By
The
Court:
This
is
an
appeal
from
the
judgment
of
Potts
J.,
[1995]
O.J.
No.
960,
dismissing
the
appellant’s
appeal
from
reassessments
of
capital
tax
under
Part
III
of
the
Corporations
Tax
Act
R.S.O.
1980,
c.97,
as
amended
(“the
Act”),
for
the
taxation
years
ending
in
1980
to
1983.
The
sole
issue
before
Potts
J.
and
on
this
appeal
is
whether
government
grants
received
by
the
appellant
should
have
been
included
in
the
corporation’s
paid-up
capital
in
the
year
of
receipt
as
“earned,
capital
and
any
other
surplus”
within
the
meaning
of
s.53(l)(b)
of
the
Act
for
the
purposes
of
determining
the
capital
tax
payable
by
the
appellant
in
the
relevant
years.
The
appeal
court
judge
held
that
they
should
be
so
included.
The
relevant
definition
of
“paid-up
capital”
reads
as
follows:
53.-(1)
The
paid-up
capital
of
a
corporation
for
a
taxation
year
includes,
(a)
the
paid-up
capital
stock
of
the
corporation;
(b)
its
earned,
capital
and
any
other
surplus;
(c)
all
its
reserves,
whether
created
from
income
or
otherwise,
except
any
reserve
the
creation
of
which
is
allowed
as
a
deduction
under
the
provisions
of
Part
II,
except
that
the
reserves
the
creation
of
which
is
allowed
as
a
deduction
under
the
following
provisions
of
Part
II
shall
be
included
in
paid-up
capital,
(i)
paragraph
20(1
)(n)
of
the
Income
Tax
Act
(Canada)
as
that
paragraph
applies
by
virtue
of
subsections
12(1)
and
(8)
of
this
Act,
(ii)
subparagraph
40(
1
)(a)(iii)
of
the
Income
Tax
Act
(Canada)
as
that
subparagraph
applies
by
virtue
of
subsection
13(1)
of
this
Act,
and
(iii)
subsection
16(1);
(d)
all
sums
or
credits
advanced
or
loaned
to
the
corporation
by
its
shareholders
directly
or
indirectly
or
by
any
person
related
to
any
of
its
shareholders
or
by
any
other
corporation;
and
(e)
all
its
indebtedness,
whether
assumed
or
undertaken
by
it,
represented
by
bonds,
bond
mortgages,
debentures,
income
bonds,
income
debentures,
mortgages,
lien
notes
and
any
other
securities
to
which
the
property
of
the
corporation
or
any
of
it
is
subject.
1972,
c.
143,
s.
126;
1977,
c.
58,
ss.
9(2),
26;
1979,
c.
28,
s.
13(1).
According
to
generally
accepted
accounting
principles
(“GAAP”),
any
government
grant
related
to
a
capital
asset
will
only
be
included
in
the
retained
earnings
or
“earned
surplus”
as
the
asset
is
used
in
the
operation
of
the
business.
It
is
not
included
in
“surplus”
on
receipt.
It
is
common
ground
between
the
parties
that
GAAP
are
not
determinative
of
the
issue
and
that
the
question
is
one
of
statutory
interpretation.
However,
the
appellant
contends
that,
in
the
context
of
this
statute,
“earned,
capital
and
any
other
surplus”
are
commercial
words
which
can
only
make
sense
in
an
accounting
context
and
that
they
therefore
should
be
interpreted
according
to
GAAP.
The
respondent
argues
in
favour
of
a
broader
interpretation
in
accordance
with
the
ordinary
meaning
of
the
phrase.
The
appeal
court
judge
adopted
the
respondent’s
approach.
With
deference
to
the
appeal
court
judge,
we
disagree
with
his
conclu-
sion.
There
is
no
doubt
that
GAAP
do
not
govern
the
result.
It
is
also
clear
that
the
“paid-up
capital
of
a
corporation”
as
defined
in
s.53
of
the
Act
constitutes
an
extension
of
the
meaning
of
“paid-up
capital”
from
its
ordinary
commercial
meaning:
Investors
Syndicate
Ltd.
v.
Ontario
(Minister
of
Revenue)
(February
11,
1994),
Doc.
Toronto
75826/91Q/B106/93,
75827/91Q/B106/93A,
75828/91Q/B106/93B,
75829/91Q/B106/93C,
75830/91Q/B106/93D
(Ont.
Gen.
Div.),
aff’d
(February
5,
1996),
Doc.
CA
Cl
7951
(Ont.
C.A.);
City
Parking
Canada
Ltd.
v.
Ontario
(Minister
of
Revenue)
(1973),
1
O.R.
(2d)
425
(Ont.
C.A.).
This
does
not
detract
from
the
fact
that,
in
the
absence
of
a
statutory
definition
for
“earned,
capital
and
any
other
surplus”,
resort
must
be
had
to
ordinary
commercial
principles
to
attribute
any
meaning
to
the
phrase.
In
this
context,
the
plain
and
ordinary
meaning
of
these
words
should
be
taken
from
the
language
accountants
speak,
not
that
of
persons
who
are
not
involved
with
corporate
balance
sheets.
The
tax
assessors
know
accounting
language,
as
do
the
accountants
who
certify
the
corporation’s
financial
statements.
The
accountants,
applying
GAAP,
do
not
include
a
government
grant
as
an
item
of
capital
surplus
in
the
year
of
surplus.
Rather,
the
grant
is
treated
as
an
item
of
retained
earnings
or
“earned
surplus”
over
time
as
the
asset
is
used
in
the
operations
of
the
business.
In
our
view,
the
statute
should
be
interpreted
in
accordance
with
this
approach.
We
are
further
convinced
that
this
is
the
correct
approach
by
reason
of
the
fact
that
the
respondent’s
handling
of
the
matter
results
in
double
taxation
which
requires
an
administrative
adjustment
to
correct.
Under
the
respondent’s
treatment,
the
amount
of
the
grant
is
brought
into
surplus
on
receipt.
In
accordance
with
GAAP,
which
are
accepted
by
the
Ministry,
another
amount
equal
to
the
value
of
the
grant
is
brought
into
earned
surplus
in
annual
increments
over
the
life
of
the
related
assets.
In.
order
to
prevent
the
obvious
duplication,
a
third
amount
is
deducted
in
annual
increments,
not
by
reason
of
any
provision
in
the
Act,
but
by
administrative
adjustment.
In
our
view,
this
is
artificial
and
can
be
interpreted
as
a
concession
that
the
earlier
imposition
of
tax
is
contrary
to
the
provisions
of
the
Act.
Consequently,
the
appeal
is
allowed,
the
appeal
court
judgment
is
set
aside,
the
reassessments
are
referred
back
to
the
respondent
for
reconsideration
and
further
reassessment
in
accordance
with
these
reasons.
The
appellant
is
entitled
to
its
costs
of
the
appeal.
Appeal
allowed.
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