G. H. C. Investments Limited v. Minister of National Revenue, [1961] CTC 187, 61 DTC 1120

THORSON, P.:—This is an appeal against the appellant’s income tax assessment for 1958.

The facts from which the issue in the appeal arises were set out in an agreed statement of facts, filed as Exhibit 1, and my summary of them is made from this statement.

The appellant is incorporated under the laws of Ontario. Its former corporate name was Tilco, Limited and prior to June 27, 1958, it carried on business under that name at Peterborough in Ontario as a manufacturer of plastics.

As at December 31, 1957, which was the end of its 1957 fiscal period, it owned certain depreciable properties which had been acquired for the purpose of gaining or producing income from its business. These are set out in a table, showing the kind of depreciable property, the class prescribed by Schedule B of the Income Tax Regulations to which it belonged and the amount of its undepreciated capital cost at the end of 1957, after deducting its capital cost allowance for the 1957 taxation year. The table is as follows:

Total$82,322.00” Prior to June 27, 1958, the appellant had also acquired additional property of a type that had previously been included in Class 8 at a capital cost of $390.

On or about June 27, 1958, the appellant under its former corporate name sold its equipment, automobiles and moulds to Tilco Plastics Limited under an agreement, dated June 26, 1958, a copy of which was attached to the agreed statement of facts. The proceeds of disposition of the properties so sold were as follows :

In all cases the proceeds of disposition were less than their respective original capital costs and the actual fair market value of the properties was $95,052.

On June 29, 1959, the appellant elected under Section 1103 of the Income Tax Regulations to include all its properties that would otherwise be included in classes 2 to 12 in Schedule B in class 1, namely, the building in class 3, the equipment in class 8, the automobiles in class 10 and the moulds in class 12.

The election was contained in a registered letter addressed to the Department of National Revenue, District Taxation Office, Front Street, Belleville, sent on June 29, 1959, and received by the Belleville District Taxation Office of the Department of National Revenue, which was the District Office at which the appellant customarily filed the returns required by Section 44 of the Income Tax Act, on June 30, 1959. The last day on which it might file the return of its income for its 1958 taxation year in accordance with Section 44 was June 30, 1959. Thus, all the requirements of Section 1103 of the Regulations relating to the election were complied with.

On June 30, 1959, the appellant filed its T2 corporation income tax return for its 1958 taxation year in which, in computing its income for the said year, it included the sum of $12,340 as the amount by which, according to its contention, the proceeds of disposition from the sale of its depreciable properties on June 27, 1958, exceeded the total of their undepreciated capital costs.

On June 20, 1960, the Minister assessed the appellant for its 1958 taxation year and in so doing included in its income for the said year the sum of $64,838 as the amount by which, in his opinion, the proceeds of disposition of $95,052 from the sale of its equipment, automobiles and moulds on June 27, 1958, exceeded the total of their undepreciated capital costs of $30,214 immediately before the disposition.

The appellant objected to the assessment but the Minister confirmed it and the appellant then brought his appeal against the assessment to this Court.

The issue in the appeal is a narrow one and its determination depends on whether the election made by the appellant on June 29, 1959, had the effect claimed for it.

The determination required consideration of Section 1103 of the Income Tax Regulations and Section 20(1) of the Income Tax Act, R.S.C. 1952, c. 148. The portions of Section 1103 of the Regulations on which counsel for the appellant relied are as follows:

“1103. (1) In respect of properties otherwise included in classes 2 to 12, inclusive, in Schedule B, a taxpayer may elect to include in class 1 all such properties acquired for the purpose of gaining or producing income from the same business.

(3) To be effective in respect of a taxation year, an election under this section must be made not later than the last day on which the taxpayer may file a return of his income for the taxation year in accordance with section 44 of the Act.

(4) An election under this section shall continue to be effective for all subsequent years.

(5) An election under subsection (1) or (2) shall be made by registered letter addressed to the District Office at which the taxpayer customarily files the returns required by section 44 of the Act.’’

And Section 20(1) of the Act provides:

“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.” There is no dispute about the amounts involved. If the appellant is right in its contention as to the effect of its election the sum of $12,340 was the amount which it was required, pursuant to Section 20(1) of the Act, to include in the computation of its income for its 1958 taxation year. On the other hand, it the election did not have the effect claimed for it, the sum of $64,838 was the amount to be included in which case the assessment appealed against was right and the appeal against it must be dismissed.

It is clearly established that the election made by the appellant under Section 1103 of the Regulations complied with all the requirements of the section. Consequently, the issue relating to it is confined to the effect that should be given to it. It was contended on the appellant’s behalf that the election was made in respect of and applicable to the whole of its taxation year ending on December 31, 1958, and consolidated all its depreciable properties in class 1 of Schedule B of the Regulations. Counsel for the appellant referred to the opening words of Section 1103(3) of the Regulations ‘‘To be effective in respect of a taxation year’’ and in support of his contention cited various dictionary definitions of the term ‘‘in respect of’’ as meaning “to refer or to relate to” or ‘‘to deal or be concerned with” or “with reference or regard to’’ and to the French text of the Regulations ‘‘a l’égard de’’ as meaning ‘‘with reference or regard to’’. He submitted that these terms also mean “applicable to’’ and that when an election is made under Section 1103(1) of the Regulations it is applicable to the taxation year to which it refers and to the whole of such taxation year.

The meaning of certain words in Section 1103(3) is clear. Section 139(2) of the Act defines ‘‘taxation year’’ as follows:

“139. (2) For the purpose of this Act, a ‘taxation year’ is

(a) in the case of a corporation, a fiscal period, . . .”?

and Section 139(1) (r) defines ‘‘fiscal period” as follows:

“139. (1) In this Act,

(r) ‘fiscal period’ means the period for which the accounts of the business of the taxpayer have been ordinarily made up and accepted for the purpose of assessment under this Act, and, in the absence of an established practice, the fiscal period is that adopted by the taxpayer . .

In the appellant’s case its accounts of its business were ordinarily made up and accepted for the period of 12 months ending on December 31 of each year and that was the fiscal period adopted by it.

It was, therefore, submitted that the effect of the appellant’s election, although made on June 29, 1959, was to include all its depreciable properties in classes 3, 8, 10 and 12 in class 1 as of January 1, 1958, and that on December 31, 1958, it had such depreciable properties in class 1 by virtue of its election.

The importance of the appellant’s contention becomes apparent when Section 20(1) of the Act is considered for if it were well founded the amount of the recapture of capital cost allowances on the disposition of its depreciable properties to be included in computing its income for its 1958 taxation year would be considerably less than if the election did not have the effect claimed for it. To be specific, it would be only $12,340 as computed by it instead of $64,838 as computed by the Minister and included in his assessment.

Counsel for the appellant referred to the words “ immediately before the disposition’’ in Section 20(1) of the Act and submitted that since its election operated to produce the result that its depreciable properties in classes 3, 8, 10 and 12 were included in class 1 as of January 1, 1958, it followed that ‘‘immediately before the disposition’’ they were all claiss 1 properties and were disposed of as such.

Counsel contended that when provision is made for an election which refers to a taxation year it must, in the absence of clear language to the contrary, which is not present here, be applicable to the whole of the taxation year and that if the Governor in Council had intended to limit the effect of an election under Section 1103 of the Regulations to depreciable properties on hand at the end of the taxation year in respect of which it was made it would have been an easy matter to have made such intention clear.

Put briefly, the submission of counsel for the appellant was that the effect of its election was such that when it sold its equipment, automobiles and moulds on June 27, 1958, it disposed of depreciable properties that by the retroactive effect of the election had been included in class 1 as of January 1, 1958, and, consequently, that when the Minister treated the disposition as a disposition of depreciable properties of classes 8, 10 and 12 he did so improperly and his assessment was erroneous.

The contention of counsel for the appellant was, in effect, a contention that the application of Section 20(1) of the Act should be confined within the limits that would allow the appellant’s election under Section 1103 of the Regulations to have the effect which, according to his submission, it should have.

In my opinion, this approach is erroneous. Even if it be conceded that if the sale of June 27, 1958, had not taken place the election made by the appellant on June 29, 1959, would have had the effect for which the appellant contended, it could not, in view of the sale and in view of Section 20(1) of the Act, have the effect of transferring the undepreciated capital costs of the equipment in class 8, the automobiles in class 10 and the moulds in class 12 and the additional property in class 8 to which I have referred from the total amount of $30,214 which they had immediately before their disposition on June 27, 1958, into the higher total amount which they would have had if they had been depreciable properties in class 1 immediately before the disposition.

If the election were given the effect for which counsel for the appellant contended this would have the result of reducing the amount that the appellant was plainly required by Section 20(1) of the Act to include in computing its income for its 1958 taxation year. Counsel for the Minister contended, and I agree with his contention, that Section 1103 of the Regulations cannot be given such an effect. It was his submission, which I accept, that all that was included in class 1 by the election of June 29, 1959, was the building which had been in class 3 and was not included in the sale of June 27, 1958, and that, consequently, the appellant was required by Section 20(1) of the Act to include in computing its income for its 1958 taxation year the amounts by which the proceeds of disposition of its equipment, automobiles and moulds exceeded the amounts of their undepreciated capital costs in their classes 8, 10 and 12 respectively immediately before the disposition,

The authority granted to the Governor in Council to enact Section 1103 of the Regulations, under which the appellant made his election, is to be found in Section 11(1) (a) of the Act which provides as follows:

“11. (1) Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year :

(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation ;”’

and, as urged by counsel for the appellant, reference should also be made to the definition of the term “prescribed” in Section 20(1) which is given by Section 139(1) (af) of the Act as follows :

“139. (1) In this Act,

(af) ‘prescribed’, in the case of a form or the information to be given on a form, means prescribed by order of the Minister, and, in any other case means prescribed by regulation.’’

and to Section 117(1) (a) which provides, inter alia, as follows:

“117. (1) The Governor in Council may make regulations

(a) prescribing anything that, by this Act, is to be prescribed or is to be determined or regulated by regulation,”

While Section 11(1) (a) of the Act empowers the Governor in Council to make regulations allowing the amount which a taxpayer in computing his income for a taxation year may deduct as part of or in respect of the capital cost to him of property, and while Sections 117(1) (a) and 139(1) (af) empower the Governor in Council to make regulations by which the class of depreciable property of a taxpayer referred to in Section 20(1) is prescribed it is clear, in my opinion, that a regulation made by the Governor in Council under an empowering section of the Act cannot have the effect of allowing a taxpayer in computing his income for a taxation year to include an amount that is less than that which the Act clearly requires him to include and thereby enabling him to reduce the amount of income tax that the Act clearly imposes, and it is not permissible to construe a regulation made under an empowering section of the Act in such a way as to produce such a result.

There is strong support for this statement of principle in two decisions of the Supreme Court of Canada. In Booth v. The King (1915), 51 Can. S.C.R. 20, there was a conflict between a statutory enactment and a regulation by the Governor in Council made under it. Sections 54 and 55 of the Indian Act, R.S.C. 1886, c. 43, so far as relevant, provided:

“54. The Superintendent General or any officer or agent authorized by him to that effect may grant licenses to cut trees on reserves and ungranted Indian lands . . . subject to such . . . regulations . . . as are from time to time established by the Governor in Council. . . .

55. No license shall be granted for a longer period than twelve months from the date thereof. . . .”

And under Section 54 regulations were enacted including the following :

5. License holders who shall have complied with all existing regulations, shall be entitled to have their licenses renewed on application to the Superintendent of Indian Affairs.”

A licence under the Act was issued to the suppliant on October 5, 1891, and renewed from year to year, the last renewal expiring on April 30, 1909. He then applied for a renewal for the year ending April 30, 1910, and on the refusal of his application by the Superintendent of Indian Affairs brought a petition of right against the Crown asking that he be declared entitled to a renewal. It was held unanimously, affirming the judgment of this Court, 14 Ex. C.R. 115, that a licence holder who has complied with the regulations had no absolute right to a renewal as a regulation making permanent renewal obligatory would be inconsistent with the statutory limitation of twelve months and, therefore, inoperative, and that, consequently, the suppliant was not entitled to the declaration sought by him. Anglin, J., with whom Davies, J., concurred, adopted the language of Maclennan, J.A., in Smylie v. The Queen, 27 Ont. App. R. 172, in which, speaking of a regulation similar to the one referred to above, he said, at page 184:

“if the regulation is not in accordance with the statute, . . ., it must give way to the statute, and can confer no right beyond what the statute authorized. . . .”

The other reasons for judgment are to the same effect.

In Belanger v. The King (1916), 54 Can. 8.C.R. 265, the facts were not as simple. There the suppliant claimed damages for an injury resulting from the negligence of an officer or servant of the Crown while acting within the scope of his duties or employment upon, in or about the construction, maintenance or operation of the Intercolonial Railway. The injury occurred at a level crossing of the Intercontinental Railway near Cacouna in Quebec under circumstances which I shall set out. The suppliant’s right depended on whether there had been a breach of statutory duty on the part of an officer or servant of the Crown amounting to negligence on his part and the determination of the issue involved consideration of the Government Railways Act, R.S.C. 1906, c. 36, and the effect to be given to a regulation made under it. Section 16 of the Act provided as follows:

“16. No part of the railway which crosses any highway unless carried over by a bridge, or under by a tunnel, shall rise above or sink below the level of the highway more than one inch; and the railway may be carried across or above any highway subject to the provisions aforesaid;”

Ordinarily, the level crossing near Cacouna had planking between the rails which raised the roadbed so that the tracks did not rise more than an inch above the surface of the highway. But Sections 49 and 54 of the Act provided for the making of regulations and their effect. They read, so far as relevant, as follows:

“49. The Governor in Council may, from time to time, make such regulations as he deems necessary,

(a) for the management, proper use and protection of all or any of the Government railways. . .

(ec) to be observed by the conductors, engine drivers and other officers and servants of the Minister, and by all companies and persons using such railways;

54. All such regulations made under this Act shall be taken and read as part of this Act:”

Under the authority of Section 49 certain ‘‘Rules for the guidance of Trackmasters and Trackmen’’ were made. One of these, Rule 48, directed that the chief of equipment should at the proper season give instructions to his foremen to cause the planking near the rails at highway crossings to be removed in order to permit flangers to operate easily.

On April 3, 1913, the day of the suppliant’s injury, before the use of snowploughs and flanger had been discontinued. the ice and snow had melted and left the tracks about six inches above the roadbed. On that day, after the usual inspection by the trackmen, some unknown person had placed a fence rail against one of the rails to assist his sleigh over the obstruction and, later in the day, the suppliant, while walking beside his loaded sleigh which his son was driving over the tracks had his foot caught between the post and the rail and severely crushed by the pressure of the sleigh.

All the judges wrote reasons but those of Duff, J., as he then was, and of Anglin, J., as he then was, best establish the ratio decidendi of the case. Duff, J., made it clear that the right of the Government authority under Section 16 of the Act to carry the railway across a highway by a level crossing was subject to the duty to see that it did not rise above the level of the high- way more than one inch and that this was a continuing duty resting upon the railway authority as long as the railway was maintained there. While he assumed that regulations made under Section 49 of the Act were to be ‘‘taken and read’’ as part of the Act he saw no difficulty in holding that in the case before him the regulation called Rule 48, in so far as it was inconsistent with Section 16, must give way ; or, as it was perhaps better to put it, the regulation must be read as subject to an implied proviso that nothing in it should be considered to sanction a departure from Section 16. Anglin, J., was specific in his view of Rule 48. At page 280, he said :

“But no regulation, although passed by the Governor in Council under section 49, can be allowed to override the explicit requirements of section 16 of the statute. If no construction can be placed upon regulation No. 48 which will bring it into harmony with that section it cannot be regarded as having been made within the authority conferred by section 49, or, if so made, it must be treated as subordinate to the precise and definite prohibition of section 16.”

Consequently, it was held that there had been a breach of the duty imposed by Section 16 of the Act amounting to negligence on the part of an officer or servant of the Crown, and that the regulation in Rule 48 could not save the respondent from liability to the suppliant.

Similarly, Section 1103 of the Regulations must not be so construed as to give the appellant’s election under it the effect for which counsel contended for such a construction would bring it into conflict with the clear requirement of Section 20(1) of the Act. The regulation cannot be allowed to override the Act. If the two are in conflict or inconsistent with one another the regulation must give way. That being so, one of two consequences follows. If Section 1103 of the Regulations is to be read as having been made within the authority of, and consistent with, the Act its construction should be limited so that the election made by the appellant under it on June 29, 1959, to include its depreciable property otherwise in classes 2 to 12 in class 1 should be confined to the depreciable properties in such classes that it had at the date of the election and should not be applicable to the depreciable properties in classes 8, 10 and 12 which it disposed of on June 27, 1958, for otherwise, as already stated, if the election were given the effect which was contended for it the regulation which gave it such an effect would be in conflict with Section 20(1) of the Act. Alternatively, if it is not reasonably possible, in view of the language used, to escape from the construction of Section 1103 of the Regulations which counsel for the appellant placed upon it and the effect of the election made under it then Section 1103 of the Regulations is SO Inconsistent with Section 20(1) of the Act that it cannot be regarded as having been made within the authority of the Act and effect should not be given to it.

In view of what I have said I need not consider what may happen in the future so far as the appellant’s building, which was not included in the sale of June 27, 1958, is concerned.

For the reasons given, I have no hesitation in finding that the election made by the appellant under Section 1103 of the Regulations, cannot, in the face of Section 20(1) of the Act, have the effect for which counsel for the appellant contended. The Minister was, therefore, right in assessing the appellant as he did and its appeal against the assessment must be dismissed with costs.

Judgment accordingly.