Bigmar Enterprises Limited v. Minister of National Revenue, [1974] CTC 2341, 74 DTC 1242

Roland St-Onge:—This appeal is from an assessment with respect to the appellant company’s 1973 taxation year. The appellant contended that at all material times it was a private corporation within the meaning of paragraph 89(1 )(f) of the amended Income Tax Act. In its 1973 taxation year the appellant earned income in the amount of $21,079, of which $14,310 came from dividends and $6,769 from other income. The total amount of its losses for the five taxation years immediately preceding its 1973 taxation year was $33,362. Out of this amount the appellant claimed $14,310 as a deduction in computing the amount on which tax imposed under Part IV of the amended Act is exigible.

By notice of assessment dated February 6, 1974 the Minister oi National Revenue reassessed tax against the taxpayer in the amount of $4,770 under Part IV of the amended Act on the grounds that the loss claimed had been incurred prior to 1971 in respect of taxation years during which the appellant was not a private corporation and also during which years there was no such thing as “non-capital loss”.

Paragraph 89(1 )(f) of the new Act defines private corporations 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;

It is admitted that at all times relevant to this appeal the appellant was (a) resident in: Canada, (b) not a public corporation, and (c) not controlled directly or indirectly in any manner whatever by one or more public corporations; and that in its 1973 taxation year the appellant was à. private corporation within the meaning of the above-mentioned definition.

As may be seen here, there is no contestation as to the facts and the only question at issue is whether the appellant company was a private corporation in 1968 and 1969 when it incurred the losses and also whether the said losses could be regarded as non-capital losses for the purpose of computing the amount of tax payable under Part IV of the Income Tax Act.

Counsel for the appellant argued that, as a rule, the former Act did not distinguish between private and public corporations for tax purposes and consequently it was possible for individual taxpayers, subject to personal corporation rules, to achieve indefinite deferral of personal income tax on portfolio dividends through the simple device of holding portfolio investments in a corporation which would receive a tax-free flow of dividends on such investments.

Then, in a written memorandum of fact and law, he explained how the new law is designed to avoid postponement of tax in portfolio dividends as follows:

“Public corporations”, as defined in paragraph 89(1 )(g) of the amended Act, are taxed at a flat corporate rate of approximately 50% on all their taxable income. As under the old tax system, taxable income continues to exclude dividends received from other taxable Canadian corporations by virtue of the provisions of section 112(1). Unlike private corporations public corporations are not subject to a special 331/3% on portfolio dividend income. But public corporations do not obtain the tax refund available to private corporations on the payment of dividends out of passive income.

“Private corporations”, as defined in paragraph 89(1)(f) of the amended Act on the other hand, are, under Part IV of the amended Act, subject to a special 33 1/3% tax levied on the amount of portfolio dividends received by them which are deductible in computing their taxable income under section 112(1) of the amended Act. . . . Because the Part IV tax is approximately equal to the amount which an individual taxpayer, whose marginal rate is 50%, would be required to pay on receipt of the same dividends after adjusting for the dividend tax credit, it ensures that dividend income received by a private corporation will not attract considerably less tax than would the same income if received directly by individual shareholders. The indefinite deferral of personal income tax on portfolio dividends received by investment holding companies, a result which obtained under the old tax system, is thus prevented. When a private corporation in turn pays a taxable dividend in an amount equivalent to its dividend income received, the corporation receives a refund of the Part IV tax. Because individual shareholders are taxed on such dividends in the normal manner and because all of the Part IV tax levied at the corporate level is returned, dividend income flowing through private corporations is ultimately taxed at the rates applicable to the individual shareholders of the corporation. The law is thus designed to avoid postponement of tax on portfolio dividends, but not to penalize, through an element of double taxation, the individual who wishes to hold his investments through a private corporation.

Referring to various sections of the new Act, counsel for the appellant also stated that a private corporation is subject to tax at a rate of 50% on its non-dividend investment income, which includes net income from capital gains and net income from non-active businesses; that for every $3 of dividends paid by the private corporation to shareholders, $1 of tax is refundable to the corporation; that two special statutory accounts were created, namely, “capital dividends account’’, and “refundable dividend tax on hand”, the existence of which commenced after the corporation “last became a private corporation”. According to him, the determination of the time “when a corporation last became a private corporation” mentioned in the definition is relevant only to delineate the beginning of the period for computing the two special statutory accounts mentioned above. Then he concluded by saying that the issue in this appeal is not so much when the appellant last became a private corporation for the purpose of computing its capital dividend accouni or its “refundable dividend tax on hand” account but rather whether the appellant was a private corporation during the 1968 and 1969 taxation years. He finally submitted that because the appellant satisfied the three necessary and sufficient conditions for the existence of a private corporation during both those years, namely,

(1) it was resident in Canada,

(2) it was not a public corporation,

(3) it was not controlled, directly or indirectly, in any manner what- ever, by one or more public corporations, the appeal should be allowed on this issue alone.

On the second point counsel for the appellant mentioned that the definition of non-capital loss contained in paragraph 111(8)(b) would not by itself include the business losses sustained by the appellant in 1968 and 1969, because section 9 of the Income Tax Application Rules, 1971 (hereinafter referred to as ITAR) stipulates that the provisions of the new Act in that respect are applicable to the 1972 and subsequent taxation years. However, according to him, the said losses fall within the definition of non-capital loss as that term is used in paragraph 186(1 )(d) of the new law for the following reasons:

Subsection 37(1) of the ITAR 1971 provides that a business loss sustained in a taxation year ending prior to 1972 and not applied in a taxation year ending prior to 1972 will be deemed to have been a non-capital loss of that previous taxation year and will be deductible in the computation of taxable income of the 1972 and subsequent taxation years as a non-capital loss of a previous year. In fact, under the old law, losses of other years were deductible from business income of a taxation year but were restricted to business losses not already applied to reduce income from other sources in those years. Under the new law, all types of losses have been classified and the rules governing their deduction from net income have been changed. Losses are now classified as non-capital losses, net capital losses and restricted farm losses.

The definition of “non-capital loss” under the new law includes loss from an office, employment and property as well as from business. Thus, subsection 37(1) of the ITAR 1971 provides for a complete transition of the deductibility, as non-capital losses in the new tax system, of business losses incurred under the old tax system.

Therefore, before being able to determine the amount which may be deducted in computing the amount on which Part IV tax is exigible, a determination of the non-capital loss under paragraph 111 (1)(a) must first be made, and such a determination cannot be made without reference to the application of subsection 37(1) of the ITAR.

Counsel for the appellant also referred to subsections 13(1) and 17(4) of the ITAR which read 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 law relating to, or that may reasonably be regarded as relating to, the same subject matter.

17. (4) Where there is a reference in the new law to any act, matter or thing done or existing before a taxation year, it shall be deemed to include a reference to the existing act, matter or thing, even though it was done or existing before the commencement of the new law.

According to his interpretation of the above two sections, counsel for the appellant submitted that the reference in paragraph 186(1)(d) to the corporation’s non-capital losses for the five previous taxation years shall be deemed to include a reference to its 1968 and 1969 business losses even though they were incurred before the new law came into force.

On the other hand, counsel for the respondent submitted that, from a reading of section 111, there is no reference to the pre-1972 Act. In determining the intention of Parliament as to whether or not the term “non-capital loss” refers to a loss previous to 1972, regard should be had to the ITAR 1971 and specifically to subsection 37(1) thereof which states that:

37. (1) For the purposes of section 111 of the amended Act, in computing a taxpayer’s taxable income for any taxation year ending after 1971, a business loss (within the meaning assigned by the former Act) sustained in any particular previous taxation year ending before 1972 shall, to the extent that it would have been deductible in computing the taxpayer’s income for the 1972 taxation year on the assumption that

(a) paragraph 27(1 )(e) and subsections 27(5) and 27(5a) of the former Act were applicable to the 1972 taxation year and section 111 of the amended Act were not so applicable,

(b) paragraph 27(1)(e) of the former Act were read with reference to subparagraph (iii) thereof, and

(c) his taxable income for the 1972 taxation year were an amount greater than the aggregate of those business losses sustained by the taxpayer in the 5 consecutive taxation years ending with his 1971 taxation year,

be deemed to have been a non-capital loss of the taxpayer for the particular previous taxation year.

Respondent’s counsel further submitted that, as can be seen from the above subsection, Parliament did not intend that the term “noncapital loss” should apply to pre-1972 taxation years. They felt it necessary to enact ITAR 37(1) as a specific provision which would allow pre-1972 business losses to be carried forward as non-capital losses in the computation of taxable income. But it should be noted that this is “for the purposes of section 111 of the amended Act”, and only for those purposes. Parliament had a chance to expand the definition of non-capital loss as that term is used in paragraphs 186(1)(c) and (d) to include a pre-1972 business loss but it did not; instead, no mention was made and the legal maxim expressio unius, exclusio alterius applies. If Parliament had wanted to extend the definition of non-capital loss as that term is used in section 186, it would have done so. It did not.

In view of the facts as established in this case and considering the law applicable thereto, I have come to the following conclusions:

With regard to the question of non-capital loss, it appears from a scrutiny of the relevant sections that, prior to 1972, only “business losses” could be carried forward, whereas now losses from an office, employment, business or property and all amounts deductible under section 112 and subsection 113(1) from the taxpayer’s income for the year are “non-capital losses” and can be carried forward.

Paragraph 111 (1)(a) says that one has to deduct non-capital losses for the five taxation years immediately preceding the taxation year under assessment and paragraph (8)(b) of the same section defines ‘‘non-capital loss” with respect to the new law. ITAR 37(1) was enacted to allow the deductibility of pre-1972 business losses because the concept of “non-capital loss” did not exist at that time.

It is obvious that subsections 13(1) and 17(4) of the ITAR were not enacted to apply to the entire non-capital loss system, because ITAR 37(1) was enacted for the purpose of section 111 in order to allow a taxpayer company to carry forward only its pre-1972 business losses as a non-capital loss and not its losses from office, employment or property.

So, as well as permitting the deduction of business losses for 1972 and the following years in accordance with section 111, ITAR 37(1) allows the taxpayer to also deduct his pre-1972 business losses. This is what the two sections, taken together, say. ITAR 13(1) and 17(4) are not applicable to the present appeal because they cannot refer to something which did not exist prior to 1972.

The concept of non-capital loss did not exist prior to 1972 nor did the concept of a private corporation under the former Act. ITAR 17(4) could, for example, refer to a mortgage reserve which was in existence prior to 1972, but it cannot create the concepts of non-capital loss or of a private corporation which were not in existence prior to the commencement of the new law. Furthermore, if business losses prior to 1972 were to be allowed as non-capital losses, all the other losses included in the definition of non-capital loss could also be deductible and, this was certainly not the intention of Parliament when it enacted ITAR 37(1).

On the second point, “private corporation” as defined in paragraph 89(1)(f) and subsection 248(1) extends that definition to the old Act, but does not render the existence of a private corporation retroactive to 1968 and 1969. On the contrary, paragraph 89(1 )(f) specifically describes for greater certainty exactly when a corporation shall be deemed to have last become a private corporation.

According to the Board’s interpretation of the relevant sections, and more particularly of paragraph 89(1)(f), sections 111 and 186, there were no such things as a “private corporation” or a “non-capital loss” before 1972, and consequently the appellant cannot benefit from these new provisions because they became applicable only for 1972 and subsequent taxation years.

Only business losses prior to 1972 can be deducted as ‘‘non-capital loss” by virtue of subsection 37(1) of the Income Tax Application Rules. For this reason the appellant was able to deduct $6,769 from its other income but unable to deduct $14,310 from its dividend income.

For the above reasons, the appeal is dismissed.

Appeal dismissed.