Supreme Court of Canada
Smith v. Minister of Finance, [1925] S.C.R. 405
Date: 1925-05-05
Cecil R. Smith Appellant;
and
The Minister of Finance Respondent.
1925: March 4, 5; 1925: May 5.
Present: Anglin C.J.C. and Idington, Duff, Mignault, Newcombe and Rinfret JJ.
ON APPEAL FROM THE EXCHEQUER COURT OF CANADA
Assessment and taxes—Federal income tax—"Income "—Profits from illegal business—Income War Tax Act, 1917, s. 3 (1).
Profits made in an unlawful or prohibited business, in this case the illegal purchase and sale of liquor in Ontario, are not "income" as that term is defined in sec. 3 (1) of the Income War Tax Act, 1917, and are not taxable under that Act.
Judgment of the Exchequer Court ([1924] Ex. C.R. 193) reversed.
APPEAL from the judgment of the Exchequer Court of Canada in favour of the respondent on a stated case.
The question to be decided is whether or not the appellant can be taxed under the Income War Tax Act, 1917, and amendments in respect to profits made by trafficking in liquor in violation of the Ontario Temperance Act. The Exchequer Court held that, he can.
McEwen for the appellant.
Harold Fisher K.C. and C. F. Elliott for the respondent.
McEwen for the appellant. To disobey an Act of a provincial legislature is made an indictable offence by sec. 164 of the Criminal Code.
There is a well defined distinction between transactions illegal only in the sense that contracts made in connection therewith are not enforceable and those positively prohibited. See Salt Lake City v. Hollister; Inland Revenue Commissioners v. Von Glehn.
Profits from crime cannot be taxed. Inland Revenue Commissioners v. Von Glehn.
[Page 406]
Harold Fisher K.C. and C. F. Elliott for the respondent. A tax may be imposed upon some specific thing but an "income tax" is imposed upon the person. Lethbridge v. Thurlow per Sir John Romilly; Caron v. The King per Lord Philimore.
In Peck v. Lowe the greater part of the income was derived from exports and the constitution prohibits any tax on duty "on articles exported from any state." The income tax was held valid.
Parliament can impose a tax on income derived from any source lawful or unlawful. Partridge v. Mallandaine; Salt Lake City v. Hollister.
The judgment of the majority of the court (the Chief Justice and Duff, Mignault, Newcombe and Rinfret JJ.) was delivered by
Mignault J.—This is an appeal from a judgment of Mr. Justice Audette in the Exchequer Court on a stated case which he directed the parties to submit on "the questions of law arising upon the facts as stated in the pleadings." The appellant, describing himself as a garage proprietor carrying on business in the city of Windsor, Ontario, had appealed to the Exchequer Court from an assessment under the Income War Tax Act, 1917, and amendments, in the sum of $28,632.23, on his income for the year 1920 amounting to $92,020. On this appeal the learned judge ordered the filing of formal pleadings. The appellant's statement of claim, so called, alleged as grounds of his appeal that, in addition to his usual occupation, he had carried on the business of trafficking in liquor within Ontario, contrary to the provisions of the Ontario Temperance Act, and that profits so made by him were not taxable income within the proper interpretation of the Income War Tax Act. The respondent's statement of defence, also so-called, in substance denied that these profits were not taxable income under the Act. Upon these pleadings the learned judge ordered the preparation, under rule 161 of the Exchequer Court, of the stated case above referred to. Both the appellant and the" respondent have concurred in this case which is in the following terms:—
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The following case is stated for the opinion of the court under an order of the Honourable Mr. Justice Audette, dated the 15th day of April, 1924, made pursuant to Rule 161 of the Rules and Orders of the Exchequer Court of Canada.
The appellant during the year 1920 gained certain profits within the province of Ontario by operations in the illicit traffic of liquor contrary to the existing provincial legislation in that respect. Upon the said profits the appellant has been assessed for Income Tax pursuant to the provisions of the Income War Tax Act, 1917, and amendments thereto. The validity of the assessment, in so far as it includes the said profit as a basis for computing the tax as assessed, is in dispute.
The question for the opinion of the court is:
(1) Are the profits arising within Ontario from the illicit traffic in liquor therein, contrary to the provisions of the said existing provincial legislation in that respect, "income" as defined by section 3, subsection 1 of the Income War Tax, 1917, and amendments thereto, and liable to have assessed, levied and paid thereon and in respect thereof the taxes provided for in the said Act.
Dated this 15th day of May, A.D. 1924.
Geo. D. McEwen,
Appellant's Solicitor.
C. F. Elliott,
Solicitor for the Minister of Finance.
The learned judge, having answered the question submitted by the stated case in the affirmative, dismissed the appeal of the appellant. The latter now appeals to this court.
This appeal must be decided upon the case stated by the parties, in which both of them have concurred. The point therefore to be determined is whether the profits in question are "income" within the meaning of the Income War Tax Act.
The Act defines "income" as follows:—
3. (1) For the purposes of this Act "income" means the annual net profit or gain or gratuity, whether ascertained and capable of computation as being wages, salary, or other fixed amount, or unascertained as being fees or emoluments, or as being profits from a trade or commercial or financial or other business or calling, directly or indirectly received by a person from any office or employment, or from any profession or calling, or from any trade, manufacture or business, as the case may be, whether derived from sources within Canada or elsewhere, and shall include the interest, dividends or profits directly or indirectly received from money at interest upon any security or without security, or from stocks, or from any other investment, and, whether such gains or profits are divided or distributed or not, and also the annual profit or gain from any other source; including the income from but not the value of property acquired by gift, bequest, devise or descent; and including the income from but not the proceeds of life insurance policies paid upon the death of the person insured, or payments made or credited to the insured on life insurance endowment or annuity contracts upon the maturity of the term mentioned in the contract or upon the surrender of the contract, and
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including the salaries, indemnities or other remuneration of members of the Senate and House of Commons of Canada and officers thereof, members of provincial legislative councils and assemblies and municipal councils, commissions or boards of management, any judge of any Dominion or provincial court appointed after the passing of this Act, and of all persons whatsoever whether the said salaries, indemnities or other remuneration are paid out of the revenues of His Majesty in respect of his Government of Canada, or of any province thereof, or by any person, except as provided in section five of this Act, with the following exemptions and deductions.
It is argued that the language of this definition is wide enough to include income derived from a business the carrying on of which is expressly prohibited by law. So would it be wide enough to comprise gains resulting from the commission of crimes, such as burglary or highway robbery, if such crimes, as often happens, be resorted to habitually as a means of making a gain or profit.
The real question however is whether we should place on the statute a construction which implies that Parliament intended to levy this income tax on the proceeds of crime or on the gain derived from a business which cannot be carried on without violating the law. Such a business should be strictly suppressed, and it would be strange indeed if under the general terms of the statute the Crown in right of the Dominion could levy a tax on the proceeds of a business which a provincial legislature, in the exercise of its constitutional powers, has prohibited within the province.
Moreover what may be called the machinery clauses of the Act (sections 7 et seq.) clearly shew that it never was contemplated that an income tax would be levied on the gains derived from illicit businesses or from the commission of crime. Thus every person liable to taxation must make to the Minister, on or before April 30, in each year, a return of his total income during the last preceding year. If the Minister, in order to be able to make an assessment or for any other purpose, desires any information or additional information, he may demand it by registered letter and the taxpayer is obliged to furnish this information within thirty days. The Minister may also require the production of any letters, accounts, invoices, statements, books or other documents, or he may have an inquiry made by an officer thereunto authorized by him, and if the taxpayer fails or refuses to keep adequate books or accounts for income tax purposes,
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the Minister may require him to keep such records and accounts as he may prescribe. Any information thus obtained is treated as confidential and its divulgement is prohibited.
I think the inference irresistible that the taxpayer's return of income, the additional information which may be demanded by the Minister, the books and accounts which may be inspected, and the accounts and records which the Minister may require the taxpayer to keep are all in respect of businesses which may be legally carried on. It is difficult to conceive of the Minister requiring criminals to furnish information as to profits derived from the commission of crime, or demanding from them the keeping of books or records of their illicit and criminal operations. Furthermore if the gains derived from crime are within the contemplation of the statute, then the expenses incurred in making these gains, e.g. in the employment of criminal agents, would be chargeable as deductions against these gains, and, as to all information furnished by the wrongdoer, there would be a promise of secrecy for his protection. It is impossible to believe that anything like this was contemplated by Parliament.
On the interpretation of this statute—and no question arises as to the power of Parliament to impose income tax on the avails of crime—I would therefore conclude that income tax is not imposed by it on such a business as that described in the stated case.
The learned trial judge relied on the case of Partridge v. Mallandaine, where it was held that persons receiving profits from betting systematically carried on by them throughout the year, are chargeable with income tax on such profits in respect of a "vocation" under 5 & 6 Vict., ch. 35 (the Imperial Income Tax Act), Sched. D. See also Graham v. Green.
At page 278 of the report in 18 Q.B.D., Denman J. said:—
I think the word "vocation" is not limited to a lawful vocation, and that even the fact of a vocation being unlawful could not be set up against the demand for income tax.
It is to be remarked however that this statement was
[Page 410]
not necessary for the decision of the case, for the betting in question was not considered as unlawful, although of course no action would have lain to recover the bets. Indeed Hawkins J. observed that "mere betting is not illegal. It is perfectly lawful for a man to bet if he likes."
But the learned trial judge quotes the following dictum attributed to Denham J. in the report of Partridge v. Mallandaine in 2 Tax Cas. 179.
But I go the whole length of saying that, in my opinion, if a man were to make a systematic business of receiving stolen goods, and to do nothing else, and he thereby systematically carried on a business and made a profit of £2,000 a year, the Income Tax Commissioners would be quite right in assessing him if it were in fact his vocation.
The fact that in the official reports of the Queen's Bench Division no such dictum is attributed to the learned judge, would tend to shew that, assuming he used that language, he did not wish it to remain on record as a deliberate statement of his opinion. Moreover it would clearly be obiter, for obviously it was not necessary for the decision of the case.
The learned trial judge also considered that the appellant should not be heard to invoke
his own turpitude to claim indemnity from paying taxes and to be placed in a better position than if he were an honest and legal trader.
This appeal, however, must be decided solely on the case stated by the parties. Both the Minister of Finance and the appellant have equally concurred in framing, as a question of law, the question whether profits derived from the carrying on of a prohibited business are "income" within the meaning of the Act. It is not open to us to avoid answering this question on the ground that the appellant's claim, as the learned trial judge regarded it, is tainted with illegality. It is not clear, moreover, that the illegality of the profits in question was first set up by the appellant. For aught that appears it may have emerged in the imposition of the assessment.
The only question for decision is whether profits earned under the circumstances described in the stated case are "income" within the meaning of the Income War Tax Act, 1917, and amendments. This question should be answered in the negative.
The appeal must be allowed with costs and judgment directed for the appellant quashing and setting aside the
[Page 411]
assessment with costs of the proceedings in the Exchequer Court.
Idington J.—The appellant is alleged to have been engaged, in and during the year 1920 (besides his ordinary business of keeping a garage) in an illicit trafficking in intoxicating liquors, contrary to the provisions of the Ontario Temperance Act, and thereby to have obtained a very large income.
This action in the Exchequer Court would seem to have been brought as a means of testing his liability to taxation under the Dominion Income War Tax Act. The parties hereto agreed upon a stated case in which the following question was submitted for the opinion of the said court.
(1) Are the profits arising within Ontario from the illicit traffic in liquor therein, contrary to the provisions of the said existing provincial legislation in that respect,, "income" as defined by section 3, subsection 1 of the Income War Tax Act, 1917, and Amendments thereto and liable to have assessed, levied and paid thereon and in respect thereof the taxes provided for in the said Act.
The case so submitted was heard by Mr. Justice Audette of said court.
The said learned judge answered the said question in the affirmative and accordingly dismissed the action with costs. Hence this appeal therefrom.
I, with due respect, cannot, after fully considering the arguments adduced before us, and the reasons assigned by the said learned judge in support of said judgment, agree with the conclusion so reached. I cannot bring myself to believe that Parliament ever had in its serious contemplation, in enacting the said Income War Tax Act, of 1917, or any amendments thereto, the conception of taxing any profits or money raised from such a criminal source.
The assertion of such an intention or purpose would.be such a novelty in the way of expressing income taxation Acts, here and elsewhere, that I should expect to find the intention or purpose expressed in such clear and unambiguous terms as the law has uniformly required all taxing Acts to be, so that there can be no doubt as to their meaning.
The rule in that regard is well stated in Hardcastle's Statute Law, at page 126, the 3rd ed. as follows:—
But for certain purposes express language in statutes is absolutely indispensable,
[Page 412]
and of those specified the first-named is that imposing a tax. Numerous cases are cited by the author and are easily available.
I do not intend to elaborate for the fact that this seems to be the first occasion of an attempt to place such an interpretation upon an Act which, in all the essential features in question herein, has been the same since its enactment in 1917, and the Ontario Temperance Act was first enacted a year previous to this taxing Act.
With all due respect for those promoting such legislation it was evident to thinking men that such a class as appellant ranks in would spring up.
The "Bootleggers," as the profiteers under the Ontario Temperance Act are commonly called (though anticipated as I say by thinkers), may not have reached such prominence as to attract attention within the year I refer to, but they certainly became (if common report and knowledge thereupon is any guide), very prominent before the taxing Act was for a year or so in its actual operation.
The fact that it was not attempted to be applied till the year 1920, if then, demonstrates that it had not been expressed in the way required, as I have cited authority for. Hence I cannot see how it can be pretended to have fallen within the indispensable requirements of a taxing Act.
And one curious feature about such profits being a source of taxable income, is the enactment in the Temperance Act, 6 Geo. V (Ont.) c. 50, section 57, which reads as follows:—
57. Any payment or compensation for liquor furnished in contravention of this Act or otherwise, in violation of the law, whether made in money or securities for money, or in labour or property of any kind, shall be held to have been received without any consideration and against justice and good conscience, and the amount or value thereof may be recovered from the receiver by the party who made the same.
Where could the profits come from if the price paid belonged to some one else?
For the foregoing reasons I would allow the appeal with costs and answer the question put in the negative.
Appeal allowed with costs.
Solicitor for the appellant: George D. McEwen.
Solicitor for the respondent: C. F. Elliott.
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