Date: 19980203
Docket: 96-3721-IT-I
BETWEEN:
TIPSTER INVESTMENTS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Sarchuk, J.T.C.C.
[1] This is an appeal by Tipster Investments Ltd. (Tipster)
from assessment no. 8649272 dated February 8, 1995.
[2] The essential facts are not in dispute. Tipster is a
Canadian-controlled private corporation. At all relevant times,
Gordon F. Roper (Roper) was its President, sole shareholder and
director. In its T2 corporate income tax return for the fiscal
year ending December 30, 1991, Tipster claimed and was allowed an
allowable business investment loss (ABIL) in the amount of
$10,540.12. This amount was based on a business investment loss
(BIL) in the amount of $14,053.50 calculated pursuant to
subsection 38(c) of the Income Tax Act (the
Act) as follows:
Business Investment Loss (BIL) $14,053.50
x .75
Allowable Business Investment Loss $10,540.12
The difference being $3,513 (rounded off)[1] represents the non-allowable
portion of the business investment loss.
[3] On December 28, 1993, by the resolution of the director,
Tipster declared a capital dividend[2] payable in the amount of $45,543.95
on December 30, 1993 on its Class A common shares, representing
the balance of its capital dividend account. In accordance with
the requirements of the Act, Tipster filed with the
Minister of National Revenue (the Minister), a T2054 - Election
in Respect of a Capital Dividend under subsection 83(2), a
certified copy of the resolution, and a schedule illustrating the
computation of Tipster’s capital dividend account.[3]
[4] The Respondent and the Appellant do not disagree with
respect to the items which form the balance of the capital
dividend account (CDA) on December 30, 1993. However, it is the
Respondent’s position that the 1991 non-ABIL amount should
have been subtracted from that balance.[4] Failure to do so meant that the
capital dividend declared by Tipster was greater than its CDA
balance in the amount of $3,512.83. Accordingly, the Minister
assessed net federal tax in the amount of $2,634.62 calculated
pursuant to subsection 184(2) of the Act as the excess
amount of the dividend declared subject to Part III tax.
[5] It is Tipster’s position that the capital dividend
which it declared equals the balance of its CDA on December 30,
1993, thus, there was no excess amount subject to Part III
tax. This submission is based on its interpretation of the
definitions of business investment loss and capital dividend
account which is that:
The Act clearly excludes a ‘business investment
loss’ (as defined in paragraph 39(1)(c) of the
Act) from a ‘capital loss’ (as defined in
paragraph 39(1)(b) of the Act). The
‘capital dividend account’ as defined in subsection
89(1) of the Act makes no reference to a ‘business
investment loss’ or paragraph 39(1)(c).
[6] Tipster’s representative argues inter alia
that:
Based on the principle that in reading a statute, one must
presume that each word, phrase, clause and subsection has been
drafted deliberately in order to produce a particular result
(Qit-Fer et Titane Inc. v. Canada (1992) 1 CTC 39, and
(1996) 2 CTC 30 FCA), and in view of the extensive detail of the
definition of the capital dividend account in subsection
89(1), one can presume that Parliament deliberately excluded any
reference to business investment loss from the capital
dividend account definition.[5]
... Paragraph 39(1)(c) contains a definition of
business investment loss which specifically carves out
from capital loss as defined in 39(1)(b) a loss
arising in certain specified circumstances. Accordingly,
considering the entirety of section 39, it is clear that a
capital loss does not include a business investment
loss.[6]
... Paragraph 39(1)(c) carves out a business
investment loss from a capital loss; there is no
similar carve-out of an allowable business investment loss from
an allowable capital loss. In order for section 38 to operate
correctly, a capital loss must be determined after considering
section 39 in its entirety i.e. after carving out a business
investments loss.[7]
... the Appellant’s position is that the ‘carving
out’ of a ‘business investment loss’ from a
‘capital loss’ that occurs in section 39 is
permanent.[8]
and submits that the interpretation advanced is consistent
with the modern interpretative rules of tax law[9] and supports the conclusion that
the definition of capital loss in subsection 248(1) and section
39 excludes a BIL with the result that a BIL has no bearing on
the calculation of the CDA.
[7] The Respondent’s position is that a BIL is a capital
loss and therefore must be considered in the calculation of the
Appellant’s CDA (defined by subsection 89(1) of the
Act). With respect thereto, the Respondent submits the
following:
The BIL must first qualify as a capital loss (“in order
to qualify within paragraph 39(1)(c) [definition of BIL]
you must also come under paragraph 39(1)(b)
[definition of capital loss]”) and is not excluded from the
definition of a capital loss.
The definition of “capital dividend account” in
subsection 89(1) does not specifically refer to BIL’s but
does refer to the amount of the capital loss of the corporation
realized in that period exceeding the total of the part of the
capital loss above that is the corporation’s allowable
capital loss.
An ABIL is not like an ordinary allowable capital loss. An
ABIL can be deducted from all sources of income. The unused
portion of the ABIL can be carried forward 7 years and carried
back 3 years. If the ABIL has not been used after 7 years, it is
carried forward indefinitely as a net capital loss.[10]
The purpose of the BIL scheme was to encourage small business
corporation investment by giving such losses more generous tax
treatments than for ordinary capital losses.
The CDA keeps track of “various tax-free surpluses
accumulated by private corporations”. These surpluses can
be distributed as tax-free dividends to Canadian resident
shareholders.
The rules for determining the balance in the CDA are set out
in subsection 89(1) of the Act. The CDA is calculated (in
part) by subtracting the amount of the non-allowable portion
(25%) of capital losses from the amount of the non-taxable
portion (25%) of the capital gains.
Since an ABIL is a capital loss, a non-ABIL is a non-allowable
capital loss which must be subtracted from the non-taxable
portion of the capital gains. Therefore, Tipster’s non-ABIL
of $3,513.00 of December 30, 1991 must be included in the
calculation to decrease Tipster’s CDA balance of December
30, 1993. Furthermore, the Respondent’s contends that the
capital dividend declared in the amount of $45,543.95 was in
excess of the balance of the CDA on December 29, 1993 in the
amount of $3,512.83. Accordingly, the Respondent’s properly
calculated the Part III tax in the amount of $2,634.62 (75% of
the excess).
Conclusion
[8] The submissions made on behalf of Tipster are based on the
premise that a proper reading of section 39 of the Act
establishes that “a capital loss does not include a
business investment loss”. This premise is not correct.
Considering the provisions of sections 38 and 39 in the context
of the statute, its objective and legislative intent, it is
evident that a BIL is not “carved out” from the
definition of a capital loss for all purposes of the Act
by paragraph 39(1)(c) as contended. The legislation in
issue is clear that in order to qualify as a BIL an amount must
first be a capital loss. If a transaction does not give rise to a
capital loss, or if a capital loss is deemed to be nil, for
example pursuant to paragraph 40(2)(g) of the Act,
no BIL can result. Paragraph 39(1)(c) does nothing more
than create a subcategory of a capital loss for certain types of
property with the specific intention of encouraging investment in
small business corporations by giving such losses more generous
tax treatment than that available for ordinary capital losses.[11]
[9] I turn next to subsection 89(1) of the Act. Capital
gains are only partially taxable. Only 75% of capital gains are
included in income as taxable capital gains and only 75% of
capital losses are allowed as a deduction from taxable capital
gains. The non-taxable portion of such capital gains goes into an
account called the capital dividend account. The purpose of the
CDA is to account for this non-taxable portion of a
corporation’s value. As contrasted to other types, a
dividend paid out of the CDA is tax-free to its Canadian resident
shareholders. Such capital dividend may not exceed the
corporation’s CDA immediately before the dividend becomes
payable pursuant to paragraph 83(2)(a) of the Act.
This restriction exists because the CDA is a notional account
which represents the amount of the corporation’s tax free
value.
[10] Applying the Appellant’s interpretation to the
facts in this case would negate the purpose of the CDA provisions
in the Act because the disposition of certain types of
property which result in a non-ABIL would not be represented in
the balance of the CDA. However, the CDA formula was specifically
drafted to include the non-allowable portion of all types of
capital losses to reduce the amount of a corporation’s
non-taxable value. If the non-allowable portion was excluded from
the calculation of the CDA as the Appellant appears to suggest,
how would this portion of the loss be taken into account with
respect to the corporation’s overall tax-free value? For
the purposes of the CDA, calculation losses which fall within the
definition of a BIL are not distinguishable from other
losses.
[11] With respect to the submission made on behalf of Tipster
regarding the legislative intent underlying sections 38 and 39, I
observe only that no identification or elaboration has been made
of what Tipster perceives to be the purpose or objective of the
relevant provisions. While Notre-Dame de Bon-Secours[12] clearly
states that in interpreting tax statutes the ordinary rules of
interpretation are to be followed that is to be done within the
context of the statute and its legislative intent. The inclusion
of the amount of the non-ABIL in the calculation of the balance
of the CDA is in accordance with the purpose of the CDA notional
account and is not in conflict with the purpose of the BIL scheme
(which concerns the application of an ABIL to all types of
income). As was observed by Counsel for the Respondent, the rules
for determining the balance in the CDA are specifically set out
in subsection 89(1) of the Act which provides that the CDA
is calculated (in part) by subtracting the amount of the
non-allowable portion (25%) of capital losses from the amount of
the non-taxable portion (25%) of the capital gains. Contrary to
the Appellant’s position, in order to subtract the non-ABIL
from the balance of the CDA, it was unnecessary for the drafters
to specifically refer to either an ABIL or a BIL. The inclusion
of capital losses and allowable capital losses in the CDA
definition is sufficient. In my view, the Respondent’s
assessment is consistent with the object and purpose of the
relevant sections. The appeal is dismissed.
Signed at Ottawa, Canada, this 3rd day of February, 1998.
"A.A. Sarchuk"
J.T.C.C.
SCHEDULE “A
Tipster Investments Ltd.
Capital Dividend Account: December 30, 1993
|
|
# shares
|
P.O.D.
|
ACB
|
Gain (loss)
|
|
Southernera Res. Ltd.
|
5,000.00
|
25,750.00
|
7,635.00
|
18,115.00
|
|
Truax Res. Corp.
|
20,000.00
|
15,760.50
|
10,000.00
|
5,760.50
|
|
Paloma Petroleum Ltd.
|
5,000.00
|
29,500.00
|
19,600.00
|
9,900.00
|
|
Alberta Energy Co. Ltd.
|
2,000.00
|
20,300.00
|
19,000.00
|
1,300.00
|
|
Dangerfield Resources Inc.
|
10,000.00
|
11,661.00
|
11,098.66
|
562.34
|
|
Saxon Petroleum Ltd.
Dorset Exploration Ltd.
Pipestone Petes Inc.
Oiltec Resources Ltd.
Atcor Resources Ltd. CIA
|
30,000.00
8,000.00
10,000.00
1,000.00
3,030.00
|
11,200.00
127,185.00
7,477.10
1,237.72
14,716.10
|
10,798.50
53,000.00
10,220.00
1,000.00
11,710.00
|
401.50
74,185.00
(2,742.90)
237.72
3,006.10
|
|
Vero Resources Ltd.
Paragon Petroleum Corp.
Clarinet Resources Ltd.
Non-taxable 25%
CDA dividend received 289872 Alberta Ltd. - June 7,
1993[13]
Carry forward from 1992 and previous years
Balance December 30, 1993
|
10,000.00
5,000.00
50,000.00
|
37,660.00
15,796.25
18,057.00
|
18,130.00
1.00
1.00
|
19,530.00
15,795.25
18,056.00
164,106.51
41,026.62
2,739.00
$1,778.33
$45,543.95
|
Email this Content