B & J Music Limited v. Her Majesty the Queen, [1981] CTC 315

Gibson, J:—B & J Music Limited (formerly Buegeleisen & Jacobson Limited) until 24 June 1974 was controlled by non-residents of Canada namely by residents of the United States. On that day it became a Canadian-controlled private corporation.

By assessment the Minister decided that the corporation was ineligible for the so-called small business deduction provided for in section 125 of the Income Tax Act for 1972, 1973 and 1974 but nevertheless calculated the “Cumulative Deduction Account” for those years according to paragraph 125(6)(b) of the Act. This had the effect of making the corporation ineligible for any deduction from tax under section 125 of the Act in its taxation years 1975, 1976 and 1977.

B & J Music Limited appeals from assessments for tax in those years in this action.

The Minister’s calculation in this regard as recorded by assessment reads as follows:

The Amount of $579792.49 in the Cumulative Deduction Account represents the following:

	Taxable Income
1972	$148864.07
1973	$255675.84
1974	$175252.58
	$579792.49

These amounts are the corporation’s taxable incomes for the taxation years commencing after 1971.

B & J Music Limited submits that its Cumulative Deduction Account for the purpose of paragraph 125(6)(b) of this Act should date from January 1, 1975 and should read as follows:

1975

Cumulative Deduction Account at the end of preceding taxation year $ Nil

Add: taxable income for 1975	$128,976
Cumulative Deduction Account, December 31, 1975	$128,976
1976
Add: taxable income for 1976	$102,567
Cumulative Deduction Account, December 31, 1976	$231,543
1977
Add: Taxable income for 1977	$ 35,842
Cumulative Deduction Account, December 31, 1977	$267,385

Subsections 125(1), (2) and (6) (in 1975-76-77) read as follows:

125. (1) There may be deducted from the tax otherwise payable under this Part for a taxation year by a corporation that was, throughout the year, a Canadian- controlled private corporation, an amount equal to 25% of the least of

(a) the amount, if any, by which

(i) the aggregate of all amounts each of which is the income of the corporation

for the year from an active business carried on in Canada,

exceeds

(ii) the aggregate of all amounts each of which is a loss of the corporation for the year from an active business carried on in Canada,

(b) the amount, if any, by which the corporation’s taxable income for the year exceeds the aggregate of

(i) % of the aggregate of amounts deducted under subsection 126(1) from

the tax for the year otherwise payable by it under this Part, and

(ii) 2 times the aggregate of amounts deducted under subsection 126(2)

from the tax for the year otherwise payable by it under this Part,

(c) the corporation’s business limit for the year, and

(d) the amount, if any, by which the corporation’s total business limit for the year exceeds its cumulative deduction account at the end of the immediately preceding taxation year,

except that in applying this section for a taxation year after the 1972 taxation year, the reference in this subsection to “25%” shall be read as a reference to “24%” for the 1973 taxation year, “23%” for the 1974 taxation year, “22%” for the 1975 taxation year, and “21 %” for the 1976 and subsequent taxation years.

(2) For the purposes of this section,

(a) a corporation’s “business limit” for a taxation year is $100,000, and

(b) its “total business limit” for a taxation year is $500,000,

unless the corporation is associated in the year with one or more other Canadian- controlled private corporations 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.

(6) in this section.

“CANADIAN-CONTROLLED PRIVATE CORPORATION”

(a) “Canadian-controlled private corporation” means a private corporation that is a Canadian corporation other than a corporation controlled, directly or indirectly in any manner whatever, by one or more non-resident persons, by one or more public corporations or by any combination thereof; and

(b) “cumulative deduction account” of a corporation at the end of any taxation year means the amount, if any, by which the aggregate of

(i) the corporation’s taxable incomes for taxation years commencing after

1971 and ending not later than the end of the particular year, and

(ii) 4, of the amounts deductible under section 112 or subsection 113(1) from the corporation’s incomes for those years

exceeds the aggregate of

(iii) / of the taxable dividends paid by the corporation in those years, and

(iv) 4 times the amount, if any, by which the corporation’s refundable dividend tax on hand (within the meaning assigned by subsection 129(3)) at the end of the particular year exceeds its dividend refund (within the meaning assigned by subsection 129(1) for the particular year).

The defendant in the defence admits that the plaintiff

(a) in filing its income tax returns for its taxation years 1972, 1973 and 1974 did not calculate the cumulative deduction account referred to in paragraph 125(6)(b) of the Income Tax Act, RSC 1952, c 148 as amended by section 1 of c 63, SC 1970-71-72 (hereinafter referred to as “The Act”),

and

(b) in assessing the plaintiff’s income tax returns for its taxation years, 1975, 1976 and 1977, the Minister of National Revenue calculated the cumulative deduction account on the basis of including therein the plaintiff’s taxable incomes for its 1972, 1973 and 1974 taxation years and totalling $579,792.49 .

The defendant in the defences also pleads in assessing the plaintiff for its 1975, 1976 and 1977 taxation years, that the Minister of National Revenue proceeded on the basis that:

(a) the plaintiff’s taxable incomes for its 1972, 1973 and 1974 taxation years, respectively, were $148,864.07, $255,675.84 and $175,252,58; and

(b) the plaintiff had paid no dividends in its 1972, 1973 and 1974 taxation years; and

(c) the plaintiff’s fiscal period corresponded at all relevant times to the calendar year,

and therefore, the Minister of National Revenue in computing the balance In the plaintiff’s cumulative deduction account as of December 31, 1974, included therein pursuant to subsection 125(6) of the Act, the sums of $148,864.07, $155,675.84 and $175,252.58.

The submission of the defendant is that the word “corporation" in paragraph 125(6)(b) of the Income Tax Act refers to all corporations and not just to “Canadian-controlled private corporations" and accordingly all corporations have a “Cumulative Deduction Account” even if they do not qualify for the so-called small business deduction because as referred to in subsection 125(1) of the Act they are not “corporation(s) that was (were), throughout the year, a Canadian-controlled private corporation".

In my view, section 125 of the Income Tax Act is a special section affording a “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 legislate 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".

Accordingly, the appeal is allowed with costs and the matter is referred back for further reassessment not inconsistent with these reasons.