Joseph Marcel André Lachance v. Her Majesty the Queen, [1993] 2 CTC 1, [1992] DTC 6603

Pinard, J.:—The plaintiff is appealing from a decision of the Tax Court of Canada dated November 13, 1990, dismissing his appeal from an assessment dated October 3, 1985 for the 1984 taxation year. By that assessment the Minister of National Revenue allocated the plaintiff's professional income between eight provinces other than Quebec, collected provincial tax amounting to $13,449.71 which the plaintiff as a result of this allocation should have paid those eight provinces, and accordingly reduced the tax rebate claimed by the plaintiff for taxes in the province of Quebec. It is of course an appeal de novo.

The facts relating to this action are not in dispute. Since 1962 the plaintiff has been a member in good standing of the Order of Engineers of the province of Quebec. On February 1,1972 he became a partner under a written partnership contract concluded between himself and Woods, Gordon ("WG"), a firm of management consultants working as a partnership. The said contract was renewed at more or less regular intervals and its latest version was executed on or about February 1, 1983.

The WG partnership's fiscal year ended on January 31 of each year.

On September 30, 1983 the plaintiff formally gave WG notice that he was withdrawing from the partnership. On November 7,1983 the plaintiff and WG proceeded to calculate the various amounts the plaintiff was entitled to follow- ing his withdrawal from the partnership, and to this end concluded a written agreement. The plaintiff's withdrawal took effect on November 15, 1983.

The calculation of the amounts to which the plaintiff was entitled under the partnership contract up to November 15, 1983 gave the following results:

The plaintiff was further entitled to his share of the WG profits for the period from February 1 to November 15, 1983, that is approximately $110,734.94.

Following his withdrawal from the partnership, that is after November 15, 1983, the plaintiff ceased providing services to the partnership and receiving other income and benefits from it. During the 1984 taxation year he resided exclusively in Quebec and had no permanent establishment outside that province.

During the 1984 taxation year WG allocated the partnership's income as follows:

On April 26, 1985 the plaintiff filed his tax return for the 1984 taxation year. He determined his taxable income and calculated his taxes based on the fact that during that taxation year he was living in Quebec exclusively and had no settled establishment outside that province, ascribing all his income, including that from WG, to the province.

On October 3,1985 the Minister of National Revenue made an assessment by which he allocated the plaintiff's income for the 1984 taxation year in accordance with WG's cross-Canada allocation, thereby collecting additional provincial tax of $13,449.71 plus interest and reducing the Quebec tax rebate from $6,138.20 to $4,830.31. These provincial taxes were broken down as follows:

The following relevant legislation and regulations must be set out here:

PROVISIONS OF INCOME TAX ACT, R.S.C. 1952, C. 148 (AM. S.C. 1970-71-72, C. 63) (THE "ACT"), IN EFFECT AT THE RELEVANT TIME

96 (1) General rules. Where a taxpayer is a member of a partnership, his income, non-capital loss, net capital loss, restricted farm loss and farm loss, if any, for a taxation year, or his taxable income earned in Canada for a taxation year, as the case may be, shall be computed as if

(a) the partnership were a separate person resident in Canada; (b) the taxation year of the partnership were its fiscal period;

(c) each partnership activity (including the ownership of property) were carried on by the partnership as a separate person . . .

(f) the amount of the income of the partnership for a taxation year from any source or from sources in a particular place were the income of the taxpayer form that source or from sources in that particular place, as the case may be, for the taxation year of the taxpayer in which the particular place, as the case may be, for the taxation year of the taxpayer in which the partnership's taxation year ends, to the extent of the taxpayer's share thereof; and . . .

(1.1) Allocation of share of income to retiring partner. For the purposes of subsection (1) and sections 101 and 103,

(a) where the principal activity of a partnership is carrying on a business in Canada and the members thereof have entered into an agreement to allocate a share of the income or loss of the partnership from any source or from sources in a particular place, as the case may be, to any taxpayer who at any time ceased to be a member of

(i) the partnership, or

(ii) a partnership that any time has ceased to exist or would, but for subsection 98(1), have ceased to exist, and either

(A) the members thereof, or

(B) the members of another partnership in which, immediately after that time, any of the members referred to in clause (A) became members

have agreed to make such an allocation

or to his spouse, estate or heirs or to any person referred to in subsection (1.3), that taxpayer, his spouse, estate or heirs, or that person, as the case may be, shall be deemed to be a member of the partnership; and

(b) all amounts each of which is an amount equal to the share of the income or loss referred to in this subsection allocated to a taxpayer from a partnership in respect of a particular fiscal year of the partnership shall, notwithstanding any other provision of this Act, be included in computing his income for the taxation year in which that fiscal period of the partnership ends.

(1.4) Right deemed not to be capital property. For the purposes of this Act, a right to a share of the income or loss of a partnership under an agreement referred to in subsection (1.1) shall be deemed not to be capital property.

(1.6) Members of partnership deemed to be carrying on business in Canada. Where a partnership carries on a business in a taxation year, each taxpayer who is deemed by paragraph (1.1)(a) to be a member of the partnership shall, for the purpose of subsection 2(3), be deemed to carry on that business in Canada in that year.

120. (1) Addition to tax for income not earned in a province. There shall be added to the tax otherwise payable under this Part by an individual for a taxation year an amount that bears the same relation to 47 per cent of the tax otherwise payable under this Part by him for the year that

(a) his income for the year, other than his income earned in the year in a province . . .

(2) Amount deemed paid in prescribed manner. Each individual is deemed to have paid, in prescribed manner and on prescribed dates, on account of his tax under this Part for a taxation year an amount that bears the same relation to three per cent of the tax otherwise payable under this Part by him for the year that

(a) his income earned in the year in a province that, on the 1st day of January, 1973, was a province providing schooling allowances within the meaning of the Youth Allowances Act.

bears to

(b) his income for the year.

(4)(a) Income earned in the year in a province". income earned in the year in a province" means amounts determined under rules prescribed for the purpose by regulations made on the recommendation of the Minister of Finance; and. . . .

PROVISIONS OF INCOME TAX REGULATIONS (“THE REGULATIONS”) IN EFFECT AT THE RELEVANT TIME

PART XXVI

Income Earned in a Province by an Individual

INTERPRETATION

2600. (1) For the purposes of paragraph 120(4)(a) of the Act,"income earned in the year in a province" by an individual means the aggregate of his incomes earned in the taxation year in each province as determined in accordance with this Part.

(2) In this Part,"permanent establishment" means a fixed place of business of the individual, including an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop or a warehouse, and

(a) where an individual carries on business through an employee or agent, established in a particular place, who has general authority to contract for his employer or principal or who has a stock of merchandise owned by his employer or principal from which he regularly fills orders which he receives, the individual shall be deemed to have a permanent establishment in that place;

(b) where an individual uses substantial machinery or equipment in a particular place at any time in a taxation year he shall be deemed to have a permanent establishment in that place; and

(c) the fact that an individual has business dealings through a commission agent, broker, or other independent agent, or maintains an office solely for the purchase of merchandise, shall not of itself be held to mean that the individual has a permanent establishment.

RESIDENTS OF CANADA

2601 (1) Where an individual resided in a particular province on the last day of a taxation year and had no income for the year from a business with a permanent establishment outside the province, his income earned in the taxation year in the province is his income for the year.

(2) Where an individual resided in a particular province on the last day of a taxation year and had income for the year from a business with a permanent establishment outside the province, his income earned in the taxation year in the province is the amount, if any, by which

(a) his income for the year

exceeds

(b) the aggregate of his income for the year from carrying on business earned in each other province and each country other than Canada determined as hereinafter set forth in this Part.

(3) Where an individual, who resided in Canada on the last day of a taxation year and who carried on business in a particular province at any time in the year, did not reside in the province on the last day of the year, his income earned in the taxation year in the province is his income for the year from carrying on business earned in the province, determined as hereinafter set forth in this Part. INCOME TAX BUSINESS

2603 (1) Where, in a taxation year, an individual had a permanent establishment in a particular province or a country other than Canada and had no permanent establishment outside that province or country, the whole of his income from carrying on business for the year shall be deemed to have been earned therein.

(2) Where, in a taxation year, an individual had no permanent establishment in a particular province or country other than Canada, no part of his income for the year from carrying on business shall be deemed to have been earned therein.

Assuming that the agreement of November 7, 1983 between the plaintiff and the WG partnership falls within the scope of subsection 96(1.1) of the Act above, the fundamental question then is whether this provision, as the defendant contended, allowed the Minister of National Revenue to apply subsection 96(1) of the Act above so as to assess the plaintiff as he did for the 1984 taxation year. In other words, could the Minister act pursuant to subsections 96(1) and (1.1) of the Act in such a way that, in the circumstances, the plaintiff would not have all his income for the 1984 taxation year allocated only to the province of Quebec?

The defendant's position in this regard seems to me inconsistent with the very wording of the said subsection 96(1.1) of the Act, read together with subsection 96(1) of the same Act, and the provisions of those subsections must be interpreted in accordance with the grammatical and ordinary sense of the words they contain, taking into account their general context, the form and object of the Act and, finally, the intention of Parliament. I thus apply the modern rule of legislative interpretation as defined by the writer E.A. Driedger and stated by the Supreme Court of Canada, interpreting the provisions of the Income Tax Act in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305, at page 316 C.T.C. (D.T.C. 6323), as follows:

While not directing his observations exclusively to taxing statutes, the learned author of Construction of Statutes, 2nd edition, (1983), at page 87, E.A. Driedger, put the modern rule succinctly:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

The purpose of subsection 96(1.1) is clearly not to determine how to calculate the income or loss of a retiring partner in connection with his assessment for a taxation year, taking into account the allowance resulting from the agreement in question, but simply to create a fiction which only applies for the purposes of subsection (1) and sections 101 and 103 of the Act. The wording of the subsection expressly limits the application of its paragraphs (a) and (b)' for the purposes of subsection (1) and sections 101 and 103”.

It is clear that the purposes of subsection 96(1) are strictly to determine how to calculate for a taxation year income (or a loss, as the case may be) of a taxpayer who is a member of a partnership, and no one else. This follows from the very language of the provision, which begins with the words "where a taxpayer is a member of a partnership", and then uses the possessive adjective "his" with respect to the income or loss covered by the methods of calculation provided:

Where a taxpayer is a member of a partnership, his income, non-capital loss . . if any for a taxation year, or his taxable income earned in Canada for a taxation year, as the case may be, shall be computed. . . .

There is no need to discuss sections 101 and 103, referred to in subsection 96(1.1), since their particular provisions do not apply directly to the plaintiff's case, and in any case they were not relied on by the defendant.

It accordingly seems clear that subsections 96(1) and 96(1.1) of the Act, whether taken together or separately, cannot apply to a "retiring partner" Within the meaning of subsection 96(1.1) so as to determine how for the purposes of his assessment for a taxation year he is to calculate his income (or loss), and that income (or loss) must instead be calculated independently in accordance with the other provisions of the Act and Regulations.

Incidentally, it is understandable that the fiction contained in subsection 96(1.1) could prove useful for the purposes mentioned in subsection 96(1), namely calculating the income (or loss, as the case may be) of a taxpayer who is a member of a partnership for a taxation year, since, for example, paragraph 96(1)(f) makes the share of each taxpayer who is a member of the partnership an essential part of the calculation.

In my opinion, if Parliament had intended that the fiction mentioned in subsection 96(1.1) should be used in a taxation year to calculate the income or loss of a" retiring partner" in the same way as income or loss of a taxpayer who is a member of the partnership in question, it would have said so. It would not have limited the scope of the provision solely to the purposes of subsection 96(1) and sections 101 and 103 as it did, bearing in mind inter alia the wording of subsection 96(1), which applies only to the method of calculating the income or loss of a taxpayer who is a member of a partnership".

As the provisions here are clear and unambiguous, it will not be necessary to refer to the way their interpretation has developed and the changes in their application, at least since March 29, 1978, by the Minister of National Revenue. (See Harel v. D./M.N.R. (Quebec), [1978] 1 S.C.R. 851, [1977] C.T.C. 441, 77 D.T.C. 5438, at pages 858-59 (C.T.C. 447, D.T.C. 5441).

Judgment is accordingly rendered allowing the plaintiffs action and referring the reassessment on appeal back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons; the whole with costs.

Appeal allowed.