Groupe Commerce, Cie D’assurances v. R., [1999] 4 CTC 54, 99 DTC 5491

Noel J.A.:

The appellant is appealing from a decision of the Tax Court of Canada by Judge Dussault, dismissing its appeal from the assessment issued by the Minister of National Revenue with respect to its 1988 taxation year.

The only question raised in this appeal is whether the trial judge was justified in finding that the appellant was not entitled to claim the tax reduction set out in paragraph 123(1)(a) in fine of the Income Tax Act, S.C. 1970- 71-72, c. 63 as amended [hereafter the Act].

Specifically, the trial judge found that the reduction set out in this paragraph is limited to Canadian-controlled private corporation which are subject to the refundable dividend tax mechanism prescribed in section 129. [1] Both parties agree that the appellant is excluded from this mechanism. [2]

The appellant submits that there is no such restriction in paragraph 123(l)(rz) and that the trial judge erred in law in refusing to find that its investment income was subject to the lower tax rate.

The relevant provision of paragraph 123(1)(a) of the Act reads as follows:

123(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

(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,

(111) that roportic 38% of 1 ATMOU 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

(ID) the east of the amounts determined

under paragraphs 125(1)(a)

to (c) in respect of the corporation

for the year, ....

(B) the amount determined under clause 129(3)(a)(1)(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 ... exceeds

(vi) in the case of a corporation that was throughout the year a Canadian-controlled private corporation. that proportion of 7% of h 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 ... (emphasis added)

* The parties agreed in the instant case that the amount under clause 123( 1 )(tz)(iv)(B) would be lower than the amount under clause 123( !)(«)(iv)(A). Reasons for judgment, appeal book, p. 22. 123(1) L’impôt payable par une corporation en vertu de la présente partie sur son revenu imposable ou sur son revenu imposable gagné au Canada, selon le cas (appelé dans le présent article le « montant imposable ») pour l’année est, sauf disposition contraire, le total [...]

a) de l’excédent éventuel du total:

[... I

(ii) du produit de 45% du montant imposable de la corporation pour l’année par le rapport entre le nombre de jours de l’année postérieurs à juin 1987 et antérieurs à juillet 1988 et le nombre total de jours de l’année,

(iii) du produit de 38% du montant imposable de la corporation pour l’année par le rapport entre le nombre de our de l’année postérieurs à juin 1988 et le nombre total de jours de l’année,

(iv) dans le cas d’une corporation qui est tout au long de l’année une corporation privée dont le contrôle est canadien, le produit de 1% du moins élevé:

(A) de l’excédent éventuel du montant imposable de la corporation pour l’année sur le total du moins élevé des montants déterminés aux alinéas 5(1 a) ac) en ce qui concerne la cor- poration pour l’année [...]

(B) du montant déterminé à la division 129(3)a)(i)(B) en ce qui concerne la corporation pour l’année,

par le rapport entre le nombre de jours de l’année postérieurs à juin 1987 et antérieurs à 1988 et le nombre total de jours de l’année, [...]

sur, dans le cas d’une corporation qui est tout au long de l’année une corporation privée dont le contrôle est canadien, le produit de 7% du moins élevé des montants déterminés aux divisions (iv)(A) et B * en ce qui concerne la corporation pour l’année par le rapport entre le nombre de jours de l’année postérieurs a 1987 et antérieurs à juillet 1988 et le nombre total de jours de l’année; [...] [mon souligné]

The parties agreed in the instant case that the amount under clause 123( 1 )(rz)(iv)(B) would be lower than the amount under clause 123( !)(«)(iv)(A). Reasons for judgment, appeal book, p. 22.

A reading of the last part of this provision, and particularly the reference which it embodies, indicates that the tax reduction is conditional on an amount to be determined under clause 129(3)(«)(I)(B) “in respect of the corporation year.” [3] However, only a corporation subject to the refundable dividend tax mechanism may have an amount determined in this way. It is accordingly incorrect to claim, as did the appellant, that he tax reduction set out in paragraph 123(1)(a) is not limited by its wording to corporations subject to the mechanism set out in section 129.

Any doubt which remains on this subject disappears when we consider the legislative history which led to the enactment of the tax reduction provided in paragraph 123(1)(a). The trial judge describes this history as follows:

[TRANSLATION]

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 tax dividend 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 1st, 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 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 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 1st, 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(1 )(«)(vi) for the period from January I to June 30, 1988 must be understood. [4]

Moreover, as the investment income subject to this mechanism also includes the taxable portion of capital gains, the reduction in the rate from 45 per cent to 38 per cent as of January 1st, 1988, also resulted in the effect of the increase in the portion of capital gains to be included, which also came into force of this date. [5] The comments issued by the Minister of Finance when the amendment was announced read as follows:

In addition, the capital gains rate for CCPCs will increase from one-half to two- thirds effective January 1st, 1998. Thus for such corporations with taxation years that straddle January I, 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. [6]

Accordingly, the trial judge properly found that the tax reduction set out in paragraph 123(1)(a) is part of the mechanism prescribed in the Act to integrate investment income. However, the appellant has been excluded from this mechanism for nearly 25 years. [7]

Clearly, the appellant was either overlooked, or Parliament simply decided not to reduce the effect of the increase in the taxable portion of capital gains in its case. In any event, and as Judge Dussault held, the solution to the inequity which the appellant complains of cannot rest in the grant of reduction which was not intended for it. [8]

The appeal should accordingly be dismissed with costs against the appellant.

Appeal dismissed.