Holiday Luggage Manufacturing Co Inc, Falcon Luggage Inc v. Minister of National Revenue, [1984] CTC 2599, 84 DTC 1590

Tremblay, TCJ:—These cases were heard at Montreal, Québec, on November 11, 1983.

1. The Point at Issue

The point at issue is whether the two appellant companies are correct in considering themselves as not being associated in the computation of the small business deduction under section 125 of the Income Tax Act, SC 1970-71-72, c 63, as amended.

2. The Burden of Proof

2.01 The burden is on the appellants to show that the respondent’s assessments are incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 Moreover, in the same judgment, the Court decided that the assumptions of fact on which the respondent based the assessments are also deemed to be correct.

In the respondent’s reply to notice of appeal in the case of Holiday Luggage, paragraph 7(a) to (g) read as follows:

7. In reassessing the Appellant for the taxation years under appeal, the Respondent relied, inter alia upon the following assumptions of fact:

(a) At all relevant times, the Appellant and Falcon Luggage Inc were “Canadian controlled private corporations”, within the meaning of section 125 of the Income Tax Act;

(b) The Appellant’s shares, as well as the shares of Falcon Luggage Inc and of Stradellina (USA) Inc, were held as follows during the relevant years:

	Common	Preferred
Holiday Luggage Inc	Shares	Shares
David Sanders	48	—
Fred Fitzhugh	1	—
Gerald E Murphy	1	—
	~50	—

Falcon Luggage Inc
Leonard Sanders	98	900
John Michelin	1	—
Jason Ruby	1	—
		——
	—
	100	900
Stradellina (USA) Inc
David Sanders	30	—
Leonard Sanders	30	—
Horace Bassoff	20	—
Joseph Berman	20	—
	—	——————
	100	—

(c) Mr David Sanders is the father of Mr Leonard Sanders, and they were thus related to each other, during the years in issue, within the meaning of section 251 of the Income Tax Act:

(d) At all relevant times, Stradellina (USA) Inc was a USA company and not a Canadian corporation, and it was not engaged in business in Canada;

(e) The Appellant company and Stradellina (USA) Inc were associated with each other during the taxation years under appeal, within the meaning of paragraph 256(l)(d) of the Income Tax Act:

(i) The Appellant company was controlled by Mr David Sanders;

(ii) Mr David Sanders was related to himself (section 251(5)(c)) as well as to his son, Mr Leonard Sanders, and both formed a group of persons that controlled Stradellina (USA) Inc;

(iii) Mr David Sanders owned directly or indirectly, in respect of each corporation, namely the Appellant company and Stradellina (USA) Inc, not less than 10% of the shares of any class of the capital stock thereof;

(f) Falcon Luggage Inc and Stradellina (USA) Inc were also associated with each other, mutatis mutandis, during the taxation years under appeal;

(g) In view of subsection 256(2) of the Income Tax Act, the Appellant company and

Falcon Luggage Inc were also associated with each other during the years in issue;

3. The Facts

3.01 The facts are not in dispute; the appellants indeed admitted the respondent’s assumptions of facts quoted above, except obviously subparagraphs (e), (f),

(g) which are rather the respondent’s conclusions. The main facts described in the notice of appeal are submitted by the respondent. Paragraphs 1 to 5 of the notice of appeal read as follows:

1. The issue in the present case relates to the computation of the small business deduction under Section 125 of the Income Tax Act in connection with the question as to whether, as alleged in the assessments and notification, the taxpayer was associated with Falcon Luggage Inc within the meaning of the provisions of Section 256 of the Income Tax Act.

2. At all relevant times all of the issued and outstanding shares of the taxpayer were owned by David Sanders and all of the issued and outstanding shares of Falcon Luggage Inc were owned by Leonard Sanders.

3. Accordingly, the companies are not associated with each other under Section 256(1) of the Income Tax Act and no issue arises on this score.

4. Revenue Canada, however, has explained to representatives of the taxpayer that they are alleging that the two companies are associated under Section 256(2) because David Sanders and Leonard Sanders each are shareholders in a United States of America company entitled Stradellina (USA) Inc and it is therefore alleged that Falcon Luggage Inc and Holiday Luggage Mfg Co Inc are each “associated” with the same corporation Stradellina (USA) Inc and are therefore each associated with each other.

5. Stradellina (USA) Inc is a USA company and not a Canadian corporation and it is not engaged in business in Canada and is not subject to taxation in Canada.

4. Law — Cases at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act in the instant case are 125(2), (3), 251(1), 251(2)(a), 256(2) and the section 248 definition of a “Corporation”. They read as follows:

Sec 125(2)

(2) Amount of business limit and total business limit. For the purposes of this section,

(a) a corporation’s “business limit” for a taxation year is $200,000, and

(b) its “total business limit” for a taxation year is $1,000,000,

unless the corporation is a member of an associated group in the year, in which case, except as otherwise provided in this section, its business limit for the year is nil and its total business limit for the year is nil.

Sec 125(3)

(3) Member of an associated group. Notwithstanding subsection (2), if

(a) all of the members of an associated group in a taxation year have filed with the

Minister in prescribed form an agreement whereby, for the purposes of this section,

(i) they allocate an amount to one or more of the members for the taxation year and the amount so allocated or the aggregate of the amounts so allocated, as the case may be, is $200,000, and

(ii) they allocate an amount to one or more of the members for the taxation year and the aggregate of the amounts so allocated, as the case may be, is $1,000,000, and

(b) the amount allocated under subparagraph (a)(i) to each member for the taxation year is not less than that member’s cumulative deduction account at the end of the immediately preceding taxation year,

the business limit for the year of each member to whom amounts have been allocated under subparagraphs (a)(i) and (ii) is the amount so allocated to the member under subparagraph (a)(i) and the total business limit for the year of each member to whom amounts have been so allocated is the amount so allocated to the member under subparagraph (a)(ii).

Sec 251 Arm's Length

(1) For the purposes of this Act,

(a) related persons shall be deemed not to deal with each other at arm’s length; and

(b) it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm’s length.

Sec 251(2)

(2) Relationship defined. For the purpose of this Act “related persons”, or persons related to each other, are

(a) individuals connected by blood relationship, marriage or adoption;

Sec 256(2)

(2) Idem. When two corporations are associated, or are deemed by this subsection to be associated, with the same corporation at the same time, they shall, for the purpose of this Act, be deemed to be associated with each other.

Sec 248

“Corporation" — “corporation” includes an incorporated company and a “corporation incorporated in Canada” includes a corporation incorporated in any part of Canada before or after it became part of Canada;

Also because of the numerous references made to section 39 of the former Act it is useful to know that 256(1) of the new Act is analogous to 39(4) of the former Act, 256(2) to 39(5), 256(3) to 39(6), 256(4) to 39(6a), 256(5) to 39(6b).

4.02 Cases at Law

Counsel for the parties referred to the following cases at law and jurisprudence:

A Cases at Law

1. Allied Farm Equipment Ltd v MNR, [1972] CTC 619; 73 DTC 5036;

2. Allied Farm Equipment Ltd v MNR, [1972] CTC 107; 72 DTC 6086;

3. Allied Farm Equipment Ltd v MNR, [1970] Tax ABC 1265; 71 DTC 1 (CAI);

4. International Fruit Distributors Ltd v MNR, 55 DTC 1186;

5. International Fruit Distributors Ltd v MNR, [1953] CTC 342; 53 DTC 1222;

6. The Queen v B & J Music Limited, [1983] CTC 50; 83 DTC 5074 (CFA);

7. B & J Music Limited v The Queen, [1981] CTC 315; 81 DTC 5176 (CF);

8. B & J Music Limited v MNR, 78 DTC 1103 (CRI);

9. The Queen v Canadian Pacific Ltd, [1977] CTC 606; 77 DTC 5383 (CFA);

10. Canadian Pacific Ltd v The Queen, [1976] CTC 221; 76 DTC 6120 (CF);

11. Les produits alimentaires Anco (1961) Inc, [1979] CTC 2669; 79 DTC 573;

12. Lea-Don Canada Limited, [1970] CTC 346; 70 DTC 6271;

13. Office Overload, 39 Tax ABC 309; 65 DTC 690;

14. Colquhoun v Brooks, 2 TC 490, especially at 495;

15. Attorney General of Ontario v Reciprocal Insurers and Others, [1924] AC 328, especially at 345;

16. Attorney General for Alberta v Huggard Assets Ltd, [1953] AC 420, particularly at 1194;

17. Re Bains: The King v Marchioness of Donegal, [1924] 2 DLR 1191, particularly at 1194;

18. MacLeod v Attorney General for New South Wales, [1891] AC 455, particularly at 457.

B Jurisprudence

19. Maxwell Interpretation of Statutes, 12th Edition 1969, 169 to 171 and 177;

20. Beal’s: Cardinal Rules of Legal Interpretation, 3rd Edition 1924,270 and 277;

21. Craies: On Statute Law, 6th Edition 1963, 469.

4.03 Analysis

A Appellant's Argumentation

4.03.1 The summary of the appellant’s argumentation is in paragraphs 6 to 16 of the notice of appeal.

4.03.2 6. The issue in this case was definitively resolved in favour of the taxpayer’s

contention by the judgment of the Federal Court of Appeal in Allied Farm Equip- met Ltd vs Minister of National Revenue, 1972 Canada Tax Cases, 619, and corresponding

judgment in similar cases heard at the same time.

The said case was summarized as follows by CTC at 619:

The appellant and two other Canadian corporations whose appeals were heard concurrently were each controlled by a different brother in a family group which con- trolled a non-resident corporation. The Canadian corporations were not associated with each other under the terms of subsection 39(4) but each of them, in the Minister’s view, was associated with the non-resident corporation, from which it followed that the Canadian corporations were associated with each other under subsection 39(5) through their common association with the non-resident corporation. In the appellant’s view the non-resident corporation, not carrying on business in Canada and therefore not liable to tax in Canada, could not be regarded as a “corporation” in applying section 39 or any other provision of the Act. From this it would follow that the Canadian corporations were not associated with the non-resident nor, therefore, with each other.

HELD (per curiam):

Subsection 39(4), by its terms, had no application to determine whether two corporations were associated unless they were both subject to tax under Part 1 of the Act. It followed that the appellant was not associated with the non-resident corporation nor therefore with the other two Canadian corporations. Appeal allowed.

4.03.3 7. When this was pointed out to Revenue Canada, the latter came forward with

the contention that the judgment in Allied Farm Equipment Ltd which was based on the pre-1972 law is no longer applicable to the post-1971 law because the pre-1972 law in the then relevant Section 39(5) of the Excise Tax Act declared that “When two corporations are associated, or are deemed by this subsection to be associated to the same corporation at the same time, they shall, for the purpose of this section, be deemed to be associated with each other” whereas the now relevant Section 256(2) declares “When two corporations are associated, or are deemed by this subsection to be associated with the same corporation at the same time, they shall, for the purpose of this Act, be deemed to be associated with each other.

8. Under Section 39 of the old Income Tax Act, the definitions of what companies were associated and what companies were not associated were embodied in Section 39 itself and, accordingly, Section 39 was the only section to which one turned for the definition itself albeit there were other sections to determine the meaning of such matters as non-arm’s length.

Mr Justice Jackett said in Allied Farm Equipment Ltd:

I shall now endeavour to indicate the question that has to be decided.

We are concerned here with four corporations, viz,

(a) the appellant, which was resident and carried on business in Canada,

(b) two other corporations that were resident and carried on business in Canada (hereinafter called “the other Canadian corporations”) and

(c) a United States corporation that was not resident and did not carry on business in Canada.

It is common ground that, applying only the tests of subsection 39(4), the appellant was not, for the purpose of section 39, “associated” with either of the other Canadian corporations. On the other hand, if one applied such tests to the appellant and the United States corporation, those two corporations would be regarded as “associated” with each other, and, similarly, if one applied such tests to either of the other Canadian corporations and the United States corporation, a similar result would be achieved. It is at this point that the difference between the parties arises. The respondent says that subsection 39(4) is applicable with the result that the appellant and the other Canadian corporations are associated with the same corporation — the United States corporation

— and it follows that subsection 39(5) requires that they “be deemed to be associated with each other”. The appellant, on the other hand, says that, as the United States corporation is not subject to tax under Part 1 of the Income Tax Act, subsection 39(4) cannot be applied in respect of it and there is therefore no basis for applying subsection 39(5).

In my view, the correct answer is to be found by an analysis of the language of subsection (2), subsection (3), subsection (3a) and subsection (4) of section 39. Each of the first three of these subsections sets up a factual case concerning “two or more” or “a group” of corporations that are “associated” (which expression does not have any sufficiently precise sense in the context) and then lays down a rule to determine “the tax payable by each of them” or “the tax payable by each of the corporations” falling within the factual case. Subsection 39(4) then provides the answer to what is meant in the earlier subsections when the section speaks about corporations that are “associated”. It says that ‘‘For the purpose of this section, one corporation is associated with another” if any of the tests enumerated therein is applicable.

What this analysis shows is

(a) that the tests found in subsection 39(4) are only applicable to determine that corporations are “associated” for the purposes of section 39,

(b) that there are three substantive rules in section 39 applicable to corporations that are “associated”, and

(c) that each of those rules determines, in certain circumstances, the amount of “the tax payable” under Part 1 of the Income Tax Act “by each of the corporations” that are “associated”. It follows, in my view, that subsection 39(4) has no application to determine whether two corporations are associated unless they are both subject to income tax under Part 1 of the Income Tax Act.

4.03.4 9. When the current Income Tax Act was introduced with Section 125 dealing

with the tax effects of small business corporations and the derogations resulting from associated companies as set forth in the current Section 125, as a matter of tidy housekeeping and in an effort to put more of the definition and interpretation sections together, the current definition of associated corporations which is word for word the same except on this point was embodied in Section 256 of the present Income Tax Act.

10. Accordingly, Section 256(2) which otherwise textually reproduces word for word exactly Section 39(5) could not say in a manner that would have any meaning that it should be “for the purpose of this section” because the section was 256 and it really had to be for the purpose of Section 125 as well. Hence, to have any meaning it had to be expressed as being “for purposes of this Act”.

In his argument, counsel for the appellant gave more explanation about that “for purposes of this Act”:

When the new law was drafted, 256(1), they didn’t say “for the purpose of this Section”, if they said, “for the purpose of this Section,” it would be meaningless. It’s a Definition Section. It’s not the Section that controls it. It’s for the purpose of really Section 125, which is the only Section. So instead of saying “for the purpose of this Section”, they said “for the purpose of this Act.” They might have said, “for the purpose of Section 125”, and played it safe and said, ‘‘ for the purpose of this Act”. If they said “for the purposes of this Section”, they would have changed the meaning. There would have been no definition. Because a definition for the purpose of the definition without governing the Act would be meaningless or ridiculous. So in common with the general Definition clauses they made it “for the purposes of the Act”, and so forth.

It so happens, although I don’t place any importance on it, that the only Section dealing with associated companies is Section 125. That’s the only place in the Act you can find it. I don’t think that makes any difference. The only Section is 125 — the result is the same — that “for the purposes of this Act”, i.e., Section 125, one corporation is associated. I emphasize particularly that every word, with the exception of the substitution of “Act” for “Section”, is identical with what went before. There was no suggestion that anything was being changed.

4.03.5 11. The desideratum of the Allied Farm Equipment Ltd judgment is clearly that

a company which is not subject to tax under Part I of the Income Tax Act (eg, a United States corporation not doing business here) is not an associated corporation and the use of the words “for the purpose of this Act” instead of the former words “for the purpose of this section” does not make the United States corporation subject to tax in Canada under Part I because they have Canadian controlling shareholders.

12. Nobody has ever previously suggested such a preposterous result and there is nothing in the law to justify it.

Counsel for the appellant gave another reason in his argumentation:

In Allied Farm Equipment I had an argument thrown at me, which actually the Crown can’t throw at me here — it’s irrelevant because the argument was dismissed —

they said: Mr Vineberg, if you argue that, suppose an American company controls two

(2) Canadian companies. If we can’t look at the American company even though they’re controlled by the same person, are you going to argue that those two (2) Canadian companies are not associated? Because they’re controlled by a non-resident we’re not allowed to look at a non-resident? And I said: No no, I’m not arguing that at all. That was settled by International Fruit Distributors Limited, and you will see reference to it in Allied Farm Equipment. The American company is a person although not subject to tax in Canada. And I’m not arguing that it isn’t a person, I didn’t argue that it wasn’t a person, and the Court recognized that by saying — it had been advanced against me that: if you carry that to its extreme conclusion, the court could never look at the persons owning the shares. Because in those days they didn’t have the limit of Canadian controlled private corporations. Today I would think that that’s academic but it’s not important whether it’s academic or not. I do not deny that a foreign corporation, whether subject to tax or not, is a person, if there is a reference to person. But in Section 256 they’re not talking of persons. They’re talking of control, they’re talking of associated corporations. It’s a term of art under the Canadian tax law.

Now, to fully appreciate the importance of the distinction, I would ask Your Lordship to turn to Section 150 of the Canadian Income Tax Act. And an interesting point can be drawn from the exercise. Incidentally, I argued the same point under Section 44(1) of the old Income Tax Act, and the two (2) Sections are identical, really.

Two (2) kinds of taxpayers under Section 150: There’s an individiual, and if I can skip a few words, “a return of income for each taxation year for which a tax is payable in the case of an individual must be filed with the Minister”.

So an individual is only subject to tax if he has to pay a tax. He only has to file a return if a tax is payable. An individual earning five hundred dollars ($500.00) a year or is three (3) years old and has no income, or he only had losses, he doesn’t even have to file a return.

Not so for a corporation. It says in so many words: “a return of the income for each taxation year in the case of a corporation shall without notice or demand be filed with the Minister in prescribed form and containing prescribed information”. Every corporation must file a tax return whether it is subject to tax or not. Not like a person.

What is meant by a corporation? They don’t say a corporation resident in Canada. They don’t say a corporation doing business in Canada. They don’t say a corporation disposing of Canadian property.

4.03.6 The Principle of “Territorial Imperative”

Counsel for the appellant contended that the decision in Allied Farm Equipment Ltd is based on what he called the “Territorial Imperative Principle”.

We know that there must be some kind of inhibition, or restraint, or limitation not spelled out in so many words in the Act, because we all know that the foreign corporation not doing business in Canada isn’t expected to file a tax return even though every corporation, whether taxable or not, must file a tax return.

The answer to that is to be found in a principle of statutory interpretation, which I would call the territorial imperative.

There are a whole series of rules of interpretation that have been defined in the courts emphasizing this territorial restriction. I have drawn up a a list — with one exception I don’t propose to quote it. These are rules of territorial limitation implicit in statutory interpretation. It’s the same list as I filed in Allied Farm Equipment. I’m not going to refer to any of these with one exception, except to say that they all underline the point that I’m making: the unseen hand of the territorial limit, which is at the root of the judgment. 1 should perhaps say that Mr Justice Jackett, speaking for the Court in Allied Farm Equipment, had delivered judgment from the bench. He didn’t go into all the reasoning that I had submitted to him in writing and otherwise; he didn’t go into any of these cases particularly; he accepted the reasoning and that’s the underlying basis of the judgment which appears.

And then the learned counsel referred to the Colquhoun case, to the Office Overload case and the Lea-Don Canada Limited case.

4.03.6.1 The Colquhoun v Brook

This case is summarized as follows: “A person resident in England is partner in a firm engaged in a trade carried on entirely out of the United Kingdom. Held, that his partnership is a foreign or colonial possession chargeable under the 5th case of schedule D and consequently he is liable only in respect of so much of the profit accruing to him as is remitted to his country”. It is important to underline that this case goes back to 1889 and at that time the British Act then did not have sanction as section 3 of our Income Tax Act which makes clear that when a Canadian is subject to tax, he is subject to tax on his world income. In sum “The Income Tax Act is addressed to its customers, but non-customers need not apply” the counsel said. This principle was brought up by the Income Tax Department in two following cases.

4.03.6.2 The Overload Case

In this case the facts are summarized as follows in 39 Tax ABC at 309:

For an agreed price of $74,385., the appellant purchased as a going concern a business being carried on in the US by a US resident. Although a balance sheet in respect thereof disclosed accounts receivable of only $33,518 (valued at $12,616) the part of the purchase price allocated thereto was $64,442. Moreover, this was said to relate to actual accounts totalling $116,913. The large disparity was said to be due to the fact that the US vendor followed the practice of factoring his accounts and was, in effect, on a cash basis. The vendor and purchaser jointly executed a form of election under Section 85D and in filing its next tax return the appellant duly added to its income $52,471 being the difference between the alleged face value of the accounts purchased ($116,913) and the price paid therefor ($64,442). At the same time, having been able to collect only $9,775 in respect of these accounts, the appellant sought to deduct $107,138 (the difference between $116,913 and $9,775) as bad debts. In the Minister’s view, however, Section 85D had application only if both purchaser and vendor were taxable in Canada in respect of the business and then only if the vendor kept his accounts on the “accrual basis’’. The Minister also contended that if, in fact, any accounts receivable were purchased, (1) they did not exceed the amount paid for them;

(2) they had not been included in computing the vendor’s income and were not still outstanding; (3) the debts purchased were debts in respect of which the vendor had previously made a deduction; and (4) the debts were not established to have become bad in the course of the taxation year.

Commissioner Davis said at 320:

After a careful review and thoughtful consideration of the evidence adduced and of the provisions of Section 85D of the Income Tax Act under which this appeal falls to be decided, I have reached the conclusion that the section taken as a whole, which, in my opinion, is the way in which it must be interpreted, is intended to apply to persons who fall to be taxed or otherwise dealt with under the provisions of the Canadian Income Tax Act and who report to the Canadian Government the income arising from the operation of the business or businesses whose sale is the central concern of the said Section 85D. That section is, in my opinion, intended to afford a continuity in the treatment of accounts receivable where the sale of a business intervenes, and to this extent I am in accord with counsel for the respondent.

In the instant case, the counsel for the appellant:

So the Tax Department won its argument on the territorial limitation implicit in the Section even though it wasn’t spelled out. 85D is for customers only. Those people who are not customers of the Tax Department, they’re not covered by the Section, because of the territorial limitations implicit in all legislation.

4.03.6.3 Lea-Don Canada Limited Case

In this case, the Supreme Court of Canada also confirmed the principle of the limitation of the Territorial. The facts are summarized as follows, in [1970] CTC at 346:

Nassau, a corporation resident in Canada, owned an aircraft which it rented to the appellant. In June 1963 Nassau sold the aircraft to its non-resident parent for $615,500, which was some $60,588 less than its “undepreciated capital cost”. Nassau accordingly claimed a terminal loss of that amount under Section 1100(2) of the Income Tax Regulations. Thereafter the parent company continued to lease the aircraft to the appellant and Nassau was wound up. In October 1963 the parent company sold the aircraft in an arm’s length transaction for $892,000. In the Minister’s view this indicated that the fair market value of the aircraft in June was $915,000 and, relying on Section 17(2) of the Act, the Minister sought to disallow the terminal loss and also to effect a recapture of capital cost allowance under Section 20(1) in the amount of $239,412. In the appellant’s view (appealing on behalf of Nassau) the aircraft became “depreciable property” of the non-resident corporation within Section 20(4) so that Section 17(2) would be rendered inapplicable by Section 17(7). The appellant sought to support its view on the proposition that the parent company was a “taxpayer” under the Act within Section 139(l)(av) and within Part III of the Act so that all deductions allowed in computing “income” were applicable even though the taxpayer was not liable to tax on that income.

The appellant’s argument failed. Mr Justice Hall said at 349:

The argument that the provisions of the Income Tax Act authorizing a deduction on account of the capital cost of depreciable property are applicable to non-residents who are not subject to assessment for income tax under Part I of the Act because such deduction is from income is wholly untenable. It is clear that Section 20(4) is concerned with taxpayers entitled to a deduction not with persons who are not subject to assessment under Part I. A non-resident not carrying on business in Canada is not a person entitled to such a deduction and therefore Section 20(4) cannot properly be said to be “applicable” to him.

4.03.7 13. Actually, if there ever previously had been any doubt on the subject, and

the judgment in Allied Farm Equipment Ltd case affirms that there should not have been, the changes embodied in the current law adopted in 1972 would in any event have brought about on an “a fortiori” basis and even more emphatically than before the same conclusions that are set forth in Allied Farm Equipment Ltd.

14. Under the old Section 39, the phraseology related to “two corporations” without defining or delimiting whether these corporations as envisaged in such Section 39 might be US or other foreign corporations. It was the contention of Revenue Canada in the prolonged Allied Farm Equipment litigation that the word “corporation” is sufficiently broad as to cover any and all corporations anywhere in the world whether incorporated in Canada and taxable here or otherwise. The contention of the taxpayer in the Allied Farm Equipment case, which was upheld in the courts, is that there was implied territorial limitation to corporations subject to taxation in Canada under Part I of the Income Tax Act before occasion arises to determine whether it comes within a circle of “associated corporations”.

15. As distinct from the old section 39 which simply dealt with “corporations” without any delimitation, Section 125 of the current Act which is the one applicable deals with “Canadian controlled private corporations”. Under Section 125(6)(a) of the current legislation, a “Canadian controlled private corporation” means a private corporation that is a Canadian corporation (amongst other limits). Stradellina (USA) Inc is not a Canadian corporation but a USA corporation. Thus, it is completely excluded from the ambit of associated companies even more emphatically than was the situation under Allied Farm Equipment under the old law. While the results are the same, Revenue Canada is deprived of the sole argument which was the basis of its case in Allied Farm Equipment.

16. As the argument did not avail even in Allied Farm Equipment when the law dealt with “two corporations” without being limited to Canadian controlled private corporations, the conclusions in Allied Farm Equipment not only apply “a fortiori” but should serve to convince Revenue Canada that there is no occasion for any assessment.

4.03.8 At the end of his argumentation, counsel for the appellant pointed out that there is something which is in provision 125(1) of the new Act which was not in 39 of the former Act. This addition reads as follows at the beginning of the said provision:

There may be deducted from the tax otherwise payable under this part.

4.03.9 As general conclusion of his argumentation, the learned counsel said:

Now, it is established that Stradellina corporation is not subject to tax under the Income Tax Act. It is not a customer of the Income Tax Department. It is excluded from the purview of associated corporations. Section 125 defines the associated corporations by cross reference, if you like, to Section 256.

Subject to these changes in the law, the entire spirit and terminology is identical. The circle is reduced to who pays the tax, it’s limited even if you’re otherwise qualified, they eliminated the public corporations like Imperial Oil, they eliminated the non-private corporations and they eliminated the Canadian corporations controlled by somebody else. But outside of these eliminations, they were more generous in the expansion, they did not make any changes.

So that the concept as defined in Allied Farm Equipment has all the logic and all the reasons.

B. Respondent’s Argumentation

4.03.10 Concerning Allied Farm case, the basic argument of counsel for the respondent is that the application of the said case is questionable. He referred to Richard B Minor in Associated Corporations (the Carswell Company Limited — 1983) at 56:

The application of the Allied Farm Equipment decision to the associated corporation rules in the current Act is questionable as the decision appears to be distinguishable on the basis that subsection 256(1) provides for the application of the association rules “for the purposes of this Act’’ and not simply for the purposes of the small business deduction, as was the case with subsection 39(4) at the time of the Allied decision. It may still be possible to argue that where the association rules are being applied only for the purposes of determining the entitlement to the small business deduction the Allied Farm Equipment case has some application. However, in view of the words in subsection 256(1) that corporations coming within the rules set out therein are “for the purposes of this Act” associated and because, as discussed earlier, the consequences of association under the Act go considerably beyond the small business deduction, the Allied Farm Equipment decision is questionable authority even for this proposition.

4.03.11 International Fruit Distributor Case

Counsel for the respondent pointed out that in the Allied Farm decision, it is referred to International Fruit Distributors Limited. Indeed Mr Justice Jackett said:

I may say that I can find no conflict between this conclusion and what was decided in International Fruit Distributors Limited v Minister of National Revenue, [1953] CTC 342 (53 DTC 1222), which decision was upheld, I understand, without written reasons, by the Supreme Court of Canada.

This case is summarized as follows in 5 DTC 1222:

Appellant and another company were owned by a third foreign corporation. The Minister considered appellant as a related company under s 36(4)(b)(i) which provides that a corporation is related to another if 70% or more of the shares of each of them is owned directly or indirectly by one person. Appellant contended that one person did not extend to a corporation or a foreign corporation.

Held, that the appeal is dismissed. Person in s 36 includes a corporation and a foreign corporation too. Under s 127(l)(ab) person includes any body corporate and politic.

Chief Justice Jackett said in Allied Farm'. “I have no doubt that the same result would follow under Section 39(4)(b)”. Provision 39(4)(b) of the former Act

reads as follows: “Both of the Corporations were controlled by the same person or group of persons”. Then the learned counsel for the respondent continued:

Alors monsieur le Juge Jackett dans l’affaire de International Fruité, pour lui c’est une situation différente.

Le juge ne répond pas à la question mais, si vous remontez, monsieur le Juge, à l'alinéa (a) du paragraphe (4) de l*article 39, dans International Fruit, la conclusion à laquelle on arriverait sous 39(4) a, si on avait une situation identique, si on applique International Fruit, c’est que la corporation américaine, qui contrôle la corporation canadienne, les deux (2) sont associées en vertu de 39(4) a.

Evidemment dans la cause de International Fruit Distributors Limited, le Juge ne se prononce que sur (b), mais la conclusion logique serait aussi de dire que les deux (2) corporations, l’américaine et la canadienne, sont associées. On ne sait pas quel aurait été son raisonnement si ce problème-là lui avait été soulevé. Mais, au fond, c’est la conclusion logique qui découle de International Fruit Distributors Limited.

4.03.12 And the learned counsel coming back to the Allied Farm decision said:

Done, monsieur le Juge, si vous lisez les motifs que le Juge en Chef Jackett de la Cour fédérale d’appel, c’est uniquement, mais uniquement parce que la partie 39 prévoyait que la corporation, la façon d’imposer des corporations, tout est contenu à l’article 39, et pas parce que, uniquement, la corporation américaine n’était pas imposable sur la Partie I. C’est parce que l’article 39 le prévoyait.

4.03.13 Counsel for the respondent also pointed out that the notion of “Associated Corporation” does not have application only in section 125 of the Income Tax Act as contended by counsel for the appellant, but also among others, in provision 129(g) (investment income from Associated Corporation deemed to be active and provision 37.1(4) (scientific research)).

4.03.14 Counsel for the respondent contended the word “Corporation” used in a provision of the Act must be construed strictly as it is, without adding unexpressed intendment [sic]. Counsel referred to the B & J Music Limited case and the Canadian Pacific Limited case.

4.03.14.1 B & J Music Limited Case

This decision was given by Mr Justice Thurlow of the Federal Court of Appeal in 1983. The facts in this case and the decision are summarized as follows in DTC at 5074:

The taxpayer corporation was formerly controlled by non-residents, however, after the sale of its shares of capital stock to Canadian owners, became a “Canadian controlled private corporation’’ and claimed the relevant small business deduction. For the purposes of the deduction, the Minister opened the taxpayer’s cumulative deduction account with the inclusion of an accumulation of taxable income of the years preceding Canadian control. On the taxpayer’s appeal from the Tax Review Board (78 DTC 1103), the Federal Court —Trial Division (81 DTC 5786) found the Minister’s calculation inappropriate for a corporation that was not Canadian controlled during those past years. The Crown appealed to the Federal Court of Appeal.

Held: The Crown’s appeal was allowed. The Court found that on the proper interpretation of the relevant statutory provision the taxpayer, as a Canadian controlled private corporation, was required to bring taxable income for the past taxation years into the computation of its cumulative deduction account. Therefore, the notion of “while a Canadian controlled private corporation’’ was not relevant to the calculation and the Crown’s appeal was allowed accordingly.

Mr Justice Thurlow, at 5075, quoted the decision of the trial judge on the particular point:

In my view, section 125 of the Income Tax Act is a special section affording “Canadian-controlled private corporation’’ special tax treatment and it does not in any of its provisions refer to any other corporations; and further Parliament did not legis- late in this section to deny the so-called small business deduction to any corporation such as B & J Music Limited which was not in 1971 a “Canadian controlled private corporation”.

Then he gave his own decision reversing the above one:

I accept the view that section 125 affords Canadian controlled private corporations special tax treatment. That, to my mind, is its purpose but, as I see it, the purpose is to be carried out only to the extent that the language of the section so provides. It is not open to the Court to extend the application of what the section provides by reliance on some supposed but unexpressed intendment.

In conclusion he added:

In order to exclude that income from the computation it would, as I see it, be necessary to amend the definition by adding after the words “Canadian taxable incomes” wording such as “while a Canadian controlled private corporation”. This, in my opinion, the Court cannot do.

4.03.14.2 Canadian Pacific Limited Case

This decision was given by Mr Justice Pratte of the Federal Court of Appeal. In this case the question in law to be decided was whether subsection 8(3) of the former Act, 15(3) of the new Act (Interest on Income Bonds) applied when the corporation paying a dividend was not subject to Part I of the Income Tax Act:

The Minister argued that since the words “unless the corporation is entitled to deduct the amount so paid in computing its income” in the last part of section 8(3) applied only to corporations which are subject to Part I of the Act, the word “corporations” in the opening part of the same subsection should be given the same restrictive meaning.

In answer to that argument Mr Justice Pratte said:

That argument in my view, rests on a fallacy. The word “corporation” is not used in a restricted sense in the last part of section 8(3). True, the words “unless the corporation is entitled to deduct the amount so paid in computing its income” refer only to corporations which are subject to Part I of the Income Tax Act. But, this is not because the word “corporation” is there used in a narrow sense; it is simply because only those corporations which are subject to Part I of the Income Tax Act can meet the condition expressed in that part of the section.

4.03.15 Concerning Stradellina Corporation, counsel for the respondent never contended that this corporation was his customer, and that it had to be taxed in Canada.

C. Court's decision

4.03.16 The Court understands well the appellants’ argumentation. However, it does not share their conclusion. The present Act must be construed as it is written just like the former Act had to be construed as it was written.

To determine whether or not two or more corporations are associated for the purpose of the Income Tax Act, the Court is bound by section 256 — and the definition of the word “corporation” of section 248 (all those provisions being quoted above in paragraph 4.01). This obligation exists whatever the application which is involved: limit for small business deduction 125(2) (3), for investment income 129(6) or for scientific research 37.1(4). Differently from the former Act indeed, the new Act embodies in section 256 the definition and interpretation concerning associated companies and this independently from the application sections. As pointed out in the lengthy explanation by the learned counsel, the first words of section 256 are: “For the purposes of this Act, . . .”

4.03.17 A foreign corporation as Stradellina (USA) Corporation which is not a Canadian corporation, which is not engaged in business in Canada, and which is not subject to taxation in Canada is a corporation within the meaning of the Income Tax Act. A corporation indeed, pursuant to section 248 “includes an incorporated company” whatever the location of the incorporation.

It is that large meaning which must be considered in construing provisions 256(1) and (2). This meaning is not restricted by provisions 125(2) and (3) despite the fact that these provisions apply to the concept of associated companies only to Canadian controlled private corporations which were associated. The association of two or more corporations has first to be determined pursuant to section 256. Then, if one or two or more of those associated corporations have a special treatment in the Act because they are Canadian controlled, private corporations or because they have made scientific research or for any other reasons, this does not change their association pursuant to provision 256, which is for the purposes of the Act. Thence, Stradellina (USA) Inc. must be considered as a corporation in construing provision 256.

4.03.18 During the taxation years under appeal, whereas the ownership of the shares of the appellants and Stradellina (USA) Inc as described in subparagraph

(b) of paragraph 7 of the reply to notice of appeal quoted in paragraph 2.2 above; whereas David Sanders is the father of Leonard Sanders and thus they are related to each other within the meaning of section 251; whereas both formed a group of persons that controlled Stradellina (USA) Inc; whereas David Sanders owned directly or indirectly in respect of Holiday Luggage Inc and Stradellina

(USA) Inc not less than 10 per cent of the shares of any class of the capital stock thereof; therefore, Holiday Luggage Inc and Stradellina (USA) Inc on one hand and Falcon Luggage Inc and Stradellina (USA) Inc on the other hand are associated companies within the meaning of provision 256(l)(d).

4.03.19 Moreover, during the years under appeal whereas the two appellants were associated with Stradellina (USA) Inc at the same time, they were also associated with each other within the meaning of 256(2).

The Court must maintain the reassessments.

5. Conclusion

The appeals are dismissed in accordance with the above reasons for judgment.

Appeals dismissed.