Des Rosiers v. R., [1975] C.T.C. 416, 75 D.T.C. 5298

Décary, J:

1 The Court must determine whether the loss sustained by three shareholders in a company which was the owner of a building, as a consequence of expenses incurred by them in their capacity as tenants of the said building, is deductible for the purposes of paragraph 27(1)(e) of the Income Tax Act.

2 The Tax Review Board found that deduction of these expenses had unduly and artificially reduced the income of plaintiff.

3 Plaintiff appealed to this Court from this decision of the Tax Review Board. This appeal is a trial de novo, and is in fact and in law an appeal from the notification of the Minister.

4 Plaintiff was the first witness heard. He is a certified public accountant, not in practice, and is an officer of the real estate brokerage firm of Armand Des Rosiers Inc. The latter firm was authorized to sell a building owned by Engineering Products of Canada Limited, and a Mr Denis of the said brokerage firm was given the task of selling it, since he has specialized in the sale of property for industrial uses for many years.

5 Armand Des Rosiers Inc was unable to sell the immovable, and so Engineering Products of Canada Limited reduced its price, and plaintiff, after some consideration, finally decided to buy the building. The selling company agreed to a price of $300,001 on the following conditions: the payment of $1 in cash and assumption of a mortgage of $300,000 at 71/2% annual interest.

6 In buying the building plaintiff acted in conjunction with two brokers from the firm of Armand Des Rosiers Inc, Messrs Denis and Lefebvre, who did not have the same financial resources as those at the disposal of plaintiff. Accordingly, plaintiff wished to protect himself by acting in such a manner that he and Messrs Denis and Lefebvre would be personally obligated to make the payments. The following scheme was agreed on: a company was incorporated, the principal objective of which was ownership of the building; plaintiff and Messrs Denis and Lefebvre became the shareholders in his company; and they personally leased the building purchased by the company, at a rental fixed by a net lease, including, in common with all leases of this kind, a number of expenses for which they were to be responsible.

7 The company, Placements Ronis Inc, was incorporated on March 7, 1967; on March 15, 1967 it bought the building; the agreement of sale contained no clause out of the ordinary; plaintiff and Messrs Denis and Lefebvre each subscribed 126 ordinary shares in the company, each with a par value of $1, making a total of $378 of share capital issued and paid up, in an authorized capital of $40,000; the issued and paid-up capital, and even the authorized capital, may appear at first glance to be insufficient for the purchase of a building worth $300,000, but I feel that the provisions of the lease concluded between the company and its three shareholders the following day establish that the capitalization was in fact sufficient for the purposes intended by the shareholders.

8 It is important to note at once that the evidence shows the rental agreed on between the company and the shareholders was a normal figure, corresponding to the market value of space in the building. The testimony to this effect by appellant and Mr Denis is corroborated by the fact that rental on leases concluded in the building are only 5 or 6 cents a square foot more than that paid to the company by appellant and his fellow shareholders.

9 In the lease between the company and the joint shareholders it is stipulated that Placements Ronis Inc would be used as a pseudonym in granting leases. The reason adduced for doing this was that, as the three shareholders were brokers with the firm of Des Rosiers, they would have been unable to secure the assistance of other brokers in obtaining subtenants if it had been known that they were the tenants. In my view, this was a valid reason.

10 So far as the low capitalization figure of Placements Ronis Inc is concerned, I feel that this state of affairs is justified by the nature of the lease: the shareholders leased the entire building at a rental allowing for the mortgage liabilities of the company, and consequently the latter did not need capital in order to liquidate its liabilities, since they were covered by the amount of rental paid by the three joint shareholders.

11 The rental which the three joint shareholders undertook to pay proved to be a burden, because they were unable to sublet portions of the building as quickly as they had expected. The reason given was that the pre-Expo '67 economic activity had ended.

12 Placements Ronis Inc entered into an agreement giving Armand Des Rosiers Inc responsibility for managing the building. No remuneration was ever paid to the latter firm for the management duties. Ordinarily, this agreement would have been between the three tenants and Armand Des Rosiers Inc. Great emphasis was placed on this fact during the hearing, but I do not consider that this agreement is of any significance whatever in resolving the issue.

13 For the years 1968 and 1969 the expenses incurred by the three joint tenants exceeded income from rentals, and consequently they incurred an operating loss. Each of the three shareholders applied one-third of these losses against his income from other sources, pursuant to the provisions of paragraph 27(1)(e) of the Act.

14 Learned counsel for the plaintiff argued that the fact that Placements Ronis Inc was merely an owner receiving rentals, which at the outset somewhat exceeded its liabilities, did not mean the company lacked a definite objective, namely that of being the sole owner of the building, so as to avoid the inconveniences inherent in co-ownership and joint ownership, and in a joint and several mortgage obligation. Consequently, the creation of the company was not part of a transaction or operation which, if deduction of disbursements or expenses relating thereto were allowed, would unduly or artificially reduce the income of plaintiff.

15 Learned counsel for the Minister argued that the lease to the shareholders was an operation or transaction resulting in an undue and artificial deduction from income, and that the expenses paid by the tenants were expenses which should have been incurred by the company; consequently, that if deduction of the expenses were allowed, it would unduly and artificially reduce their income; and that those expenses were incurred to protect a capital asset: the shares of plaintiff.

16 In order to decide whether a deduction unduly and artificially reduces income, I feel it is important to survey the facts which appear to me to be relevant: the testimony of the three plaintiffs is substantially identical; it proved impossible for Armand Des Rosiers Inc to carry out the task entrusted to it by Engineering Products of Canada Limited, of selling the building; plaintiff and Messrs Denis and Lefebvre considered the possibility of buying the building; they examined the premises but, because of the presence of heavy machinery, they were unable to discover the true state of the building and they did not call in engineers to do this; the condition of the premises was not what they thought, and required repairs and renovations, as transpired subsequently; plaintiff and Messrs Lefebvre and Denis thought the entire building could easily be leased, and that this would be a profitable undertaking, which proved to be a second error on their part, because the building was not completely leased before the end of 1968; before making the purchase plaintiff and Messrs Denis and Lefebvre arranged for a company to be incorporated, in which they each subscribed for 126 shares having a par value of $1 each, which gave Placements Ronis Inc an issued and paid up capital of $378, in an authorized capital of $40,000; this represented a thin issued capitalization; the role that the company was to play: to be the owner of the building, and lease it to the shareholders under a “net net lease”, in order that the company might meet its mortgage debts; the building was purchased on March 15, 1967 for $300,001 payable on the following conditions: the payment of $1 in cash and assumption of the obligations of a mortgage debt of $300,000; the day following the purchase, Placements Ronis Inc leased the entire building to its three shareholders at a rental fixed under the usual terms of a “net net lease”, amounting to $1 a square foot; this rental amount was the going rate, as was proven by leases granted by the company, since the same premises were re-leased for 5 or 6 cents more a square foot; the company acted as a pseudonym for the three shareholders, the reason being that the latter were all real estate brokers working for the same firm, Armand Des Rosiers Inc, and did not want this fact known, in order to be able to obtain the services of brokers outside Armand Des Rosiers Inc; indeed, the first rental was due to the efforts of another real estate brokerage; the entire building was not leased until the end of 1968; renovations and repairs cost much more than $50,000, the amount anticipated by plaintiff and Messrs Denis and Lefebvre; bank loans and advances made by the shareholders to the company became too burdensome for two of the shareholders, who had to sell their shares to plaintiff at a loss, because they were in debt beyond their ability to repay.

17 The French version of subsection 137(1) reads:

137. (1) Dans le calcul du revenu aux fins de la présente loi, aucune déduction ne peut être faite à l'égard d'un déboursé fait ou d'une dépense contractée, relativement à une affaire ou opération qui, si elle était permise, réduirait indûment ou de façon factice le revenu.

18 In my opinion, the subject of the verb “réduirait” (would reduce) is the pronoun “qui” (that). Although the phrase “affaire ou opération” (transaction or operation) immediately precedes the pronoun “qui”, the latter pronoun substitutes for “déduction” (deduction), because it is the “déduction” that reduces income, not the “affaire ou opération”. In an income statement there are entries for deductions, but none for transactions or operations. The deduction consists of one or more items of expense or disbursement; the expenses or disbursements are designated by reference to the type of transaction or operation in which they were made. An expense or disbursement will be deductible depending on the type of transaction or operation in which it is made: an expense or disbursement of a current nature, in accordance with recognized accounting principles; one made deductible in accordance with a statutory provision; one of a capital nature, in accordance with recognized accounting principles; and one disallowed under an express provision of the Act, as a deduction in computing income. In each case it is the reason for the expense or disbursement, namely the operation or transaction, that determines whether the expense or disbursement can be allowed as a deduction in computing income.

19 For the purposes of subsection 137(1), therefore, it is the nature of the reason for the expense of disbursement, namely the transaction or the operation, that determines whether a deduction results in an undue or artificial reduction. It follows that this nature, acquired from the transaction or operation by the disbursement or expense, is what must be considered in deciding what is undue or artificial, since the fact of the transaction or operation being undue or artificial is the primary reason for the disbursement or expense, which is the basis for the deduction, and the deduction is in turn the reason for the reduction.

20 With regard to the use of the phrase “si elle était permise” (if allowed), it should be noted that in sections 11 and 12 of the Act, when reference is made to a “déduction”, the words “déduction admise” (deduction allowed) and “déduction non-admise” (deduction not allowed) are used, not “déduction permise” or “non- permise”. The meaning of “permettre” (allow), which is to let happen, not to prevent, applies to a deduction rather than to an operation or transaction. In my view, the verb “permettre” cannot be applied to a transaction or operation, since the Minister has no powers to allow or not allow a transaction or operation, but he does have powers to allow or disallow the deduction of a disbursement or expense.

21 We must examine more closely the meaning of the key words “indûment” (unduly) and “de façon factice” (artificially), which give to the transaction or operation the nature that will in turn affect the question of reduction.

22 In Robert, Dictionnaire de la langue française:

Indûment: adv ... D'une manière indue ...

Indu, ue: adj ... Qui va à l'encontre des exigences de la raison, de la règle, de l'usage ...

Factice: adj ... 1º Vx. Qui n'est pas de création naturelle. V. Artificiel, ...

... 2º Mod. Qui est fait artificiellement, à l'imitation de la nature ...

... 3º Fig. Qui n'est pas naturel ...

23 “Indu” (undue) suggests the idea of being contrary to reason, practice or custom; “factice” (artificial) suggests the idea of falsity.

24 Let us now consider the English version of subsection 137(1):

137. (1) In computing income for the purposes of this Act, no deduction may be made in respect of a disbursement or expense made or incurred in respect of a transaction or operation that, if allowed, would unduly or artificially reduce the income.

25 The English version of subsection 137(1) uses the words “if allowed”, words which were also used in sections 11 and 12 of the Act. The verb “to allow” is defined in the Shorter Oxford English Dictionary on Historical Principles as:

Allow: v ... 2. To accept as true or valid, to admit 1548 ... 3. trans. To permit (an action, etc.) 1558 ... II. Fr. allouer...

1. To assign as a right or due -1596; to give, or let any one have, as his share, or as what he needs ME; to portion, endow -1712..

2. To place to one's credit, count to one -1667; hence, to deduct from the debit, to abate -1530; gen. to add or deduct (so much) on account of something not formally appearing 1663 ...

26 I feel there is some disparity between the two versions: the French version used the word “permise”, although in sections 11 and 12, which deal with deductions, the word “admettre” was used. The English version, by using the verb “allowed”, which comes from the French “allouer”, in subsection 137(1) and sections 11 and 12, leaves no doubt that the reference is to “deduction”. I conclude, therefore, that the two versions must be interpreted as meaning that “permise” refers to “déduction”, just as “allowed” refers to “deduction”.

27 In the English version, the key words “unduly” and “artificially” are defined in the Shorter Oxford English Dictionary on Historical Principles as:

Artificially: Adv. artificial

Artificial: ... adj. 1. Opp. to natural.

1. made by or resulting from art or artifice; not natural. 2. Made by art in limitation of, or as substitute for, what is natural or real 1577. 3. Factitious; hence, feigned, fictitious 1650. 4. Affected 1598 ...

Unduly: ... adv. late ME ... 1. Without due cause or justification; unrightfully, undeservedly. 2. To excess; beyond the due degree 1779 ....

28 So far as the definition of “artificially” is concerned, I do not think it can reasonably be said that expenses are not natural, or that they are “feigned”, but this can be said of an operation or transaction. “Unduly” suggests the idea of a lack of justification, or the idea of excess. The second meaning, of excess, does not appear in the French definition of “indûment”; that meaning corresponds to the idea contained in subsection 12(2) of the Act, namely the reasonableness of the quantum of an expense or disbursement. In the English version as in the French, the words “indûment” and “de façon factice”, and the words “unduly” and “artificially”, attribute these characteristics to the operation or transaction, the source of the disbursements or expenses, and the operation or transaction communicates these same characteristics to these disbursements and expenses; the expenses and disbursements communicate these characteristics to the deduction, which in turn communicates to the reduction the same characteristics.

29 I feel it is impossible to interpret this section other than by determining the nature of the transaction or operation which gave rise to the expense or disbursement: the expense or disbursement will have this nature, as will the deduction claimed. I therefore agree with the interpretation of subsection 137(1) to the effect that it is the transaction or operation which qualifies the deduction, and this qualification is that resulting from the words “would unduly or artificially reduce the income”.

30 I think subsection 137(1) justifies reference to the same dictionary, Robert, Dictionnaire de la langue française, for a definition of the words “affaire”, “opération” and “permettre”:

Affaire: sens (II)

Convention, marché, négociation, tractation, traité, transaction. Entreprise, opération commerciale, spéculation. Une bonne (elliptiqt. une “affaire”: un marché- advantageux) affaire, une affaire d'or. Une mauvaise affaire. Une grosse, une petite affaire. Proposer une affaire à quelqu'un. S'intéresser, prendre part à une affaire. Entreprendre, lancer une affaire. Prendre une affaire en main. Etre à la tête d'une affaire. Administrer, conduire, diriger, gérer une affaire. S'occuper d'une affaire. Conclure, régler, terminer une affaire. L'affaire est dans le sac. V. Sac. Réussir, manquer, rater, une affaire. Se retirer de son affaire. Son affaire va bien, va mal, marche bien, marche mall. Entendre son affaire, connaître son métier.

31 I think that this definition suggests the idea of different stages in a plan as making up an “affaire”. Ibid:

Opération: sens (II) est ainsi défini.—

Démarche de l'esprit, acte ou série d'actes, supposant réflexion et combinaison de moyens* en vue d'obtenir un résultat déterminé. V. Accomplissement, entreprise, exécution, travail. Les opérations essentielles de la médecine (cit. 7) clinique. La première opération en histoire consiste à se mettre à la place des hommes que l'on veut juger (Cf. Entrer, cit. 50). L'analyse est l'opération qui ramène l'objet à des éléments déjà connus (Cf. Intuition, cit. 2). Opérations industrielles, chimiques, pharmaceutiques, techniques. V. Manipulation, traitement. Les opérations qui conduisent de l'obtention de la matière première à la fabrication du produit fini (Cf. Intégration, cit. 1). Machine (cit. 15) qui se charge de la plupart des opérations.

Opération: sens (VI) est ainsi défini.—

(XVIIIº s.) V. Affaire (II, 1º), spéculation. Opération commerciale (Cf. Courtier, cit. 4; effet, cit. 40), financière, immobilière (Cf. Idéal 2, cit. 23). Opérations de bourse, ventes et achats réalisés dans une bourse* de marchandises ou de valeurs. Opération au comptant, à court terme, à long terme. Combiner une opération. Opération d'envergure (cit. 6), audacieuse (Cf. Marché, cit. 28), imprudente, malhonnête. Opération avantageuse, désastreuse.—Fam. Vous n'avez pas fait là une belle opération!—Par anal. La guerre, mauvaise opération et qui ne rapporte rien (Cf. Dommage, cit. 6).—Opération de banque: ensemble des actes juridiques accomplis à l'occasion du commerce des banques.—Opérations comptables, de comptabilité. Opérations de dépenses et de recettes (Cf. Exercise, cit 22; et aussi Journal, cit. 1).

32 The phrases “acte ou série d'actes” (action or series of actions) in sense (II) , and “l'ensemble des actes juridiques” (group of actions with legal consequences) in sense (VI) should be noted, as each phrase suggests the idea of a plan and the stages of an operation. Ibid:

Permettre:

Laisser* faire quelque chose, accepter qu'une chose soit, se produise ..., ne pas l'empêcher.

Permettre de ...:

Suivi de l'infinitif. Donner le droit*, la liberté, le pouvoir de ...

33 As between allowing something to be done, and conferring a right to do something, I adopt the meaning of “conferring a right to” for purposes of interpretation of the section. Nothing in the Act permits the Minister to disregard the legal existence of a transaction or operation, but expenses and disbursements incurred as a consequence may or may not be allowed in computing income.

34 In the Shorter Oxford Dictionary the word “transaction” is defined as:

Transaction:

[ad. L. transactionem, f. transigere; see prec.] 1. Roman and Civil Law. The adjustment of a dispute between parties by mutual concession; compromise; hence gen. an arrangement, an agreement, a covenant. Now Hist. exc. as in 3b. 2. The action of transacting or fact of being transacted -1655. 3. That which is or has been transacted; a piece of business; in pl. doings, proceedings, dealings -1647. b. Theol. In ref. to the Atonement, ‘transaction’ has senses ranging from 1 to 3. (In sense 1 chiefly in deprecation.) 1861. 4. The action of passing or making over a thing from one person, thing, or state to another -1691. 5. Pl. The record of its proceedings published by a learned society.

Rarely in sing. -1665.

3. Discoursing of the Court of France, and the transactions there Clarendon. Hence Transactional a., ly adv.

Transact:

v. 1584 [f. L. transact-, transigere to drive through, accomplish, f. TRANS-<+> agere to drive, do, act.] 1. intr. To carry through negotiations; to have dealings, do business; to treat; also, to manage or settle affairs. Now rare. b. fig. (usu. dyslogistic.) To have to do, to compromise 1888. 2. trans. To carry through, perform (an action, etc.); to manage (an affair); now esp. to carry on, do (business) 1635. 3. To deal in or with; to traffic in, negotiate about; to handle, treat; to discuss. arch. 1654. 4. To transfer -1889. 1.b. In his criticism .. he seems to us a little to ‘t.’ with cant 1890. 2. A country fully stocked in proportion to all the business it had to t. Adam Smith.

35 I think the second sense of “transaction”, “the action of transacting”, and the third sense, “that which has been transacted; a piece of business”, correspond to subsection 137(1), though it would appear that the choice of this word was not as fortunate as “affaire” or “opération”.

36 Consideration of the origins of subsections 137(1) and 12(2) may be helpful in determining the scope of subsection 137(1).

37 Subsection 12(2) of the 1948 Act is derived from subsection 6(2) of the Income War Tax Act. This subsection, 6(2), is taken from section 7 of the Statutes, 23-24 Geo V, c 41, and reads as follows:

6. (2) Le ministre peut rejeter comme dépense la totalité ou toute fraction de traitement, gratification, commission ou d'honoraires d'administrateur qui, à son avis, excède ce qui est raisonnable pour les services rendus.

38 The English version is worded as follows:

6. (2) The Minister may disallow as an expense the whole or any portion of any salary, bonus, commission or director's fee which in his opinion is in excess of what is reasonable for the services performed.

39 It is clear that the purpose of these two versions was to determine the reasonableness of the quantum of an expense, which may be all or a part of the amount of the expense, having regard to the services rendered, but not the expense itself, because of its character or nature. Thus, it is the quantum that is in question, not the expense.

40 By c 34, of SC 1939–40, 2nd session, namely 4 Geo VI, section 17, subsection 6(2) was repealed and replaced by the following:

6. (2) Le ministre est autorisé à rejeter toute dépense qu'il peut discrétionnairement déterminer comme excédant ce qui est raisonnable ou normal en ce qui concerne l'entreprise du contribuable, ou faite relativement à une opération ou affaire qui, à son avis, a indûment ou artificiellement réduit le revenu.

41 The English version reads:

6. (2) The Minister may allow any expense which he in his discretion may determine to be in excess of what is reasonable or normal for the business carried on by the taxpayer, or which was incurred in respect of any transaction or operation which in his opinion has unduly or artificially reduced the income.

42 It may be noted, first of all, that the section no longer relates to specific expenses: salaries and so on; it applies to any expense; it no longer mentions disallowance of the whole of a specific expense; it permits the disallowance of anything in excess of what is reasonable or normal; and it uses “normal” in addition to “reasonable”, creating a choice between two standards: reasonableness or normality, two complementary concepts. The new concept of normality undoubtedly referred to the practices and customs applicable to the business.

43 However, a new and much more significant concept appears in the Act—and this is the genesis of subsection 137(1): disallowance of any expense incurred in respect of any transaction, if such expense in the Minister's opinion has unduly or artificially reduced income.

44 It may be noted that the right to disallow the whole of the quantum of an expense or disbursement under what was formerly subsection 6(2) now depends on whether an operation or transaction is undue or artificial; that the right to disallow a portion of an expense or disbursement depends on the reasonableness or normality of that expense; and that only what is in excess of such reasonableness or normality may be disallowed.

45 In my view, these provisions of subsection 6(2) of c 34 clearly indicate that it is the transaction or operation which, because of its undue or artificial nature, attaches this characteristic to the expense or disbursement, which may be disallowed in its entirety, at the Minister's discretion.

46 No change was made in the Act until 1948, when the Income War Tax Act was repealed, and replaced by the Income Tax Act, c 52 of the 1948 Statutes.

47 The two concepts which were contained in one section, subsection 6(2), became the subject of two separate sections: subsections 12(2) and 125(1).

48 Subsection 12(2) read, in French:

12. (2) Dans le calcul du revenu, il n'est opéré aucune déduction à l'égard d'une mise de fonds ou d'une dépense autrement déductible, sauf dans la mesure où la mise de fonds ou la dépense était raisonnable dans les circonstances.

49 The English version was:

12. (2) In computing income, no deduction shall be made in respect of an outlay or expense otherwise deductible except to the extent that the outlay or expense was reasonable in the circumstances.

50 This section preserves the standard of reasonableness, but abandons that of normality; permits disallowance of the amount of an expense which exceeds what is reasonable; and widens the ambit of the standard by referring to the circumstances rather than to the taxpayer's business.

51 In my opinion the section has a wider scope as a result of elimination of the standards of normality and the type of business, because the standard of reasonableness is qualified by the circumstances, which makes it subjective.

52 The use of the phrase “mise de fonds” for “outlay” in French should be noted. This error was to be corrected in 1952.

53 The concept of what is undue or artificial is now the subject of subsection 125(1) of the Act:

125. (1) Dans le calcul du revenu aux fins de la présente loi, aucune déduction ne peut être faite à l'égard d'un déboursé fait ou d'une dépense subie, relativement à une transaction ou opération qui, si elle était permise, réduirait indûment ou de façon factice le revenu.

54 The English version reads:

125. (1) In computing income for the purposes of this Act, no deduction may be made in respect of a disbursement or expense made or incurred in respect of a transaction or operation that, if allowed, would unduly or artificially reduce the income.

55 In my view, the fact that both concepts were contained in the same section, 6(2), indicates that there was, and still is, some relationship between subsections 12(2) and 125(1), which became 137(1), if only their common origin.

56 Subsection 12(2) limits its application to reasonableness in relation to the circumstances, and identifies its object: disallowance of a portion of a disbursement or expense; its ambit is clearly circumscribed.

57 Subsection 137(1) limits its application to what is undue and artificial, and identifies its object: disallowance of any disbursement or expense incurred in respect of an operation or transaction deemed to be undue or artificial; its ambit cannot be easily circumscribed. Indeed, these standards, of what is undue and artificial, are standards of morality which necessarily vary.

58 The fact that in a transaction or operation there are certain aspects less well advised than others should not result in making the entire operation or transaction artificial or undue, and all the expenses incurred in respect of it non-deductible.

59 The provisions of subsection 137(1) are very wide, and confer on the Minister a power that enables him to abolish the specific provisions of sections 11 and 12 of the Act for all practical purposes, since any disbursement or expense deemed to be non-deductible is undue, and its deduction is unfounded, which is one of the meanings of undue.

60 In my view subsection 137(1) is the section with the widest scope in all of Part VI of the Act, for its boundaries are more imprecise than all the others, which provide either for a decision of the Treasury Board or evidentiary requirements, if the section is to apply. There is nothing of this kind in subsection 137(1).

61 Under section 13 of the Interpretation Act, reference may not be made to the marginal note of subsection 137(1), but judicial authority exists for referring to the heading, which in this instance is “Tax Evasion” for Part VI of the Act, and also for referring to the context of subsection 137(1).

62 The heading of Part VI, “Dissimulation de matière imposable”, by its use of the word “dissimulation”, emphasizes a deliberate act by the taxpayer intended to defraud the treasury. Moreover, in English this title is rendered by “Tax Evasion”, which leaves no doubt that it refers to a deliberate act.

63 So far as the context is concerned, in particular subsection 138(1) of the Act, it is interesting to note that if “one of the main purposes for a transaction or transactions ... was improper avoidance or reduction of taxes, ... the Treasury Board may give such directions as it considers appropriate to counteract the avoidance or reduction”.

64 The purpose of subsection 138(1) is essentially the same as that of subsection 137(1), except that the power to act resides not with the Minister but with the Treasury Board; subsection 138(1) is a less dangerous weapon than that contained in subsection 137(1), since Treasury Board approval is required, though the provision in subsection 138(1) has the same objective, namely that of reversing the reduction or avoidance of tax.

65 In my opinion, “dissimulation” implies camouflaging or disguising an act in order to lend it an appearance not its own, while “avoidance” suggests the idea of avoiding by legal, or at least legalistic, means a heavier tax burden. There is undoubtedly a difference between the two versions.

66 It should also be emphasized that in subsection 138(1) the legislator used the words “irrégulièrement éviter ou réduire les impôts” (improper avoidance or reduction of taxes). If it is bad form to avoid taxes improperly, that implies, ipso facto, that it is good form to avoid or reduce taxes properly. “Régulier” and “irrégulier” must be understood not as meaning in a continuing or intermittent manner, but by following, or not following, the rules of the game.

67 It is surprising that subsection 138(1), the application of which is exceptional, since it requires reference to the Treasury Board, should have a narrower scope than subsection 137(1), because reduction or avoidance in accordance with the rules does not fall within its purview. The reference in subsection 138(1) to “irrégulièrement” (improperly) implies that the action in question is contrary to the rules, is not within the accepted standard. In Robert, Dictionnaire de la langue française, we find the following definition:

Régulier:

Qui est conforme aux règles, ne fait pas exception à la norme ....

Irrégulier:

2º (Abstrait). Qui n'est pas conforme à la règle établie, à l'usage commun ....

68 This reference to accepted standards, practice, rules, must be taken into account. I think subsection 138(1) throws great light on the interpretation that must be placed on subsection 137(1).

69 Section 138A also requires study. This section confers discretion on the Minister in two cases: the reduction or disappearance of the assets of a corporation where one of the purposes is to avoid tax, or the existence of corporations having the reduction of tax as one reason for their existence.

70 Under subsection 138A(3) the Tax Review Board or the Federal Court may conclude that, in the first case, the transaction or series of transactions did not have the effect attributed to it by the Minister, and in the second case, that none of the main reasons for the existence of the corporations was to reduce tax. Clearly defined standards are provided in this section.

71 In my opinion what is noticeable in the provisions of this section is that the legislator took pains to use, in the first case, the phrase “transaction or series of transactions”. In subsection 137(1) the phrase used is “transaction or operation”, not “transaction or series of transactions”. A transaction and a series of transactions are two different things.

72 In the case at bar, there was a series of transactions, not a transaction, and subsection 137(1) refers only to a transaction. Furthermore, subsection 138(1), which is the reference to the Treasury Board, requires that there must have been an improper reduction or avoidance of taxes, that is to say, by means contrary to accepted standards, rules and practice, by legalistic rather than legal means.

73 In my view it is necessary to refer to this accepted standard, these rules and practices, to decide whether the operation or transaction in question was undue or artificial.

74 In my opinion, the facts in evidence do not support characterization of the operation as undue or artificial. Plaintiff and his fellow tenants acted in a manner appropriate to real estate agents joining together to purchase a building, and in so doing they acted in conformity with the rules, accepted standards and practice. When we speak of an undue or artificial operation or transaction we refer, in my view, to a sham, a deception. There was nothing of that nature in the case at bar. Plaintiff and his fellow tenants chose from among several methods the one that would entail the least tax burden, but there was nothing undue or artificial about the method chosen.

75 To my mind, the concept of what is undue or artificial is another way of stating the well-known principle of form and substance, a principle which is not referred to in every situation, but only when the nature of a transaction, though designated as A, is in law and in fact B.

76 Learned counsel for the Crown adduced another argument, namely that plaintiff and his fellow tenants incurred these expenses not qua tenants but qua shareholders. I cannot subscribe to this proposition of law, since it might be applied to any person who is a shareholder in a private company who incurs expenses and acts in some other capacity than that of a shareholder.