the $65 that remains.

While this argument might have a certain amount of appeal from a procedural point of view, it does not appear to have any basis in law. It is based on several assumptions that should be dealt with before going further.

The first assumption is that when a group of corporations file a Form T2013, and the Minister subsequently deems that one or more other corporations is/are actually associated with the group, the original form has validly allocated the business limit between the associated members. The question to be answered here is that in filing a Form T2013, the taxpayer corporations assume that certain corporations are associated with each other. What if they are wrong? The Minister would reassess them and tell them that they must add another corporation to their list of associated corporations. Does it render their Form T2013 invalid? Are the allocations purported to be made under the Form T2013 invalid?

This takes us back to two criteria of subsection 125(3) listed above that must be satisfied in order for the corporation to have the business limit allocated to it. The first criterion is that all the associated corporations must file an agreement in the prescribed form. There are two possible interpretations of this criterion that hinge on the word “all”. (1) All of the associated corporations must file a valid agreement that lists all of the corporations that are in fact associated, or (2) all of the associated corporations must file an agreement valid or invalid and the agreement need not accurately list the corporations that are in fact associated. It would seem a matter of common sense that the first alternative was Parliament’s intent. However, for our purposes this question is rendered irrelevant by the second criterion which is that the agreement must allocate amounts amongst the associated corporations that total $200,000.

In the current case the second criterion has clearly not been satisfied. The Forms T2013 that were filed in 1995 purport to allocate close to $400,000 amongst the four associated corporations. One form gave $200,000 to the Appellant and nothing to DCL. The others gave $174,971 to DHL and $24,964 to D-5. Neither form was signed by the associated corporations. the others. The result is that until valid Forms T2013 are filed or notice was given by the Minister as described in subsection 125(4), the business limits for DHL, D-5, DCL and the Appellant were all nil under subsection 125(2). The first assumption of the Minister, that the original form has validly allocated the business limit between the associated members, would therefore appear to be false.

The second assumption is that when a taxation year for a corporation becomes statute-barred, it finalizes the allocation to that corporation. This is an estoppel-type argument saying in effect that the associated corpora tions received the benefit of their allocation and now that the Minister cannot assess them they cannot change their minds. This simply has no basis in law. As stated above, before the 1995 Forms T2013 were filed, the actual business limit of each of the four corporations was nil by virtue of subsection 125(2). The Minister in 1993 chose to reassess only the Appellant, but in fact should have reassessed DHL and D-5 as well. The fact that those corporations’ 1990 taxation year is now statute-barred is really irrelevant. The Minister should have either reassessed all of the corporations before 1990 became statute-barred on the basis that their business limit was nil, or issued the written notice described in subsection 125(4). In either case, the associated corporations would then have had an opportunity to file a valid Form T2013. As noted by counsel for the Appellant, there is no time limit given on when the Form T2013 must be filed.

The final assumption is that the Minister is empowered to rely on one Form T2013 and ignore another one, and allocate to a corporation an amount of business limit different than that made by the taxpayer. As mentioned above, the powers of the Minister in this matter are carefully circumscribed. However, counsel for the Minister seemed to make broad assumptions about the discretion of the Minister so it might be worth further examination.

The duty of the Minister is provided in subsection 220(1) of the Act. This reads:

The Minister shall administer and enforce this Act and control and supervise all persons employed to carry out or enforce this Act and the Deputy Minister of National Revenue may exercise all the powers and perform the duties of the Minister under this Acct.

The Minister has no authority to behave contrary to the Act. Discretion only is granted, and even then, this discretion cannot be exercised arbitrarily or capriciously.

On the plain wording, with respect to allocation of the $200,000 business limit, the Minister’s discretion is only to allocate the amount of the business limit. There is no time as to when the allocation is to take place.

Argument No. 2

One must take a look at subsection 152(7) of the Act which reads:

Assessment not dependent on return or information. The Minister is not bound by a return or information supplied by or on behalf of a taxpayer and, in making an assessment, may, notwithstanding a return or information so supplied or if no return has been filed, assess the tax payable under this Part.

The effect of the subsection is to allow the Minister to assess a taxpayer where no return has been filed, or when a return is filed that contains inaccuracies. The Minister can assess the taxpayer and ignore what was asserted. While it may be true that the Minister can ignore the Form T2013 filed in 1995, that is unhelpful. The Minister can, by choice, ignore any matter of evidence, but this does not change its legal effect. The Act permits a taxpayer to allocate its business limit if it files an effective Form T2013. It is this Court that will determine if the Form T2013 is effective or not, and if it is effective then this Court will direct the Minister to reassess on that basis.

Argument No. 3

This argument fails for the same reason that counsel for the Minister’s second argument failed. I suppose the Minister might disallow any deduction claimed by a taxpayer even if it were validly claimed under the Act (it would be irrational and irresponsible and contrary to his duty but he might do so), but can counsel seriously contend that the Minister in disallowing a validly claimed deduction affect a taxpayer’s entitlement to that deduction? It would indeed be remarkable if that were the case.

I will not take time to go into the case referred to by counsel for the Minister, Greene v. Minister of National Revenue (sub nom. Greene v. Canada), [1995] 1 C.T.C. 135, 95 D.T.C. 5078. Suffice it to say that it does not apply in this situation.

Argument No. 4

Counsel for the Minister’s final argument is that failure to provide the written notice as described in subsection 125(4) is corrected by section 166. That section of the Act reads:

An assessment shall not be vacated or varied on appeal by reason only of any irregularity, informality, omission or error on the part of any person in the observation of any directory provision of this Act.

Counsel, by inference, is suggesting that the written notice requirement described in subsection 125(4) is a “directory provision”, a failure to observe it is an omission or error.

As for the meaning of “directory”, Black's Law Dictionary, Sixth Edition, has the following definition:

A provision in a statute, rule of procedure, or the like, which is a mere direction or instruction of no obligatory force, and involving no invalidating consequence for its disregard, as opposed to an imperative or mandatory provision, which must be' followed...

The Oxford English Dictionary, Second Edition, provides:

Applied to that part of the law which directs what is to be done, esp. to “a statute or part of a statute which operates merely as advice or direction to the person who is to do something pointed out, leaving the act or omission not destructive of the legality of what is done in disregard of the direction.”

Section 166 has been applied in circumstances involving minor irregularities. In Stephens v. R. (sub nom. Stephens, W.R., Estate v. The Queen), [1984] C.T.C. Ill, 84 D.T.C. 6114 (F.C.T.D.); affirmed [1987] 1 C.T.C. 88, 87 D.T.C. 5024 (F.C.A.), notices of assessment were held to be valid despite bearing the incorrect department name and incorrect Deputy Minister’s name. The Court held that the defects were not confusing or prejudicial and were irregularities that could be cured. Similarly in R. v. Riendeau (sub nom. Canada v. Riendeau), [1990] 1 C.T.C. 141, 90 D.T.C. 6076 (F.C.T.D.); affirmed (sub nom. Riendeau v. Minister of National Revenue), [1991] 2 C.T.C. 64 (sub nom. Riendeau v. R.), 91 D.T.C. 5416 (F.C.A.), the Court held that an assessment based on a repealed section of the Act could be confirmed on a different basis. Cullen, J. stated that section 166 is limited to cases where there is a substantial and fundamental error.

A failure of the Minister to provide written notice before allocating business limits amongst associated corporations as required by subsection 125(4) would normally be a substantial and fundamental error. To hold otherwise would result in the remarkable situation that the requirement of providing written notice would be entirely without purpose. If associated corporations failed to file a Form T2013 or filed an invalid one, after a request was made, the Minister would be free to allocate the business limit as he saw fit.

It might be argued that the failure of the Minister to provide written notice was not prejudicial in this case since the Appellant was warned in the reassessment of 1993 that the Minister deemed all four corporations associated. However, the Act creates no obligation for the Appellant and the other corporations to file a valid Form T2013 in such circumstances. Moreover, the Appellant continues to assert that it was not associated with DHL and D-5. In such a situation, the Minister should have assessed all four corporations instead of attempting to circumvent the Act. I believe the operative principle in such a situation is as stated in Québec (Communauté urbaine) v. Corp. Notre-Dame Bon-Secours [1994] 3 S.C.R. 3, (sub nom. Notre-Dame de Bon-Secours (Corp.) v. Québec (Communauté urbaine)), [1995] 1 C.T.C. 241, (sub nom. Corp. Notre-Dame Bon-Secours v. Québec (Communauté urbaine)), 95 D.T.C. 5017, that upon reasonable doubt, not resolved by the ordinary rules of interpretation, the interpretation will be settled by recourse to the residual presumption in favour of the taxpayer.

Conclusion

The Act is clear and unambiguous. The Forms T2013 that were originally filed were invalid and prior to 1995, the actual business limit of the four corporations was nil. The Minister should have provided written notice to the Appellant that it was required to file a Form T2013 (as described in subsection 125(4)), or assessed the Appellant on the basis that its business limit was nil. In either case, the Appellant would have had the opportunity to file a valid Form T2013, and it did so in 1995. That the Minister can no longer reassess the other corporations associated with the Appellant was due to oversight and is irrelevant to this motion.

There appears to be an omission in the Act with respect to time limits, which resulted in this motion, and the omission could easily be corrected by a change in the Income Tax Act.

The motion is allowed with the result that the appeal is allowed with costs.

Motion allowed and therefore appeal allowed.