Mara Properties Ltd. v. The Queen, 93 DTC 1449, [1993] 2 CTC 3189 (TCC), ultimately aff'd 96 DTC 6309, [1996] 2 S.C.R. 161

Kempo, T.C.C.J.:—In its 1982 tax return the appellant reported a loss arising from the sale in that year of a property it had acquired as a result of the winding up of one of its subsidiaries. In notices of reassessment, all dated July 16, 1991, the Minister of National Revenue (the "Minister") disallowed the loss and all attempts by the appellant to carry forward any part thereof in the computation of its income for those taxation years. The sole issue is whether the loss, which was admittedly tax-motivated, could properly be claimed by the appellant in computing its income. It is common ground that if the loss can be claimed for 1982, it may then be carried forward as reported by the appellant for its 1983, 1987 and 1988 taxation years which are also under appeal.

The facts

The appellant is a corporation with a fiscal year-end in any relevant year of November 30. It has its principal place of business in Vancouver, British Columbia. Both parties agree that the appellant was at all material times a taxable Canadian corporation as defined in subsection 248(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The appellant's business affairs were managed by its principal shareholder, Mr. Werner Paulus, a resident of the United States.

Prior to and throughout the 1982 taxation year the appellant carried on the business of developing and selling real property. The profit it realized from this activity was reported as income for tax purposes and not as capital gains. In 1982 the appellant entered into a series of transactions the sole purpose of which was the utilization of rollover provisions in the Act in order to acquire, for its own use, the accrued and unused non-capital losses of a subsidiary corporation. Subsection 88(1) of the Act provided that on the wind up of a subsidiary corporation into its parent it was deemed to have disposed of its property at its cost amount and the parent was deemed to have acquired the property for that cost.

The plan was formulated and implemented in the following way. The entire issued and outstanding shares in the capital stock of Fraserview Development Ltd. (” Fraserview") were purchased on November 30, 1982 at a price of $69,998. There was no dispute that the selling shareholders dealt with the appellant at arm's length and that, at all material times, Fraserview was also a taxable Canadian corporation.

Immediately following the share acquisition, the appellant caused Fraserview to be wound up in such a manner that all of Fraserview's debts and assets passed to it. The real target was 92 acres of land overlooking the Fraser River located near Maple Ridge, British Columbia (the"land"). Indeed, it was Fraserview's only remaining inventory asset at the time of its wind up. That Fraserview was a real estate development company and that at all material times the land had been held by it as a trading asset on income account was common ground.

Fraserview had acquired the land some sixteen months earlier at a purchase price of approximately $6 million. By the time of its wind up into the appellant it had incurred development expenses of $1,577 million so that its actual cost exceeded $7,577 million. Fraserview's financing for the land's acquisition and development outlays was provided by two mortgages and various shareholder loans. In particular, the Toronto-Dominion Bank loaned approximately $3 million secured by a first charge on the land, the unpaid vendors held a second mortgage on the land for approximately $4.0 million, and Fraserview's shareholders provided the rest which was short of $600,000. Prior to Fraserview's wind up on November 30, 1982 the land's fair market value had dropped to $3 million. Since it was Fraserview's only parcel of real estate, the debts owed to its unpaid vendor and its shareholders (both being subservient to the bank’s $3 million first mortgage) became essentially worthless. It was common ground that if the land had been sold by Fraserview at that time, it would have realized a loss in the neighbourhood of $4.6 million.

However as the appellant was fully apprised of its own exposure to Fraserview's creditors following the share acquisition, it had to firstly "park" Fraserview's debts. At the behest of Mr. Paulus, one Norman Kelsey incorporated a company called Boswell Holdings Ltd. which purchased the $4.6 million debt for approximately $200,000 and subsequently assigned it to the Pielwood Financial Partnership which was controlled by Mr. Paulus. At this juncture it is appropriate to note that the appellant had inherited these debts which were not under its control but rather had been merely parked into friendly hands. Accordingly, they remained fully enforceable against the appellant's assets. The evidence was that these debts were subsequently paid out in full. The upshot of the whole matter was while the appellant's tax recovery arising out of the subsection 88(1) rollover and sale of the land amounted to approximately $2.3 million, it did thereafter pay out the $4.6 million in debts.

Once the debts had been effectively parked in the aforesaid manner the appellant acquired Fraserview's shares and then wound it up. A sale of the land at its fair market value of $3,022,970 had already been pre-arranged by the appellant such that, concurrently with the wind-up, it was bound to sell it to THU Holdings Ltd., an arm's length purchaser. Thereafter the bank’s first mortgage of roughly the same amount was released on payment from the sale proceeds.

These series of transactions were motivated solely for the purpose of reducing tax. Appellant's counsel's words cut to the core:

Now let's be clear, Your Honour. We make no bones about the fact that this was an entirely tax-motivated transaction. We make no bones about the fact that there was no reasonable expectation of profit in property where we acquired it at noon and sold it by dusk for a loss of four and a half million dollars.

That this was factually correct was elicited from Mr. Ralph Schmidtke, an officer of the appellant. He also confirmed that although the land had in the past been considered for acquisition and development as part of the appellant's regular business, it was only an idea which was dropped.

Mr. John Bowles, chartered accountant and Coopers & Lybrand's partner in charge of the appellant's audit, testified that upon the share acquisition and wind up the land was recorded as inventory in the appellant's books with the result that it became part of the appellant's inventory at Fraserview's cost, and that as far as he was concerned it was sold at a“ rollover” loss.

The appellant's statement of loss and deficit recorded the amount of $3,022,970 as property sales under revenue, and $7,686,171 as cost of property sold under expense. This loss amount of $4,663,201 formed part of the net loss reported by the appellant. By notice of reassessment the loss amount was added back to income which resulted in a revised net income for 1982 of $739,833. This effectively removed the whole transaction from the appellant's financial statement of revenue and expense. However it was conceded the loss amount should be calculated at a lesser amount as follows:

— Cost as determined by

Part of the claimed loss was applied against other revenues of the appellant in its 1982 taxation year and the remainder was carried forward and applied against other revenues in the 1983, 1986 and 1987 taxation years with the result that no tax was payable for any of those years.

There was consensus that the real estate loss in question was properly describable, in the vernacular, as a "pregnant loss". It had accrued but was not realized or crystallized in the hands of Fraserview. If it had, it could not have been utilized by a parent corporation in the same way following its wind up without running afoul of the paragraph 88(1.1)(e) condition requiring continuance of the subsidiary's business.

The respondent's reply to the notice of appeal described the issues to be determined in the following manner:

(i) whether the appellant's cost of the land, as deemed by subsection 88(1) of the Act, was an outlay or expenditure made by the appellant to gain or produce income from business or property;

(ii) whether the former shareholders of Fraserview conferred a benefit on the appellant by the transfer of their shares to the appellant to enable the appellant to utilize the unrealized tax loss of Fraserview on the land; [abandoned at hearing, see infra]

(iii) whether the land was held by the appellant as inventory;

(iv) whether the deduction of the appellant’s deemed cost of the land from the appellant's proceeds from the sale of the land constitutes a deduction which would unduly or artificially reduce its income for its 1982 taxation year;

(v) whether any amount of the appellant's non-capital losses for its 1984 and 1985 taxation years should be applied against its income for its 1983 taxation year, [abandoned at hearing, infra]

At the hearing issues (ii) and (v) were abandoned. The respondent's pleadings had raised an argument expressed in the alternative that if there was a loss it would be on capital account. This was also abandoned but with the concurrent caution that no admission was to be inferred therefrom to the effect that the subject land may thereby be characterized as inventory in the appellant's business.

Appellant's counsel pointed out that as item (iv) was admittedly not relied upon by the assessor, the evidentiary burden of proof would be on the Minister. I concur with this submission, however no issue arises on this matter because all of the facts known to and relied upon by the assessor were undisputed and were identical to those advanced at trial. The burden respecting the legal consequences arising therefrom remains equally on the parties.

Submissions

Respondent-counsel's principal and over arching position rested on what was averred as a basic proposition of fiscal law, arising jurisprudentially out of subsection 9(1) and paragraph 18(1 )(a) of the Act, to the effect that the appellant must show that the cost was incurred in accordance with the ordinary principles of commercial trading or business practice and for the purpose of gaining or producing income from the business; Royal Trust Co. v. M.N.R., [1957] C.T.C. 32, 57 D.T.C. 1055 (Ex. Ct.) and that the transaction encompassed a reasonable expectation of profit in order for it to be a source of income to it; Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213. In that this was not the purpose or intent here, which was admittedly to utilize a loss, the cost of the land did not arise in the course of, within the ambit of, or for the purposes of the appellant's business which was the buying, developing and selling of real estate. Accordingly, and for all aspects of the respondent's submissions, the land, and therefore its cost, did not become part of the appellant's inventory. Subsection 88(1) is merely a rule or mechanical provision which does not operate to preserve or automatically transfer the land's characterization on occasion of a liquidation and wind up; Hickman Motors Ltd. v. Canada, [1993] 1 C.T.C. 36, 93 D.T.C. 5040 (F.C.T.D.); Bowes & Cocks Ltd. v. M.N.R., [1989] 2 C.T.C. 2043, 89 D.T.C. 341 (T.C.C.), and therefore the appellant must establish, independent of subsection 88(1), that the land formed part of its inventory in accordance with normal business principles. This did not happen here because the transaction was loss driven; it was entered into for the sole purpose of utilizing a loss arising directly from the cost which it seeks to be deductible for tax purposes. Any ambiguity concerning the applicability of subsection 88(1) is resolvable through a contextual examination of the section 88 rollover provisions within which it is found; Hickman Motors, supra.

Appellant's counsel urged that the facts mandate an entirely different approach to the matter. When Fraserview was wound-up the cost of the land mechanically moved up to and became the appellant's cost by specific dictates of subsection 88(1). The fiscal consequences that the Minister disavows are attributable solely to the automatic workings of subsection 88(1) via its deeming provisions which must be given effect; Placements Serco Ltée v. The Queen, [1988] 1 C.T.C. 213, 88 D.T.C. 6125 (F.C.A.) and R. v. Verrette, [1978] 2 S.C.R. 838, 85 D.L.R. (3d) 1 at page 845 (D.L.R. 15). As the appellant did not disburse, outlay or expend anything for the land, but rather had inherited the cost as deemed, paragraph 18(1)(a) is not applicable. Further and in any event, the loss arising from the appellant's sale of the land was a simple mathematical calculation being the difference between its cost and the sale proceeds. It has been authoritatively established that the cost of inventory is not a "deduction" in computing income; M.N.R. v. Shofar Investment Corp., [1980] 1 S.C.R. 350, [1979] C.T.C. 433, 79 D.T.C. 5347, and Oryx Realty Corp. v. M.N.R., [1974] C.T.C. 430, 74 D.T.C. 6352 (F.C.A.). The Hickman Motors case, supra, is markedly dissimilar to the situation here in that, inter alia, the deduction therein being sought attracted other and more specific statutory provisions. More significantly, subsection 88(1) by its own terms is expressed to be applicable notwithstanding any other provision of the Act. This includes all of the provisions relied upon to disallow the cost which, if they were applied, would run counter to and thwart tax-free rollovers on corporate liquidations to which subsection 88(1) was purposefully directed. There is no ambiguity here, but if there is it ought to be resolved in favour of the taxpayer; Canterra Energy Ltd. v. The Queen, [1987] 1 C.T.C. 89, 87 D.T.C. 5019 (F.C.A.) and Johns-Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46, [1985] 2 C.T.C. 111, 85 D.T.C. 5373.

Thus far, a capsulization of respondent-counsel's position was that if the land, and therefore its cost, had not formed part of the appellant's business inventory, that would be the end of the whole matter and the appeal should fail for that reason alone. The alternative submission was advanced that subsection 245(1) of the Act applies to preclude deduction of the cost for the reason that it arose out of an artificial transaction which, if allowed, would amount to an undue or excessive reduction to income. The nature of the whole transaction here was artificial which taints the nature of the cost sought to be deducted and causes it too to be artificial; Sour Oil Ltd. v. The Queen, [1981] C.T.C. 336, 81 D.T.C. 5168 (F.C.A.), and The Queen v. Irving Oil Ltd., [1991] 1 C.T.C. 350, 91 D.T.C. 5106 (F.C.A.). The transaction formed no part of the appellant's business and hence was artificial, it being created solely to secure a tax advantage; Bishop (Inspector of Taxes) v. Finsbury Securities Ltd., [1966] 3 All E.R. 105 (H.L.), and FA & AB Ltd. v. Lupton (Inspector of Taxes), [1971] 3 All E.R. 948 (H.L.). Subsection 245(2) is a general avoidance provision which may override deductions otherwise authorized by the statute; The Queen v. Alberta and Southern Gas Co., [1977] C.T.C. 388, 77 D.T.C. 5245 (F.C.A.); aff'd [1979] 1 S.C.R. 36, [1978] C.T.C. 780, 78 D.T.C. 6566.

For the appellant, counsel submitted that his arguments previously advanced are equally supportive of the inapplicability of subsection 245(1) to the facts of this case. Particularly, the subsection 88(1) inherited cost can not be categorized as an outlay, expense or disbursement; The Queen v. Esskay Farms Ltd., [1976] C.T.C. 24, 76 D.T.C. 6010 (F.C.T.D.). Even if that were so, it is not deductible in the computation of income; Shofar Investment and Oryx Realty, both supra. Additionally, it is very significant that where the Act, through its specific dictates, leads to a result, and that result is artificial by design, this artificiality cannot be used against itself; Produits LDG Products Inc. v. The Queen, [1976] C.T.C. 591, 76 D.T.C. 6344 (F.C.A.). While the transaction was without a business purpose other than the tax saving derived by application of the Act, such a test is not a prerequisite; Stubart Investments Ltd. v. The Queen, [1984] S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305. The English cases mentioned by respondent's counsel are distinguishable in fact and in law.

An overview of appellant-counsel’s submission was expressed in the following way in his written memorandum of fact and law:

— As demonstrated above, the cost of the property to the appellant, as specifically determined by subsection 88(1) of the Act, is not a deduction in computing income. As demonstrated above, the cost of the property, as determined by subsection 88(1), is not an “ outlay”, "expense" or "disbursement". Accordingly, regardless of the purpose or motive of the appellant with respect to this transaction, paragraph 18(1)(a) and subsection 245(1) are, by their own terms, inapplicable.

— The appellant states that this appeal may be resolved on the basis set forth above. The appellant also states that the respondent's arguments, if accepted, would lead to a result contrary to the scheme of subsection 88(1) of the Act.

(a) In 1971, provisions were introduced for the tax-free transfer of property. Thus subsection 85(1) admits of rollovers of property by corporations; section 87 admits of rollovers on corporate amalgamations, subsection 97(2) admits of rollovers on transfers of property to partnerships, and subsection 88(1) admits of tax-free rollovers on corporate liquidations. The underlying purpose of all of those sections is to defer the recognition of gains or losses until the property is ultimately disposed of in a non rollover transaction.

(b) To accomplish that result the Act specifically provides that the property will be transferred at cost and the cost to the transferor will be the cost to the transferee.

(c) Subsection 88(1) is, by its own terms, applicable" notwithstanding any other provision of this Act". Absent such a provision, the tax-free rollover of property on a liquidation could be thwarted. The respondent's argument in this case is a perfect example of why subsection 88(1) is designed to supersede other provisions of the Act. If the respondent's argument were to prevail, then obviously paragraph 18(1)(a) and subsection 245(1) would supersede the specific dictates of subsection 88(1) and the rollover of cost bases from subsidiary to parent would be denied.

For fifty years, Parliament has been concerned with the carry back and carry forward of losses by corporations and the transfer of losses between corporations. There has developed over the years a complex, specific, and arcane body of rules defining what is prohibited with respect to loss transfers.

With the change of the Income Tax Act in 1971 to admit tax-free rollovers between corporations, it became possible for taxpayers to transfer accrued but unrealized losses in transactions much like that before the Court today.

In 1982 Parliament enacted specific legislation to stop such transfers with respect to depreciable property and eligible capital property. No amendment was made at that time to prevent the transfer of accrued losses with respect to capital property or inventory.

In 1987, well after the transaction here in question, Parliament enacted legislation to specifically prohibit the transfer of accrued losses with respect to capital property and inventory. The reassessment by the Minister in this case is an attempt to give retrospective effect to the 1987 amendments.

The specificity of the provisions of subsection 88(1) and the various rules relating to transfers of property with accrued gains and losses as those rules were in 1982, provide a complete code which dictated the results that would follow specific courses of action. In cases such as this where such specific rules apply, that result cannot be thwarted simply for the lack of a business purpose. If the rules need be changed to prevent a result it lies within the command of Parliament to make such changes. Absent such modification by Parliament, the rules must be applied so that any uncertainty or ambiguity will be resolved in favour of the taxpayer.

Respondent's counsel submitted that the 1987 amendments simply reflected and clarified the state of the law as it was in 1982, and that no retrospective concepts are involved.

Analysis

The section 88 rollover provisions

The seminal provision is subsection 88(1), the relevant portions providing:

88. Winding-up.

(1) Where a taxable Canadian corporation (in this subsection referred to as the "subsidiary") has been wound up after May 6, 1974. . . notwithstanding any other provision of this Act, the following rules apply:

(a). . . each property of the subsidiary that was distributed to the parent on the winding-up shall be deemed to have been disposed of by the subsidiary for proceeds equal to,

(iii) . . . the cost amount to the subsidiary of the property immediately before the winding-up;

(c) the cost to the parent of each property of the subsidiary distributed to the parent on the winding-up shall be deemed to be the amount deemed by paragraph (a) to be the proceeds of disposition of the property. . . .

The subsection 88(1) rules deem a disposition by the subsidiary for proceeds equal to its cost amount at that time, with a mirror image in favour of the acquiring parent. In tax vernacular it is a rollover provision which, if all of its conditions are met, deems a disposition and acquisition to have occurred at the subsidiary’s cost, and to defer its fiscal consequences until the property has been actually disposed of by sale or otherwise. It is not an elective provision. It operates automatically upon all of its conditions being met which is the situation here. Where it does not apply, the subsidiary’s property is deemed to have been sold at its fair market value immediately before its winding-up.

A strong inference arises which is not readily discounted that one important rationale underlying subsection 88(1) includes statutory recognition that a subsidiary, prior to the wind up into its parent, may have then been possessed of non-capital property afflicted by an accrued loss which would be lost if it was sold by it before the wind up. This conclusion arises upon examination of other provisions in the Act. A taxpayer's ability to deduct non-capital losses and net capital losses, retrospectively and prospectively, appears within section 111 of the Act. If Fraserview had sold the land in 1982 at fair market value, section 111 would have been of no benefit to it because it had no income for set off purposes and its realized loss would have been completely lost. Following the wind up, subparagraph 88(1.1)(e)(i) precluded the appellant's utilization of the realized loss unless it had carried on Fraserview's business for profit or with a reasonable expectation of profit. Thus the financial extent of the subsection 88(1) deferral would be significantly affected if fair market values were to be the cost amount, and thus the rationale for the deeming provisions and the overriding prescription that it is to apply notwithstanding any other provision of the Act.

I do not agree that the 1987 amendments merely clarified what was otherwise the state of the law in 1982 as argued by respondent's counsel. They go much farther in that if the subject transactions had occurred thereafter the subsidiary’s inventory must be valued at fair market value. Accordingly after 1987, accrued and unrealized losses on inventory could not pass up to the parent on a wind up but rather remained with the subsidiary. The 1987 amendments were substantive. They went beyond mere clarification or codification of the existing state of the law by materially changing its impact on the subsidiary and on the parent. These were known as the new stop-loss or anti-avoidance rules and were publicly touted to preclude the results of the very situation at hand. Appellant's counsel forcefully urged that if the land was neither capital property nor the subject of an adventure in the nature of trade then, by definition, it must be inventory which is precisely how it was accounted for. Unfortunately the 88(1) rollover provisions do not say exactly that, and hence this litigation. I would add that there is no reason to believe Parliament would be unaware that the cost amount as deemed could, at any time and from time to time, greatly exceed fair market value amounts.

Respondent's counsel cited Hickman Motors Ltd., supra, as authority to be followed where, if there is ambiguity as to the subsection 88(1) effects, that its resolution lies within the other rollover provisions appearing in section 88. In that case the taxpayer claimed an entitlement to capital cost allowance under the auspices of section 88 of the Act. Depreciable capital property had been acquired by it via a wind-up of its subsidiary, held for a few days over its fiscal year end, and then transferred to another related company, all with no operative intent of their use for the purpose of gaining or producing income during that time. Counsel's arguments there were similar to those advanced here, namely that since those assets were transferred in the course of a wind-up of the kind contemplated by section 88 which provided automatic rollover provisions, it was thereby unnecessary to establish that they were acquired by the parent to produce income.

In the course of his judgment, Joyal, J. replicated subsection 88(1.1) which counsel had cited to him. He also replicated paragraph 20(1)(a) of the Act and 1102(1)(c) of the Regulations because they dealt specifically with capital cost allowances and their restrictability to property being used to gain or produce income from a business. Paragraph 88(1.1)(c) and subparagraph (e)(i) were noted by Joyal, J. to restrict the deductibility of non-capital losses to the continuance of business purpose by the parent. Whereas it was observed that subsection 88(1.1) did not clearly require that the parent must have acquired depreciable capital assets for the purpose of producing income, on examination of paragraph 88(1.1)(c) he opined that it was interpretable as requiring a business use for capital cost allowance deductibility on the part of the parent. He said at page 43 (D.T.C. 5045):

It seems to me, therefore, that the principle of a continuing business being carried on by a parent is preserved in that particular enactment. At least it gives strength to the proposition that the rollover provisions are only triggered off when the capital assets transferred from a subsidiary to a parent are used in the parent's business, a condition which I have found on the facts has not been met.

Such an interpretation is also consonant with the more generic principle underlying capital cost allowances under the Income Tax Act that capital assets may be depreciated only when used in the business.

and at pages 44-45 (D.T.C. 5046):

It follows that a Court should be wary of countenancing an ingenious application of a particular statutory provision which goes against the grain as it were of the more general principles underlying the whole scheme of Canadian taxation. This kind of curial discipline was aptly expressed by Lord Reid in Greenberg v. I.R.C., [1971] 3 All E.R. 136 at page 149 (H.L.), as cited in Stubart Investments Ltd. v. The Queen, supra, at pages 560-61 (C.T.C. 306-07, D.T.C. 6315):

We seem to have travelled a long way from the general and salutary rule that the subject is not to be taxed except by plain words. But, I must recognize that plain words are seldom adequate to anticipate and forestall the multiplicity of ingenious schemes which are constantly being devised to evade taxation. Parliament is very properly determined to prevent this kind of tax evasion, and if the courts find it impossible to give very Wide meanings to general phrases the only alternative may be for Parliament to do as some other countries have done and introduce legislation of a more sweeping character, which will put the ordinary well-intentioned person at much greater risk than is created by a wide interpretation of such provisions as those which we are now considering.

This is not to suggest that section 88 of the Act is a trap to any taxpayer who decides to follow that route. On the other hand, we are not dealing here with an accumulation of capital losses, but with the transfer of capital assets where depreciation allowances are statutorily limited to those capital assets used in the business. Unless found to be used in the business, no capital loss allowances may be claimed. Having found that the assets involved could not have been realistically used in the plaintiff's business, the statutory condition has not been met.

[Emphasis added.]

With respect to the following remarks of Joyal, J. found on page 44 (D.T.C. 5045), respondent's counsel invited the Court to infer that it was subsection 88(1) and not 88(1.1) which was really being flagged. I am uncertain that this was so given the last sentence of his observations. It states:

Although it is an obvious challenge to apply this rule to the abstruse and esoteric language of section 88, it nevertheless seems to me that the technical approach urged by the plaintiff must be consonant and consistent with the more generic provisions of the statute. I conclude that the specific processes found in subsection 88(1.1) with respect to the rollover of assets and liabilities can only be applied in light of the other provisions of the Act which I have cited. To do otherwise would simply result in artificiality and create an imbalance or nonconformity in the application of the more generic provisions of the statute which Parliament had no intention of creating.

Counsel omitted reference to the last sentence of that paragraph which states:

I also note that whereas subsection 88(1) contains a“ notwithstanding any other provision of this Act" clause, subsection (1.1) does not.

Rather, counsel focused his submissions on the generic sourcing principles reflected in the earlier parts of the paragraph and argued that, with respect to the appellant's situation, the source principles are within subsection 9(1) and subsidiarily within paragraph 18(1)(a) of the Act which preclude deductibility of the cost amount unless the land was acquired for the purpose of profit from a business it was carrying on. Any ambiguity, he said, ought to be resolved in the same method as employed in the Hickman Motors case, supra.

In my opinion counsel is drawing a long bow out of that decision in as much as it was dealing with entitlement to capital cost allowances which are themselves subjected to specific statutory restrictions elsewhere and which are generally not the underlying subject matter of fiscal rollover objectives. Capital cost allowance entitlements normally arise out of capital property ownership and usage. They are not capital or non-capital property per se which the present case is all about.

Similarly, the Bowes & Cocks Ltd. case, supra, concerned deductibility for interest on funds borrowed by the taxpayer for the purposes of financing a subsection 88(1) rollover plan identical in nature to the one in this case. Paragraph 20(1)(c) of the Act targeted interest deductibility which proved fatal to that taxpayer's claim because its conditions could not be met.

At this juncture it is important to recognize that what this case is really about is the appellant’s purported inability to utilize the deemed cost amount against its actual proceeds of disposition. If the Minister is correct in his approach, then in principle the appellant would have full proceeds of disposition receipted without any cost offset. While the appellant claims to be entitled to a deduction for the net loss arising out of the sale of the land, the Minister through the disallowance of this net loss has effectively ignored all aspects of the transaction. No question or issue concerning the nature or characterization of the appellant's proceeds of disposition arises here. In any event, any allowance of a sufficient cost amount to simply offset these proceeds, as a matter of equity, is not an available premise here. This anomaly did not arise in the Hickman Motors, supra, situation.

Clarity and easy comprehensiveness does not arise within section 88 which purports to formulate very complex rules, conditions and restrictions regarding specific properties passed-up to the parent. That one or all may present a '"flavour" is of little real assistance. While Joyal, J. in Hickman Motors, supra, at page 44 (D.T.C. 5045) said he found “no route to enlightenment when dealing specifically with undepreciated capital cost allowances”, he felt he was able to resolve a perceived ambiguity because of and through clearly worded specific sourcing provisions in the Act as well as inferentially within subsection 88(1.1) itself. As noted earlier, respondent's counsel argued that the Act's subsection 9(1) and paragraph 18(1)(a) were the sourcing provisions to be utilized in the resolution of the ambiguity. Indeed, he had already postulated that these provisions superseded all others in any event because they house all of the fundamental business purpose principles which must govern this case. These provisions will be examined next.

Paragraph 18(1)(a): expense deductions

Paragraph 18(1)(a) is not without its own problems. It reads:

18.(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property.

[Emphasis added.]

Two long-standing, highly authoritative decisions, Oryx Realty Corp., supra, and Shofar Investment Corp, supra, have firmly established that the cost of inventory is not an “outlay” or "expense" made or incurred that is a "deduction" in the computation of income.

To repeat, it is the deemed cost amount that is being disavowed to the appellant. Clearly, the appellant did not make or incur any outlay or expense as these acts had already been done by Fraserview. The deemed cost of the land was no more than an aggregate of the various expenditures previously made; it was representative of a mathematically derived cost amount which the appellant inherited by operation of the Act.

In Esskay Farms Ltd., supra, at page 36 (D.T.C. 6017) Cattanach, J. was considering the applicability of subsection 137(1) [now 245(1) infra], to the facts of that case. One of the reasons given for its inapplicability was that:

[t]he word “disbursement” in common parlance means "money paid out, an expenditure" and the word "expense" also in common parlance means "money out of pocket". I see no valid reason for ascribing any other meaning to those words as used in the context of section 137(1).

Similarly in Mckee v. The Queen, [1977] C.T.C. 490, 77 D.T.C. 5345 (F.C.T.D.), wherein the taxpayer sought to deduct capital cost allowances arising out of his investment in a motion picture syndicate, Addy, J. in considering the applicability of that same provision and the obiter expressed by the Supreme Court in Harris v. M.N.R., [1966] S.C.R. 489, [1966] C.T.C. 226, 66 D.T.C. 5189 at page 505 (C.T.C. 241-42, D.T.C. 5198) that the words "disbursement or expense made or incurred" were apt to include a claim for capital cost allowance, concluded at page 494 (D.T.C. 5347):

It seems abundantly clear that the common ordinary meaning of the word "expense" pertains to a payment, an outlay of money and expenditure or that which has created a liability or which might have necessitated the transfer of some assets in payment therefor. It can also mean the cost of a thing or whatever must be given up or surrendered for it. The word "disbursement" is even more indicative of an immediate outlay or payment and signifies an expenditure.

He went on to observe that an allowance in respect of a capital cost could not itself be the cost and thus these concepts could not be synonymous.

In the case at bar, the deemed cost of the land to the appellant arose simply by operation of subsection 88(1) which preserved an aggregate amount expended or outlayed by Fraserview for rollover purposes. To infer that this created a statutory synonymity between the words "outlay or expense made or incurred” by Fraserview to the appellant's "cost amount" as deemed would require an uncalled for reading out of the words "by the taxpayer" following the words "made or incurred” in paragraph 18(1)(a).

Section 9: income and profit

Subsection 9(1) of the Act provides:

9 (1) Subject to this Part, a taxpayer's income for a taxation year from a business or property is his profit therefrom for the year.

The denial of the appellant's ability to utilize the cost amount of the land was focused on the appellant's lack of intent and its known inability to earn a profit therefrom. In other words the deemed cost amount, which unquestionably had then exceeded the fair market value amount, is deniable pursuant to subsection 9(1) because the income therefrom, by design, could not have conceivably produced a profit on its pre-arranged disposition.

This self same argument was advanced on behalf of the respondent in the recently reported case of Mark Resources Inc. v. Canada, [1993] 2 C.T.C. 2259, 93 D.T.C. 1004 (T.C.C.) wherein it was averred that since, by design, the interest paid by that taxpayer on the borrowings could never exceed the expected dividend returns from its subsidiary and thus produce a profit, subsection 9(1) would operate to preclude its deductibility. Respondent-counsel's argument here encompasses precisely the same assumptive inferences, recognized and rejected by Bowman, J., that section 9 purports to define income from a business or property that must be applied throughout the Act in the absence of a contrary intention.

While this decision antedates this case, the analysis and conclusion on this point are jurisprudentially sound and are particularly applicable to question the soundness that subsection 9(1) would conclude the case against the appellant on all grounds. At page 2274 (D.T.C. 1015) Bowman, J. concluded:

. . . the interpretation contended for by the respondent in my view attributes to section 9 an effect that ignores its purpose. Its purpose is not to define income. Rather it emphasizes that in the computation of income one must apply, subject to the Act, ordinary principles of commercial accounting so far as applicable and in conformity with the rules of the Income Tax Act".

To carry those principles into this case, subsection 88(1) is a rule within the Act which, by its own terms, is expressed to operate notwithstanding any other provision of the Act and is tacitly included in the opening words of subsection 9(1) stating that it is subject to Part I of the Act. Thus, it may well be that the inherent principles within subsection 9(1), as broad and general as the authorities say they are (as for example in Royal Trust Co., supra, at page 40-42 (D.T.C. 1060), get caught up and remain within a circular analysis if the subsection 88(1) deeming provisions are not to be ignored. In other words, reliance upon subsection 9(1) analytically begs the question. This lends support to the conclusion that subsection 9(1) may well have been purposefully pre-empted by subsection 88(1) in order to preserve the integrity of its rollover provisions. To use appellant-counsel's words, subsection 88(1) "drives the results”. Needless to say I am without the comfort enjoyed by Joyal, J. in Hickman Motors, supra, by being able to point to very clear and specific statutory enactments concerning the subject matter itself.

The House of Lords’ decisions cited by respondent's counsel, Finsburg Securities, supra, and FA & AB, supra, were put forth in support of the proposition that if a transaction concerning property was devoid of the ordinary and normal badges of trade it would not be a trading transaction and the property would not be regarded as stock-in-trade.

In my view these cases are distinguishable in fact and in law and therefore are of no help here. Both judgments referenced the tax avoidance aspects of the scheme, however those purposes were not perceived to be fatal. Both cases involved forward-stripping transactions under which, inter alia, the future interests of the vendors of the shares sold to the taxpayers were being safeguarded and also under which the vendors were to be saved from tax exposure. The issue to be resolved arose out of the opening words of the applicable legislation [Income Tax Act (U.K.), 1952, c. 10, section 341], "where any person sustains a loss in any trade, profession, employment or vocation . . .” which focused precisely on whether the subject share transactions could be regarded as trading transactions of a kind undertaken by a dealer in shares and securities. The decision was negative and the taxpayers were unsuccessful. Fiscal rollover principles were not involved.

Conclusion: 9(1) and 18(1)(a)

In view of all of the above, and bearing in mind that the want of legislative clarity or explicitness giving rise to reasonable uncertainty normally augers against the taxing authority, Canterra Energy Ltd., supra, I am unable to conclude that either of these provisions precludes the appellant's usage of the deemed cost as against its proceeds of disposition.

Section 245: artificial transactions

The last arrow in the Minister's quiver arose out of the purported applicability of subsection 245(1). The Federal Court of Appeal in Alberta and Southern Gas, supra, has determined that, given its context in the overall scheme of the Act, subsection 245(1) is of application to every class of deductible expense, including those statutorily permitted. In 1982 it provided as follows:

245 Artificial transactions.— (1) In computing income for the purposes of this Act, no deduction may be made in respect of a disbursement or expense made or incurred in respect of a transaction or operation that, if allowed, would unduly or artificially reduce the income.

[Emphasis added.]

The definitional issues which arise out of the highlighted words employed in this provision are identical to those previously raised and analyzed, and no compelling reasons have been advanced as to why those conclusions ought to be any different for this provision. To repeat, the cost of inventory is not a “deduction” in the computation of income, and the inherited deemed cost amount is not in respect of a“ "disbursement or expense made or incurred”. That the words "by the taxpayer" are omitted is of no significant import here.

It was argued that the loss amount claimed was artificially derived and that allowance of the deemed cost would result in an undue or excessive reduction in income. While that may be the result, it ignores the reality that the amount of that cost was not created by any act on the part of the appellant but rather was the product of a statutory deeming provision which must be given effect, Verrette, supra, and Placements Serco Ltée, supra, which the appellant recognized and utilized in its favour.

Further, it has been authoritatively determined that tax considerations motivating a transaction or events play an insignificant if not inconsequential role; Alberta Southern Gas, supra. The scheme or transactions here were not shams. They were real and legally effective; they did not feign or simulate the cost amount of the land either to Fraserview or to the appellant. They did not, in a circular fashion or otherwise, alter, change, fabricate or generate that which was not previously there. The sole substantive change that arose from the transactions was the appellant's ability to utilize the cost amount of the land by and through the operation of the Act. Artificial? I think not.

The meaning of the terms undue" and artificial" were considered in Spur Oil Ltd., supra, at page 343 (D.T.C. 5173):

. . . the finding of artificiality in the transaction being examined, does not, per se, attract the prohibition set out in subsection 137(1) [now 245(1)] of the Income Tax Act. To be caught by that subsection, the expense or disbursement being impeached must result in an artificial or undue reduction of income. “ Undue” when used in this context should be given its dictionary meaning of excessive". . . . Turning now to"artificial", the dictionary meaning when used in this context is, in my view, "simulated" or "fictitious" . . .

[Emphasis in original.]

On this subject Bowman, J. in the Mark Resources Inc. case, supra, at pages 2266-67 (D.T.C. 1009-10) opined:

It is fair to say that artificiality is in the eye of the beholder, and where one draws the line between "acceptable" and “ unacceptable” tax avoidance schemes is a matter of perception. In that determination the fact that the scheme may have been predominantly or exclusively fiscally motivated plays a minor or even a nonexistent role. [footnote omitted] What is of far greater importance is whether the scheme falls within accepted norms of commercial reality. The 200 year lease option in Harris, supra, on the face of it was not within those bounds. Similarly, in Consolidated-Bathurst Ltd. v. The Queen, [1987] 1 C.T.C. 55, 87 D.T.C. 5001 (F.C.A.), a guarantee by the insured of the reinsurer's obligations to the primary insurer was held not to be within ordinary principles of commercial usage within the insurance industry. In Irving Oil, supra, the purchase of crude oil from a subsidiary at a price that was found by the trial judge to be fair market value appeared to the Federal Court of appeal to offend no principles of commercial normality.

Wherein, then, lies the artificiality in this case? They were real transactions. The artificiality, if I understand the respondent's argument correctly, must consist in the overall objective of utilizing the U.S. subsidiary's losses in Canada and the attainment of that end by borrowing at a rate that was higher than the anticipated return, all in accordance with a prearranged plan.

Considered separately neither of these elements justifies a disallowance of the interest paid under subsection 245(1). The tax considerations that motivated the arrangement by itself do not by themselves bring it within the ambit of subsection 245(1). The borrowing at a rate that does not and cannot yield an economic return as a means of achieving a predetermined economic result is in itself not artificial. To hold that this scheme failed for artificiality would be to ignore the decision of the Federal Court of appeal in Irving. If the Irving scheme was not artificial this one cannot be.

Footnote 1 at page 2267 (D.T.C. 1010) in Judge Bowman's reasons, while clearly obiter, are particularly apt to the appellant's case. He observed:

The emotive and somewhat pejorative connotations of such expressions as "tax avoidance scheme" do not assist particularly in a rational analysis of the problem. Even if there were any place in the analysis of the consequences of tax motivated arrangement for assessing some level of fiscal reprehensibility, which I doubt, I should think that the absorption of business losses within a corporate group would rank rather low. There is nothing particularly sinister about using the rules of a highly specific taxation statute to achieve such a result provided that the transactions are real and legally binding and are not contrary to the scheme of the Act as a whole. It was, after all, a scheme to achieve precisely that objective that was held acceptable by the Supreme Court of Canada in Stubart, supra. There is a world of difference between the creation of artificial deductions and losses out of thin air and the utilization of legitimately incurred losses within a related group.

In Irving Oil Ltd., supra, at page 358 (D.T.C. 5112) Mahoney, J. speaking for the Court said:

In my respectful opinion, the learned trial judge was plainly wrong in finding, on a balance of probabilities and having regard to the totality of the evidence, that Irvcal had a bona fide business purpose. I, therefore, propose to approach the remaining issues on the basis that what was concocted and carried out was a tax avoidance scheme, pure and simple, as conceived in the so-called "Irvcal proposal", recited above.

Be all that as it may, a transaction or arrangement does not fail effectively to avoid tax simply because it lacks a bona fide business purpose. That heresy was put to rest by Estey, J., in Stubart, supra, at page 575 (C.T.C. 314-15, D.T.C. 6322):

I would therefore reject the proposition that a transaction may be disregarded for tax purposes solely on the basis that it was entered into by taxpayer without an independent or bona fide business purpose. A strict business purpose test in certain circumstances would run counter to the apparent legislative intent which, in the modern taxing statues, may have a dual aspect. [sic] Income tax legislation, such as the federal Act in our country, is no longer a simple device to raise revenue to meet the cost of governing the community. Income taxation is also employed by government to attain selected economic policy objectives.

Likewise here, as in Irving Oil, and I am paraphrasing, Parliament presumably had (until 1987) a policy objective obviously unrelated to the raising of revenue in maintaining a parent's ability to utilize its subsidiary's unrealized non-capital losses following its wind up into the parent.

Conclusion

I conclude that the appellant is entitled to deduct the deemed cost amount as determined by subparagraph 88(1)(a)(iii) of the Act of $7,577,175 respecting the Maple Ridge property from its proceeds of disposition of $3,022,970 and that the appellant has thereby incurred a non-capital loss for tax purposes for its 1982 taxation year in the amount of $4,554,205. In my opinion this result is not repugnant or inconsistent with the object and spirit of the Act as a whole nor with Parliament's intent.

Decision

For the foregoing reasons, the appeals are allowed for each of the 1982, 1983, 1987 and 1988 taxation years and the matters are referred back to the Minister of National Revenue for reconsideration and reassessment in a manner not inconsistent with these reasons.

The appellant is entitled to its costs on a party-to-party basis.

Appeal allowed.