Flanagan Hotel Company Limited v. Minister of National Revenue, [1972] CTC 561, 72 DTC 6486

Heald, J:—This is an appeal from the decision of the Tax Appeal Board dated July 22, 1971 in respect of the income tax reassessment for the appellant’s taxation year 1967.

The parties have proceeded by way of Special Case stated for the opinion of the Court pursuant to Rule 475. The relevant portions of the stated case are as follows:

1. The Appellant is a body corporate, incorporated on the 15th of July, 1910 pursuant to the laws of the Province of Saskatchewan.

2. The Appellant carried on its business as a hotel operator, operating the Senator Hotel at the City of Saskatoon in Canada from 1910 to 1967 and duly filed an income tax return including financial statements, when and as required. Its fiscal year at all times was the calendar year.

3. In the carrying on of its business the Appellant owned depreciable property within the meaning of the Income Tax Act and the Income Tax Regulations described as Classes 1, 3, 8, 9 and 12.

4. From the 1st of January, 1949 to the 31st of December, 1966 the Appellant claimed and was allowed pursuant to the provisions of the Income Tax Act and Income Tax Regulations an allowance on account of capital cost with respect to the said classes as follows:

CLASS 1	$	574.74
CLASS 3		80,542.09
CLASS 8	103,064.33
CLASS 9		383.75
CLASS 12		6,063.66
	$190,628.57

5. The Appellant on or about the 25th day of October A.D. 1967 sold the said Senator Hotel and all the depreciable property it had in each of the said classes in connection with that hotel in one transaction.

6. Of the selling price of the said Senator Hotel and its assets the parties to the said sale with respect to the said classes of assets allocated to each of the said classes a portion of the selling price equal to the undepreciated capital cost as at 31st of December, 1966 plus an amount at least equal to the amount of capital cost allowance claimed and allowed as stated in paragraph 4 hereof.

7. Pursuant to section 20(1) of the Income Tax Act the amount (subject to any other provision of the Income Tax Act) which is to be added to the income of the Appellant for its 1967 taxation year is as follows:

CLASS 1	$	575.74 (sic)
CLASS 3		80,542.09
CLASS 8	103,064.33
CLASS 9		383.75
CLASS 12		6,063.66
	$190,628.57

8. In its return of income for the taxation year ending on the 31st of December, A.D. 1967, the year in which it sold the said depreciable property the Appellant purported to elect pursuant to section 43(1) of the Income Tax Act to use the provisions of that section with respect to Class 8 property, only, that is, the taxpayer elected to have only the amount of $103,064.33 taxed as though it were income equally over the previous five years.

9. The Respondent on receipt of the income tax return of the Appellant for its 1967 taxation year and on reading what he thought was the purported election pursuant to section 43(1) of the Income Tax Act, was of the opinion that the election had to be with respect to the amount of $190,628.57 and with no lesser amount.

10. The Respondent acting on the opinion set forth in paragraph 8 hereof and after having computed the Appellant’s income tax on the premise that the Appellant’s purported election was for the sum of $190,628.57 and having computed the tax on the basis there was no election, assessed the Appellant on the basis there was no election since by his computation the tax assessed on that basis was less than the tax assessed on the basis that there was an election with respect to the sum of $190,628.57.

11. The Appellant while still contending it has the right to elect pursuant to section 43(1) as it did elect, agrees that if this Honourable Court should be of the opinion that it has not such a right, the reassessment appealed from is correct.

QUESTION FOR THE COURT

12. The question for the opinion of the Court is as follows:

Must the election contemplated in section 43(1) of the Income Tax Act for the 1967 taxation year when made be in respect of all amounts to be brought into income pursuant to section 20(1) of the said Act.

DISPOSITION

13. The parties agree that if the Court is of the opinion in the affirmative on the said question, judgment shall be entered for the Respondent dismissing the appeal with costs, but if the Court is of the opinion in the negative on the said question, judgment shall be entered for the Appellant allowing the appeal with costs.

I should observe that the reference to paragraph 8 in paragraph 10 of the stated case is obviously in error and the reference should be to paragraph 9 rather than to paragraph 8.

The narrow question then for decision in this appeal is as stated in paragraph 12 of the stated case:

Must the election contemplated in section 43(1) of the Income Tax Act for the 1967 taxation year when made be in respect of all amounts to be brought into income pursuant to section 20(1) of the said Acct.

The pertinent portions of the Income Tax Act read as follows:

20. (1) Where depreciable property of a taxpayer of a prescribed class has, in a taxation year, been disposed of and the proceeds of disposition exceed the undepreciated capital cost to him of depreciable property of that class immediately before the disposition, the lesser of

(a) the amount of the excess, or

(b) the amount that the excess would be if the property had been disposed of for the capital cost thereof to the taxpayer,

shall be included in computing his income for the year.

43. (1) Where an amount is included in computing a taxpayer’s income for a taxation year by virtue of section 20, the taxpayer may elect to pay, as tax for the year under this Part, in lieu of the amount that would otherwise be payable, an amount equal to the aggregate of

(a) the tax that would be payable by the taxpayer for the year under this Part (before making any deduction under section 33, 38, 40, 41 or 41 A) if no amount were included in computing the taxpayer’s income for the year by virtue of section 20, and

(b) the aggregate of the amounts by which the taxpayer’s taxes under this Part (before making any deduction under section 33, 38, 40, 41 or 41A) would have been increased if the portion of the amount so included by virtue of section 20 determined under subsection (2) had been included in computing the taxpayer’s income for each of the taxation years in the period determined under subsection (2),

minus any amount deductible for the year under section 33, 38, 40, 41 or 41A.

(2) Where the period during which the taxpayer was not exempt from tax under this Part and

(a) if a corporation, carried on business in Canada, and

(b) if an individual, was resident in Canada,

immediately before the taxation year for which an amount is included in computing his income by virtue of section 20 is only one taxation year or less, subsection (1) does not apply; and where that period

(i) is more than one taxation year and not more than 2 taxation years, the portion referred to in paragraph (b) of subsection (1) is /2 and the period referred to therein is the 2 immediately preceding taxation years,

(ii) is more than 2 taxation years and not more than 3 taxation years, the portion referred to in paragraph (b) of subsection (1) is /3 and the period referred to therein is the 3 immediately preceding taxation years,

(iii) is more than 3 taxation years and not more than 4 taxation years, the portion referred to in paragraph (b) of subsection (1) is /4 and the period referred to therein is the 4 immediately preceding taxation years,

and

(iv) is more than 4 taxation years, the portion referred to in paragraph (b) of subsection (1) is 1/5 and the period referred to therein is the 5 immediately preceding taxation years.

Counsel for the appellant submitted that because of the reference to section 20 and subsection 43(1), it is necessary, for a proper interpretation of the word “amount” as used in section 43 to have regard particularly to subsection 20(1) and that subsection 20(1) provides that when the proceeds of disposition exceed the undepreciated capital cost of a prescribed class (italics mine), then, and in such an event, the lesser of (a) the amount of the excess, or (b) the amount that the excess would be if the property had been disposed of for the capital cost thereof to the taxpayer, shall be included in computing income for the year in question.

His submission then is that the “amount” spoken of in subsection 43(1) which gives the election right to the taxpayer is the amount of a particular or prescribed class and that the taxpayer has his right of election under subsection 43(1) in respect of every class of depreciable assets of which he is possessed and that the taxpayer has every right under subsection 43(1) to elect with respect to one or more of the classes of depreciable property owned by him and in respect of which he is taxed under subsection 20(1).

With every deference, I cannot concur in this interpretation of subsection 43(1).

Section 20 is included in Division B of Part I of the Act and is entitled “Computation of Income”. Section 43 is included in Division E of Part I of the Act and is entitled “Computation of Tax’’. Under and by virtue of subsection 20(1), the sum of $190,628.57 is added to appellant’s 1967 income. That figure may be broken down into five different figures representing five different classes of depreciable assets under the Regulations but the total figure is the “amount” referred to in section 43. A careful consideration of paragraphs 43(1)

(a) and (b) reveals that in at least three instances reference is made to the “amount” included in the taxpayer’s income by virtue of section

20. I am satisfied that this “amount” necessarily includes all, and not only a portion of the component parts of the deemed income under section 20.

Section 20 includes in the income of a taxpayer recaptured capital cost allowance. Such a book profit on the sale of depreciable property represents the cumulative effect, over the years, of depreciation claimed for tax purposes in excess of actual depreciation in value. Such recaptured income could be, and in this case is, a very substantial sum relative to the taxpayer’s normal annual income and would place him in an abnormally high tax bracket for a single year, with damaging effect on his after-tax income. Thus section 43 provides an alternative method of computing the tax. Instead of computing tax on his real taxable income for the year, which includes the amount so recaptured, the taxpayer may, in effect, treat the recaptured amount as having been received as income in equal portions in each of the five preceding taxation years. By spreading this special income in this way, hardship which might otherwise result from liability for tax in an abnormally high bracket may be avoided.

Thus, section 43 provides a privilege or a benefit on a taxpayer who finds himself in this situation and said section should be interpreted in the manner described in The Canadian Encyclopedic Digest (Ontario), 2nd edition, at page 488 where it is stated:

While a taxing Act is to be construed strictly in favour of the taxpayer, a statute under which an exemption is claimed from a burden imposed upon the community at large is also to be narrowly construed against the claim to be exempt. As taxation is the rule and exemption the exception the intention to make an exemption ought to be expressed in clear and unambiguous terms, and it cannot be taken to have been intended when the language of the statute on which it depends is doubtful and uncertain. . . .

Thus, the appellant is in the position here of having to establish that subsection 43(1) does, in clear and unambiguous terms, allow it to make an election in respect of only a portion of the capital cost recaptured under section 20.

Looking at subsection 43(1), it seems to me that the plain meaning of the words used therein is that the total amount and only the total amount can be averaged and that subsection 43(1) is capable of no other sensible construction.

It is instructive to look at other sections in the Income Tax Act where election privileges are given to taxpayers under different circumstances.

For example, section 42 permits averaging for farmers and fishermen. Farmers and fishermen are recognized as being peculiarly vulnerable to the vagaries of nature and to the resulting unpredictable fluctuations in their income from one year to another. The purpose of section 42 is to introduce a measure of stability in the level of tax rates applicable to such taxpayers by extending to them the privilege, if they so wish, of averaging their income over five year blocs instead of paying tax on an annual basis like other taxpayers. Paragraph 42(1)(a) requires that the total income, including investment and other income, be ascertained and it is the total income, after allowable deductions, that is averaged. Paragraph 42(1)(a) uses the words “ascertain the amount”. I note that here, as in subsection 43(1), the word “amount” is used to describe the total income. In the same way, I am satisfied that the word “amount” as used in subsection 43(1) is used to describe the total amount, and only the total amount added to income by virtue of section 20.

Section 43A, enacted after section 43, gives an election to the Minister with respect to incorrect valuation of a taxpayer’s inventory and it also uses the word “amount” in the context of the total or entire amount added to income under the section.

I am accordingly of the view that the question posed in paragraph 12 of the stated case must be answered in the affirmative. It follows that the appeal is dismissed with costs.