Le Groupe Commerce Compagnie D’assurances v. Her Majesty the Queen, [1996] 3 CTC 2066, 97 DTC 537

Dussault J.T.C.C.: — This is an appeal from an assessment in respect of the appellant’s 1988 taxation year. For that taxation year, which corresponded to the calendar year, the Minister of National Revenue (the “Minister”) denied the appellant the tax reduction provided under subparagraph 123(l)(a)(vi) of the Income Tax Act (the “Act”) for the period from January 1 to June 30, 1988.

Counsel for the parties filed an agreement on the facts together with the relevant documents. This agreement reads as follows:

Facts:

1. In this agreement:

- “Canadian-controlled private corporation” has the meaning given to it in paragraph 125(7)(b) of the Income Tax Act, as applicable to the taxation year ending December 31, 1988 (hereinafter the I.T.A.);

- “Canadian investment income” and “foreign investment income” have the meaning given to them in subsection 129(4) of the I.T.A.;

- “Part I tax reduction” refers to the adjustment provided in subparagraph 123(l)(a)(vi) of the I.T.A., as applicable to the taxation years ending after June 1987 and commencing before July 1988.

2. During the period in issue, the Appellant operated a general insurance company.

3. Throughout its taxation year beginning on January 1, 1988 and ending on December 31, 1988, the Appellant was a Canadian-controlled private corporation.

4. For its 1988 taxation year, the Appellant calculated its taxes claiming an adjustment of $465,263, which it stated represented the Part I tax reduction it was allowed to deduct (see tab 1 of Annex A: Appellant’s T-2 return for the 1988 taxation year and documents attached thereto).

5. In order to arrive at this figure, the Appellant contends that the amount determined under clause 129(3)(a)(i)(B) in respect of the Appellant for the year was allegedly $13,366,265 and it represented, according to the Appellant, its Canadian investment income and its foreign investment income for the year based on its interpretation of subsection 129(4) without regard to subparagraph (a)(iii) thereof (see tab 1 of Annex A: Appellant’s T-2 return for the 1988 taxation year and documents attached thereto).

6. According to the Appellant, the adjustment of $465,263 was determined in the following manner:

7% X $13,366,265 X	number of days after
	June 1987 and before
	July 1988	182
		$465,263
	total number of days in
	the taxation year 366

7. As a result of the adjustment of $465,263 claimed by the Appellant, the Appellant’s corporate surtax provided in section 123.2 of the I.T.A. was reduced (see tab 1 of Annex A: Appellant’s T-2 return for the 1988 taxation year and documents attached thereto).

8. At the Appellant’s request, the Respondent made a carryover of net capital losses of $1,201,193 from the 1989 taxation year to the 1988 taxation year in accordance with paragraph 111(1 )(b) and subsection 111(1.1) of the I.T.A. (see tab 2 of Annex A: letter dated September 27, 1989 sent by the Appellant requesting a loss carry-back and form T2S(4)).

9. On or about April 20, 1990, the Minister of National Revenue issued a notice of reassessment dated April 20, 1990 to the Appellant in respect of the Appellant’s taxation year ending December 31, 1988. In the said notice of reassessment, the Minister of National Revenue made the carryover of net capital losses mentioned in the previous paragraph and denied the Appellant the amount of $465,263 as a Part I tax reduction, which also affected the Appellant’s surtax (see tab 3 of Annex A: Notice of Reassessment dated April 20, 1990).

10. The parties agree that under section 141.1 of the I.T.A., the Appellant was deemed, inter alia, not to be a private corporation for the purposes of section 129 of the I.T.A. for its taxation year beginning on January 1, 1988 and ending on December 31, 1988.

11. According to the Respondent, since the Appellant is deemed not to be a private corporation for the purposes of section 129 of the I.T.A., there is therefore no amount determined under clause 129(3)(a)(i)(B) in respect of the Appellant for the 1988 taxation year.

12. According to the Respondent, the definition of Canadian investment income and foreign investment income provided in subsection 129(4), for the purposes of subsection 129(3), does not apply either to the Appellant since it is deemed not to be a private corporation under section 141.1 for the purposes of section 129,

13. The Appellant filed, within the established deadlines, a notice of objection to the notice of reassessment made by the Minister of National Revenue who confirmed said notice of reassessment in a notice dated February 3, 1992 (see tab 4 of Annex A: Confirmation from the Minister of National Revenue dated February 3, 1992).

Points at Issue:

14. The point at issue is whether the Part I tax reduction applied in respect of the Appellant for its 1988 taxation year.

15. Should the Court decide that the Part I tax reduction applied to the Appellant, the parties agree that the amount that the Appellant should have been allowed as a Part I tax reduction was $423,451 rather than the amount mentioned in paragraph 6, and the corporate surtax provided for in section 123.2 would have to be adjusted accordingly.

[Translation.]

The tax reduction to which the appellant claimed entitlement is provided in subparagraph 123(l)(a)(vi) as applicable to the taxation years ending after June 1987 and commencing before July 1988. This provision reads as follows:

Section 123: Rate for corporations.

(1) The tax payable under this Part for a taxation year by a corporation upon its taxable income or taxable income earned in Canada, as the case may be, (in this section referred to as its “amount taxable”) for the year is, except where otherwise provided, the aggregate of

(a) the amount, if any, by which the aggregate of

(i) that proportion of 46% of its amount taxable for the year that the number of days in the year that are before July, 1987 is of the number of days in the year,

(ii) that proportion of 45% of its amount taxable for the year that the number of days in the year that are after June, 1987 and before July, 1988 is of the number of days in the year,

(iii) that proportion of 38% of its amount taxable for the year that the number of days in the year that are after June, 1988 is of the number of days in the year,

(iv) in the case of a corporation that was throughout the year a Canadian-controlled private corporation, that proportion of 1% of the lesser of

(A) the amount, if any, by which

(I) its amount taxable for the year exceeds the aggregate of

(II) the least of the amounts determined under paragraphs 125(l)(a) to (c) in respect of the corporation for the year, and

(III) 2 times the aggregate of amounts deducted under subsection 126(2) by the corporation from its tax for the year otherwise payable under this Part, and

(B) the amount determined under clause 129(3)(a)(i)(B) in respect of the corporation for the year, that the number of days in the year that are after June, 1987 and before 1988 is of the number of days in the year, and

(v) in the case of a corporation that was throughout the year an investment corporation or a mutual fund corporation, that proportion of 1% of the lesser of

(A) its amount taxable for the year, and

(B) its taxed capital gains for the year (within the meaning assigned by subsection 130(3)) for the year that the number of days in the year that are after June, 1987 and before July 1988 is of the number of days in the year exceeds

(vi) in the case of a corporation that was throughout the year a Canadian-controlled private corporation, that proportion of 7% of the lesser of the amounts determined under clauses (iv)(A) and (B) in respect of the corporation for the year that the number of days in the year that are after 1987 and before July, 1988 is of the number of days in the year, and

Subparagraph 123(l)(a)(vi) specifies that in the case of a corporation that was throughout the year a “Canadian-controlled private corporation”, the seven per cent reduction applies to the lesser of the amounts determined under clauses (iv)(A) and (B). If the deduction had been applicable in the instant case it would have applied to the period from January 1 to June 30, 1988. Moreover, since it is admitted that the amount determined under clause (B) would have been less than that determined under clause (A), that amount would be the one that should be taken into consideration in the instant case. By a second reference, this amount would be that determined under clause 129(3)(a)(i)(B) in respect of the corporation for the year. This latter clause itself refers to subsection 129(4) read without regard to subparagraph (a)(iii) thereof, for the purposes of determining the Canadian investment income and the foreign investment income of a corporation for the year. Subclauses 129(3)(a)(i)(B)(I) and (II) stipulate that the net capital losses that could be carried over and that were deducted in the year, as well as losses for the year from a source that is property, must then be deducted from the amount thus determined under subsection 129(4). It is through this series of references that one can determine the Canadian investment income and the foreign investment income for the year that would normally have been taxable and to which, according to the appellant, the reduction provided in subparagraph 123(l)(a)(vi) should apply.

However, section 141.1 of the Act establishes the following presumption:

Notwithstanding any other provision of this Act, an insurance corporation (other than a life insurance corporation) that would, but for this section, be a private corporation shall be deemed not to be a private corporation for the purposes of section 129, subsection 55(5) and paragraphs 89(1 )(b) and (b.2).

Appellant's Position

The appellant’s position is that its entitlement to the reduction provided in subparagraph 123(l)(a)(vi) is in no way affected by section 141.1 because the reference from clause 123(l)(a)(iv)(B) to clause 129(3)(a)(i)(B) should be interpreted as a simple “mathematical” reference to an amount computed under this clause and not to all of the other conditions set forth in section 129 for its general application including that to the effect that the corporation be a “Canadian- controlled private corporation”.

On this point, counsel for the appellant argued that the reference question in the instant case was similar to that considered in the recent judgment of the Supreme Court of Canada in Québec (Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours, [1994] 3 S.C.R. 3, (sub nom. Notre- Dame de Bon-Secours (Corp.) v. Québec (Communauté urbaine)), [1995] 1 C.T.C. 241, (sub nom. Corp. Notre-Dame de Bon-Secours v. Québec (Communauté urbaine)), 95 D.T.C. 5017. In that judgment, the Supreme Court of Canada, after considering the principles of interpretation that must apply in taxation matters, decided in particular that a non-profit corporation could be entitled to a property tax exemption for all of its facilities even though that corporation held a permit as a reception centre under the Act respecting Health Services and Social Services of Québec (“A.H.S.S.S.”) for only part of its facilities. The provision that provides for the exemption is subsection 204(14) of the Act respecting Municipal Taxation of Québec (“A.M.T.”) that reads as follows:

204. The following are exempt from all municipal or school real estate taxes:

..(14) an immoveable belonging to a public establishment within the meaning of the Act respecting health services and social services (chapter S-5), including a reception centre contemplated in section 12 of that act, used for the purposes provided by that act, and an immoveable belonging to the holder of a day care centre permit or nursery school permit contemplated in paragraph 1 or 2 of section 4 or 5 of the Act respecting child day care (chapter S-4.1), used for the purposes provided by that act; [1]

Gonthier J., rendering the decision for the Court, explained in the following terms his rejection of the Communauté urbaine de Québec’s argument that the exemption could not be allowed in respect of all of the facilities:

If the legislature had intended that the tax exemption of a reception centre should be subject to the existence of a permit issued by the proper authority, it would have said so expressly as it did for day-care centres. [2]

In the instant appeal, counsel for the appellant maintained that the reference to “an amount determined” under a legislative provision meant nothing more than a reference to an amount computed under that provision. They argued further that, sincesubparagraph 123(l)(a)(vi) stipulates that the tax reduction applies only “in the case of a corporation that was throughout the year a Canadian-controlled private corporation”, this statement would be redundant if the purpose had been to ensure that the conditions of section 129 were also met. Indeed, the preamble to this section states that it applies only to a “private corporation”. Counsel argued that a presumption created for a particular purpose should not be used for a purpose other than that for which it was created. The decision of the Federal Court of Appeal in Lachance v. R. (sub nom. Lachance v. Canada), [1994] 2 C.T.C. 185 (sub nom. R. v. Lachance), 94 D.T.C. 6360. was cited in support of this argument. Counsel for the appellant further contended that subsection 41(3) of the Interpretation Acl [3] respecting references provides similar direction in that it states that a reference in an enactment to an element of a section shall be read as a reference only to that element.

Since subparagraph 123(l)(a)(vi) provides a tax reduction, the appellant’s counsel was of the opinion that where there is ambiguity a residual presumption should then favour the proposed interpretation as would be the case with a provision providing for a deduction or an exemption. The decisions of the Supreme Court of Canada in Johns-Manville Can. Inc. v. R. (sub nom. Johns-Manville Canada Inc. v. The Queen), [1985] 2 S.C.R. 46, [1985] 2 C.T.C. Ill, 85 D.T.C. 5373. Corp. Notre- Dame de Bon-Secours (supra) and Harel Harel v. Québec (Deputy Minister of Revenue) (sub nom. Harel v. Deputy Minister of Revenue (Que.)), [1978] 1 S.C.R. 851, [1977] C.T.C. 441, 77 D.T.C. 5438. were cited in support of this argument.

Counsel for the appellant also argued that a review of the object and spirit of section 123 leads to the same conclusion, that is that the prescribed tax reduction was applicable to the appellant. While acknowledging that the purpose of this reduction was to provide an interim adjustment to the mechanisms for integration of corporate tax and personal tax, primarily because of the reduction in the latter tax under the 1987 tax reform, counsel argued that consideration must also be given to another aspect of this reform, that is the increase under the transitional rules set forth in section 38 of the Act of the taxable portion of the capital gain as of January 1, 1988. They noted that that increase in the taxable portion of a capital gain from half to two-thirds applied not only to individuals but also to “Canadian-controlled private corporations” as of January 1, 1988. The increase did not apply to any of the other corporations until July 1, 1988. In their view, this point is emphasized in the comments of the Minister of Finance that accompanied the draft tax reform and which explained the need for the tax reduction that is the subject of the instant case. [4] This reference to budget documents is supported by the decisions of the Federal Court of Appeal in Edmonton Liquid Gas Ltd. v. R. (sub nom. Edmonton Liquid Gas Ltd. v. The Queen), [1984] C.T.C. 536 (sub nom. Edmonton Liquid Gas Ltd. v. Minister of National Revenue), 84 D.T.C. 6526 and Lor-Wes Contracting Ltd. v. R. (sub nom. Lor-Wes Contracting Ltd. v. The Queen, [1985] 2 C.T.C. 79 (sub nom. Lor-West Contr. v. Minister of National Revenue), 85 D.T.C. 5310.

In order to ensure a better understanding, I will reproduce herein most of the comments of the Minister of Finance in respect of the taxation of investment income of private corporations. The last paragraph is however

that which directly addresses the problem before us:

3. Taxation of Investment Income of Private Corporations

As a consequence of reductions in tax rates and the reduced dividend tax credit, changes are proposed to the mechanisms that integrate the tax on private corporations and their shareholders.

The refundable portion of Part I tax paid by a Canadian-controlled private corporation on its investment income will be reduced from 25 per cent to 20 per cent of the amount of such income.

The rate of the refundable tax levied under Part IV of the Act on taxable dividends received by corporations will be reduced from 33 1/3 to 25 per cent.

The rate at which the refunds of such tax are made on distributions will be reduced from $1 for every $3 of dividends paid by the corporation to $1 for every $4 of dividends.

The reduction in the refundable portion of the Part I tax will apply to investment income earned after 1987, and the reduction in the rate of the Part IV tax on dividends will be effective for dividends received after 1987. The reduction in the rate at which the refundable portion of Part I tax and Part IV tax (collectively referred to as refundable dividend tax on hand or “RDTOH”) is refunded will apply with respect to dividends paid after 1987.

To maintain the integration of investment income earned, but not distributed, by a private corporation before 1988, a special computation of RDTOH of the corporation will be required as of December 31, 1987, and the amount so computed will be reduced by one- third. This adjustment is to ensure that the total tax paid by the corporation and an individual shareholder on investment income earned before 1988 and distributed after 1987 will approximate the tax that would be payable by the individual if he or she had earned the income directly before 1988 rather than through the corporation.

The general corporate rate reduction which is proposed to take effect on July 1, 1988 will be advanced to the beginning of 1988 with respect to the investment income, including taxable capital gains, of Canadian-controlled private corporations (CCPCs) in order to reflect the personal tax changes effective January 1, 1988. This avoids the need for a second set of adjustments to the refundable tax rules which would be required if the corporate income tax rate reduction did not apply to such income until July 1, 1988. In addition, the capital gains inclusion rate for CCPCs will increase from one-half to two-thirds effective January 1, 1988. Thus for such corporations with taxation years that straddle January 1, 1988, the inclusion rate will be determined by prorating the one-half and two-thirds inclusion rates based on the number of days in the taxation year on either side of that date. As a result, the reduction in the tax rate on investment income and the increase in the capital gains inclusion rate for CCPCs are effective at the same time.

With the aid of a number of tables, counsel then explained that refusing to allow the tax reduction to an insurance corporation like the appellant leads to excessive and unjustified over-taxation of its capital gains for the period from January 1 to June 30, 1988 compared to all other corporations. I note immediately in this regard that the exercise is more theoretical than practical in the instant case since a net capital loss carryover eliminated the taxable portion of the capital gains earned by the appellant during its 1988 taxation year, so that no capital gain was here subject to tax.

Lastly, counsel for the appellant noted that the various references at issue ultimately bring us to subsection 129(4) which determines a corporation’s investment income for a given year. In their view, the purpose of this provision, based on the actual wording used therein, is to determine the investment income of a “corporation” and not that of a “Canadian-controlled private corporation” so that it could be concluded that any corporation, not only a “Canadian-controlled private corporation”, can have investment income. By analogy, counsel for the appellant referred to the decision of the Federal Court of Appeal in R. v. B & J Music Ltd. (sub nom. B & J Music Ltd. v. The Queen), [1983] C.T.C. 50 (sub nom. B & J Music Ltd. v. Minister of National Revenue), 83 D.T.C. 5074, in which it was held that the taxable income of a “Canadian-controlled private corporation” for the years in which it was not such a corporation and could not thus be entitled to the small business deduction provided for in section 125 of the Act had to be brought into consideration for the purposes of computing the “cumulative deduction account” of that Canadian-controlled private corporation.

Respondent's Position

Counsel for the respondent contended that the presumption in section 141.1 of the Act, according to which an insurance corporation is deemed not to be a private corporation for the purposes of section 129, results in no amount being determinable in respect of the appellant under subsection 129(3) of the Act because all of the provisions of section 129 are rendered inapplicable to such an insurance corporation. Counsel began by summarizing the various mechanisms for integration of corporate tax and personal tax and then noted that such an insurance corporation was not entitled, either before the tax reform of 1987 or after it took effect, to the tax refund provided in section 129 of the Act so that it would be illogical to allow it a temporary tax reduction in respect of its investment income that was not provided by the integration rules established for “Canadian- controlled private corporations” in respect of such income. Also referring to the documents published by the Minister of Finance when presenting the 1987 tax reform, [1] he maintained that the purpose of the temporary tax reduction of seven per cent provided in subparagraph 123(l)(a)(vi) in respect of the investment income of “Canadian-controlled private corporations” was essentially to provide an interim corrective measure from January to July 1988 to the integration rules set forth in section 129 in order to avoid a second set of adjustments to the refundable tax mechanism provided for in this section that would have been necessary as a result of the general reduction in rates as of July 1988.

Counsel for the respondent pointed out that although subsection 129(4) gives a definition of Canadian investment income and foreign investment income of a “corporation” for the year, its preamble clearly indicates that it is defining the expressions used “in subsection (3)”. In clause 129(3)(a)(i)(B), the possessive adjective “its” is used in the expressions “its Canadian investment income” and “its foreign investment income”. In his view, this could only refer to a corporation covered by subsection 129(3) itself, that is a “Canadian-controlled private corporation”. This is not the case in the instant appeal because of the presumption created by section 141.1 of the Act.

Counsel for the respondent was also of the opinion that the anomaly or distortion identified in respect of the taxation of capital gains as part of investment income was not relevant in the instant case because these capital gains were offset by the carryover of net capital losses claimed in the year. Counsel further contended that the anomaly or distortion was created by the transitional provisions of section 38 increasing the taxable portion of the capital gains as of January 1, 1988 to which the appellant was subject rather than by the non-application of the tax reduction provided in subparagraph 123(l)(a)(vi).

In short, by relying on the general context of the Act and of the adjustments introduced under the 1987 tax reform, more particularly on the integration mechanism provided in section 129 in respect of the refundable tax, counsel for the respondent argued that the appellant was not entitled to the tax reduction under subparagraph 123( l)(a)(vi) because it was clear that the purpose was to totally exclude insurance corporations like the appellant from the benefits arising from this integration mechanism.

Analysis

The interpretation proposed by counsel for the appellant appears to me to be very technical and mechanical. Such an approach was recently criticized by the Federal Court of Appeal in the following terms:

The approach adopted by the learned judge was a purely mechanical one, focussed on the method, the means devised to achieve the goal. The proper approach must be a functional one, and the scheme must be considered as a whole, taking into account the intent of the legislation, its object and the spirit and what it actually accomplishes (cf. Stubart Investments Ltd. v. R., [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305), and Swantje v. R. (sub nom. Swantje v. Canada), [1994] 2 C.T.C. 382 (sub nom. R. v. Swantje) 94 D.T.C. 6633, at page 384-85 (D.T.C. 6635).

The interpretation proposed by counsel for the respondent is, in my view, more in keeping with the spirit of the legislation relating to the taxation of investment income of private corporations and the nature of the adjustments introduced by the 1987 tax reform to the various mechanisms for integration of corporate tax and personal tax. It also corresponds to the teleological approach advocated by the Supreme Court of Canada in a number of decisions, including Corp. Notre-Dame de Bon-Secours, supra.

In addition to the credit for dividends paid to shareholders who are individuals, we know that three other mechanisms (as well as the small business deduction provided for in section 125 of the Act) were established in respect of corporate tax in order to ensure the full integration of the tax on private corporations and that on their shareholders in respect of certain incomes, thereby ensuring the neutrality of the system, regardless of whether said income was earned directly by an individual or through a corporation. The mechanisms in respect of the non-taxable portion of capital gains, in respect of investment income, including the taxable portion of capital gains, and in respect of dividends are provided in paragraphs 89(1 )(b) (capital dividend account) and (b.2)(life insurance capital dividend account), section 129 (dividend refund) and section 186 (Part IV refundable tax) respectively. It is not necessary for the purposes of the instant appeal to describe these mechanisms in detail. Suffice it to say that the mechanisms in paragraphs 89(1 )(b) and (b.2), as well as that in section 129, are rendered inapplicable to insurance corporations like the appellant because of the presumption stipulated in section 141.1 of the Act. As for being entitled to the section 186 refundable tax, such corporations are exempted from it under paragraph 186.1(b) of the Act. In my view, it is within this global context, in which insurance corporations like the appellant are excluded from all of the integration mechanisms provided in respect of private corporations, except for the small business deduction, that the tax reduction provided for in subparagraph 123(l)(a)(vi) of the Act must be considered.

The reasons for this exclusion and the history of section 141.1 of the Act are explained very Well in the following extract from the Canadian Tax Reporter.

Although a life insurance corporation was deemed by section 141 to be a public corporation, the Act before 1974 contained no similar provision in respect of other insurance corporations, even though their sources of income were essentially similar. In concept, the net income of an insurance corporation is a combination of its underwriting gains and losses and the income derived from investing funds required to be kept on hand to meet reserve requirements. This combined income would normally be regarded as active business income. However, a non-life insurance corporation that otherwise qualified as a private corporation, was entitled to dividend refunds under section 129 in respect of tax on its investment income and was entitled to distribute half of net capital gains as capital dividends under subsection 83(2).

Effective for the 1974 to 1980 taxation years the status of a private

CCH Canadian Limited, Canadian Tax Reporter, Vol. 4, pages 19,605 and 19,606.

corporation was withdrawn in respect of non-life insurance corporations, except for the limited purposes of allowing it the small business deduction under section 125 where it qualifies, and providing for a recovery of that deduction under Part VI of the Act in the event the corporation becomes controlled by non-residents.

As a transitional measure the general insurance corporation continued to be treated as a private corporation for the purpose of section 129, but was deemed to have no investment income for 1974 to 1980 taxation years. This

allowed the corporation to obtain a dividend refund under section 129 if it paid dividends. Alternatively, it was allowed to obtain a refund of Part IV by making application to the Minister, without the necessity of paying dividends.

Effective for 1981 and subsequent taxation years a non-life insurance corporation will be a private corporation except for the purpose of:

(a) section 129, which makes it ineligible for refundable tax treatment on investment income and Part IV tax on taxable dividends;

(b) subsection 55(5); and

(c) paragraphs 89(1 )(b) and (b.2), which prevent it from having a capital dividend account or a life insurance capital dividend account and making tax-free distributions therefrom.

Furthermore, an insurance corporation is specifically exempted from the Part IV tax on taxable dividends (section 186.1).

However, the company will be private for the purpose of the small business deduction, for the entitlement of its shareholders to an allowable business investment loss, and the special treatment of stock option plans for its employees, provided the other relevant conditions are met. It could also be subject to the corporate distributions tax on dividends for the 1983 and subsequent taxation years.

[Emphasis added.]

In addition to the Part IV tax refund, section 129 provides for the refund of part of the tax paid by a “Canadian-controlled private corporation” on its investment income when taxable dividends are paid to its shareholders. Pursuant to subsection 129(3) and (4), investment income includes, among others, the taxable portion of earned capital gains and the interest income or other property income earned by a “Canadian-controlled private corporation” during a given year. The “refundable dividend tax on hand” account defined in subsection 129(3) consists, in principle, of a certain percentage of this investment income. Under the 1987 tax reform, the reduction in personal tax rates and in the dividend credit as of January 1, 1988 meant that adjustments had to be made to section 129. The refundable portion of the Part I tax that was paid on investment income and that is part of the “refundable dividend tax on hand” account had to be reduced from 25 per cent to 20 per cent. In addition, the balance in this account as at December 31, 1987 had to be reduced by one-third while the rate of refund in cases where dividends were paid was reduced to $1 for every $4 of dividends paid rather than for every $3. All of these changes were required to maintain the integration of corporate tax and personal tax, and the system’s neutrality, at least in theory.

In this context, it is easy to understand that the general corporate tax rate reduction from 45 per cent to 38 per cent as of July 1, 1988 would have necessitated a further set of adjustments. Rather than adopting that approach, it was decided to directly reduce by seven per cent the base rate On investment income subject to the refundable tax under section 129 of the Act. In my view, this is how the reduction provided for in subparagraph 123(l)(a)(vi) for the period from January 1 to June 30, 1988 must be understood. I again reproduce that part of the Minister of Finance’s comments which relate directly to this aspect:

The general corporate rate reduction which is proposed to take effect on July 1, 1988 will be advanced to the beginning of 1988 with respect to the investment income, including taxable capital gains, of Canadian-controlled private corporations (CCPCs) in order to reflect the personal tax changes effective January 1, 1988. This avoids the need for a second set of adjustments to the refundable tax rules which would be required if the corporate income tax rate reduction did not apply to such income until July 1, 1988. [7]

It is clear from this text that the intent was to reduce that tax solely in respect of investment income subject to the section 129 refundable tax. However, the appellant could not have such income since it was totally excluded from the application of the section 129 refundable tax mechanism by the presumption of section 141.1 of the Act.

In my view, the Minister of Finance’s further comments in the same paragraph must also be understood by bearing in mind that he was still referring exclusively to investment income of a “Canadian-controlled private corporation” subject to the section 129 refundable tax of which the taxable portion of capital gains earned is one component. These comments read as follows:

In addition, the capital gains inclusion rate for CCPCs will increase from one-half to two-thirds effective January 1, 1988. Thus for such corporations with taxation years that straddle January 1, 1988, the inclusion rate will be determined by prorating the one-half and two-thirds inclusion rates based on the number of days in the taxation year on either side of that date. As a result, the reduction in the tax rate on investment income and the increase in the capital gains inclusion rate for CCPCs are effective at the same time. [8]

It is true that the taxable portion of the capital gains of an insurance company like the appellant which qualified as a “Canadian-controlled private corporation” was increased from one-half to two-thirds as of January 1, 1988. However, it must be realized that pursuant to section 141.1 of the Act, the refundable tax mechanism provided in respect of investment income under section 129 of the Act could not be applied to this taxable portion. Since an insurance corporation like the appellant is not treated like other “Canadian-controlled private corporations” in respect of its investment income and more specifically, in respect of the taxable portion of its capital gains, [9] it is obvious that treating it the same way as other “Canadian-controlled private corporations” in respect of the increase in the taxable portion of capital gains under the transitional rules of section 38 creates a distortion or an anomaly. However, I am of the opinion that the problem arises from the fact that the capital gains treatment was not covered by a specific provision or exception under the transitional rules of section 38, by treating an insurance corporation like a corporation other than a “Canadian-controlled private corporation”. Such a treatment would have been in keeping with that applied to such corporations prior to the 1987 tax reform and which continued to apply to them after the full implementation of the reforms on July 1, 1988. Since the problem lies with the transitional rules of section 38 of the Act, the solution would not be to allow the seven per cent tax reduction provided in subparagraph 123(l)(a)(vi) to everything that might commonly be designated as investment income of an insurance corporation but to which the refundable tax mechanisms provided in respect of investment income in section 129 of the Act cannot be applied. This solution would be even more illogical and unreasonable since the tax reduction would apply, in the instant case, not to income made up of the taxable portion of the capital gains earned by a corporation, but to income made up exclusively or primarily of interest income and other income from property.

I therefore conclude that the reference from subparagraph 123(l)(a)(vi) to clause 123(l)(a)(iv)(B), from that clause to clause 129(3)(a)(i)(B) and from that clause to subsection 129(4) must be interpreted as a reference to an amount normally considered as investment income for the purposes of these last two provisions, that is investment income of a “Canadian- controlled private corporation” subject to the refundable tax under section 129 of the Act. The appellant did not have any such income. It was therefore not entitled to the tax reduction provided for in subparagraph 123(l)(a)(vi).

I will add two brief comments. The first relates to subsection 41(3) of the Interpretation Act to which counsel for the appellant referred. This subsection reads as follows:

A reference in an enactment to a subsection, paragraph, subparagraph, clause or subclause shall be read as a reference to a subsection, paragraph, subparagraph, clause or subclause of the section, subsection, paragraph, subparagraph or clause, as the case may be, in which the reference occurs.

Even if the application of this subsection to the reference of clause 123(l)(a)(iv)(B) to an “amount determined under clause 129(3)(a)(i)(B) in respect of the corporation for the year” is interpreted as a reference to this clause alone, it is still necessary for an amount to be able to be determined under this clause “in respect of the corporation for the year”. This was not the case here since I am of the opinion that the whole of section 129 is rendered inapplicable to the appellant by virtue of section 141.1 of the Act. It should not be forgotten that this section stipulated that:

Notwithstanding any other provision of this Act, an insurance corporation (other than a life insurance corporation) that would, but for this section, be a private corporation shall be deemed not to be a private corporation for the purposes of section 129....

In this regard, the issue is much different from that raised by a single reference in Corp. Notre-Dame de Bon-Secours (supra). In my view, the rule of exception defined in section 141.1 must be taken to mean that an affected corporation is deemed not to be a private corporation for all purposes of section 129, notwithstanding any other provision of the Act. Since the requirement to be a “private corporation” is fundamental to the application of section 129, the effect of section 141.1 of the Act is to neutralize, for an insurance corporation like the appellant, the effect of the references from subparagraph 123(l)(a)(vi) and from clause 123(l)(a)(iv)(B) to clause 129(3)(a)(i)(B) of the Act.

The second comment relates to the argument that the condition set forth in subparagraph 123(l)(a)(vi) that the corporation be “a corporation that was throughout the year a Canadian-controlled private corporation” is redundant. We are dealing here with a paragraph, paragraph 123(l)(a), which is more than 50 lines long with only one semi-colon at the end of its French version. In such a convoluted text, made more cumbersome by successive references, I do not view the statement of the condition in subparagraph 123(l)(a)(vi) as redundant. I believe that it simply helps to clarify the scope of the paragraph. Moreover, this question of form should not, in any case, take precedence over what I consider to be the general economy of the Act and the intent of Parliament.

For these reasons, the appeal is dismissed with costs awarded to the respondent.

Appeal dismissed.