Allied Farm Equipment Limited v. Minister of National Revenue, [1972] CTC 107, 72 DTC 6086

Heald, J:—This is an appeal from a decision of the Tax Apeal Board rendered on December 7, 1970 (reported [1970] Tax ABC 1265) dismissing the appeal by the appellant from reassessments for income tax with respect to its 1960, 1961, 1962, 1963 and 1964 taxation years.

The parties have agreed to a Special Case stated by consent pursuant to Rule 475. The Special Case so stated reads as follows:

1. At all material times

(1) the Appellant was a corporation

(a) which was

(i) incorporated pursuant to the laws of the Province of Manitoba,

(ii) resident in Canada, and

(iii) carried on business in Canada, and

(b) all of whose issued and outstanding shares were owned as follows:

			Class A
	Common	Preference	Preference
	Shares	Shares	Shares
Alexander J Kanter	98	400	900
Eugene V Paskewitz	1		—
		—
George Linden Higgins	1		—
		—
Total shares	100	400	900
(2) Falcon Equipment Company Limited was a corporation
(a) which was

(i) incorporated pursuant to the laws of the Province of Ontario,

(ii) resident in Canada, and

(iii) Carried on business in Canada, and

(b) all of whose issued and outstanding shares were owned as follows:

	Common	Preference
	Shares	Shares
James I Kanter	20,005	500
C Perry	1
H Chadwick	1	—
Total shares	20,007	500

(3) Northwest Farm Equipment Limited was a corporation

(a) which was

(i) incorporated pursuant to the laws of the Province of Alberta,

(ii) resident in Canada, and

(iii) carried on business in Canada, and

(b) all of whose issued and outstanding shares were owned as follows:

	Common		Preference
	Shares	I.	Shares
Solomon Kanter	999		400
Dennis Sammen	1.		—
Total shares	1,000		400

(4) Middle West Farm Equipment Export Corporation was a corporation

(a) which was

(i) incorporated pursuant to the laws of the United States of America or one of the states thereof,

(ii) was not resident in Canada, and

(iii) did not carry on business in Canada, and

(b) all of whose issued and outstanding shares were owned as follows:

Common

Shares

Alexander J Kanter	30
James I Kanter	30
Solomon Kanter	30
Total shares	90

2. Alexander J Kanter, James I Kanter and Solomon Kanter are brothers.

3. By the reassessments which are the subject matter of the Appellant’s appeal the Respondent reassessed the Appellant with respect to the 1960, 1961, 1962, 1963 and 1964 taxation years on the basis that at all relevant times the Appellant was a corporation which was associated with Falcon Equipment Company Limited and Northwest Farm Equipment. Limited, within the meaning of subsection (5) of section 39 of the Income Tax Act, on the grounds that at all material times each of the Appellant, Falcon Equipment Company Limited and Northwest Farm Equipment Limited was associated with Middle West Farm Equipment Export Corporation, within the meaning of subsection (4) of section 39 of the Act.

4. The facts above stated are agreed by the Appellant and the Respondent.

5. The question for the opinion of the Court is whether Middle West Farm Equipment Export Corporation was at all material times a corporation which was associated with each of the Appellant, Falcon Equipment Company Limited and Northwest Farm Equipment Limited, within the meaning of subsection (4) of section 39 of the Income Tax Act.

6. The Appellant and Respondent agree:

(1) that if the Court shall be of opinion in the positive, then the Appellant, Falcon Equipment Company Limited and Northwest Farm Equipment Limited were associated with each other pursuant to the provisions of subsection (5) of section 39 of the Income Tax Act, and the appeal shall be dismissed with costs payable to the Respondent, and

(2) that if the Court shall be of opinion in the negative, then the appeal shall be allowed with costs payable to the Appellant and the reassessments with respect to the 1960, 1961, 1962, 1963 and 1964 taxation years referred back to the Respondent for reconsideration and reassessment on the basis that the Appellant was not associated with Falcon Eugipment Company Limited and Northwest Farm Equipment Limited, within the meaning of section 39 of the Income Tax Act.

At the trial, an additional fact was agreed on by both parties and to prove same, counsel for the appellant tendered in evidence, as Exhibit A-1, a letter to him from respondent’s counsel dated January 13, 1972, the relevant portion of which is as follows:

It is not my intention to argue that Middle West Farm Equipment Export Corporation was “employed in Canada”. From this and from the agreed fact that Middle West Farm Equipment Export Corporation was neither resident in Canada nor carried on business in Canada it therefore follows that that company was not subject to taxation in Canada under the Income Tax Act, and it is certainly not my intention to argue that it otherwise is subject to such taxation.

Subsection 39(4) for the purposes of the 1960 taxation year reads as follows:

39. (4) For the purpose of this section, one corporation is associated with another in a taxation year if, at any time in the year,

(a) one of them owned directly or indirectly 70% or more of all the issued common shares of the capital stock of the other, or

(b) 70% or more of all the issued common shares of the capital stock of each of them is owned directly or indirectly by

(i) One person,

(ii) two or more persons jointly, or

(iii) persons not dealing with each other at arm’s length one of whom owned directly or indirectly one or more of the shares of the capital stock of each of the corporations.

Subsection 39(4) for the purposes of the 1961 and subsequent taxation years reads as follows:

39. (4) For the purpose of this section, one corporation is associated with another in a taxation year if, at any time in the year,

(a) one of the corporations controlled the other,

(b) both of the corporations were controlled by the same person or group of persons,

(c) each of the corporations was controlled by one person and the person who controlled one of the corporations was related to the person who controlled the other, and one of those persons owned directly or indirectly one or more shares of the capital stock of each of the corporations,

(d) one of the corporations was controlled by one person and that person was related to each member of a group of persons that controlled the other corporation, and one of those persons owned directly or indirectly one or more shares of the capital stock of each of the corporations, or

(e) each of the corporations was controlled by a related group and each of the members of one of the related groups was related to all of the members of the other related group, and one of the members of one of the related groups owned directly or indirectly one or more shares of the capital stock of each of the corporations.

The Court’s opinion is asked as to whether Middle West Farm Equipment Export Corporation (hereafter Middle West) was at all material times a corporation which was associated with each of the appellant, Falcon Equipment Company Limited (hereafter Falcon) and Northwest Farm Equipment Limited (hereafter Northwest), within the meaning of subsection (4) of section 39 of the Income Tax Act. If the Court’s opinion is in the positive, then the parties agree that the appellant, Falcon and Northwest were associated with each other pursuant to the provisions of subsection (5) of section 39 of the Income Tax Act and they further agree that, in such event, the appeal shall be dismissed with costs.

Appellant submits that all of the subsequent sections of Part I of the Income Tax Act are conditioned by section 2 of the Income Tax Act.

Section 2 of the Income Tax Act reads as follows:

2. (1) An income tax shall be paid as hereinafter required upon the taxable income for each taxation year of every person resident in Canada at any time in the year.

(2) Where a person who is not taxable under subsection (1) for a taxation year

(a) was employed in Canada at any time in the year, or

(b) carried on business in Canada at any time in the year,

an income tax shall be paid as hereinafter required upon his taxable income earned in Canada for the year determined in accordance with Division D.

(3) The taxable income of a taxpayer for a taxation year is his income for the year minus the deductions permitted by Division C.

Thus, said section 2 imposes liability for Canadian income tax on the following:

(a) every person resident in Canada,

(b) every person employed in Canada, and

(c) every person who carried on business in Canada.

Thus, appellant has established by paragraph 4 of the Stated Case and by Exhibit A-1, that Middle West does not come within any of the above categories liable for tax under section 2 of the Income Tax Act.

Appellant’s counsel expressed the situation in rather a colourful way. He said that section 2 of the Income Tax Act established who were the “customers” and who were the “non-customers” of the income tax Department.

On the basis of the agreed facts, there can be no argument but that Middle West is outside of section 2 and thus a “non-customer” of the Canadian income tax Department.

Developing his argument, appellant’s counsel submits that sections 3 and 4 of the Income Tax Act are conditioned by section 2 thereof and that when they refer to income of a taxpayer, they are talking about income and taxpayers covered by section 2.

Counsel then directed my attention to section 44 of the Income Tax Act which requires “a corporation” to file an annual income tax return. He submits that “corporation” in that section relates to only those corporations covered by section 2 and is qualified by section 2 so that the requirement to file a return has no application to the “non-customers”, as he describes them, of the Minister of National Revenue.

Appellant’s counsel then turns to section 39 of the Income Tax Act and argues, that as in all the other sections of Part I, section 39 must be conditioned by section 2 and be read subject to section 2.

Counsel refers firstly to subsection (1) of section 39 and refers to the words therein: “The tax payable by a corporation under this Part”. He observes that Middle West is not taxable under this Part, is a “non-customer” and therefore obviously the word “corporation” as used in subsection 39(1) does not include Middle West.

Turning to subsection (2) of section 39, counsel quotes the first words therein: “(2) Where two or more corporations [italics mine] are associated with each other in a taxation year, the tax payable by

each of them . . .”’ and then he asks the question: “How can a corporation that is not subject to tax be covered under subsection 39(2)?”

Counsel then moves on to subsection 39(3). This subsection allows associated corporations to file an agreement with the Minister under which they agree to the manner of allocation of $35,000 of income between them on which the lower rate of income tax is payable. Counsel then asks the same question as before: “How could the word ‘corporation’ as used in subsection (3) possibly include a corporation that is not taxable in Canada?”

Counsel uses the same argument in subsection (3a). Subsection (3a) covers the case where the associated corporations have not agreed to the allocation of the first $35,000 of income between them and, in such an eventuality, requires the Minister to make the allocation amongst said associated companies. Counsel argues that if “corporation” as used in subsection (3a) means any corporation, including a “non-customer” like Middle West, then the Minister would be able to allocate the low income tax rate to a corporation like Middle West, where it could not be used. His submission is that such a construction would give a ridiculous result and that Parliament cannot be presumed to have intended such a consequence. He says that it is perfectly apparent that “corporation” as used in subsection (3a) must mean a Canadian corporate taxpayer if it is to have any sensible meaning at all.

Appellant’s counsel cited another section in Part I of the Act — namely paragraph 27(1)(e).

This paragraph permits a taxpayer to deduct from income, business losses sustained in the five taxation years immediately preceding and the taxation year immediately following the taxation year.

Said counsel gives an example of a United States corporation in years 1, 2 and 3 operating only in the United States and losing $100,000 per year. Then in the fourth year, said United States corporation comes to Canada and does business here. The further assumption is that in the fourth year, said corporation makes $300,000 in Canada. Counsel says that if respondent’s interpretation of the word “corporation” is correct, then it means “any” corporation “anywhere” and that accordingly, on these facts, the said losses of said corporation in the years when it was a “non-customer” of the Canadian income tax Department could be charged against the Canadian profit in year 4 with the sensational result that said foreign corporation would have no taxable income in Canada in year 4.

Appellant’s counsel cites this example to dramatize his submission that respondent’s interpretation of the word corporation in section 39 would produce a ridiculous result, thus distorting the meaning of the section and the intention of Parliament.

On the other hand, counsel for the respondent acknowledges that Middle West is not subject to tax in Canada. He also acknowledges that appellant is not associated with Falcon and Northwest under the terms of subsection 39(4) of the Income Tax Act but says that the appellant is associated with Falcon and Northwest under subsection 39(5), because of the relationship existing between the appellant and Middle West.

Respondent’s counsel says that the question to be decided here is whether Middle West is a “corporation” within the meaning of subsection 39(4). If the answer to that question is in the affirmative, then the appellant and Falcon and Northwest are covered by subparagraph 39(4)(b)(iii) with respect to the taxation year 1960 and by paragraph 39(4)(d) with respect to the taxation year 1961 and subsequent years and would therefore be held to be associated with Middle West.

His further submission is that by virtue of subsection (5) of section 39, the appellant and Falcon and Northwest are thus deemed to be associated with each other. Subsection 39(5) reads as follows:

39. (5) When two corporations are associated, or are deemed by this subsection to be associated, with the same corporation at the same time, they shall, for the purpose of this section, be deemed to be associated with each other.

I agree with respondent’s counsel’s submission that the key question for decision here is whether the word “corporation” as used in subsections 39(4) and (5) is wide enough to include a corporation such as Middle West. I also agree with his analysis of the consequences if the Court answers that question in the affirmative.

Respondent’s counsel cites the definition of corporation as contained in paragraph 139(1 )(h) of the Income Tax Act which reads as follows:

(h) “corporation” includes an incorporated company and a “corporation incorporated in Canada” includes a corporation incorporated in any part of Canada before or after it became part of Canada;

He also cites in support of his position, the judgment of President Thorson (as he then was) in the case of International Fruit Distributors Limited v MNR, [1953] Ex CR 231; [1953] CTC 342. This decision was affirmed by the Supreme Court of Canada without written reasons.

In that case, all the issued shares of the appellant and another Canadian company were owned by a United States company. At that time, the applicable section of the Act was, for all practical purposes, the same as subsection 39(4) as it was here for the 1960 taxation year. Subsection 39(5) was also, for all practical purposes, the same then as it is now. President Thorson held, in that case, that the word “person” as it appeared in the section, included the foreign corporation and that accordingly the appellant was a related corporation (as they were then described in the Act) within the meaning of the section.

President Thorson said at page 233 [344] thereof:

As I understand this definition the term “person” in Section 36(4)(b)(i) of the Act clearly includes a corporation. Indeed, it includes “any” corporation and there is no reason for holding that it does not extend to a foreign corporation such as Pacific Gamble Robinson Company. I am unable to find any ambiguity in its meaning by reason of the use of the term “corporations” in Section 36(5).

After careful consideration, I have reached the conclusion that the International Fruit decision (supra) is on all fours with the instant case in its relevant facts and that I! am bound by it.

It is true that International Fruit was decided under subparagraph 39(4)(b)(i) but I do not think it would have been decided any differently under subparagraph 39(4)(b)(iii) as both subparagraphs were for the 1960 taxation year. Nor do I think it would have been decided any differently under paragraph 39(4)(d) as it was for the 1961 and subsequent taxation years.

At page 232 [343] of said judgment, President Thorson said:

The submission of counsel for the appellant, put shortly, is that the term “person” in Section 36(4)(b)(i) does not extend to a corporation or, alternatively, does not extend to a foreign corporation. It was urged that if it was read as extending to a corporation then Section 36(5), which reads as follows:

“36. (5) When two corporations are related, or are deemed by this subsection to be related, to the same corporation at the same time, they shall, for the purpose of this section, be deemed to be related to each other.”

would be unnecessary surplusage, that the specific reference in it to corporations had the effect of excluding a corporation from the meaning of the term “person” in Section 36(4)(b)(i), that this creates an ambiguity in its meaning and that such ambiguity should be resolved in the appellant’s favour.

I am unable to agree. It is not a proper approach to the construction of the Income Tax Act to regard it as necessarily consistent in the use of its various terms throughout the Act or to assume that inconsistency in their use necessarily result in ambiguity in their meaning.

[ Italics mine. I

In my opinion, the italicized portion of the above quotation from President Thorson is a complete answer to the appellant’s submission that all the subsequent sections of Part I of the Income Tax Act must be read subject to section 2. I think it also answers his comments with respect to subsections (1), (2), (3) and (3a) of section 39. I am not here asked to interpret “corporations” in those subsections. I am concerned here with subsections (4) and (5) and l have the opinion that the word “corporations” as used therein must be given its plain, ordinary meaning as defined in paragraph 139(1)(h) of the Act.

Learned counsel for the appellant relied on the case of Lea-Don Canada Limited v MNR, [1969] CTC 85 (Exchequer Court); affirmed by the Supreme Court [1970] CTC 346. The section of the Income Tax Act under consideration there was subsection 20(4). which provided:

20. (4) Where depreciable property did, at any time after the commencement of 1949, belong to a person (hereinafter referred to as the original owner) and has, by one or more transactions between persons not dealing at arm’s length, become vested in a taxpayer, the following rules are. . . ., applicable . ..

There, appellant sought to argue that the word “taxpayer” would include a non-resident corporation, not liable for Canadian income tax. This argument was rejected by my brother, Cattanach J in the Exchequer Court and by Mr Justice Hall who wrote the judgment of the Supreme Court. Mr Justice Hall held that subsection 20(4) was concerned only with taxpayers entitled to a deduction and not with persons not subject to assessment under Part I.

In my view, the Lea-Don decision (supra) does not assist appellant. First of all, it interprets an entirely different subsection of the Act and it is interpreted in the context of the words as used in that subsection. Secondly, the factual situation here is different in that the application of the rules in subsections 39(4) and (5) to Middle West does not result in any tax liability to Middle West whereas in the Lea-Don case (supra) the Court was dealing with a deduction section and the applicability or non-applicability of which would result in a change in the liability for tax.

The other case relied on by the appellant is in the same category as Lea-Don (supra). It is the case of Office Overload Company Limited v MNR., 39 Tax ABC 309; 65 DTC 690. In that case, the court was again required to interpret a deduction section, section 85D which deals with the rules to be applied in claiming the bad debt component of accounts receivable, as a deduction.

In both of those cases, the interpretation of the section or subsection in question affected the tax liability of both entities involved. This One characteristic effectively distinguishes both cases from the case at bar. In the case at bar, the interpretation asked for, regardless of which way it goes, will not affect the tax liability of Middle West in any way.

Maxwell on Interpretation of Statutes, 12th edition, says at page 28:

The first and most elementary. rule of construction is that it is to be assumed that the words and phrases of technical legislation are used in their technical meaning if they have acquired one, and otherwise in their ordinary ‘meaning, and the second is that the phrases and sentences are to be construed according to the rules of grammar.

And then again on page 43:

The so-called “golden rule is really a modification of the literal rule. It was stated in this way by Parke B.: “It is a very useful rule, in the construction of a statute, to adhere to the ordinary meaning of the words used, and to the grammatical construction, unless that is at variance with the intention of the legislature, to be collected from the statute itself, or leads to any manifest absurdity or repugnance, in which case the language may be varied or modified, so as to avoid such inconvenience, but no further.

lt seems to me that it is necessary to read subsections (4) and (5) of section 39 in conjunction with the definition of “corporation” in paragraph 139(1 )(h). When this is done, I fail to see how “corporation” can be read as excluding a foreign corporation. To do so, I would have to read something into subsections 39(4) and (5) that is not there. The authorities establish that I must give this word its plain and ordinary meaning unless to do so would lead to manifest absurdity or repugnance.

In the case at bar, I do not believe that any such manifest absurdity or repugnance will result.

In conclusion, and in answer to paragraph 5 of the Stated Case, it is the opinion of the Court that Middle West Farm Equipment Export Corporation was at all material times a corporation which was associated with each of the appellant, Falcon Equipment Company Limited and Northwest Farm Equipment Limited, within the meaning of subsection (4) of section 39 of the Income Tax Act.

The appeal is accordingly dismissed with costs payable to the respondent.