DUMOULIN, J.:—This is an appeal from the income tax assessment, dated July 22, 1958, for the taxation year 1957, of Glenora Securities Inc., of Montreal, Province of Quebec, levying for the above fiscal year, a tax in the sum of $10,382.18.
Glenora Securities Inc., a limited company, with an office in the City of Montreal, was resident in Canada throughout the whole of its taxation year 1997.
The instant appeal was argued in law, both parties having submitted an Agreed Statement of Facts and filed elaborate factums.
The factual components of the controversy are quite simple :
(a) In 1957, appellant received dividends from
| sources in the United States totalling | $53,946.50 |
| (b) Expenses incurred, or carrying charges, were | |
| in the amount of $9,324.59 ((all monetary | |
| figures computed in Canadian currency) with, | |
| also, a depletion claim for $756.89, a total of . | 10,081.48 |
| (c) Therefore appellant’s profit or income accru | |
| ing from American sources, during 1957, con | |
| sisted in | 43,865.02 |
| (d) Appellant paid to the Government of the | |
| United States, for 1957, a withholding tax of | 8,092.01 |
| Such are the basic, uncontroverted, facts. | |
The legal issue can also be stated briefly: the appellant claims a deduction under Section 41(1) (a) of the Income Tax Act (R.S.C. 1952, e. 148) of the full amount of the tax paid to United States fiscal authorities: $8,092.01, whereas the assessment objected to allows only a 15% deduction computed on an income of $43,865.02, namely an amount of $6,579.75.
Both litigants mention, as the relevant provisions of our Income Tax Act, Sections 2, 3, 4 and 41.
Section 4 identifies ‘‘income’’ with “profit”, that is net profit; any different meaning would seem practically unsound.
The United States withholding tax, at a rate of 15%, was levied upon the gross receipts of $53,946.50, permitting of no deductions on the score of earning expenses or depletion of capital sources, whilst, Canadian legislation contemplates taxing merely the net profit of $48,865.02, calculated, might I say, conformably to Earl Loreburn’s speech in Usher’s Wiltshire Brewery Ltd. v. Bruce, [1915] A.C. 483 at 444, “. . . on ordinary principles of commercial trading, by setting against the income earned the cost of earning it’’.
A first point worthy of note is the difference between the taxing instruments concerned: the foreign one levies tax on gross receipts or total dividends, the Canadian law deducting earning expenditure and depletion, thereby exempting a portion, $10,081.48, of the revenue from sources in the United States.
Admittedly the moot text under review is none other than Section 41 of the Act, more particularly subsection (1), paragraphs (a) and (if applicable) (b) hereunder recited.
“41. (1) A taxpayer who was resident in Canada at any time in a taxation year may deduct from the tax for the year otherwise payable under this Part an amount equal to the lesser of
(a) the tax paid by him to the government of a country other than Canada on that part of his income from sources therein for the year upon which he is subject to tax under this Part for the year, or
(b) that proportion of the tax for the year otherwise payable under this Part that
(i) that part of the taxpayer’s income
(A) for the year, if section 29 is not applicable, or
(B) if section 29 is applicable, for the period or periods in the year referred to in paragraph
(a) thereof,
from sources in that country that was not exempt from income tax in that country minus amounts that are deductible for the year or such period or periods, as the case may be, under paragraph (d) of subsection (1) of section 28,
is of
(11) the taxpayer’s income
(A) for the year, if section 29 is not applicable, or
(B) if section 29 is applicable, for the period or periods in the year referred to in paragraph
(a) thereof,
minus amounts that are deductible for the year or such period or periods, as the case may be, under section 28.’’
I may dispose, as irrelevant, of this long and somewhat confusing subsection (b), since none of the conjectures, provided for—or against, by Sections 29 and 28, arise in this case. More- over, I have no recollection that either party contended it was of any account. Section 41(1) (a) remained throughout the subject-matter of the argument, or as paragraph 8 of appellant’s notes and authorities puts it: ‘The whole issue in this appeal turns upon the meaning of the word ‘income’ in Section 41(l)(a).”
The nature of this difficulty makes it advisable to summarize in their own words litigants’ respective view-points.
Reverting to the ‘‘Notes of Argument and Authorities cited on behalf of Appellant”, the second paragraph, on page 3, goes thus:
‘‘Section 41 thus provides for deduction of foreign tax paid on foreign income, subject to two limitations: (1) if any part of the income (in the proper sense of ‘profit’) from the foreign source is not subject to tax in Canada, there is no credit in respect of tax paid to the foreign government on that part, and (2) the credit cannot in any case exceed the proportionate Canadian tax on the foreign income. Neither of those limitations has application in this case.”
With the exception of its last and negative sentence: ‘‘ Neither of those limitations, etc.”, this presentation of the issue would seem quite correct; my opinion is that no other one could be reasonably entertained. Let us look more closely at those “two limitations”, which may very likely paint a true picture of this affair.
One part ‘‘of the income from the foreign source is not subject to tax in Canada . . .” namely carrying expenses and depletion totalling, as seen above: $10,081.48. Then, if the following proposition No. (2) is true, and it does appear to be the clear purport of the law, ‘‘. . . credit (ï.e., tax relief or deduction sought) cannot in any case exceed the proportionate Canadian tax on the foreign income’’. And such was respondent’s decision in respect of the tax levied at the proportionate rate of 15% on the foreign ‘‘income’’, which in the United States, no more and no less than in Canada, can mean nothing but net profit, actually: $43,865.02, entitling to tax credit of $6,579.75.
It would appear that appellant confuses exemption with taxing ratios, the former refused in the foreign country, but granted pro tanto in Canada ; the latter, operating at similar percentages of 15%, here and in the United States, but as against different ingredients of the total yield.
Appellant next proceeds with its analysis of the law as follows (cf. Notes of Argument and Authorities, paragraph 10) : :
“10. Section 41(1) (a) entitles the Appellant to deduct the tax paid [all italics are found in the text] to the Government of the United States ($8,092.01), subject to the limitation that the tax must have been paid on that part of its income from sources in the United States on which it was subject to tax under Part I of the Income Tax Act. The Section provides for the deduction of the tax actually paid, on that part of the income from the United States which was taxable in Canada
N
This first portion of paragraph 10 is, if I apprehend it correctly, a repetition of the tentative interpretation previously commented upon, and a similar remark applies to the remainder. I need do no more than refer parties to my notes above.
Paragraph 13 of the ‘‘Notes of Argument and Authorities cited on behalf of Appellant”, summarizes the legal construction it would attach to Section 41(1) (a) of our Act. I quote:
“13. It is to be noted that the Section allows a deduction of the tax paid, which in this case was $8,092.01. It does not provide for a deduction of the amount arrived at by applying the rate of foreign tax to the income subject to tax in Canada, which is what the Respondent has done in this case by allowing only 15% (the United States withholding tax rate) of the income amount of $48,865.02. The Appellant had income from sources in the United States of $43,865.02, and on that income it paid a tax of $8,092.01. The rate or method of computation used by the United States Government in imposing a tax of $8,092.01 is immaterial : the only thing of any significance for Canadian tax purposes that the Appellant received from the United States in 1957 was an income of $43,865.02—on that income it paid a tax of $8,092.01.”
A careful reading of the law is irreconcilable with the meaning that appellant seeks to convey.
The Court could agree, since Section 41(1) (b) is out of question, only if Section 41(1) (a), instead of its present context, read : :
“A taxpayer who was resident in Canada at any time in a taxation year may deduct from the tax for the year otherwise payable under this Part . . .
(a) the tax paid by him to the government of a country other than Canada . . .”’
Thus amputated of its actual and operative purview, an amount equal to that paid to a foreign authority, would become automatically deductible from foreign dividends by a resident of this country.
Quite in line with this reasoning is the respondent’s reply appearing at page 3, second paragraph, of its Factum.
“As under section 41(1) the tax credit may be claimed only for the tax paid to the United States on income from sources therein and subject to tax in Canada, i.e. on income computed by applying the provisions of our own income tax legislation regarding the computation of income, it follows that where income tax is required to be paid to the United States under the income tax legislation of that country on an amount of money or income which is not subject to tax in Canada under our own income tax legislation (as for instance where the difference between gross income and net income is taxed in the United States), such amount of money cannot be taken into consideration for the determination of the tax credit that may be claimed under either paragraph (a) or paragraph
(b) of section 41(1).”’
Such is, I believe, the intent of Section 41(1) (a). It provides the basic elements for any fixation of tax credit which, in the instant case, was properly allowed in a sum of $6,579.75, or 15% on a net profit (“income” as outlined in Section 4) of $43,865.02.
For the reasons above, appellant’s income tax assessment for 1957, to an amount of $10,382.18, was levied in accordance with the provisions of the pertinent law.
Therefore this appeal is dismissed, with taxable costs going in favour of the respondent.
Judgment accordingly.
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