Date: 19980702
Docket: 96-4254-IT-G
BETWEEN:
ELAN DEVELOPMENT LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] These appeals are in respect of the Appellant’s
1991, 1992 and 1993 taxation years.
[2] In computing income for the 1991, 1992 and 1993 taxation
years, the Appellant, Elan Development Ltd. (“Elan”),
claimed the small business deduction.
[3] In reassessing the Appellant for the 1991, 1992 and 1993
taxation years, the Minister of National Revenue (the
“Minister”) disallowed the said deduction.
FACTS
[4] At the hearing, the parties filed a Statement of Agreed
Facts. It reads:
1. The Appellant, Elan Development Ltd., was incorporated
pursuant to the law of the Province of Manitoba;
2. Throughout 1991, 1992 and 1993, 67847 Manitoba Ltd.,
incorporated pursuant to the laws of Manitoba, was the sole
shareholder of the Appellant;
3. Throughout 1991, 1992 and 1993, Norbert Hansch was the sole
shareholder of 67847 Manitoba Ltd.;
4. Ernst Hansch Construction Ltd. was incorporated pursuant to
the laws of the Province of Manitoba;
5. Throughout 1991, 1992 and 1993, 50% of the shares of Ernst
Hansch Construction Ltd. were owned by NH and 21% were owned by
MP.
6. MP is the brother-in-law of NH and was so related
throughout 1991, 1992 and 1993.
7. In computing income for the 1991, 1992 and 1993 taxation
years, the Appellant claimed the small business deduction.
8. By Notices of Reassessment dated July 31, 1995 the Minister
of National Revenue reassessed the Appellant on the basis that it
was associated with Ernst Hansch Construction Ltd. throughout the
taxation years 1991, 1992 and 1993 by reason of paragraph
256(1)(d) of the Income Tax Act R.S.C. 1985, chapter 1 (5th
Supp.) (the “ACT”) and disallowed the said
deduction.
9. On October 30, 1995, the Appellant filed Notices of
Objection with the Minister of National Revenue, objecting to the
said reassessments.
10. By Notification dated August 14, 1996 the Minister
confirmed the said reassessment pursuant to paragraph 256(1)(d)
and subsection 125(3) of the Act.
ISSUE
[5] The issue in these appeals is whether paragraphs
251(6)(a) and (b) and subparagraph
55(5)(e)(i) of the Income Tax Act (the
“Act”) are contrary to section 15 of the
Canadian Charter of Rights and Freedoms (the
“Charter”) and as a result whether the
Appellant is thus entitled to the small business deduction.
ANALYSIS
[6] Section 125 of the Act allows a Canadian-controlled
private corporation to deduct a business limit of $200,000.
[7] The purpose of section 125 is to give preferential tax
treatment to Canadian-controlled private corporations including
the small business deduction. However, by virtue of the
provisions of section 125 and in particular
subsections 3 and 4 thereof, that deduction cannot be shared
by companies that are associated.
[8] The purpose of section 256 of the Act is to
discourage the multiplication of corporations carrying on
business in order to get greater advantage from the lower tax
rate.
[9] In this case, the Appellant claimed the said deduction.
The Minister disallowed the deduction on the basis that the
Appellant is an associated corporation as defined by paragraph
256(1)(d) of the Act. Consequently, pursuant to
subparagraphs 251(6)(a) and (b), the shareholders
of Ernst Hansch Construction Ltd., Mr. Norbert Hansch and
his brother-in-law, Mr. Manfred Pflug, are connected.
[10] The Appellant submits that paragraphs 251(6)(a)
and (b) of the Act violate subsection 15(1) of the
Charter.[1]
Paragraphs 251(6)(a) and (b) of the Act deem
brothers and brother-in-laws to be related and thus not dealing
at arm’s length. The Appellant argues that these provisions
discriminate brothers and brother-in-laws from other taxpayers.
In addition, the Appellant alleges discrepancy of treatment in
the Act. It submits that while paragraphs 251(6)(a)
and (b) deem brothers and brother-in-laws to be related,
subparagraph 55(5)(e)(i) of the Act deems brothers
and sisters to be not related with each other.
[11] Subsection 55(2) of the Act is an anti-avoidance
provision which has the effect of converting certain tax-free
dividends into (taxable) capital gains. The object is to prevent
capital gains stripping.
[12] The Minister’s reassessment does not rely on
subparagraph 55(5)(e)(i). As it was not relied on by the
Minister to reassess the Appellant, there is no factual
foundation upon which the Court can determine the
constitutionality of that section. Charter decisions are
not made in the factual vacuum.[2] Moreover, this subparagraph was not in force
during the material taxation years.
[13] Section 256 of the Act provides for circumstances
in which two corporations are associated. In the case at bar, the
Appellant is an associated corporation under paragraph
256(1)(d) of the Act. The purpose of the rules
provided in section 256 is to prevent the multiplication of the
small business deduction through the use of more than one
corporation to carry on business activities. Paragraph
256(1)(d) of the Act refers to the concept of
‘related persons’. This term arises in a number of
provisions in the Act. Most of these provisions are
designed to prevent tax avoidance. The different groups of
persons enumerated under subsection 251(6) of the Act are
deemed to be related, thus not dealing with each other at
arm’s length. Accordingly, if two or more persons are
related as defined in subsection 251(6), they will not be dealing
at arm’s length, regardless of the actual dealings between
them.
[14] In determining whether a provision violates subsection
15(1) of the Charter, the Supreme Court of Canada
established a test in Andrews v. Law Society of British
Columbia, [1989] 1 S.C.R. 143. At pages 174-175,
McIntyre, J. gave the following definition of
discrimination:
I would say then that discrimination may be described as a
distinction, whether intentional or not but based on grounds
relating to personal characteristics of the individual or group,
which has the effect of imposing burdens, obligations or
disadvantages on such individual or group not imposed upon
others, or which withholds or limits access to opportunities,
benefits, and advantages available to other members of society.
Distinctions based on personal characteristics attributed to an
individual solely on the basis of association with a group will
rarely escape the charge of discrimination, while those based on
an individual’s merits and capacities will rarely be so
classed.
[15] In Ontario Public Service Employees Union et al. v.
The National Citizens Coalition Inc. et al., 87 DTC 5270
(Ont. H.C.), affirmed by the Ontario Court of Appeal (90 DTC
6326), Galligan, J. of the Ontario High Court comments at page
5272:
The Income Tax Act is full of examples where one
taxpayer for certain reasons has certain deductions which another
taxpayer does not have. Also, certain taxpayers are called upon
to pay more taxes than others. Some taxpayers are called upon to
pay taxes at a higher rate than others.
[16] Undoubtedly, paragraphs 251(6)(a) and (b),
as well as subparagraph 55(5)(e)(i), of the Act do
make a distinction between persons related by blood or marriage
from other taxpayers. The same issue has been raised in different
cases. The question of discriminatory distinction in the
Act was dealt with in The Queen et al. v.
Thibaudeau, 95 DTC 5273 (S.C.C.). The Supreme Court of Canada
held that the creation of distinctions is inherent in the
Act and does not violate section 15 of the
Charter. Gonthier, J. stated at page 5280 that:
It is of the very essence of the ITA to make distinctions, so
as to generate revenue for the government while equitably
reconciling a range of necessarily divergent interests. In view
of this, the right to the equal benefit of the law cannot mean
that each taxpayer has an equal right to receive the same
amounts, deductions or benefits, but merely a right to be
equally governed by the law. The basic purpose of s. 15 of
the Charter was explained by McIntyre, J. in
Andrews,supra, at p. 171:
It is clear that the purpose of s. 15 is to ensure equality in
the formulation and application of the law. The promotion of
equality entails the promotion of a society in which all are
secure in the knowledge that they are recognized at law as human
beings equally deserving of concern, respect and
consideration.
That being the case, one should not confuse the concept of
fiscal equity, which is concerned with the best distribution of
the tax burden in light of the need for revenue, the
taxpayers’ ability to pay and the economic and social
policies of the government, with the concept of the right to
equality, which as I shall explain in detail later means that a
member of a group shall not be disadvantaged on account of an
irrelevant personal characteristic shared by that group.
[17] A similar issue was dealt with in Laflamme v.
M.N.R., 93 DTC 50 (T.C.C.). Watson, D.J.T.C.C. examined the
constitutionality of subsection 15(2) of the Act
which refers to the concept of ‘related persons’
under subsection 251(1) of the Act. At page 53, he
says:
A distinction made on the basis of a blood relationship or
dependence to a shareholder is directly relevant to this purpose.
It follows that the legislator has distinguished shareholders and
persons connected to shareholders in this Act because they are
best placed to take advantage of their controlling position.
[18] And at pages 53-54, he says:
Under subsection 15(2) of the Income Tax Act, all
shareholders and persons connected with a shareholder are treated
in the same way without discrimination based on one of the
grounds of discrimination mentioned in subsection 15(1) of the
Charter or a ground similar to those mentioned. The fact hat a
“connected” person is treated differently from a
person not so connected, or that a shareholder or employee
receives different treatment from someone not a shareholder or
employee, is not discrimination. Within the class of persons
affected by subsection 15(2) of the Income Tax Act, there
is equal treatment, equal protection and equal benefit without
discrimination.
[19] Furthermore, it is well established that section 15 is
limited to individuals and does not apply to corporations like
the Appellant. In Edmonton Journal v. Alta. (A.G.), [1989]
2 S.C.R. 1326, the Appellant argued that section 30 of the
Alberta Judicature Act contravenes subsection 2(b)
and section 15 of the Charter which respectively guarantee
the right of freedom of expression and legal equality. While the
Supreme Court of Canada held that section 30 of the Alberta
Judicature Act infringes subsection 2(b) of the
Charter, LaForest, J. concluded, at page 1382, that
“s. 15 [of the Charter] is limited to individuals,
it does not apply to corporations like the appellant”.
Therefore, section 30 of the said Act does not infringe section
15 of the Charter. See Canada (Minister of Industry,
Trade and Commerce) v. Central Cartage Co. et al (No.
1) 109 N.R. 357 (F.C.A.).
[20] Notwithstanding this jurisprudence the Appellant submits
this case is a unique circumstance and the Charter applies
because the corporation’s status is based on individuals.
This may be a unique circumstance, but this does not change the
fact that the Charter does not protect corporations.
[21] Hence, I conclude that individual distinctions affecting
the Appellant’s status does not bring it under the
Charter.
SUMMARY
[22] The constitutionality of section 55(5)(e)(i)
cannot be considered by this Court as it was not the basis of the
assessment in dispute and notwithstanding a corporation is not
protected by the Charter.
[23] The comparison section 15 analysis undertaken in relation
to subsections 251(6)(a) and (b) by the Appellant
in its submission pursuant to the tests set forth in
Andrews (supra) and Thibaudeau
(supra) lead to a conclusion the Act makes
distinctions but those distinctions are not based on irrelevant
personal differences. As such, those distinctions are not
discriminatory within the meaning of subsection 15(1) of the
Charter.
[24] Lastly, as set forth the Charter does not confer
protection to corporations.
[25] Thus, I conclude, for these reasons, that there is no
infringement of section 15 of the Charter.
DECISION
[26] The appeals are dismissed.
Signed at Ottawa, Canada, this 2nd day of July 1998.
“D. Hamlyn”
J.T.C.C.
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