Spiegel v. R., [1997] 1 CTC 2587, 97 DTC 817

Sarchuk J.T.C.C.: — The appeal of Bernard Spiegel (the Appellant) is from an assessment of tax in respect of his 1986 taxation year, in which the Minister of National Revenue (the Minister) denied the scientific research tax credit (SRTC) claimed by the Appellant.

The parties have filed with the Court a Statement of Agreed Facts [1] ,

which reads as follows:

1. The taxation year in issue is 1986.

2. Subject to paragraph 3 hereof, the documents contained in the Common Book of Documents are hereby admitted as evidence without proof thereof.

3. The parties reserve the right to dispute the legal significance of the documents referred to in paragraph 2 hereof.

4. The Appellant resides in the Municipality of Metropolitan Toronto in the Judicial District of York. His municipal address is 130 Baycrest Avenue, Toronto, Ontario, M6A 1W5.

5. Seatech International Research & Development Inc. (“Seatech”) was, at all material times, a corporation incorporated pursuant to the laws of British Columbia, with its head office located in the City of Victoria, British Columbia.

6. On December 31, 1985, Seatech issued 3,632,094 Class B 8% non- cumulative redeemable voting research and development preferred shares (“Class B Preferred Shares”) for a total consideration of $3,632,094.

7. On December 31, 1985, Seatech also issued 767,906 Class C 8% non- cumulative redeemable voting research and development preferred shares (“Class C Preferred Shares”) for a total consideration of $767,906.

8. Goliath Financial Services Partnership (the “Partnership”) was formed on December 31, 1985 between Seaboy Marine Systems Ltd. (incorrectly described as Seaboy Marine Services Ltd. in the Partnership Agreement dated December 31, 1985) and Fisher Research Centre Inc. under the firm name and style of Goliath Financial Services. the first year-end of the Partnership was December 30, 1986.

9. On December 31, 1985, the Partnership purchased 2,829,910 of the Class B Preferred Shares from Seatech for $2,829,910.

10. In January 1986, Seatech filed a T2113 Designation form prescribed under the Income Tax Act (Canada) (the “Act”). A copy is attached as Exhibit A. The security is described as Research and Development Preference Shares, and the total amount designated is $1,570,090. The amount designated consists of $767,906 for the Class C Preferred Shares and $802,184 for Class B Preferred Shares other than those purchased by the Partnership (namely 3,632,094 total Class B Preferred Shares issued minus the 2,829,910 Class B Preferred Shares purchased by the Partnership).

11. In February 1986, Seatech filed a T2114 Summary form, prescribed under the Act. A copy is attached as Exhibit B. The security is described as Promissory Notes, and the total amount designated in respect of the security is $1,570,090. This amount does not include those Class B Preferred Shares purchased by the Partnership.

12. Also in February 1986, Seatech filed a T2114 Summary form, prescribed under the Act, in respect of certain of the securities issued by it on December 31, 1985. A copy is attached as Exhibit C. The security is described as Research & Development Preferred Shares, and the total amount designated in respect of the security is $1,570,090. This amount does not include those Class B Preferred Shares purchased by the Partnership. The purpose of this filing was to correct an error made in the T2114 Summary form referred to in paragraph 11 hereof in describing the relevant security or right.

13. By Declaration of Trust dated December 24, 1986, the Bernard Spiegel Client Trust was created, with Mr. Bernard Spiegel as sole trustee. The following is a list of the beneficiaries of the Bernard Spiegel Client Trust, together with their payments to the trustee:

Queen City Bedding Company Limited	$250,000
Mark Kogan	120,000
Rakhil Kogan	93,750
Boruch Goland	12,500
Roza Goland	13,750
Eugene Kogan	10,000
Dr. Sheldon Silver	25,000
Dr. Marcy Alexis	50,000
Dr. Morris Wallach	16,000
Dr. Edith Lorimer	21,875
Dr. Joseph (Mike) Lorimer	3,125
Bernard Spiegel	10,750
Adrienne Spiegel	8,625

Adrienne Management Corporation 4,000

Miriam Spiegel

4,125

2643,500

14. The sole purpose of the Bernard Spiegel Client Trust was to acquire interests in the Partnership.

15. By cheque dated December 30, 1986 the amount of $643,500 was paid by Bernard Spiegel Client Trust to Weir & Foulds in Trust to facilitate the trust’s acquisition of an interest in the Partnership.

16. On December 30, 1986, the Appellant, through the Bernard Spiegel Client Trust, subscribed for 21,500 units in the Partnership.

17. On December 30, 1986, the Partnership redeemed 1,287,000 Class B Preferred shares for the sum of $785,070 (61 cents per share).

18. On December 31, 1986, the total capital account of the Partnership was $1,287,000.

19. On December 31, 1986, the interest of Bernard Spiegel Client Trust in the Partnership was transferred to a Patrick Fisher.

20. A “T3” trust return was filed by the Bernard Spiegel Client Trust for the taxation year ending December 31, 1986.

21. Before the end of March 1987, The Bernard Spiegel Client Trust purported to issue a T2114 Supplementary form, prescribed under the Act, to each of the persons listed in paragraph 13 above in order to enable them to claim the tax credit in issue.

22. The Appellant claimed a federal scientific research tax credit of $7,310 on his income tax return for the 1986 taxation year.

23. On or about February 29, 1988, Seatech purported to file a T2113 Designation form pursuant to subsection 194(7) of the Act. A copy is attached as Exhibit D. On or about February 29, 1988, Seatech paid to the Respondent the amount of $12,500, which amount would be the appropriate penalty under the Act for a late filed designation.

24. By Notice of Reassessment dated July 18, 1988 (the “Reassessment”), the Respondent, through the Minister of National Revenue (the “Minister”), reassessed the Appellant in respect of his 1986 taxation year and denied the scientific research tax credit claimed by the Appellant in respect of his 1986 taxation years.

25. The Appellant filed a Notice of Objection to the Reassessment, dated September 8, 1988.

26. On or about January 30, 1989, Seatech filed a T2114 Summary form in which the “total amount designated” is $2,857,090. A copy is attached as Exhibit E.

27. By Notification of Confirmation by the Minister dated December 4, 1991, the Respondent, through the Minister, confirmed the Reassessment and denied the Appellant’s claim for the scientific research tax credit on the grounds that no valid designation for the scientific research tax credit existed.

28. The Minister applied the $12,500 amount referred to in paragraph 23 to reduce Seatech’s unpaid balance on the Part VIII assessment for the taxation year ending November 30, 1986.

29. No notice contemplated by subsection 194(7) of the Act was mailed by the Minister to Seatech.

30. By letter dated September 26, 1993, the Respondent withdrew the claim that the Class B Preferred Shares issued by Seatech to the Partnership did not meet the requirements set out in subsection 194(4.2) of the Act. [2]

The Appellant also testified. Aside from providing background information with respect to his involvement in this transaction, little information relevant to the issue in dispute was provided. The Respondent adduced evidence from Philip Stephen Feely, a Chartered Accountant who was employed by Revenue Canada in 1982 as an auditor. In 1986, he joined the Research and Development Group (an audit group at Revenue Canada’s head office) and ultimately was the Research and Development (R & D) coordinator for the Ottawa Audit Division, which was basically involved in the scientific research and development tax incentive program. More recently, his primary responsibility was providing training to auditors across Canada with respect to the SRTC program. Currently, he is the senior R & D tax policy officer dealing with research and development tax incentives at the Department of Finance. His testimony was directed to the nature of the SRTC program and the “mechanics” of how a SRTC transaction works assuming that all things take place according to the requirements of the Income Tax Act (the Act) and to the steps taken by Revenue Canada for the purpose of determining the existence of a Part VIII liability. Feely also discussed departmental policy and criteria for dealing with specific cases where the designations were “technically invalid”.

Issue:

The issue for this Court to determine is whether the Minister properly denied the Appellant’s claim for the scientific research tax credit on the grounds that: (a) the provisions of subsection 194(4) and 194(7) of the Act had not been complied with and that accordingly, no valid designation for the scientific research tax credit had been made, or (b) that the Appellant is not entitled to deduct the said credit pursuant to subsection 127.3(3) of the Act in that the Bernard Spiegel Client Trust (BSCT) was not the first person to be registered holder of the Class B Preferred shares issued by Seatech.

Appellant’s Position:

The Appellant contends that paragraph 194(7)(a) of the Act should be read so as not to require a T2114 information return (information return) to be filed by the due date that would have applied had a designation been made under subsection 194(4). In summary, Counsel for the Appellant submitted that reading out the timing requirement in paragraph 194(7)(a) accords with the modern framework for statutory interpretation set out by the Supreme Court of Canada, [3] because:

(i) Paragraph 194(7)(a) especially in its interaction with Regulations 205(1) and 226(2), creates an ambiguity in the context of late-filed designations under subsection 194(7) because the regulations and the information returns effectively direct a taxpayer to set out designations that have not yet been made.

(ii) United Equities and the legislative context in which subsection 194(7) and Regulations 205(1) and 226(2) appear indicate that the SRTC provisions, and in particular the curative subsection 194(7), should be interpreted in a manner that is “investor- friendly”.

(iii) The goal of a T2114 information return is to provide information to the Minister regarding SRTC designations. This goal of providing information was achieved in the case at bar by the filing of a T2113 designation form on February 29, 1988 and by the filing of a T2114 Supplementaries with the Minister in March, 1987.

(iv) To the extent that the application of the ordinary rules of interpretation does not resolve the ambiguity in the application of subsection 194(7), such ambiguity ought to be resolved in favour of the taxpayer.

In the alternative, the Appellant submits that the information return filed on January 30, 1989 is a valid amendment to the original information return filed on February 28, 1986 and that the amended information return should effectively relate back to the earlier date.

With respect to the Respondent’s alternative position, the Appellant contends that on a plain reading of subsections 127.3(3) and (4), the BSCT was deemed to be the first holder (as contemplated by subsection 127.3(3)) of the relevant SRTC instruments.

Respondent’s Position:

The Respondent takes the position that no proper designation was filed in accordance with the provisions of subsection 194(4) of the Act and Regulations 205 and 226. She contends that while subsection 194(7) of the Act and Regulations 205 and 226 provide for the filing of a late designation, in order to comply with the requirements the designation would have been required to be filed on or before January 31, 1987 and the information return would have been required to be filed on or before February 28, 1987. That had not been done.

No substantive submissions were made with respect to the application of subsections 127.3(3) and (4) of the Act.

The Law:

The relevant provisions of the Act and the Income Tax Regulations are as follows:

Income Tax Act:

194(1) Corporation to pay tax. - Every corporation shall pay a tax under this Part for a taxation year equal to 50% of the aggregate of all amounts each of which is an amount designated under subsection (4) in respect of a share or debt obligation issued by it in the year or a right granted by it in the year.

(4) Corporation may designate amount. - Every taxable Canadian corporation may, by filing a prescribed form with the Minister at any time on or before the last day of the month immediately following a month in which it issued a share or debt obligation or granted a right under a scientific research and experimental development financing contract (other than a share or debt obligation issued or a right granted before October 1983, or a share in respect of which the corporation has, on or before that day, designated an amount under subsection 192(4)) designate, for the purposes of this Part and Part I, an amount in respect of that share, debt obligation or right not exceeding the amount by which

(a) the amount of the consideration for which it was issued or granted, as the case may be,

exceeds

(b) in the case of a share, the amount of any assistance (other than an amount included in computing the scientific research and experimental development tax credit of a taxpayer in respect of that share) provided, or to be provided by a government, municipality or any other public authority in respect of, or for the acquisition of, that share.

(7) Late designation. - Where a taxable Canadian corporation that issued a share or debt obligation or granted a right under a scientific research and experimental development financing contract does not designate an amount under subsection

(4) in respect of the share, debt obligation or right on or before the day on or before which such designation was required by that subsection, the corporation shall be deemed to have made the designation on that day if

(a) the corporation has filed with the Minister a prescribed information return relating to the scientific research and experimental development tax credit in respect of the share, debt obligation or right within the time that it would have been so required to file the return had the designation been filed on that day, and

(b) within 3 years after that day, the corporation has

(i) designated an amount in respect of the share, debt obligation or right by filing a prescribed form with the Minister, and

(ii) paid to the Receiver General, at the time the prescribed form referred to in subparagraph (i) is filed, an amount that is a reasonable estimate of the penalty payable by the corporation for the late designation in respect of the share, debt obligation or right;

except that, where the Minister has mailed a notice to the corporation that a designation has not been made in respect of the share, debt obligation or right under subsection (4), the designation and payment described in paragraph (b) must be made by the corporation on or before the day that is 90 days after the day of such mailing.

127.3(3) Trust. For the purposes of this section and section 53, where a taxpayer, other than a broker or dealer in securities, is a beneficiary under a trust and an amount is designated by a corporation under subsection 194(4) in respect of a share, debt obligation or right acquired by the trust in a taxation year of the trust where the trust is the first person, other than a broker or dealer in securities, to be a registered holder of the share or debt obligation or to have acquired the right, as the case may be,

(a) the trust may, in its return of income for that year, specify such portion of that amount as may, having regard to all the circumstances (including the terms and conditions of the trust arrangement), reasonably be considered to be attributable to the taxpayer and as was not specified by the trust in respect of any other beneficiary under that trust; and

(b) the portion specified pursuant to paragraph (a) shall be deemed to be an amount designated on the last day of that year by the corporation under subsection 194(4) in respect of a share, debt obligation or right, as the case may be, acquired by the taxpayer on that day where the taxpayer is the first person, other than a broker or dealer in securities, to be a registered holder of the share or debt obligation or to have acquired the right, as the case may be.

127.3(4) Partnership. For the purposes of this section and section 53, where a taxpayer, other than a broker or dealer in securities, is a member of a partnership and an amount is designated by a corporation under subsection 194(4) in respect of a share, debt obligation or right acquired by the partnership in a taxation year of the partnership where the partnership is the first person, other than a broker or dealer in securities, to be a registered holder of the share or debt obligation or to have acquired the right, as the case may be, such portion of that amount as may reasonably be considered to be the taxpayer’s share thereof shall be deemed to be an amount designated on the last day of that year by the corporation under subsection 194(4) in respect of a share, debt obligation or right, as the case may be, acquired by the taxpayer on that day where the taxpayer is the first person, other than a broker or dealer in securities, to be a registered holder of the share or debt obligation or to have acquired the right, as the case may be.

Income Tax Regulations:

205(1) Date returns to be filed. - All returns required under this Part shall be filed with the Minister without notice or demand and, unless otherwise specifically provided, on or before the last day of February in each year and shall be in respect of the preceding calendar year.

226(2) Each corporation that has designated an amount under subsection 194(4) of the Act in respect of a security issued or granted by it shall make an information return in prescribed form in respect of each such security.

Conclusion:

The main issue before this Court is whether there has been compliance by the Appellant with paragraph 194(7)(a) notwithstanding the fact that no information return in respect of the SRTC instruments was received by the Minister until January 30, 1989.

The position taken by the Minister in assessing and the submissions made by Counsel for the Respondent in support thereof appear to be based on two assumptions. First, that an information return is essential to the proper administration of the SRTC scheme. In my view, that is not the case. First, the testimony of Feely falls far short of establishing that the filing of an information return is in any substantive way integral to the Minister’s administrative practices with respect to subsection 194(7) of the Act. Second, this issue was put to rest by Robertson J.A. in United Equities Ltd. v. Minister of National Revenue [4] in the following words:

Regardless of how one wishes to characterize the Trial judge’s interpretation of subsection 194(7), that interpretation does not, in my view, lead to an unworkable and impractical result. This takes me to the nub of the appellant’s argument, namely that filing of information returns is critical to the administration of subsection 194(7). Like the Trial judge, I do not find this argument persuasive once it is learned that “no provision of the Act specifies the need or time for filing information returns, a matter dealt with by regulation” (per MacKay, J. at 6578-6579). If the information returns are as critical as suggested by the appellant, then surely the Act would have emphasised the need for their filing.

The appellant’s argument loses its appeal even further if one compares, for example, the content of the designation form (Form T2113, Appeal Book, Vol. II, at 199) with the summary information return (Form T2114, Appeal Book, Vol. II, at 200). That comparison reveals two single-page documents containing virtually identical information. During oral argument, counsel for the appellant noted that the latter document would differ from the former had there been multiple investors. Presumably, the submission of multiple designation forms would have achieved the same result.

As to the argument that a Minister’s notice cannot issue until such time as he receives the information returns, I note three facts. First, in this case the Department learned of the failure to file the designation without an information return having been filed. Second, the information returns in questions did not have to be filed until eight months after the designation was filed. Normally, one would expect that documents which are supposedly critical to the administration of a taxing scheme will be subject to a requirement that they be filed prior to or at the same time as other required documents. Third, in 1985, procedures were put into place whereby the Department was able to tie an investor’s claim for a SRTC with that of the corresponding designating company, notwithstanding the failure to file the required information returns. In my opinion, a designating company’s failure to file such documents did not and does not undermine the Minister’s ability to exercise his powers under subsec- tion 194(7) of the Act.

I add only that in the present appeal, Revenue Canada also learned of the failure to file the designation without an information return having been filed.

The second assumption is that exempting provisions in the Act are to be interpreted strictly against the taxpayer. More specifically that in this case, the relief under paragraph 194(7)(a) is only available if the prescribed information return has been filed as required by subsection 194(4) of the Act and sections 205 and 226 of the Regulations. In particular, Counsel for the Respondent argued that Regulation 226(2) requires that each corporation designating an amount under subsection 194(4) “shall make an information return in prescribed form” and, pursuant to Regulation 205(1), the return “shall be filed” before the last day of February in each year. According to the Respondent, the proper interpretation of the word “shall” is imperative unless found in an enactment where the context indicates otherwise, which is not the case here. In support, Counsel for the Respondent referred to the decision of the Supreme Court of Canada in Reference re Language Rights under s. 23 of the Manitoba Act, 1970 (sub nom. Reference re Lanaguage Rights Under s. 23 of the Manitoba Act, 1870 and s. 133 of the Constitution Act, 1867) [5] where the following statement was made:

As used in its normal grammatical sense, the word “shall” is presumptively imperative. See Odgers’ Construction of Deeds and Statutes, (5th ed. 1967) at page 377; The Interpretation Act, 1867 (Can.), 31 Viet., c. 1, s. 6(3); Interpretation Act, R.S.C. 1970, c. 1-23, s. 28 (“shall” is to be construed as “imperative”). It is therefore incumbent upon this Court to conclude that Parliament, when it used the word “shall” in section 23 of the Manitoba Act, 1870, intended that those sections be construed as mandatory or imperative, in the sense that they must be obeyed, unless such an interpretation of the word “shall” would be utterly inconsistent with the context in which it has been used and would render the section irrational or meaningless. See, e.g. Re Public Finance Corp. and Edwards Garage Ltd. (1957), 22 W.W.R. 312, page 317 (Alta. S.C.).

Counsel for the Respondent also sought support from the following comment by Strayer J. in R. v. Adelman [6] :

... It seems neither unjust nor unreasonable, nor in any way inconsistent with the Act or the Regulations, for a taxpayer to be required to adhere strictly to the procedure prescribed by the law for the exercise of this right having regard to the fact that its exercise will affect his position and that of the Minister both in respect of this particular disposition but also in respect of all those dispositions in the future ...

I am unable to give “shall” a mandatory interpretation in the circumstances of this appeal, since that would render the effect of paragraph 194(7)(a) of the Act irrational and unworkable. Such an approach to the relevant legislative provision would, in my view, ignore the modern purposive and contextual approach set out by the Supreme Court of Canada in Stubart Investments Ltd. v. R., (sub nom. Stubart Investments Ltd. v. The Queen) [7] with respect to which Estey J. made the following comment in the Golden v. R., (sub nom. Golden v. The Queen)? [8]

the Court recognized that in the construction of taxation statutes the law is not confined to a literal and virtually meaningless interpretation of the Act where the words will support on a broader construction a conclusion which is workable and in harmony with the evident purposes of the Act in question....

[Emphasis added.]

With regard to the legislative purpose of subsection 194(7) of the Act, Robertson J.A. speaking for the Court in United Equities (supra), said the following, at pages 174-75:

The Trial judge rightly noted that the provisions of the Act governing SRTCs are intended to encourage otherwise risky private investment in research and development projects, and it is in this context that subsection 194(7) must be interpreted. In my opinion, that subsection is a curative provision intended to provide relief against forfeiture of intended tax benefits. Without a legislative mechanism for allowing late filing, the designating company and the investor may forfeit the right to create and purchase a tax credit respectively.

As in the present case, an investor who did everything that was required of it under the Act could still lose its SRTC because of an inadvertent late filing of information returns by the designating company. Since subsection 194(7) is a curative provision, I do not see how a narrow interpretation of that provision would further the legislative aim of encouraging investment, when such a construction reduces the possibility of investors and designating companies obtaining relief from forfeiture.

A liberal construction, that is to say one that the subsection can reasonably bear and is consistent with legislative objectives, has the effect of giving the Minister the discretion to develop policies which take into account the competing interests of Canadian taxpayers and innocent investors and to refuse to send a notice where it is found that the interests of the former should prevail over the latter. When viewed in this light, it seems that the most reasonable construction, and one that is in accord with the objects and purposes of the legislation, is that adopted by the Trial judge. As I see it, a liberal construction of subsection 194(7) lends legitimacy to and achieves the same ends as the departmental policy implemented in February, 1987 dealing with the disposition of “technically invalid designations” - a policy which could conceivably be subject to legal challenge; see Trial judge’s reasons (at 6579) dealt with earlier.

The clear and unequivocal opinion expressed by Robertson J.A. with respect to the proper construction of subsection 194(7) is applicable to the appeal before me notwithstanding that the facts and issues in United Equities are distinguishable. [9]

With these principles in mind, I turn to the Appellant’s argument that:

... the strict requirement in paragraph 194(7)(a) that a T2114 information return had been filed by the time such a form would have had to have been filed if a T2113 designation had been made on the due date for filing a T2113 designation under subsection 194(4) (i.e in the case at bar, on February 28, 1987) produces absurd and unworkable results from the point of view of both the corporation which issues SRTC instruments and the investor in SRTC instruments.

The results referred to by Counsel for the Appellant are, in my view, readily apparent by examining subsection 226(2) of the Regulations which provides that each corporation that has designated an amount under subsection 194(4) of the Act in respect of a security issued by it, shall make an information return in prescribed form in respect of such security. But it is not possible for a taxpayer to file an information return in respect of a “designation” in circumstances where such “designation” has not in fact been made. In drafting subsection 194(7) of the Act, Parliament could not have intended that an information return, the form and content of which is geared to amounts already designated, should also be filed in anticipation that certain amounts might be designated at a later date.

It should be noted that Regulation 205(1) is extremely broad in nature in that it refers to each and every one of the vast number of information returns required by the Act to be filed on the last day of February in each year. It is evident from the breadth and scope of this Regulation that no consideration could have been given by the legislators to the consequences of the timing imposed by the combined operation of subsection 194(7) and this Regulation.

The facts before me are that on December 31, 1985, Seatech issued 3,632,094 Class B Preferred shares and 767,906 Class C Preferred shares. On that same date, Goliath Partnership purchased 2,829,910 of the Class B Preferred shares. In January, 1986, a designation was filed with respect to certain Class B and Class C Preferred shares other than those purchased by the Goliath Partnership. In February, 1986, Seatech filed an information return with respect to these shares. [10] However, as of February 28, 1987, Seatech, for whatever reason had not yet made a designation in respect of the shares purchased by the Goliath Partnership, some of which are the subject of this appeal. Thus, from Seatech’s point of view, the information return filed on February 28, 1986 which designated the amount of $1,570,090 in respect of the security (which did not refer to the shares purchased by the Partnership) complied fully with the requirements in Regulation 226(2) and the wording of the form itself because it reflected the situation as it existed on that date, which was, if I may repeat myself, that no designation had yet been made with respect to the SRTC instruments in issue in this appeal.

Requiring SRTC issuers to file an information return indicating “the total amount designated in respect of the security or right” at a time at which the decision to designate may not even have been made is not only unworkable and impractical, but is in cases such as this, impossible. In the course of his testimony, Feely was asked whether the Minister’s position was that the assessment was proper because no information return was filed by the prescribed date being February 28, 1987. Feely agreed that was the case. The following exchange then took place:

Q. All right. And I am simply asking you that in February, 1987, the second designation had not been made so how could we have filed a T2114 in February, 1987 to cover a second designation that had not yet been made?

A. You cannot file a summary for a designation that has not been made.

Q. That is your answer?

A. Yes.

The Appellant’s position that the time element in subparagraph 194(7)(a)(i), i.e. the prerequisite that an information return be filed by the -due date stipulated in subsection 194(4) should be read out in this case in order to avoid an interpretation inconsistent with the context in which it has been used and which would render the section meaningless, has merit. To do so would be consistent with the principles to be observed in the current nterpretation of taxation statutes set out by Gonthier J. in Notre Dame de "ton Secours (supra) as follows at page 252:

The interpretation of tax legislation should follow the ordinary rules of interpretation;

A legislative provision should be given a strict or liberal interpretation depending on the purpose underlying it, and that purpose must be identified in light of the context of the statute, its objective and the legislative intent: this is the teleological approach;

The teleological approach will favour the taxpayer or the tax department depending on the legislative purpose in question, and not on the existence of pre-determined presumptions;

Substance should be given precedence over form to the extent that this is consistent with the wording and objective of the statute;

Only a reasonable doubt, not resolved by the ordinary rules of interpretation, will be settled by recourse to the residual presumption in favour of the taxpayer.

In the particular circumstances of this case, I have concluded that an information return need not have been filed by Seatech as a pre- condition of this Appellant’s entitlement to avail himself of the remedial provisions of subsection 194(7) of the Act. This is a liberal construction which in my view, the subsection can reasonably bear and is consistent with its legislative objectives, as defined by Robertson J.A. in United Equities (supra).

The second ground pleaded by the Respondent in support of the disallowance of the tax credit is that the BSCT was not the first person to be the registered holder of the Class B Preferred shares issued by Seatech. Counsel for the Respondent made only a passing reference to subsection 127.3(4) and that in a different context. Nonetheless, I do not believe that it would be appropriate to assume that this ground has been abandoned.

The relevant provision is subsection 127.3(4). It allows a partnership which is the first holder of an SRTC instrument to “flow through” credits to individuals partners subject to a number of conditions. First, an amount must have been designated by the SRTC issuer. Since I have concluded that the designation filed February 29, 1988 by Seatech is a valid late-filed designation, that condition has been met. Next, the BSCT must be a member of the partnership in question. The facts establish the following. The Goliath Partnership was formed December 31, 1985. The first year end of the partnership was December 30, 1986. [11] On December 31, 1985, the Goliath Partnership purchased 2,829,910 of the Class B Preferred shares from Seatech for $2,829,910. [12] By Declaration of Trust dated December 24, 1986, the BSCT was created. The Appellant was sole trustee and one of the beneficiaries. [13] On December 30, 1986, the BSCT subscribed for 1,287,000 units of the Goliath Partnership during its taxation year ending December 30, 1986 and thereby was admitted to the partnership. [14] As Counsel for the Appellant noted, there is no requirement that a taxpayer referred to in subsection 127.3(4) be a partner throughout the partnership’s taxation year.

Once those conditions have been met, subsection 127.3(4) deems the following to be correct. First, BSCT is considered to have acquired the SRTC instrument on the last day of the partnership’s taxation year, being December 30, 1986 and second, it is deemed to be the first holder of the SRTC instrument. Furthermore, BSCT must make a reasonable and exclusive allocation to the beneficiary in question (in this case to the Appellant) of the amount designated by the SRTC issuer in question. That has been done. Hence, no other conclusion can be reached but that the provisions of subsections 127.3(3) and (4) have been met. In my view, the Minister’s assessment cannot be supported on this basis.

The appeal is allowed, with costs to the Appellant to be taxed.

Appeal allowed.