Canadian Dredge and Dock Company Limited v. Minister of National Revenue, [1981] CTC 2212, 81 DTC 154

The Chairman:—This is the appeal of Canadian Dredge and Dock Company Limited from reassessments dated June 29, 1977 in respect of the 1971, 1972, 1973 and 1974 taxation years. A summary of the facts and the issue are clearly set out in the pleadings.

Facts: The appellant in his statement of facts alleges as follows:

A. Statement of Facts

1. The appellant is a body corporate incorporated pursuant to the laws of the Province of Nova Scotia, which carries on business in the marine construction industry in the Maritimes and the Great Lakes and St Lawrence Seaway area of Canada.

2. During the years 1968 to 1970 inclusive the appellant incurred losses in the total amount of $1,059,558, which losses were deducted by the appellant in computing

its taxable income for the taxation years 1971 to 1973 inclusive.

3. By notices of reassessment dated the 29th day of June, 1977, Revenue Canada assessed the appellant disallowing the carry forward of losses for the years 1971, 1972 and 1973 in the amounts of $371,384, $763,174 and $274,193 respectively.

4. By notices of reassessment dated the 29th day of June, 1977 Revenue Canada assessed the appellant disallowing the small business deduction made pursuant to section 125 of the Income Tax Act for the 1974 taxation year.

5. By notices of objection filed on the 14th day of July, 1977 with respect to the taxation years 1971, 1972 and 1973, and on the 9th day of August, 1977 with respect to the 1974 and 1975 taxation years, the appellant objected to the said reassessments.

6. By notification dated the 6th day of November, 1978 the Minister confirmed the reassessments.

Paragraphs 2 to 6 inclusively of the appellant’s statement of facts are admitted by the respondent. With reference to paragraph 1 of part A of the notice of appeal, he only admits that the appellant is a body corporate incorporated under the Laws of Nova Scotia. The respondent does not admit any of the allegations in part B of the notice of appeal.

The facts as set out by the respondent in his reply are:

4(a) in its 1971 taxation year, the appellant was not, during that taxation year carrying on the business in which the loss of $371,384 deducted by the appellant in computing its taxable income for its 1971 taxation year, was incurred:

(b) in its 1972 and 1973 taxation years, control of the appellant was acquired, before the end of the appellant’s 1972 taxation year, by person or persons who did not, at the end of the appellant’s 1970 taxation year, control the appellant and the appellant was not, during the appellant’s 1972 or 1973 taxation year, carrying on the business carried on by the appellant prior to the end of its 1970 taxation year.

Appellant’s submissions:

7. The business loss of $371,384 is properly deductible in computing the taxable income of the Appellant within the provisions of paragraph 27(1 )(c) and subsection 27(5) of the Income Tax Act as it was prior to 1972.

8. The non-capital losses of $763,174 for the 1972 taxation year and $274,193 for the 1973 taxation year were properly deductible in computing the taxable income of the appellant within the provisions of subsection 111(1) and subsection 111(5) of the Income Tax Act.

9. In computing its tax for the 1974 taxation year the appellant was entitled to a deduction pursuant to section 125 of the Income Tax Act.

Respondent’s submissions:

6. With respect to the appellant’s 1971 taxation year, the appellant is prohibited from “carrying forward” business losses sustained by it in proceeding taxation years pursuant to subsection 27(5) of the old Act, on the basis that between the end of the appellant’s 1970 taxation year and its 1971 taxation year control of the appellant was acquired after June 13, 1963 by a person or persons who did not, at the end of the appellant’s 1970 taxation year, control the appellant, and the appellant was not, during the appellant’s 1971 taxation year, carrying on the business in which the loss was sustained.

7. The respondent submits that with respect to the appellant’s 1972 and 1973 taxation years, the appellant is precluded from “carrying forward” accumulated losses from prior taxation years by virtue of subsection 11 (5), on the basis that the appellant is not permitted to deduct, for the purpose of computing its taxable income for its 1972 and 1973 taxation years portion of its non-capital losses for its 1968 through 1970 taxation years aS may reasonably be regarded as its losses from carrying on a particular business because control of the appellant was acquired, before the end of the appellant’s 1972 taxation year, by a person or persons who did not, at the end of the appellant’s 1970 taxation year, control the appellant, and the appellant was not, during the appellant’s 1972 or 1973 taxation years carrying on that business.

8. The respondent submits further that with respect to the appellant’s 1974 taxation year, the small business deduction to which the appellant was entitled to a nil amount, because the disallowance of prior years losses affected the determination of the taxable incomes in those prior years which in turn affects the "cumulative deduction account” pursuant to paragraph 125(6)(b) of the Act.

For purposes of clarification, it was pointed out at the hearing that the company which incurred losses in the amount of $1,059,558 during the years 1968, 1969 and 1970 was T C Gorman Nova Scotia, Limited (hereinafter referred to as “Gorman NS”), the subject company incorporated in February of 1935 whose business was marine constructions.

(a) On March 31, 172, Gorman NS changed its name to Canadian Dredge and Dock Company Limited, hereinafter referred to as “Dredge”.

(b) Dredge was incorporated under Federal Charter on January 18, 1928. On July 7, 1967, Dredge changed its name to CDRH Limited and on May 9, 1972 again changed its name to Foodex Systems.

(c) Bedford Construction Company Limited, a wholly owned subsidiary of Dredge, was incorporated under the Company Laws of Ontario on January 19, 1954. On September 14, 1967, it changed its name to Canadian Dredge and Dock Company Limited and on April 27, 1972 again changed its name to Able- mont Limited.

The respondent did not dispute any of the facts set out above nor did he question the transactions as set out hereinafter:

In 1965 shares of T C Gorman Construction Co Ltd (a Quebec company) were owned by Canadian Dredge and Dock Co Ltd (now Foodex). T C Gorman Construction Co Ltd owned all of the shares of T C Gorman (Nova Scotia) Ltd (the “subject company”).

In 1965 a Mr Frank Ross acquired the shares of the Gorman companies.

During 1966/7 the subject company bid and obtained a contract for the North Sydney Harbour in which the following losses were incurred:

April 30, 1968	(785,365)
April 30, 1969	(210,429)
April 30, 1970	( 63,764)
	(1,059,558)

On March 31, 1969, Canadian Dredge & Dock Limited (now Ablemont) took an option to acquire the shares in the Gorman companies. This option was exercised on July 13, 1970.

On December 17, 1971 the shares of the Gorman companies were sold to Mar- well Dredging Ltd, the present owner.

In computing its taxable income the company deducted its losses as follows:

December 31, 1971	91,684
December 31, 1972	693,681
December 31, 1973	274,193
	1,059,558

Law:

The basic issue is more particularly centered on subsection 27(5) of the Income Tax Act, RSC 1952, c 148, as amended and subsection 111(5) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

There is agreement between the parties that a change in the control of Gorman NS took place after June 13, 1963, and before the end of the 1971 taxation year, by a person that did not control the appellant at the end of 1968, 1969 or 1970 taxation years. The legal issue is therefore further condensed and only paragraph 27(5)(b) of the old Act and paragraph 111 (5)(a) of the Income Tax Act are truly pertinent to the principal issue.

Paragraph 27(5)(b) reads as follows:

the corporation was not, during the taxation year, carrying on the business in which the loss was sustained.

Paragraph 111 (5)(a) reads as follows:

control of the corporation has been acquired, before the end of the year, by a person or persons who did not, at the end of that preceding year, control the corporation and the corporation was not, during the year, carrying on that business, or

We are concerned here with the business of Gorman NS for the period of 1968 to 1973 inclusively. There is agreement between the parties that during the years 1968, 1969 and 1970, during which losses were sustained, Gorman NS (under the management control of Dredge since 1969) was operating a marine construction business in the Maritimes. The purchase by Gorman NS of Dredge assets in May of 1971, resulted in the company having two operations in the loss application years: its original operations in the Maritimes and the Great Lakes and St Lawrence area operations, the assets for which had been purchased from Dredge.

Notwithstanding the number of related transactions and the complexity of the evidence adduced, the issue in this appeal simply put is: whether the business carried on by Gorman NS in the loss years is the business carried on by that company during the loss application years viz 1971, 1972 and 1973.

The appellant’s submission is twofold:

(a) That the marine construction business of Gorman NS in the Maritimes in which the losses were sustained in 1968, 1969 and 1970, is the marine construction business from which income was derived in the Great Lakes and St Lawrence areas in 1971, 1972 and 1973.

(b) The appellant continued to carry on the marine construction business in the Maritimes in the loss application years even if it were found that the Great Lakes marine construction business was not the marine construction business carried on by the appellant in the Maritimes in the loss application years.

The respondent’s contention is that the business carried on by the appellant in the loss application years is not the business that it carried on in the loss years and consequently the appellant is not entitled to the deduction of business to the deduction of business losses provided for under paragraph 27(1 )(e) of the former Act and paragraph 111 (1 )(a) of the current Act.

Paragraph 27(1 )(e) reads as follows:

business losses sustained in the 5 taxation years immediately preceding and the taxation year immediately following the taxation year, but

Paragraph 111(1 )(a) reads as follows:

Non-capital losses.—non-capital losses for the 5 taxation years immediately preceding and the taxation year immediately following the taxation year, but no amount is deductible in respect of non-capital losses from the income of any year except to the extent of the taxpayer’s income for the year minus all deductions permitted by the provisions of this Division other than this paragraph, paragraph

(b) or section 109;

In submitting that the appellant’s company did not carry on during the loss application years the business that it carried on during the loss years, the respondent cited Holiday Knitwear v MNR, 31 Tax ABC 30; 63 DTC 116, as providing some of the tests of what the concept of “business” involves and points out that a business means more than just its product. Another case referred to was MNR v Eastern Textiles Limited, [1957] CTC 48; 57 DTC 1070, which established inter alia “that a company can carry on more than one business”. Island Motor Transport Limited v MNR, 33 Tax ABC 365; 63 DTC 884, was cited to point out that while retaining the elements of a business, they can be so materially alterered that in effect the changes give rise to a new type or new field of business.

It is the respondent’s position that:

(a) The business carried on by the appellant in the Maritimes in the loss years, was not the business it carried out in the Maritimes in the loss application years.

(b) The business carried on by the appellant in the Great Lakes area in the loss application years was not the business carried on by the appellant in the Maritimes during that same period or in the loss years.

Dealing first with the respondent’s second point (ie the business carried on by the appellant in the loss application years in the Great Lakes is not the business carried on in the Maritimes during the loss application period), it is necessary in my view to make a distinction between the “business” of a company and the various operations through which the company carries on that business.

The acquisition by Gorman NS of the Ontario assets in May 1971 was evidently made with a view of operating a marine construction business in the Great Lakes area, as had been done in the Maritimes in the loss years. At the beginning of the loss application year in 1971, the company was therefore carrying on “business” by means of two operations; one in Ontario and one in the Maritimes.

It is also important to consider the nature of the appellant’s business. Although the concept of “business” suggests several elements which are common to all business, as set out at 126 of Holiday Knitwear (supra) cited by the respondent, there are countless specific factors which differ from one business to another and which cannot be ignored in determining the instant issue.

I have not been given any reason to doubt the testimony of Mr Collin B Fairn, President of Canadian Dredge and Dock Company Limited, who from 1952 to 1956 was field engineer for T C Gorman Nova Scotia, when he stated that marine construction businesses very often operate in various areas in the country and abroad and usually away from the location of their head offices. Nor is it unreasonable to accept that, owing to the nature of the business and the very high cost of equipment necessary in carrying out most of the marine construction jobs, the renting of maring equipment from/to competing companies is a common and often necessary practice in that specialized industry.

The continuity of the appellant’s legal entity as a company throughout the period of 1968 to 1973 inclusively is not disputed nor, in may opinion, could an impartial observer conclude otherwise than that the appellant, under whatever name it operated, was principally engaged in marine constructions during the whole of that period. Although it does not of course determine the issue, the evidence is that the losses incurred by the appellant in the loss years and the income earned by it in the loss application years both resulted from the exercise by the company of “a marine construction business”. The question is whether it was the business.

The respondent’s principle contention is basic to both his submissions and the reasons advanced by the respondent in support of his position also underlie both aspect of his submissions.

The respondent contends that between the end of the loss period and the beginning of the loss application period, the appellant hao ceased exercising its Maritime construction business in the Maritimes, or had so altered its operations that in effect it could no longer be said to be in the marine construction business in the Maritimes. The respondent also claims that the Company’s Ontario operations were not the business carried on by the appellant in the loss years.

It is therefore the respondent’s contention that having discontinued, essentially altered or completely changed the business it exercised in the loss years, the appellant company cannot claim losses from any of its subsequent operations in the loss application years, whether in the Maritimes or in Ontario, since those subsequent operations would no longer be “the business” the appellant carried on in the loss years as required by subsections 27(5) and 111(5) of the Act.

The respondent’s basic submissions are that, in the loss application period the appellant’s company’s revenues were from rentals; it had no current marine contracts; its administrative office was reduced to a trailer; it had disposed of major fixed assets; it had substantially reduced the use of its warehouse due to leasing and its permanent personnel had been cut down to two employees.

In argument, the respondent admitted that the appellant’s business in the loss application years had retained some of the characteristics of its business in the loss years, but had substantially reduced its receivables and its current assets from $1.2 million in 1967 to $386,708 ($231,876 marine plant, $142,255 warehouse, $12,577 vehicles), as indicated in the balance sheet as at April 30, 1971.

In my opinion, whatever may have been the amount of the reduction of the assets allocated by the appellant to the appellant’s Maritime operations in the loss application years, one cannot reasonably conclude from that fact alone that the appellant was no longer in the marine construction business. The fact that the appellant moved its administrative offices from downtown Halifax, Nova Scotia, to a trailer on its own land on which its warehouse and marine plant were constructed and reduced the number of personnel from 20 to 2 or 3 employees is not evidence that the appellant had ceased or essentially altered the nature of its business. It can however and does indicate to me that having sustained a heavy loss in its operations in the Maritimes, the appellant’s company sought to re-establish its cash flow by selling some of its assets and therefore, it significantly reduced but not necessarily ceased its marine construction activities on the East Coast, no matter where in Canada its administrative offices may have been located.

It is also the respondent’s submission that the appellant was engaged in a small leasing business in the loss application years. Had the evidence been that marine construction business did not frequently require the renting of marine equipment from competitors and that the appellant had, at no time in the exercise of its business during the loss years, rented marine equipment to or from competitors, then perhaps one might possibly conclude that the appellant had altered the nature of its business. That however is not the evidence.

The respondent admits that Mr R Larocque, who was general manager and a key-men in the appellant’s operation in the Maritimes in the loss years, continued on behalf of the company to seek-out marine construction work in the loss application years and, with the help of Mr C B Fairn, the company’s chief engineer (as well as its President) albeit located in Toronto, made bids on tenders for marine construction jobs in the Maritimes. Though not generally successful in its bids for marine construction in 1971, 1972 and 1973, the evidence is that the company could have and did execute some awarded marine construction contracts in the Maritimes in the loss application years. Whether the income from the “Come by Chance” contract in Newfoundland was allocated to it or not, is a company decision, but the contract was in fact executed by the appellant’s Maritime operations.

The documentary evidence produced by both the respondent and the appellant leads me only to the conclusion that the appellant’s marine construction operations in the Maritimes were greatly diminished in the loss application years, but there is no hard evidence that the appellant had at any time actually ceased its marine construction operations or had converted it into a small leasing business as claimed by the respondent.

With reference to the business carried out by the appellant, Gorman NS bought (not sold) the Ontario Marine construction assets while still operating, what was admittedly a greatly reduced marine operation in the Maritimes.

The fact that Dredge effectively controlled Gorman NS since March of 1969 is in my opinion a significant factor in determining the issue. There is not only the taking over of the control of Gorman NS by Dredge in the loss years, but there is also the over lapping of the Gorman NS operations with those of Dredge which existed well within the loss years period, both of which were in the field of marine construction.

It is the respondent’s contention that the two businesses had no resemblance one to the other becasuse the name was different, the management, the goodwill, the employees, the machinery and the customers had changed. It is my belief this is too narrow a view on which to dertermine the continuity or otherwise of the business of any company and for purposes of this appeal such an interpretation is not, in my opinion, in keeping with the words of subsection 111(5) of the Act, “as may reasonably be regarded as its loss from carrying on any particular business”. The corporate entity of the appellant was not affected by such changes and, in my opinion, neither was its “particular business” of marine construction.

In support of his submission that the appellant’s business in the loss application years was not the business it operated in the loss years, the respondent cited the following cases:

A decision of the Exchequer Court of Canada in Garage Henri Brassard Ltée \j MNR, [1960] CTC 321; 60 DTC 1205, dismissing the taxpayer’s appeal. In his reasons, Mr Justice Fournier at 325 and 1207 respectively stated:

It is admitted that the appellant has been the same legal entity from its creation to this day. The evidence shows that from 1951 to 1954, the appellant, when it was known by the name of Ranger Motor Sales Ltd, operated a garage and carried on an automobile and automobile accessory business. It has been established beyond any doubt that it ceased business operations on December 20, 1954, and that in the course of 1954 and 1955 it sold its assets.

In W B Sullivan Construction Limited v MNR, [1971] CTC 373; 71 DTC 291, Mr W O Davis, QC, Presiding Member of the Tax Appeal Board, stated at 390 and 300 respectively:

After considering all the facts which were either admitted or proven during the hearing, I have arrived at the conclusion that the appellant had ceased its business activities when, in October 1961, after it had been placed in interim receivership under the Bankruptcy Act, its proposal to its creditors was accepted and approved by the Court. By that time all the assets of the appellant company had been taken over by the trustee, and all its liabilities had also been taken over.

In Holiday Knitwear Ltd v MNR, [1963] CTC 30; 63 DTC 116, the Tax Appeal Board dismissed the appellant’s appeal. In his reasons stated at 48 and 126 respectively, Mr J O Weldon, QC, as quoted by the respondent said:

In a non-technical sense the term “business” appears to embrace such matters as

— name, owners or shareholders, management, employees, premises, machinery, stock-in-trade, product, goodwill and financial standing.

Mr J O Weldon, QC, however further added:

It seems to be undisputed that it is a straight question of fact whether the appellant Holiday Knitwear Limited was, during the taxation years 1958, 1959 and 1960, carrying on the business in which the loss was sustained.

In Island Motor Transport Ltd v MNR, [1963] CTC 365; 63 DTC 884, the Tax Appeal Board again dismissed the appeal. Mr Maurice Boisvert, QC at 374 and 888 respectively stated:

The appellant sustained losses, not in holding its franchises, but in the operation of carrying passengers by buses. From the date of the sale of its assets and the renting of its franchises, the appellant entered in a new field of business, a new activity completely different from its former one.

In that decision, Mr Maurice Boisvert, QC, the Presiding Member, also cited the words of Mr Justice Thorson, President of the Exchequer Court in MNR v Eastern Textile Products Limited, [1957] CTC 48; 57 DTC 1070, also referred to by the respondent.

Mr Justice Thorson at 50 and 1071 respectively stated:

The facts may be stated briefly. The respondent was incorporated by New Brunswick Letters Patent, dated October 28, 1943, and had its chief place of business at Saint John. For several years it carried on business there in rented premises. Its business was the manufacturing of textile products such as pyjamas, boxer shorts, overalls, mackinaws and other such goods and the selling of the products so manufactured by it. Mr J J Block, the respondent’s president, said that in the early part of 1951, about March, the respondent sold its manufacturing plant and arranged to have its purchaser manufacture for it the products which it had previously produced. Thereupon the respondent stopped manufacturing but continued to sell the products which the purchaser of the plant manufactured for it.

Also at 58 and 1076 respectively, Mr Justice Thorson continued:

The right to deduct losses does not extend to a profit from an activity other than the business in which the loss was sustained. It seems to me that it is contrary to the policy as declared in the section that a taxpayer should have the right to deduct from his income for any taxation year a business loss sustained in another year in a case where his income is not from the business in which the loss was sustained. Thus, if he ceases to carry on the business in which the loss was sustained and, therefore, does not make any profit from it the right to deduct a business loss does not enure to him. The purpose of the policy no longer exists.

In Richardson Terminals Ltd v MNR, [1971] CTC 42; 71 DTC 5028, affirmed by [1972] CTC 528; 72 DTC 6431, Mr Justice Dumoulin, in dismissing the taxpayer’s appeal, stated at 64 and 5040 respectively:

The large profits accruing, annually, during the five-year period, May 1st, 1963, to April 30, 1968, resulted from the business carried on at Port Arthur solely by the appellant, and not by Marine Pipeline and Dredging, which neither in name, fact or law ever engaged in any suchlike pursuit.

The courts are consistent in holding that a company will not be entitled to deduct losses incurred in previous years if there has been a change of control in the company and if it has clearly interrupted, ceased and altered the business in which the losses were sustained. Both these conditions are questions of fact. The change of control in the company is not in dispute. Only the continuity of the appellant’s business is questioned here.

There is no dispute as to the following basic facts:

1. Gorman NS was in the marine construction business in the loss years 1968, 1969 and 1970.

2. Dredge, whose business was marine construction, acquired control of Gorman NS in 1969, preserving the appellant’s corporate entity.

3. Gorman NS purchased the Ontario marine construction facilities and operated a marine construction business in the Great Lakes area in the loss application years.

The evidence is that, in the loss application years, only some of the assets in the appellant’s Maritime operations were sold; the appellant continued to seek-out and to bid on tenders for its marine construction operations in the Maritimes; a marine construction contract was awarded and carried out by the appellant in Newfoundland in the loss application years; marine construction contracts on which bids were made could have been executed in the Maritimes, either with the appellant’s marine equipment already located in Halifax or with equipment transported from the company’s Great Lakes & St Lawrence operations, or through the accepted practice of renting marine equipment from competitors. The skilled labour to carry out marine construction jobs was available on and around Halifax in the loss application years and could have been called by Mr Larocque, who was still the company’s general manager of the marine operations in the Maritimes in 1971, 1972 and 1973.

There is evidence that the appellant substantially reduced its assets in the Maritimes, but there is no hard evidence that the appellant changed its Maritime operations from marine construction to a leasing business and that it operated two different businesses in the loss application years: one in the Maritimes and one in the Great Lakes area, as suggested by the respondent. Nor on the basis of the evidence can I conclude that the appellant’s company at anytime completely ceased, essentially changed or even suspended its marine construction operations in the Maritimes in the loss application years.

In these respects particularly, the facts of the instant appeal are distinguishable from those of the cases cited by the respondent in which the businesses carried on by the taxpayer had clearly ceased to be operated or had so been altered in the loss application years that they could not be considered as being the business carried on by the taxpayer during the loss years.

On the basis of the evidence, I am of the opinion that throughout the period of 1968 to 1973 inclusively, the appellant’s only business was marine construction; that at no time did it cease to be engaged in the marine construction business; that the Ontario operations were added to the appellant’s Maritime operations and become part of the business carried out by the appellant in the loss years.

I conclude therefore that the appellant established, to the satisfaction of the Board, that the business engaged in by the appellant in the loss application years was the business it exercised in the loss years.

For these reasons, the appeal is allowed and the matter referred back to the Minister for reassessment on the basis that: the business carried on by the appellant in 1971, 1972 and 1973 was the business it carried out in 1968, 1969 and 1970; that the losses claimed are deductible pursuant to paragraph 27(1)(e) and subsection 27(5) of the Act, and paragraph 111 (1 )(a) and subsection 111(5) of the Act; that the appropriate adjustments be made with reference to a deduction pursuant to paragraph 125(6)(b) of the Act, in respect of the appellant’s 1974 taxation year.

Appeal allowed.