Date: 20010705
Docket: A-127-00
Neutral citation: 2001 FCA 217
CORAM: DÉCARY J.A.
EVANS J.A.
SHARLOW J.A.
BETWEEN:
FEDERATED CO-OPERATIVES LIMITED
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
SHARLOW J.A.
The appellant Federated Co-operatives Limited owned bankers' acceptances with a cost of $244,156,063 at the end of 1992, $285,358,284 at the end of 1993, and $282,538,905 at the end of 1994. In filing its income tax returns for those years, the appellant included those amounts in its "investment allowance" as defined in subsection 181.2(4) of the Income Tax Act, R.S.C. 1985, c. 1 (5th supp). The Crown assessed the appellant to exclude those amounts from the appellant's investment allowance, which increased the liability of the appellant under Part I.3 of the Income Tax Act by $488,312 in 1992, $570,717 in 1993 and $565,078 in 1994. The assessments were appealed unsuccessfully to the Tax Court of Canada: Federated Co-operatives Ltd. v. Canada, [2000] 2 C.T.C. 2382, 2000 D.T.C. 1946, [2000] T.C.J. No. 93 (QL) (T.C.C.). The appellant now seeks to reverse that decision.
Subsection 181.2(4) is found in Part I.3 of the Income Tax Act, which imposes a tax on the "taxable capital" of certain corporations. The provisions of Part I.3 that are relevant to this case read as follows:
| 181.2(1) The taxable capital employed in Canada of a corporation for a taxation year (other than a financial institution or a corporation that was throughout the year not resident in Canada) is the prescribed proportion of the corporation's taxable capital for the year.
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181.2(1) Le capital imposable utilisé au Canada, pour une année d'imposition, d'une société, sauf une institution financière ou une société qui tout au long de l'année n'a pas résidé au Canada, correspond à la proportion prescrite du capital imposable de la société pour l'année.
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| (2) The taxable capital of a corporation (other than a financial institution) for a taxation year is the amount, if any, by which its capital for the year exceeds its investment allowance for the year.
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(2) Le capital imposable d'une société, sauf une institution financière, pour une année d'imposition est égal à l'excédent éventuel de son capital pour l'année sur sa déduction pour placements pour l'année.
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| (3) The capital of a corporation (other than a financial institution) for a taxation year is the amount, if any, by which the total of
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(3) Le capital d'une société, sauf une institution financière, pour une année d'imposition correspond à l'excédent éventuel du total des éléments suivants_:
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| (a) the amount of its capital stock (or, in the case of a corporation incorporated without share capital, the amount of its members' contributions), retained earnings, contributed surplus and any other surpluses at the end of the year,
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a) le capital-actions de la société (ou, si elle est constituée sans capital-actions, l'apport de ses membres), ses bénéfices non répartis, son surplus d'apport et tout autre surplus à la fin de l'année;
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| (b) the amount of its reserves for the year, except to the extent that they were deducted in computing its income for the year under Part I,
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b) ses réserves pour l'année, sauf dans la mesure où elles sont déduites dans le calcul de son revenu pour l'année en vertu de la partie I;
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| (c) the amount of all loans and advances to the corporation at the end of the year,
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c) les prêts et les avances qui lui ont été consentis à la fin de l'année;
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| (d) the amount of all indebtedness of the corporation at the end of the year represented by bonds, debentures, notes, mortgages, bankers' acceptances or similar obligations,
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d) ses dettes à la fin de l'année sous forme d'obligations, d'hypothèques, d'effets, d'acceptations bancaires ou de titres semblables;
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| (e) the amount of any dividends declared but not paid by the corporation before the end of the year,
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e) les dividendes qu'elle a déclarés mais n'a pas versés avant la fin de l'année;
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| (f) the amount of all other indebtedness (other than any indebtedness in respect of a lease) of the corporation at the end of the year that has been outstanding for more than 365 days before the end of the year, and
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f) toutes ses autres dettes, sauf celles afférentes à un bail, à la fin de l'année qui sont impayées depuis plus de 365 jours avant la fin de l'année;
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| (g) where the corporation was a member of a partnership at the end of the year [...].
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g) dans le cas où elle est un associé d'une société de personnes à la fin de l'année [...].
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| (4) The investment allowance of a corporation (other than a financial institution) for a taxation year is the total of all amounts each of which is the carrying value at the end of the year of an asset of the corporation that is
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(4) La déduction pour placements d'une société, sauf une institution financière, pour une année d'imposition correspond au total des montants don't chacun représente la valeur comptable à la fin de l'année d'un élément d'actif de la société qui est, selon le cas_:
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| (a) a share of another corporation,
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a) une action d'une autre société;
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| (b) a loan or advance to another corporation (other than a financial institution),
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b) un prêt ou une avance consenti à une autre société, sauf une institution financière;
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| (c) a bond, debenture, note, mortgage or similar obligation of another corporation (other than a financial institution),
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c) une obligation, un effet, une hypothèque ou un titre semblable d'une autre société, sauf une institution financière;
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| (d) long-term debt of a financial institution [...]
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d) une dette du passif à long terme d'une institution financière [...]
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John Delatre Falconbridge, Crawford and Falconbridge, Banking and Bills of Exchange, 8th ed. (Toronto : Canada Law Book, 1986) describes bankers' acceptances as follows at page 878:
A bankers' acceptance is a bill of exchange drawn by a customer upon a bank, payable at some specified future date and accepted by the bank. It is called a bankers' acceptance to distinguish it from a trade acceptance which is typically accepted by the customer and represents an obligation arising under a trading contract. Banks' acceptance of drafts drawn on them by their customers has been judicially recognized as a part of the business of banking for over a hundred years. Typically, the customer draws a bankers' acceptance payable to the customer's own order and receives it back from the bank after acceptance. The customer then endorses the acceptance either "generally", thus rendering it payable to bearer or "specially", making it payable to a named broker. In either event, the acceptance will usually be sold to an investor in the money market.
The legal rights and obligations attached to bills of exchange and acceptances are set out in the Bills of Exchange Act, R.S.C. 1985, c. B-4. The relevant provisions read as follows:
| 16(1) A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay, on demand or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person or to bearer.
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16(1) La lettre de change est un écrit signé de sa main par lequel une personne ordonne à une autre de payer, sans condition, une somme d'argent précise, sur demande ou à une échéance déterminée ou susceptible de l'être, soit à une troisième personne désignée -- ou à son ordre --, soit au porteur.
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| [...]
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[...]
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| 34(1) The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer.
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34(1) L'acceptation d'une lettre est l'engagement pris par le tiré d'exécuter l'ordre du tireur.
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| [...]
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[...]
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| 127. The acceptor of a bill by accepting it engages that he will pay it according to the tenor of his acceptance.
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127. L'accepteur d'une lettre s'engage à la payer suivant les termes de l'acceptation.
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| 128. The acceptor of a bill by accepting it is precluded from denying to a holder in due course
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128. L'accepteur d'une lettre ne peut opposer au détenteur régulier ce qui suit_:
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| (a) the existence of the drawer, the genuineness of his signature and his capacity and authority to draw the bill;
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a) l'existence du tireur, l'authenticité de sa signature, sa capacité et son autorité de tirer la lettre;
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| (b) in the case of a bill payable to drawer's order, the then capacity of the drawer to endorse, but not the genuineness or validity of his endorsement; or
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b) dans le cas d'une lettre payable à l'ordre du tireur, la capacité de celui-ci, à ce moment-là, d'endosser, sauf l'authenticité ou la validité de son endossement;
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| (c) in the case of a bill payable to the order of a third person, the existence of the payee and his then capacity to endorse, but not the genuineness or validity of his endorsement.
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c) dans le cas d'une lettre payable à l'ordre d'un tiers, l'existence du preneur et sa capacité, à ce moment-là, d'endosser, sauf l'authenticité ou la validité de son endossement.
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| 129. The drawer of a bill by drawing it
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129. La personne qui tire une lettre, ce faisant_:
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| (a) engages that on due presentment it shall be accepted and paid according to its tenor, and that if it is dishonoured he will compensate the holder or any endorser who is compelled to pay it, if the requisite proceedings on dishonour are duly taken; and
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a) promet que, sur présentation en bonne et due forme, elle sera acceptée et payée à sa valeur, et s'engage, en cas de refus, à indemniser le détenteur ou tout endosseur forcé de l'acquitter, si les formalités obligatoires à la suite d'un refus ont été dûment remplies;
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| (b) is precluded from denying to a holder in due course the existence of the payee and his then capacity to endorse.
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b) ne peut opposer au détenteur régulier l'existence du preneur et sa capacité, à ce moment-là, d'endosser.
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In general terms, a corporation's capital and debt are included in its taxable capital. That tax base is reduced through the device of the "investment allowance" which represents certain investments in other corporations. Fundamental to the argument for the appellant is the premise that the purpose of the "investment allowance" is to ensure that no amount is included in the taxable capital of two corporations at the same time. The appellant argues that Part I.3 should be interpreted in a way that avoids such double taxation.
I agree with the appellant that the definition of "investment allowance" must be interpreted, if possible, so that it has its intended effect. I also agree that there are similarities between the definition of "taxable capital" and the definition of "investment allowance" from which it might be inferred that Parliament, as a matter of policy, has tried to avoid taxing the same capital twice.
However, the definition of "taxable capital" is not a mirror image of the definition of "investment allowance". Even where the two definitions are similar, the amounts described in each definition may not be the same. For example, the liability of a debtor under a particular debt instrument may exceed the carrying cost of a debt investment that is acquired at a discount.
In addition, it must be recognized that where it is appropriate to consider matters of policy to assist in the interpretation of a statute, all relevant policy matters must be taken into account. It would appear from a review of Part I.3 as a whole that the avoidance of what the appellant refers to as double taxation is not the only policy consideration that may bear on the issues in this case.
The definition of taxable capital in paragraph 181.2(3)(d) includes the "indebtedness represented by bonds, debentures, notes, mortgages, bankers' acceptances and similar obligations". The reference to "bankers' acceptances" was added by S.C. 1994, c. 7, sch. VIII, (1993, c. 24), subsection 106(1), applicable to taxation years ending after December 20, 1991.
In what might be described as the companion provision for the investment allowance, paragraph 181.2(4)(c), the words are "a bond, debenture, note, mortgage or similar obligation of another corporation". That provision has never been amended.
From these two provisions it can be seen that Parliament considered how bankers' acceptances should be treated for purposes of Part I.3 of the Income Tax Act and determined that, for the years under appeal in this case, the indebtedness represented by a banker's acceptance must be included in the taxable capital of the drawer or issuer. However, the cost of a banker's acceptance to the holder is not expressly included in the holder's investment allowance. Assuming this reflects a deliberate distinction, a possible rationale is suggested by the scheme of Part I.3.
Within the definition of "investment allowance" there are three provisions, paragraphs 181.2(4)(b), (c) and (d), that refer to investments in other corporations in the form of debt. Two of those three provisions, paragraphs 181.2(4)(b) and (c), exclude debts of financial institutions. The third includes debts of financial institutions, but only debt with a term of five years or more (see the definition of "long-term debt" in subsection 181(1)). A banker's acceptance typically has a term of one year or less. Whether or not a banker's acceptance is indebtedness of the drawer or issuer (a point discussed below), it could be seen from a policy perspective as indebtedness of the accepting bank. If Parliament's objective is to exclude short-term bank debt from the investment allowance, then an interpretation of paragraphs 181.2(4)(b) and (c) that excludes bankers' acceptances from the definition of "investment allowance" would be consistent with that objective.
It is with these considerations in mind that I approach the problem of statutory interpretation presented by this case.
The facts are not in dispute. The manner in which the appellant acquired the bankers' acceptances and its reasons for doing so are well described in the decision of the Tax Court Judge, which I do not propose to repeat. For present purposes it is sufficient to say that the bankers' acceptances were acquired by the appellant as short term investments in reliance on the credit of the accepting bank, with no regard to the credit worthiness or even the identity of the drawer or issuer. The acquisitions were completed through one or more brokers, who received the purchase price from the appellant and paid it to the issuers, net of certain fees.
The amount the appellant paid for the bankers' acceptances was always less than their face amount. The difference, disregarding banking and brokerage fees, was the appellant's expected profit and the issuer's expected financing cost.
On the date stipulated for presentment and payment of the bankers' acceptances, the appellant looked solely to the bank for payment of the face amount. The taxpayer had no knowledge of the arrangements between the bank and the issuer. It is presumed that the issuer would have an obligation to indemnify the bank for any amounts paid on presentation of the bankers' acceptances.
The appellant argues that the holder's cost of a banker's acceptance should be included in the holder's "investment allowance" under either paragraph 181.2(4)(b) as a "loan or advance to another corporation (other than a financial institution)" or under paragraph 181.2(4)(c) as a "bond, debenture, note, mortgage or similar obligation of another corporation (other than a financial institution)".
The existence of the financial institution exclusion in both provisions means that the appellant must argue that the debtor under a banker's acceptance is the drawer or issuer and not the accepting bank. It is common ground in this case that the issuers of the bankers' acceptances acquired by the appellant were corporations that were not financial institutions.
The first question is whether a banker's acceptance is a loan or advance from the holder to the issuer. The appellant concedes, correctly in my view, that a banker's acceptance is not a loan to the issuer, but argues that the word "advance" has a broader meaning than "loan", a meaning that is broad enough to cover bankers' acceptances.
I agree that the meaning of "advance" is broader than the meaning of "loan". An advance may include, for example, a payment made in return for the agreement of the recipient to provide goods or services in future: see, for example, Oerlikon Aérospatiale Inc. v. The Queen, (1999), 243 N.R. 1, [1998] 4 C.T.C. 2821, 99 D.T.C. 5318, [1999] F.C.J. No. 496 (QL) (F.C.A.) and TransCanada Pipelines v. Ontario (Minister of Revenue), (1992) 62 O.A.C. 105, [1993] 1 C.T.C. 277, [1992] O.J. No. 2592 (QL) (Ont. C.A.). In commenting on these cases, the Tax Court Judge in this case said (at paragraph 22):
An "advance" [...] is an amount paid before the completion of an obligation for which it is to be paid; or an amount paid before the performance of a resulting reciprocal obligation.
However, I see no analogy between this case and Oerlikon Aérospatiale or TransCanada Pipeline. I agree with the Tax Court Judge that the appellant's cost of a banker's acceptance is not an "advance" to the issuer within the meaning of "advance" as applied in those cases. For each banker's acceptance acquired by the appellant, money passed from the appellant to the issuer through the broker. However, the issuer had no obligation to repay the same sum of money to the appellant, or to provide any goods or services. The issuer's only payment obligation to the appellant was a contingent obligation under the Bills of Exchange Act to pay the face amount of the banker's acceptance if the accepting bank failed to do so.
The appellant also relies on the definition of "advance" from Black's Law Dictionary, 6th ed., (St. Paul: West Publishing Co., 1990), in particular the underlined words:
To move something forward in position, time or place. To pay money or render other value before it is due; to furnish something before an equivalent is received; to loan; to furnish capital in aid of a projected enterprise in expectation of return from it. To supply beforehand; to furnish on credit or before goods are delivered or work done; to furnish as a part of a stock or fund; to pay money before it is due; to furnish money for a specific purpose understood between the parties, the money or sum equivalent to be returned; to furnish money or goods for others in expectation of reimbursement.
In my view, this definition does not expand the meaning of "advance" beyond what has been recognized in Oerlikon Aérospatiale and TransCanada Pipelines.
The appellant also cited Air Canada v. Minister of Finance for British Columbia, [1981] 2 W.W.R. 97 (B.C.C.A). That was an appeal under the British Columbia Corporation Capital Tax Act, R.S.B.C. 1979, c. 69, which imposed a tax on the "taxable paid-up capital" of certain corporations. The issue in that case was whether the amounts paid for certain bank paper held by Air Canada were "loans and advances" to the bank, which would be deductible in computing its taxable paid-up capital, or "cash on deposit with any corporation doing the business of a savings bank", which would not be deductible. The bank paper took the form of certificates of deposit, bearer deposit term notes, foreign currency swap deposits, and bankers' acceptances.
Carrothers J.A., for the Court, noted that bank deposits and all four forms of bank paper are similar in that they all represent debts owed by the bank. However, a bank deposit has certain key characteristics not shared by bank paper. A bank deposit represents money readily available to the depositor at any time for use in exchange, either by cash withdrawal or by the use of an order to pay, such as a cheque. Also, the debt of a bank that is represented by a bank deposit generally is not evidenced by a single debt instrument document, but only by deposit receipts and bank records. By contrast, each of the four kinds of bank paper in issue are documents evidencing debts of the bank that were payable to the holder on a stipulated date. Carrothers J.A. concluded as follows at page 102:
Obviously, the bank paper in question, in comparison to its quintessence as "cash on deposit", has a preponderance of the characteristics and attributes of "investments" and "loans and advances to other corporations". While there is undoubtedly a measure of imprecision in the wording used, the weight of the evidence persuades me that this enigma ought to be resolved in favour of the taxpayer. Accordingly, I would hold that all these forms of bank paper are not "cash on deposit" but are "loans and advances" which are not to be excluded from the deductible investment allowance.
Thus, for purposes of the legislation under consideration in Air Canada, the indebtedness represented by the bank paper was considered to be more like loans or advances to the bank than cash on deposit with the bank. If this case is taken as authority for the proposition that a banker's acceptance represents an advance by the holder to the accepting bank, it does not assist the appellant because an advance to a bank is expressly excluded from the definition of "investment allowance". It is not authority for the proposition that a banker's acceptance represents an advance made by the holder to the issuer.
In summary, I agree with the Tax Court Judge that a banker's acceptance is not an advance by the holder to the issuer, and that the holder of a banker's acceptance cannot include its carrying cost in the investment allowance under paragraph 181.2(4)(b).
The next question is whether a banker's acceptance is "a bond, debenture, note, mortgage or similar obligation of another corporation (other than a financial institution)" within the meaning of paragraph 181.2(4)(c). The appellant argues that a banker's acceptance is either a note of the issuer or an obligation of the issuer that is similar to a bond, debenture, note or mortgage. For the reasons that follow, I am unable to accept that argument.
Underlying the appellant's argument is the characterization of a banker's acceptance as a debt of the issuer that is guaranteed by the accepting bank. That characterization is not correct. Generally, the obligation of a guarantor is a contingent one, in the sense that the guarantor of a debt is liable to pay the debt only if the debtor defaults. By contrast, a bank that accepts a bill of exchange is the party primarily liable for payment. The secondary payment obligation is that of the issuer, and is contingent on the bank's default.
I agree with the Tax Court Judge that a banker's acceptance is not a note of the issuer. A note is a document evidencing a promise by the maker of the note to pay a certain amount of money. A banker's acceptance is a bill of exchange that consists of an order by the issuer to its bank to pay a certain amount of money plus an acceptance by the bank of the legal obligation to pay that amount of money when the bill is presented for payment. Disregarding for the moment the distinction between a promise to pay and an order to pay, it might be said that the payment obligation of the issuer of a bill of exchange with no bank acceptance bears some similarity to the payment obligation of the issuer of a note. However, the bank's acceptance of the bill of exchange results in a substantial change in the issuer's payment obligation. Once the bill of exchange is accepted by a bank, the bank alone is primarily liable to pay the holder. The payment obligation of the issuer to the holder is merely a secondary obligation that is contingent upon the bank's failure to pay.
The same reasoning leads me to conclude that a banker's acceptance is not an obligation of the issuer that is similar to a bond, debenture, note or mortgage. Each of those is a document evidencing indebtedness of the maker in the form of a promise to pay, an obligation for which the issuer is primarily liable. The issuer of a bill of exchange that has been accepted by a bank is only contingently liable to pay the holder.
The appellant cited Recalma v. Canada (1998), 232 N.R. 7, [1998] 2 C.T.C 403, 98 D.T.C. 6238, 158 D.L.R. (4th) 59, [1998] 3 C.N.L.R. 279, [1998] F.C.J. No. 433 (QL) (F.C.A.), an oral decision of this Court in which a banker's acceptance is described as "a short-term note issued by a third party which the bank selling the note is primarily responsible for (or guarantees) repayment". The issue in Recalma was whether certain investment income was property located on a reserve for purposes of section 87 of the Indian Act. R.S.C. 1985, c. I-5. The case did not require a determination of whether or not a banker's acceptance is a "note" of the issuer, and I do not read the decision as addressing that point. I agree with the Tax Court Judge that the use of the word "note" in Recalma was intended only as a casual description. In any event it is not a correct description, although the error is a minor one that does not cast doubt on the correctness of the decision.
The appellant also relied on the French version of paragraph 181.2(4)(c), and argued that the words used in the French version have a much broader meaning that the words used in the English version. I reproduce both versions for ease of reference:
| (c) a bond, debenture, note, mortgage or similar obligation of another corporation (other than a financial institution),
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c) une obligation, un effet, une hypothèque ou un titre semblable d'une autre société, sauf une institution financière;
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In particular, it was argued that the French word "obligation" has a broader meaning that the English word "debt" and could signify the obligation of the issuer of a banker's acceptance to reimburse the bank, and that the French word "effet" has a meaning that is broader than the English word "note" and could be read as including any instrument or bill of exchange. The French words "obligation" and "effet" are generic terms that in certain contexts may be given a broader meaning than the English words "debt" and "note". However, their more usual meaning is somewhat narrower. In my view, the French words "obligation" and "effet", read in the context of subsection 181.2(4), are used in a sense that makes them synonymous with the English words "debt" and "note".
For these reasons, I would dismiss this appeal with costs.
"K. Sharlow"
J.A.
"I agree
Robert Décary J.A."
"I agree
John M. Evans J.A."
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