Maurice J Arpin v. Minister of National Revenue, [1974] CTC 2124

The Chairman (orally: September 11, 1973):—This is an appeal by Maurice J Arpin against the reassessment of the Minister of National Revenue for the taxation year 1970, which reassessment disallowed, for the purpose of calculating the taxable income of the appellant, losses incurred by a personal corporation controlled by the said appellant.

The appellant’s Exhibit A-1 is a statement of agreed facts submitted at the opening of the hearing, and I include in my reasons for judgment this statement of facts, which refers to paragraphs 2 and 3 of the reply of the Minister in this case, and so it is necessary to read into these reasons not only the agreed statement of facts contained in Exhibit A-1 but also paragraphs 2 and 3 of the Minister’s reply.

I might say at the outset that the appellant has represented himself so ably that he has done, I think, great harm to the time-worn adage that “a lawyer who represents himself, has a fool for a client’. In my view, he certainly made a very strong case on his own behalf..

AGREED STATEMENT OF FACTS

1. Facts stated in paragraphs 2 and 3 of the Reply to Notice of Appeal — which read as follows—

“2. He (the Minister of National Revenue) says that:

(i) at all times material hereto the Appellant was a partner in the law firm of Arpin & Company and in his 1970 taxation year reported as income his share of the net profits from that source, minus automobile expenses, being the amount of $26,832.24:

(ii) at all times material hereto the Appellant held, except for qualifying shares, all the shares of a private company known as Acadian Investments Ltd which reported a net loss of $22,789.15 in its 1970 taxation year; and

(iii) the Appellant in his 1970 return of income deducted the net loss of Acadian Investments Ltd from his business income so that his total income reported was $4,043.09 and the taxable income reported was $2,444.14.

3. He says that he assessed the Appellant for his 1970 taxation year So as to disallow the deduction of $22,789.15, being the net loss of Acadian Investments Ltd so that his total income was $26,832.24 and his taxable income was $25,188.04.”—

2. At all material times:

a) Acadian Investments Ltd engaged in no activity whatsoever other than rental of real property.

b) every activity of Acadian Investments Ltd was performed through the instrumentality of the Appellant, personally and exclusively, excepting only the preparation of year-end financial statements.

I think it is trite law to say that personal corporations came into being as a result of the ability of persons to avoid the payment of tax that would be rightfully payable by them by incorporating a separate legal entity in the form of a limited company. What Parliament did was to enact subsection 67(1) of the Income Tax Act, is it applies to this taxation year, and, since it is not lengthy, I will read it in full:

67. (1) The income of a personal corporation whether actually distributed or not shall be deemed to have been distributed to, and received by, the shareholders as a dividend on the last day of each taxation year of the corporation.

The appellant argues that Parliament never intended that the Act should be interpreted to mean that a taxpayer should pay on profits from a personal corporation that are deemed to be his own income and yet be deprived of the reciprocal right of applying the losses of such personal corporation against his other domestic income, his world income, or his income from all sources. He argues that, since the Act is silent on the matter of losses, this Board must apply the logical inferences and interpret the applicable sections of the Act in accordance with the ordinary canons of construction applicable to all legal interpretations.

The appellant goes on to argue that the Act treats a personal corporation as if it did not exist and, by referring to section 68, he cites as examples of this the fact that a personal corporation need not file a return, has no liability for tax, and has not available to it the ordinary everyday advantages of averaging that a limited entity otherwise would have. Furthermore, according to subsection 67(1), its income is pushed out of the corporation and into the hands of the shareholders at the end of each fiscal year in accordance with the formula set out in the Act. He adds as well that, on the other hand, although subsection 67(1) deems the profits to be dividends, such dividends are not treated as dividends in the ordinary, everyday sense that one associates with them under income tax law.

He also argues that, if it was not the intention of Parliament to have a reciprocal arrangement, it was a very easy matter for them to spell it out, and he argues—and perhaps I put it too strongly when I say he argues, but he says—that the only reason that the Act does not contain a proscription of the deduction of losses of a personal corporation is because it would be such an inequitable proposition that the responsible ministers of government would hesitate to bring such legislation before Parliament.

I do not feel that ! am in a position to, nor should I, impute such a dereliction of duty to the members of Parliament, and I think it is a general rule of construction that Parliament is taken to have meant what it says in its legislation and that the only additions that can be made to its will must be clearly inferable from the words contained in the applicable statute. It is not for the courts or for the Board to legislate, but only to interpret.

In order to read into subsection 67(1) and the other applicable provisions of the Act such a reciprocal arrangement as is urged upon me by the appellant, I would have to find some meaning to the word “income” that would include “losses” and would grant to this personal corporation an exception to one of the very examples that the appellant cites of the unusual position or view that the Parliament or Government of Canada takes of personal corporations. I would have to go, I think, to subsection 67(1) and take the word “income” and interpret it to mean “net operational results”, thus including negative as well as positive income. n this way, perhaps I could arrive at some justice for the shareholder of the personal corporation by permitting him to utilize losses that had occurred in the previous year.

In the light of the spirited argument of the appellant, there is a great temptation to place that interpretation on it but, if I am to interpret the relevant sections of the Act strictly, I feel that I am precluded from this interpretation by the clear wording of subsection 67(1), which speaks of the income as a “dividend” which, in its ordinary meaning, precludes the inclusion of “negative” income.

The appellant has also invoked sections 11 and 27, which are “deduction sections”, but I think that section 27 is of little assistance to him, because it is found in the division of the Act which is headed “Computation of taxable income” and, by the appellant’s own argument—and as is well known—a personal corporation has no taxable income, so I can find no help for him in section 27.

The appellant argues that, although section 11 could have contained the clause “and no other deductions are allowed”, it is silent on that point, and he argues further that, if it is silent, then the section is in effect an open-ended one and I am at liberty to read those words into it. Again, for the same reason that, as l have mentioned, I would not read words into subsection 67(1), I will not read into section 11 the words that the appellant would like me to, and again I repeat that it is for Parliament, and not for me, to make such an addition.

In his very thorough approach to the topic, the appellant has argued that the corporation is a business under section 32 of the Act, and that he is its controlling shareholder and is carrying on the business of. this personal corporation. In support of this statement, he cites the alter ego theory—a theory which ! accept in its proper place— namely, that the company, that is, the personal corporation, is simply the alter ego of the appellant or vice versa, and that whatever is done by the appellant is really all that is done by the company.

I think to make such a finding would be to disregard the basic tenets of corporate law, because a shareholder can only render a service to the corporation of which he is a shareholder, and the corporation, which is a separate legal entity, can only function through the assistance and physical acts of its shareholders and, of course, of its board of directors, which the term “shareholder” is deemed to include. So I think the “alter ego theory”, although I recognize it as a sound theory in law, is, on the facts before me, only brought into play by the wording of subsection 67(1) of the Income Tax Act, and, in my view, by no stretch of legal interpretation and construction could it be said that the appellant was himself carrying on the business by virtue of the fact that he was a shareholder, or even, for all intents and purposes, the only shareholder, of Acadian Investments Limited.

Therefore, on all the facts before me, it is my view that Parliament intended to say exactly what it said when it enacted the sections applicable to personal corporations to which reference has been made. Therefore, on all the evidence before me, the appeal must be dismissed.

Appeal dismissed.