Manac Inc. Corp. v. Her Majesty the Queen, [1996] 3 CTC 2459, 96 DTC 1714

St-Onge J.T.C.C.: — The appeal of Manac Inc. was heard in the city of Montréal, Province of Quebec, on July 18 and 19, 1995. The task before this Court is to interpret subsection 111(5) of the Income Tax Act in order to decide whether the appellant was entitled to deduct non-capital losses of $2,180,726 for its 1987 and 1988 taxation years.

According to the pleadings, the following facts were admitted. The appellant is a corporation resulting from the merger of 2432-0095 Québec Inc. and Manac Inc. on June 22, 1987. From the early 1980s to 1987, Manac Inc. obtained its supplies of FRP panels, which were used to manufacture boxes of trailers and semi-trailers, from Panneaux Nortex Ltée. It was also admitted that, from May 1981 to May 1983, Nortex was controlled by a company related to Manac Inc., that all the shares of Nortex were purchased by 2432-0095 Québec Inc. on May 17, 1987, that Nortex was immediately wound up into 2432-0095 Québec Inc. and that the interested parties intended to see this to be carried out under subsection 88(1) of the Income Tax Act.

On June 22, 1987, Manac Inc. was merged with 2432-0095 Québec Inc. In computing its taxable income for the taxation year ended on December 31, 1987, the appellant deducted the amount of $2,180,726 in respect of non-capital losses incurred by Nortex during the taxation years preceding the change in its control.

At the hearing, counsel for both parties agreed to amend the amount of $359,778 to read $141,755 in subparagraphs 15(h), 15(i) and 15(j) of the reply to the notice of appeal and also to amend the total losses of $2,180,726 in subparagraph 15(j) to read $1,962,703. As a result of these amendments, counsel for the appellant admitted subparagraphs 15(a) to 15(1) and 15(q), declared subparagraphs 15(m) to 15(p) and 15(s) settled and disputed all the other subparagraphs. What remains therefore is to interpret subsection 111(5) in order to determine whether the appellant was entitled to the deduction of $1,962,703.

The respondent disallowed the deduction for the following reasons:

(a) Manac Inc. is a company incorporated in 1966 which manufactured trailers used for road transport;

(b) Nortex was a corporation founded in 1977 which, prior to its winding-up in April 1987, manufactured FRP panels intended for the transportation industry; FRP panels are in fact panels of seven-ply plywood covered in fibreglass to which a gel coat is applied;

(c) Fibrobec Inc. purchased 60 per cent of Nortex’s voting shares in May 1983 and the remaining 40 per cent of Nortex’s voting shares in May 1985;

(d) Fibrobec Inc. was a corporation dealing at arm’s length with Manac Inc. and the companies related to it;

(e) on April 17, 1987, 2432-0095 Québec Inc. purchased 100 per cent of Nortex’s voting shares;

(f) as 2432-0095 Québec Inc. was a subsidiary of Manac Inc. at the time, so that a change in control of Nortex in fact occurred on April 17, 1987;

(g) as a result of this change in control, Nortex’s taxation year is deemed to have ended on April 16, 1987;

(h) the sum of $141,755 had to be deducted as a deemed capital cost allowance in computing Nortex’s income for the taxation year ending on April 16, 1987;

(i) this sum of $141,755 represents the amount by which the undepreciated portion of the capital cost to Nortex of class 1, 3, 8, 10, 12 and 29 depreciable property exceeded the aggregate of the fair market value of that property on April 16, 1987 and the capital cost allowance taken in respect thereof for the taxation year ending on April 16, 1987;

(j) on April 16, 1987, that is, immediately prior to the date of the change in control, Nortex had a non-capital loss balance of $1,820,948, to which is to be added the aforementioned amount of $141,755, whence a total non-capital loss balance for Nortex of $1,962,703 at April 16, 1987;

(k) on April 17, 1987, Nortex was wound up into 2432-0095 Québec Inc., a procedure which the interested parties intended to see carried out under subsection 88(1) of the Income Tax Act;

(l) on June 22, 1987, 2432-0095 Québec Inc. was merged with Manac Inc.; the corporation resulting from the merger, which is the appellant, retained the name Manac Inc.;

(m) the deduction of $359,778 as a deemed capital cost allowance which was made in computing Nortex’s income for the taxation year ending on April 16, 1987, reduces the undepreciated portion of the capital cost of the appellant’s class 1, 3, 8, 10, 12 and 29 property by the following amounts:

Class 1: $1,422;

Class 3: $176,064;

Class 8: $9,104;

Class 10: $31,433;

Class 12 and 29: $141,755;

Total: $359,778;

(n) this reduction of the undepreciated portion of the capital cost of the appellant’s class 1, 3, 8, 10, 12 and 29 property results in turn in a reduction of the capital cost allowance which the appellant may claim in computing its income;

(o) the maximum amounts of capital cost allowance which the appellant may claim in computing its income for the taxation years ending on December 31, 1987, and April 22, 1988, are as follows:

Taxation year ending on December 31,1987: $1,198,646,

Taxation year ending on April 22, 1988: $ 492,171;

(p) the appellant having requested that the maximum capital cost allowance be allowed it, the Minister of National Revenue in fact deducted these respective amounts of $1,198,646 and $492,171 in recomputing the appellant’s income for its 1987 and 1988 taxation years;

(q) the appellant continued to manufacture FRP panels following the change in Nortex’s control, Nortex’s winding-up into 2432-0095 Québec Inc. and the merger of 2432-0095 Québec Inc. with Manac Inc.; within the appellant corporation, it is the Nortex division which was thus responsible for manufacturing these panels;

(r) during the taxation years ending on December 31, 1987, and April 22, 1988, the operations of the Nortex division resulted in losses for the appellant which, according to the pro forma financial statements prepared by the appellant, would increase over the following three years;

(s) throughout its 1987 and 1988 taxation years, the manufacturing of FRP panels was not carried on by the appellant for profit or with a reasonable expectation of profit;

(t) the appellant’s income for its 1987 and 1988 taxation years from the manufacture and sales of trailers and semi-trailers was not all or substantially all derived from the manufacture and sale of properties similar to those which Nortex manufactured and sold before the change in control on April 17, 1987;

(u) the FRP panels that Nortex manufactured and sold before the change in control of April 17, 1987 are not properties similar to trailers and semi-trailers manufactured and sold by the appellant;

(v) the non-capital losses totalling $1,962,703 incurred by Nortex up until April 16, 1987, are not deductible in computing the appellant’s taxable income for its taxation years ended on December 31, 1987, and April 22, 1988;

(w) of the non-capital loss carryover of $1,992,693 which the appellant claimed for its 1987 taxation year, an amount of $1,820,943 consists precisely of the non-capital losses incurred by Nortex up until April 16, 1987;

(x) the Minister of National Revenue has thus disallowed the deduction of this amount of $1,820,948 [sic] in computing the appellant’s taxable income for its 1987 taxation year, thus limiting the non-capital loss carryover to $171,645.

Referring to subsection 111(5), counsel for the appellant explained that two conditions are set out, the first being that the business that was subject to the acquisition of control operate for profit or with a reasonable expectation of profit. He stated that that condition, which was raised by the Minister in his reply to the notice of appeal, was no longer disputed between the Minister and the appellant.

The second condition set out concerns income, where it is said “to the extent of the aggregate” of the income from the business where the loss originates or from a similar business. He explained that what is referred to here is the sufficiency of income to cover the non-capital losses incurred prior to the change in control. As to what constitutes a similar business, it is defined in terms of similarity of properties. The income derived from those properties must be a substantial part of the income following the change in control.

It was not disputed that, prior to the change in control, Panneaux Nortex had manufactured and sold fibreglass panels for use in manufacturing truck trailers.

Therefore, the appellant’s argument was that substantially all its income came from the sale of trailers manufactured from these FRP panels and also from similar aluminum and steel panels. A variety of panels were therefore used for a similar purpose, which was the manufacture of truck trailers.

Counsel for the appellant explained that, according to the respondent, subsection 111(5) set the condition that there be a correlation in the commercial activity with respect to similar properties, “that is, if panels were sold before control was acquired, those same panels must be sold afterward; they cannot be leased or developed”.

Counsel for the respondent admitted for his part that what was at issue was the interpretation of subsection 111(5) and that the facts, namely that the appellant manufactured truck boxes on trailers and also the trailers, were not really in dispute. The questions to be decided were as follows: (1) Are the properties similar properties? (2) Did substantially all the appellant’s income in 1987 come from the sale of those same properties?

(3) Do the expressions “as the case may be” and “selon le cas” imply that if there is a sale by business no. 1, there must necessarily be a sale by business no. 2? (4) Do the terms “aménagement” and “mise en valeur” mean the same thing considering that the English term “development” was not changed in 1994? Can a property that was developed (“aménagé”) lose its identity and be merged into another property? Does the term “aménagement” concerns lands and farm losses considering that subsection 111(5) speaks of businesses or farm losses?

Marcel Blouin, an accountant, has worked for the Canam Manac Group since 1975, when he began his employment as a controller and vice- president finance, and he gave the following explanation.

In 1987, Manac Inc. was wholly owned by the Canam Manac Group of which Mr. Dutil was the president. From 1966 to 1976, the appellant manufactured only steel flatbeds for transporting logs. In 1976, the appellant’s engineers worked on the development of a resin-coated FRP wood panel. In 1979, Treco, which was then controlled by Mr. Dutil, purchased Panneaux Nortex. In 1985, Fibrobec Inc. became the owner of Nortex. On April 17, 1987, 2432-0095 Québec Inc., a subsidiary of Manac Inc., purchased 100 per cent of Nortex’s shares. At that time, Nortex’s activity was limited solely to the manufacture of fibreglass balconies. The appellant’s engineers put into place all the equipment, the infrastructure, for manufacturing the panels, while using the Nortex people’s resin expertise.

In cross-examination, the witness admitted that, when Nortex was purchased in 1987 for $1, it was facing bankruptcy, that its creditors had received a sum of $463,680 and that Nortex had 20 employees, whereas the appellant had 300. In 1966, the appellant’s plant had four main production lines, two steel production lines and two van production lines. The steel was purchased in rolls or in angle iron and cut in order to manufacture the web of the “trailer”. There was less preparation to do in the van production line because there was less steel involved. The steel line had a flatbed production stage that was much longer because more space and manufacturing were required. It also included sanding by means of a pellet jet system, painting and the installation of axles, springs, wheels, tires and the electrical and air systems.

In 1983, Manac Inc. did not manufacture FRP panels, which were made by Fibrobec. The appellant assembled the metal panels, then, in 1986, began assembling aluminum panels.

In the case of the FRP panel, this meant assembling 4 x 8 or 4 x 10 plywood sheets and laminating them with resin, while the metal and aluminum were purchased in rolls, which were cut into 4 x 8 or 4 x 10 sheets that were welded together.

In 1987, Manac manufactured trailers and truck boxes, while Nortex first manufactured fibreglass balconies, then exclusively FRP panels.

In 1987, the appellant sold 400 flatbeds without the FRP panel component for $9,000,596.85 log trailers without the FRP panel component for $3,926,000.51 chip trailers, with the rear always in steel, the front optionally in steel or in FRP panels and the sidewalls 90 per,cent FRP panels, for $2,190,000, 13 dump trailers without FRP panels for $63,000, 939 metal vans without FRP panels for $23,102,000, 461 vans with sidewalls in FRP panels only for $11,370,000, 20 long load dollies for transporting heavy equipment for $1,000,099 and 23 container carriers for transporting steel units for $297,000.

In 1987, total sales amounted to $53,000,000, of which $36,000,000 came from vans and the remainder from steel products, i.e. flatbeds, log trailers, dump trailers, container carriers and so on. The cost of an FRP panel box represented 66.2 per cent of the total cost of a van, i.e. $8,707 out of $13,143, excluding labour costs.

In 1990, the Nortex division was closed and the base of the trailers was switched to steel. In 1993, the steel option included steel walls instead of FRP panels. In the price structure in all cases, there were basic specifications plus options such as a larger number of axles, lights and a choice of wall heights. The appellant has always developed custom products for its clientele, who were trailer buyers.

Counsel for the appellant argued that Manac Inc. was involved in the development of FRP panels in 1976. In 1983, 60 per cent of Nortex’s shares were transferred to Fibrobec, a corporation unrelated to the appellant, so that its competitors could continue obtaining supplies of FRP panels from Manac Inc. In 1985, Manac divested itself of the remaining 40 per cent of its shares in Panneaux Nortex and became Nortex’s main customer by purchasing 80 per cent of its panels. In 1987, Manac Inc. derived approximately 81 per cent of its income from the three types of panels.

The point at issue is whether the appellant was entitled to the deduction under subsection 111(5) of the Act. There are two conditions: first, an expectation of profit, which was not disputed; and second, sufficient income from the business where the loss originated or from a similar business.

A similar business substantially all the income of which was derived from the sale, leasing, rental or development of similar properties or properties that were sold, leased, rented or developed prior to the change in control: counsel was surprised to see how so many ambiguities could be created.

The first ambiguity concerned the similarity of the commercial activity involving the properties before and after the change in control. Such commercial activity is stated in subsection 111(5) in terms of sale, leasing, rental or development. With respect to the similar properties, was it necessary that there be sales before and after control was acquired?

The second question was as follows: did the product manufactured by Nortex and the trailers manufactured from the three types of panels by Manac Inc. constitute development of its panels for the purposes of subsection 111(5)?

According to the appellant, the answer was no to the first question and yes to the second.

The third question was as follows: did Manac Inc. derive substantially all its income from the said trailers manufactured from the three types of panels? Counsel explained that subsections 111(5) and section 85 of the Act were enacted to prevent speculation involving corporations operating at a loss where the losses are really the only reason why such a business is acquired.

To prove this, he reviewed the legislative development of the said subsections and referred to Edwin Harris’s text on subsection 111(5), the origin of which goes back to 1958 and section 27.5 of the Act. The business where the loss originates must continue after the change in control.

The Carter Commission then recommended that the loss remain with the entity that incurred it. Where there was a change in control, the loss would be attributed to the shareholders.

In 1981, the losses attributable to a business of a corporation were deductible only to the extent of the income from the business that incurred the loss. In 1982, the losses were deductible to the extent of the aggregate of the income that the corporation derived for the year from the given business and from any other business substantially all the income of which came from the sale of properties “that are similar to the properties sold” by the given business.

In that same year, Bill C-139 added after the word “sale” the words “leasing, rental or development of properties . . . that are similar to the properties sold, leased, rented or developed or the services rendered, as the case may be, in the course of carrying on the particular business before that time”.

In 1983, Bill C-2 added the words “farm loss”.

In January 1987, subparagraphs 11 l(5)(a)(i) and (ii), as amended by Statutes of Canada 1987, c. 46, subsection 402-4 [sic], read as follows:

(i) only if that business was carried on by the corporation for profit or with a reasonable expectation of profit throughout the particular year, and

(ii) only to the extent of the aggregate of the corporation’s income for the particular year from that business and, where properties were sold, leased, rented or developed or services rendered in the course of carrying on that business before that time, from any other business substantially all the income of which was derived from the sale, leasing, rental or development, as the case may be, of similar properties or the rendering of similar services;

A substantially similar business includes four activities: the sale, leasing, rental and development of similar properties and the rendering of similar services.

In his article “Business Losses - The New Rules”, Andrew Trotta wrote at page 922:

In other words, the new paragraph 11 l(5)(b) will require that a comparison for similarity be made not simply of two separate businesses but, rather, of the property sold, the services rendered, or the activities carried on by the two businesses. The rationale for introducing this unusual test rather than a “same or similar business” test is that the adoption of a “same business” test would have been much too restrictive in the light of the judicial authorities. Furthermore, permitting unsued losses to be deducted against income from a “similar business” was considered to be too broad in that it would have produced difficulties in interpretation with respect to the classes or categories of industrial or commercial activities carried on by taxpayers. A corporation manufacturing electrical machinery, for example, could argue that the manufacture of electric motors was a similar business since both activities involved a similar manufacturing process. Under the proposed amendments, however, the inquiry will be factually restricted to determining whether the electrical machinery sold by the loss corporation is similar to the electric motors sold by that same corporation following a change in its control.

Counsel stated that one could observe that the expression “substantially similar business” that was introduced into the Act in subsection 111(5) was there to achieve the objective of preventing corporations that are operating at a loss from being acquired for no other reason than to benefit from those losses.

Trotta states that “same business” is defined in the tax case law, whereas a “similar business” means a business that has the same commercial activity such as, for example, the processing of unrelated properties. “Similar business” = two manufacturing and processing activities, the one manufactures clothing, the other aircraft engines, same business.

In Martin & Company (E.P.) Ltd. v. Minister of National Revenue, (1959), 22 Tax A.B.C. 254, the appellant had operated in the sale of clothing before and after a fire in 1955: before the fire, in the retail sale of women’s clothing and, afterward, in the manufacturing and wholesaling of women’s, then men’s clothing. The Board held per Fisher that the fact that the clientele was different was immaterial, although paragraph 27(l)(c) was to be strictly construed. The respondent had gone beyond what was reasonable.

Based on that decision, if Manac Inc. had only sold trailers and, after the acquisition, had manufactured and sold trailers, the business would have been the same.

In the instant case, the appellant purchased a business operating in the manufacture of a substantial component of the trailer. According to Martin, supra, there may be dissimilar classes of commercial activities, i.e. sale and manufacturing, with respect to the same type of property, that is, a property having the same use or intended purpose such as men’s and women’s clothing, for example. There is an element of similarity in the use that is made of the property produced.

According to counsel, dissimilar activities are the sale and manufacture of properties that are different but have a certain commonality as to their use or intended purpose, such as transportation, trailers and the panels used to manufacture the trailers.

Despite the terminology used in subsection 111(5) from early 1983, mention is still being made in the public documents and notes issued by the Department of “similar business”, and “farm loss” is also added. If one refers to the previous text of the legislation, “as the case may be” appeared in the text after “sale, leasing, rental or development of properties, or the rendering of services”, which marked the alternative between activities involving properties and those involving services. The words “as the case may be” have thus been shifted so that the phrase now reads “sale, leasing, rental or development, as the case may be, of similar properties”. This ended the twists and turns of the legislative development of subsection 111(5), from the budget announcement or its introduction in 1958 and 1981 and its various amendments up to the text of 1987.

Hence, a business operating at a loss was purchased solely for its losses, not for its economic capacity or its income-earning potential.

Three questions, of law, of fact and of both law and fact, arise. The first: is it necessary to have the same commercial or economic activity?

This correlation in the commercial activity is not mentioned in the explanatory notes to the amendments made in 1983. Nothing indicates that the activity must be the same.

On the contrary, the words “as the case may be” indicated the alternative between the sale, lease, rental and development of properties as opposed to the rendering of services.

Counsel for the appellant contended that, according to authors Morris and Novis, the Minister’s unofficial position was discussed in 1983 and it was that if a different activity was associated with two similar properties such as the sale and construction of a building, Revenue Canada unofficially considered the two businesses as being the same.

According to Novis, Revenue Canada’s position is that if the corporation that is operating at a loss sells a property and the company that is operating at a profit does the same, the commercial activities must be the same because of the expression “as the case may be” in subparagraph 11 l(5)(a)(ii). However, according to them, that does not prevent a vertical integration, such as that involving a manufacturer and a retailer, since both are presumed to be operating in the sale of the same property. They note that the text is not clear.

One last author, Rivard, explained the case of a business that apparently stopped being the same business. The applicable test is twofold.

First, one must consider the similarity of the properties sold, leased, rented and so on in the operation of the first business with those of the second business. If there are a number of different types of properties in the second business, the properties that are similar to the properties sold by the first business must be identified among the properties and services of the second business. Second, provided that similar properties can be identified, it becomes necessary to determine the proportion of the second business’s revenue from the properties sold. This twofold test raises numerous difficulties; for example, is a woman’s blouse a property similar to a pair of children’s boots, a man’s jacket, etc. - Where does one draw the line?

Is the test met if, in the first business, a property is sold, whereas in the second, the similar property is merely leased, rented or developed, since subsection 111(5) refers to the similarity of the properties themselves, not to their use or intended purpose. He closed on his remarks by saying that all authors agreed that this correlation is not necessary and that it does not apply in the case of a vertical integration.

In light of such ambiguity, counsel for the appellant referred the Court to the decision by 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 that ambiguities in tax matters should be resolved in the appellant’s favour.

As to the question whether the manufacturing of trailers from the three types of panels constituted “development”, “aménagement” or “mise en valeur” of the said panels, he contended that the three sorts of panels used to manufacture a trailer were the same properties since, according to the decision in Martin, supra, the use of those properties cannot create a distinction with respect to the properties’s similarity. The manufacturing of women’s dresses and the manufacturing of men’s trousers are one and the same business in that their purpose is to clothe people, just as the three types of panels were used to manufacture the trailers: their use or intended purpose is the same.

There is no definition of “similar properties” in the Income Tax Act. He contended that Revenue Canada had been asked to determine what constituted “similar properties” or “the rendering of similar services”. The Department apparently answered that both expressions could be interpreted only on the basis of the facts of each individual case. It was necessary to consider the product sold by each business in order to determine whether the income was produced by the sale of similar properties.

As to the word “similar”, he referred to the Oxford English Dictionary, which defines “similar” as meaning “of the same substance or structure throughout”.

Webster defines “similar” as “having characteristics in common”.

The test of the use of similar properties may be used in the case of a farm loss because of the definition in section 228 [sic] of the Income Tax Act and because a farm may be developed in order to produce properties that are sold and thus to produce income.

With respect to the expression “mettre en valeur”, he referred the Court to Le Petit Robert dictionary, which gives, among others, the meaning to develop or to make something produce, as is the case in the operation of a farm. As to the expression “substantially all the income be derived from the development of a similar property”, in Gulf Canada it has been decided that income was not earned from the production of a mineral substance, but from the sale of the product.

Counsel for the appellant suggested that the only meaning of the development (“mise en valeur”) of a property is that it creates another property in order to provide for a vertical integration, that is, the acquisition of a property essential to the buyer which he integrates in another property from which he derives substantially all his income.

The last question addressed by counsel for the appellant concerned whether substantially all the income of the appellant had come from the development of similar properties, that is, the three types of panels the income from which was derived from the sale of the trailers. In his view, the appellant derived 81.9 per cent of its profits from the sale of the trailers manufactured from the steel, aluminum and FRP panels, and as much as 85 per cent in 1987 and 95 per cent in 1995, whereas it no longer used FRP panels.

From a review of the case law, counsel for both parties appeared to agree to allow the qualitative method to be used rather than the quantitative method for comparing income from each of the sources. When the mathematical calculation is used, the test used by Revenue Canada for “all or substantially all” is 90 per cent. This test is arbitrary and may vary.

Mr. Morris, the author above cited, suggests that a percentage of 75 per cent would be “substantial” since the purpose of the “substantially all” test is only to prevent similar properties from being transferred to a corporation so that it can benefit from the losses of the other corporation over which control is being acquired.

These expressions are ambiguous and, for the third time, he referred the Court to Corporation Notre-Dame de Bon-Secours, in contending that subsection 111(5) had to be construed in the taxpayer’s favour.

He emphasized the witness’ statement that, without the van that was developed starting in 1976, the appellant would not be what it is today.

Maurice Régnier, also counsel for the appellant, suggested addressing the issue in terms of same business and cited the example of an automobile manufacturer that manufactures chassis, engines, in short, an automobile. If each of these parts is manufactured by two different persons, must it be contended that there are two separate businesses? Conversely, if the two are integrated in a single person, do we disregard the fact that there are two persons and say there is only one? By admitting that this is the same business, we do not have to consider questions of similar properties, of “substantially all” income and the entire litany of restrictions contained in subparagraphs 111 (5)(a)(i) and (ii).

He closed on a philosophical note, asking the question, “Why create a distinction between the parts and the whole?”

Counsel for the respondent argued that one must consider the whole picture: the losses were not incurred by Manac Inc. but by Nortex. Parliament has decided that these losses may no longer be used by the company that acquires control of the company operating at a loss, except in certain instances.

The term used is “except that”, which allows for exceptions in very specific cases under subparagraphs 11 l(5)(a)(i) and (ii), i.e. in cases of same business, same properties. He divided his argument in four parts.

1. The appellant did not derive substantially all its income from the sale, leasing, rental or development of panels.

2. The words “as the case may be” indicate that if the business operating at a profit, which purchased the business operating at a loss, is involved in sales, the business operating at a loss must also be involved in sales of the same properties.

3. The properties were not similar in this case: the appellant sold vans and trailers that had boxes made of FRP panels.

4. The term “aménagement” applies to land; the “mise en valeur” of a property cannot erase its identity.

He referred the Court to Corporation Notre-Dame de Bon-Secours in stating the following tests:

1. the taxpayer must be given the benefit of the doubt when the Court has no choice and must choose between two valid, equally plausible and logical interpretations falling within the object or intent of the Act;

2. tax legislation should be subject to the ordinary rules of construction and 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 Act, its object and its legislative intent; in the context of subsection 111(5), the legislative intent was to introduce [sic] the use of losses for a company acquiring another company, except in certain instances, and the criteria must be met or it will not be allowed to use losses that are not its own;

3. substance should be given precedence over form to the extent that this is consistent with the wording of the object of the Act;

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

He referred the Court to the Technical Notes on subsection 111(5), which read as follows:

The amendments to paragraphs 111 (5)(a) will ensure that, where there has been an acquisition of its control, a corporation will be allowed in a subsequent taxation year to deduct that portion of its non-capital loss that may reasonably be regarded as being in respect of a deduction under new paragraph 110(1 )(k), but only if a business carried on by the corporation in the year in which the deduction arose is carried on throughout the subsequent year and only to the extent of its income for the subsequent year from that business or from a similar business.

He thus answered Mr. Régnier by saying that, in those notes, reference is made to similar businesses. The purpose is to have similar businesses and the means chosen for limiting the losses to businesses that had similar businesses is subsection 111(5).

The authors cited by counsel for the appellant spoke of business. That is the objective and the vehicle used is subsection 111(5). When they spoke of Avis and of the term “as the case may be” interpreted by the respondent, Avis could not use the losses of the Ford dealer because it was not the same “business”.

The object of the Act is to restrict the use of losses allowed between similar businesses under subsection 111(5).

The term “similar properties” was added because it is much easier to apply than “business” in restricting losses. “Similar properties” is a criterion for determining whether the business is the same business.

The expression “as the case may be” is an expression used in the statute which must be interpreted and which must be given a logical meaning that, as the case may be, must be sale. As to the expression “mise en valeur” (development), the thing that is “mise en valeur’ (developed) must not disappear or lose its identity. One “met en valeur” (develops) 2 x 4s and 2 x 6s when building a house, for example. When one assembles FRP panels, they become a trailer with a box. Subsection 111(5) speaks of “aménagement” (development), but also of farm losses. It is difficult to derive income from the development of a property; a commercial activity is needed. “Aménagement” refers to land because subsection 111(5) refers to farm losses. The “aménagement” of a property does not include the use of a property that is integrated, that is part of a whole and that loses its identity. As to the similar properties, in Nortex’s case, they were the FRP panels described above, and, in the appellant’s case, they were trailers, including those with a box made of FRP panels. As to the expression “substantially all the income”, its meaning depends on each case and one must consider the business as such or the property as such. One must consider the attributes of the property or the income, the figures.

In the instant case, one must look at sales less expenses, that is, profit. Income is an amount. To interpret what “all or substantially all” means, one must consider the two extremes, 100 per cent and zero. In the middle, we have the majority, i.e. 50 plus one, and Revenue Canada’s position is that “substantially all” is 90 per cent.

Counsel for the respondent submitted that the appellant’s evidence was not strong enough to determine the appropriate percentage for “substantially all the income”. One must take into consideration overhead, salaries, drawings, engineers’ time and warranties. The appellant claimed that 80.9 per cent of its income came from the sale of vans, but these were also metal trailers with all the accessories and extras as described above. A large portion of the selling price must be attributed to the trailer itself. He concluded by saying that the 80.9 per cent did not pass the test of what was “substantially all the income” derived from the sale of trailers.

The Court made a considerable effort, without success, to understand how the appellant could have been right in deducting Nortex’s losses under subparagraph 11 l(5)(a)(ii).

After summarizing the facts and arguments of counsel for both parties, the Court has come to the conclusion that the business operating at a loss, that is, Nortex, was involved in the sale of FRP panels, from which it drew its income, whereas the appellant was involved in the sale of trailers, from which it drew its income.

The appellant’s witness even said that Manac Inc. became Nortex’s main customer in 1985 by purchasing 80 per cent of Nortex’s panels and that the appellant had always developed custom products for its customers, who were trailer buyers.

No mention is made in subparagraph 11 l(5)(a)(ii) of the economic activity of manufacturing because, in itself, it does not produce income. The criteria that go together are the sale and the income and, to restrict the use of corporations operating at a loss, the properties sold must be similar. This is clearly stated in that subparagraph.

It has been suggested that, instead of the expression “similar properties”, the word “business” should have been used. It is quite clear that the expression “similar properties” makes the subparagraph more restrictive than “business”, but the Court must take into consideration the fact that the subparagraph mentions “similar properties”, not “businesses”, and the Court does not have the power to widen the scope of this subparagraph.

The appellant wished to use the word development (“ame’nager” or “mettre en valeur’) when it did not earn its income from the development of FRP panels, but rather from the sale of trailers. The panels that were used to manufacture the trailers were only one of the many components used in manufacturing the trailers. They lost their identity by becoming part of the trailers. Thus having lost their identity, they could not be properties similar to the trailers for the purposes of subsection 111(5) of the Act since, in order to earn income, the appellant had to sell trailers, not panels.

There is no point in deciding on the relevant percentage of income because the evidence is far from convincing on this point and all the appellant’s income came from the sale of trailers, whereas only two out of eight types of trailers, i.e. the chip trailer and the FRP van, were sold with FRP side panels, for $13,560,000 out of total sales of $53,000,000.

The Martin decision in 1955 cannot apply in 1987 because of the new subsection 111(5), which defines and thus restricts the use of similar businesses by means of the words “similar properties”.

The case law and authors cited above lead one to believe that the use of “similar businesses” instead of “similar properties” would have made it much more difficult to interpret subsection 111(5) given the very large variety of businesses and properties.

Concerning Mr. Régnier’s comment, the Court cannot go beyond the scope of subsection 111(5) and use the word “business” when the subsection states “similar properties” in order to define “similar businesses”. As to the word “aménager” (development), which creates some difficulties when one wishes to interpret it as the appellant did, it creates no difficulty when used with respect to farming businesses.

Nor is there any point in interpreting the expression “as the case may be” since the two businesses in the instant appeal earned income through the same commercial activity: they were both operating in sales.

The legislative intent was clearly to restrict the use of companies operating at a loss and the objective of the Act was to allow their use in very specific cases.

Thus, for there to be a similar business, according to subparagraph 11 l(5)(a)(ii), three criteria must be met: there must be (1) a commercial activity, (2) similar properties and (3) income.

In closing, the Court cannot overlook a decision that has very often been used in deduction matters, W. A. Sheaffer Pen Co. of Canada Ltd. v. Minister of National Revenue (sub nom. W.A. Sheaffer Pen Co. v. Minister of National Revenue), [1953] C.T.C. 345, 53 D.T.C. 1223: “the exemption provisions of a taxing act must be construed strictly...taxation is the rule and exemption the exception.”

For all these reasons, the appeal is dismissed.

Appeal dismissed.