Fred Padfield Limited v. Minister of National Revenue, [1976] CTC 2249, 76 DTC 1195

The Chairman:—This is the appeal of Fred Padfield Limited from income tax assessments in respect of the 1972 and 1973 taxation years.

The issue in this appeal is whether business losses incurred by the appellant in 1967 and 1968 could be applied to and deducted from the special dividend tax payable under Part IV of the Income Tax Act to the extent of the taxable dividends received by it in the amounts of $485 in 1972 and $780 in 1973.

The appellant was represented by Mr Davies, a chartered accountant, who simply referred to the decision in Blgmar Enterprises Limited v MNR, [1974] CTC 2341; 74 DTC 1242. He then cited the Department of National Revenue’s Interpretation Bulletin IT-269 of November 17, 1975, dealing with the matter in issue, and stated that the decision in Blgmar was incompatible with the Department of National Revenue’s Interpretation Bulletin IT-269, issued approximately one year later.

Counsel for the respondent agreed that the facts and issue in the appeal before the Board were identical to those in Bigmar, and he noted that the Bigmar Enterprises appeal had been dismissed.

Counsel for the respondent’s principal arguments were that the Tax Review Board is not bound by the Interpretation Bulletin emanating from the Department of National Revenue and that the principle of stare decisis applies to decisions rendered by members of the Tax Review Board.

In order to confirm the accepted principle that neither the courts nor the Board are bound or estopped by Interpretation Bulletins emanating from the Department of National Revenue, counsel for the respondent cited the case of Ernest G Stickel v MNR, [1972] CTC 210; 72 DTC 6178, in which Mr Justice Cattanach clearly established that an Information Bulletin is not a statute and cannot be substituted for the Act. In my opinion, the learned judge’s decision in respect of the Information Bulletin in the Stickel case is equally valid and applicable to any of the Interpretation Bulletins published periodically by the Department of National Revenue. There can be no question that the interpretation of statutes is the exclusive prerogative of the courts. Interpretations of certain sections of the Income Tax Act put forward by either party in an issue are for obvious reasons very closely scrutinized by the Board or the courts and, of course, are not binding on the tribunals. Accordingly, no matter how well-intentioned they may be, general Interpretation Bulletins of various sections of the Income Tax Act emanating from the Department of National Revenue, whether circulated by it or reproduced in other publications, cannot be, and indeed are not, binding on the courts. However, the corollary to that principle is, in my opinion, equally important, and that is that the tribunal is not precluded from applying what it contends to be a legally valid interpretation of a particular section of the Income Tax Act simply because it has also been put forward in a Department of National Revenue Interpretation Bulletin or in some other publication.

Counsel for the respondent seemed to be arguing that, because the Board was not bound by the contents of Interpretation Bulletin IT-269, it must therefore ignore it, and must simply render a decision in the present appeal on the principle of stare decisis (which, according to counsel for the respondent, binds all members of the Board) by dismissing the appeal in order not to conflict with what was done earlier in the Bigmar Enterprises appeal by another member of the Tax Review Board. In my view, the determination of the issue in the appeal is not as simple nor as clear-cut as that.

Since respondent’s counsel has invoked the application of the rule of stare decisis for decisions rendered by members of the Tax Review Board as a principal argument, the Board is forced to deal with that point before considering the merits of the appeal.

Although there is no doubt that the Tax Review Board, on the basis of the principle of stare decisis, is strictly bound by the decisions of higher courts, I do not believe, however, that the members of the Tax Review Board are bound by the principle of stare decisis in relation to decisions previously rendered by other members of the Board.

In this connection, I quote the words of Jackett, CJ, then President of the Exchequer Court, in the case of Canada Steamship Lines Limited v MNR, [1966] CTC 255; 66 DTC 5205, in which, at page 259 [5208], he states:

. . . I think -I am bound to approach the matter in the same way as the similar problem was approached in each of these cases until such time, if any, as a different course is indicated by a higher Court. When I say bound, I do not mean that I am bound by any strict rule of stare decisis but by my own view as to the desirability of having the decisions of this Court follow a consistent course as far as possible.

if the strict rule of stare decisis was not laterally applicable to the then members of the Exchequer Court, nor, I presume, to the present members of the Federal Court of Canada, it is a fortiori not applicable to the members of the Tax Review Board. The desirability of having Board decisions follow, as far as possible, a consistent course is unquestionably important, and is in fact eagerly sought by the Tax Review Board. There can, however, in my opinion, be exceptional circumstances when it is expedient to accept the lesser of two evils (that is, the continuous promulgation of an unclear, inadequate or erroneous decision of the Tax Review Board versus the confusion of parties in litigation as to what criteria they have to meet), and to depart from a decision previously rendered by the Board in view of later developments. This, I believe, is particularly applicable at the Tax Review Board level where the existence of two seemingly valid but opposite interpretations by members of the Board of an unclear, but important, section of the Income Tax Act will precipitate a final and necessary determination by a higher court. I must conclude, therefore, that, desirable as “comity” among the members of the Board may be, they are not bound strictly to apply the rule of stare decisis among themselves. In the case of Dorchester-Drummond Corporation Ltd v MNR, [1976] CTC 2109; 76 DTC 1088 (presently under appeal to the Federal Court), Judge Flanigan, then Chairman of the Tax Review Board, arrived at the same conclusion, at page 2111 [1089], when he stated:

Although it would be perhaps imprudent, if not chaotic, to make a habit of not following decisions of my colleagues, as I understand the rule of stare decisis I am not bound by decisions other than those of courts which can sit in appeal on decisions of this Board.

In the circumstances, the Board cannot avoid reviewing the pertinent sections of the Act as they relate to the facts of this appeal.

In supporting the Minister’s position in both the present appeal and in the Bigmar case, counsel for the respondent made a brief summary of the related sections of the Act that are in issue, and concluded that the losses incurred by the appellant in 1967 and 1968, and claimed as deductible non-capital losses for purposes of Part IV of the Income Tax Act, were properly disallowed.

The facts, as I understand them from the pleadings, are as follows:

In 1967 and 1968 the appellant company incurred business losses and proceeded to deduct these losses from other income pursuant to paragraph 27(1)(e), RSC 1952, c 148, as amended.

In 1972 and 1973 the appellant received dividends subject to tax, under subsection 186(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended, in the amounts of $485 and $780 respectively. Against these taxable dividends it deducted, in each of the pertinent years. part of the 1967 and 1968 losses in amounts equal to the dividends received in 1972 and 1973, with the result that no tax under Part IV was payable.

In assessing the appellant, the Minister disallowed the deduction of the 1967 and 1968 losses on the ground that prior to 1972 the appellant was not a private corporation within the meaning of paragraph 89(1 )(f) of the Income Tax Act, SC 1970-71-72, c 63, as amended, and therefore not entitled to deduct the losses pursuant to subsection 186(1) of the said Act.

Alternatively, if the appellant is considered by the Board to have been a private corporation in 1967 and 1968, the respondent submits that the amounts claimed as deductible were not “non-capital losses” for any taxation year, and therefore cannot be used in reducing the amount of dividends taxable under Part IV of the present Act.

The first question to be determined, it appears to me, is whether, in 1967 and 1968, the appellant company was a “private corporation” within the meaning of paragraph 89(1)(f) of the new Act.

Paragraph 89(1 )(f) defines “private corporation” as follows:

(f) “private corporation” at any particular time means a corporation that, at the particular time, was resident in Canada, was not a public corporation, and was not controlled, directly or indirectly in any manner whatever, by one Or more public corporations; and for greater certainty for the purposes of determining, at any particular time, when a corporation last became a private corporation,

(i) a corporation that was a private corporation at the commencement of its 1972 taxation year and thereafter without interruption until the particular time shall be deemed to have last become a private corporation at the end of its 1971 taxation year, and

(ii) a corporation incorporated after 1971 that was a private corporation at the time of its incorporation and thereafter without interruption until the particular time shall be deemed to have last become a private corporation immediately before the time of its incorporation;

In my opinion, the significant words of the section are ‘private corporation’ at any particular time means a corporation that, at the particular time, was resident in Canada, was not a public corporation, and was not controlled, directly or indirectly in any manner whatever, by one or more public corporations”. “[A]t any particular time” seems quite clear to me, and means exactly what it says, and, in my view, does not exclude periods of time prior to 1972. The concept of a private corporation as defined in paragraph 89(1 )(f) can, and in my opinion does, apply to all corporations which can meet the essential requirements, whether they were incorporated prior to, or after, 1972. The fact that for tax purposes private corporations did not exist legally as such prior to 1972 does not alter the fact that some companies incorporated prior to 1972 can and do qualify as having been private corporations within the meaning of paragraph 89(1 )(f) of the Income Tax Act.

Subparagraph 89(1)(f)(i) referred to by counsel for the respondent reads as follows:

(i) a corporation that was a private corporation at the commencement of its 1972 taxation year and thereafter without interruption until the particular time shall be deemed to have last become a private corporation at the end of its 1971 taxation year, . . .

This subparagraph, in my opinion, confirms rather than refutes the above interpretation. Had the contrary been intended, it seems to me that subparagraph (i) would have read “shall be deemed to have first”

—rather than last—“become a private corporation at the end of its 1971 taxation year, . . .”.

Although the evidence is unclear on the point, counsel for the respondent clearly admitted that the facts of the present appeal were on all fours with those of the Bigmar appeal. I must therefore assume that, in 1967 and 1968, the appellant company was resident in Canada, was not a public corporation and was not controlled, directiy or indirectly in any manner whatever, by one or more public corporations. It was on this basis that counsel for the respondent argued the case.

In my opinion, for purposes of subsection 186(1) of the new Act, the appellant company should be considered to have been a “private corporation” in 1967 and 1968 within the meaning and intent of subsection 89(1) of the current Income Tax Act. In my view, section 13 of the Income Tax Application Rules, 1971, which is a transitional section, supports that opinion. ITAR section 13 reads as follows:

13. (1) Subject to this Part and unless the context otherwise requires, a reference in any enactment to a particular Part or provision of the new law shall be construed, as regards any transaction, matter or thing to which the old law applied, to include a reference to the Part or provision, if any, of the o!d law relating to, or that may reasonably be regarded as relating to, the same subject matter.

The second question to be determined is whether business losses incurred in the years prior to 1972 by a corporation that qualifies as being a private corporation can be applied to and deducted from dividends taxable pursuant to Part IV of the current Income Tax Act.

In my opinion, paragraph 186(1)(d) does not permit private corporations to deduct non-capital losses incurred in the five taxation years immediately preceding and the taxation year immediately following the taxation year. Paragraph 186(1)(d) reads as follows:

(d) such part of the corporation’s non-capital loss for a taxation year during which it was a private corporation that is any of the 5 taxation years immediately preceding and the taxation year immediately following the taxation year as the corporation may claim, not exceeding, however, the portion of that loss that

(i) is not deductible under section 111 from the corporation’s income for the taxation year, and

(ii) would be so deductible if the reference in paragraph 111(1)(a) to “income for the year” were read as a reference to “income for the year plus the amount on which the taxpayer would be required to pay tax for the year under Part IV if subsection 186(1) were read without reference to paragraph (d) thereof”.

Paragraph 111(1)(a), read in conjunction with section 37 of the ITAR, in my opinion, permits corporations, which prior to 1972 qualified as private corporations, to carry over what until then were known as “business losses” and which were redefined as “non-capital losses” in paragraph 111(8)(b) of the new Act.

The fact that the appellant company sustained business losses in 1967 and 1968 and that these losses were claimed as deductions by the appellant pursuant to paragraph 27(1)(e) of the old Act, was not contested by the respondent.

Under the circumstances, I find that the appellant, in 1967 and 1968, though not legally nor generally recognized as such at that time, did qualify as being, and as having been for purposes of subsection 186(1), a private corporation at that time within the meaning and intent of paragraph 89(1 )(f).

I also find that the business losses incurred by the appellant company, a private corporation prior to 1972, are non-capital losses within the meaning and intent of paragraph 111(1)(a) of the new Act and deductible pursuant to, and within the limits of subsection 186(1) of Part IV of the Income Tax Act.

In departing from the decision rendered by my learned colleague in the Bigmar Enterprises appeal, I am motivated by the importance of the issue and by the distinct possibility that the matter may have to be finally determined by a higher court. In arriving at my decision, notwithstanding my opinion that the Board is in no way bound by the Department of National Revenue’s Interpretation Bulletins, I have taken judicial notice of its Interpretation Bulletin IT-269, which reads in part as follows:

. . » Non-capital losses for purposes of paragraph 186(1)(d) include business losses for years prior to 1972 that are deemed to be non-capital losses by subsection 37(1) of the ITAR, provided the corporation qualified as a private corporation pursuant to paragraph 89(1 )(f) for such prior years.

I have also taken into account that, although having been supported in the Bigmar Enterprises appeal, the Department of National Revenue felt it necessary to issue a contrary Interpretation Bulletin in favour of the taxpayer. More importantly, the above-cited portion of the Department of National Revenue’s Interpretation Bulletin IT-269 is, in my opinion, in keeping with the wording, meaning and intent of the pertinent sections of the Income Tax Act.

For these reasons the appeal is allowed.

Appeal allowed.