Re Income Tax Act, 1932, and Proctor and Gamble Co., [1935-37] CTC 334

TAYLOR, J.:—In this appeal counsel for the appellant contended that it was beyond the power of the province to impose the tax upon the appellant sought to be imposed under The Income Tax Act, 1923, e. 9; and in any event tha they were not liable for the amount claimed.

The appellant corporation is a manufacturer of soap and kindred products. Its head office is at Toronto in Ontario, and it is a subsidiary of a corporation whose head office and manufacturing plant is in Ohio, U.S.A. It is incorporated in Canada under the provisions of the Companies Act, R.S.C. 1927, ce. 27. It has not registered in Saskatchewan. The Saskatchewan sales approximate $300,000 annually, but a small percentage of the Canadian total.

The appellants employ two salesmen resident in Saskatchewan, and for one supply an automobile. These salesmen solicit orders for the company’s products from the trade. The company has no warehouse of its own in Saskatchewan, but warehouses perishable goods and some stock in public warehouses within the province.

It is admitted that the facts are correctly set out in the elaborate reasons for the decision under review. It seems somewhat a refinement of reason to suggest that this company is not doing business within the province. The fact is that they find a market here for their products and advertise in that market extensively by radio announcement, magazine and other methods. Their salesmen " " push ’ sales here and take orders or offers to purchase from Saskatchewan purchasers. These orders happen to have on them a printed clause that they are not binding on the company until accepted by the head office, but the practice I gather from the statements of counsel is to ship these orders without special acceptance in any case. They thus sell and deliver into Saskatchewan annually about $300,000 of their products. That to me seems to be doing a pretty good business in Saskatchewan.

And I may be pardoned for pointing out that this province largely maintains the governmental and social institutions which enable the company to do that business in Saskatchewan. Other firms in competition with the appellant’s business have to pay towards the upkeep of these social and governmental institutions, and it ill becomes any corporation taking advantage of a market for their products to contend that they should not pay the same share of taxation as other companies in like businesses in that market. And in my opinion the right of a province to submit the business done in the province to taxation is so clear and well settled that the question is no longer arguable. It has been held decisively that the appellant company is subject to provincial laws of general application such as laws imposing taxation: Rex v. Great West Saddlery Co. [1921] 2 A.C. 91, at 100. The province has no right of course to tax assets or business done without the province, and perhaps lest anything in this judgment be misunderstood it is necessary for me to say that I am not discussing cases of alleged discriminatory taxation, or cases where the taxation interferes with powers or privileges given to special corporations by Dominion legislation or charter. But that a province can put all corporations carrying on business within the province, howsoever or wheresoever incorporated, on the same basis of taxation, is clearly settled.

No question of discrimination arises. In fact it is the other way. The appellant is putting forward a contention that would enable it and other "‘foreign corporations’’ to do business in the province on a basis more favourable than a domestic corporation.

Argument was addressed to me on what is embraced in the phraseology ‘‘carrying on business in the province.’’ With all due respect I may say that these short simple words have been the subject of considerable fantastic reasoning and conclusion. The plain significance of the expression in regard to a firm selling in a provincial market is that they have made ‘sales on the market. If a customer in a broker ‘s office buys on a particular exchange, say in Chicago, he is held to carry on business there according to all the applicable rules of the exchange. And surely it is open to the province maintaining a provincial market to define what constitutes carrying on business in that market. That is what has been done in sec. 24 of The Income Tax Act, 1932. Under that section the appellants are deemed to be carrying on business in Saskatchewan.

The appeal is against the taxation and assessment for the fiseal years ending on June 30 in the years 1932, 1933 and 1934. The appellants filed with the income tax commissioner about June 23, 1934, three returns for that period. It is not now argued that these returns were correct. The net earnings in Saskatchewan, according to these returns, was calculated by an estimate of the income earned without Saskatchewan and by deducting that from the total income of the company, submitting the net taxable income of $749.26, $1,905.24 and $2,543.08 for the three years respectively. There is nothing in the auditor’s statements furnished subsequently on demand or in any information in the file which is before me to indicate any division of the company’s business as between the respective provinces in Canada from which the above computation could be made or checked. The appellants dropped that contention and in a letter of June 11, 1934, from the company to the commissioner took this stand:

‘Where a net profit accrues from the operation of a business such as ours, each function should be credited with having contributed to the total net profit in the proportion that the expenses incurred in exercising that function bear to the total expenses incurred in the exercise of all factors or functions. For the year 1932 the selling profit was 15.2% of the total and for 1933 17.4%. If these percentages are applied to the total net income for these years respectively the resulting figure will be the selling profit for the Company as a whole. This selling profit can then be allocated to the Province on the basis of the percentge of Saskatchewan sales to total sales. ’ ‛

Counsel’s contention in the appeal is that that is the correct method and the only correct method of assessment, and he further submits that to endeavour to impose a tax on those functions or factors in the business exercised beyond the limits of the province would be ultra vires of the province.

Not a single authority has been submitted for this entirely novel method of computing profits.

I can understand how necessary it is for any business to carefully account the cost of the various expenses of doing business, but to attribute to one function or service in the business a special or proportionate value in the production of the ultimate profit is, as I see it, purely hypothetical. To me the proposition that the expenses incurred in connection with the delivery, for example, of the product is definitely responsible for a fixed proportion of the profit on the whole business is a business fallacy. It may quite be, as it so often is in businesses such as is conducted by the appellant, that the capacity to produce is in excess of normal market requirements for say the Eastern market, and when invading the Western Canada market the ratio of additional sales results to the additional cost of production is much more than the normal ratio for the business. The "'over- head’’ has all been provided for in the normal business. This is so ordinarily, and there is therefore no discrimination—likely the contrary—in a provision that bases the net income of the taxpayer on the ratio of net profit to the gross sales of the taxpayer on its provincial business.

The real difficulty in this assessment is in the returns made by the company. First they filed what the commissioner considered unsatisfactory returns. Then the above contention was raised and information furnished to support it. They have never submitted the information concerning the conduct of their whole business and that part of it conducted in Saskatchewan which would enable the commissioner to decide what actual profit the company did make on the business which it is his duty to tax. Counsel for the appellant argued that they were not asked to furnish anything more than they have furnished. The answer to that is that the statute requires them to furnish the information in the first instance with the return. The return is required to be true and complete.

Under the circumstances what was the commissioner’s duty? Under sec. 25 of The Income Tax Act, 1932, it is, I think, plain that this company must be deemed to be carrying on business in Saskatchewan and to earn a proportionate part of the income derived therefrom in Saskatchewan. This part of the section is copied from the Income War Tax Act, R.S.C. 1927, c. 97. Subsec. 2 of sec. 24 provides that ‘‘the Minister shall have full discretion as to the manner of determining such proportionate part. ‘ ‘ Had the subsection been acted upon I can see arguments against the authority of the Legislature to confer such a wide power. But apparently it was not acted upon. Resort was had to a procedure resting on firmer grounds. In sec. 63 of the Act it was provided “that for the purpose of carrying out the provisions of this Act according to their true intent and of supplying any deficiencies therein, the Lieutenant Governor in Council may make regulations not inconsistent with the spirit of the Act, which shall have the same force and effect as if incorporated therein.’’ Pursuant to this power a regulation has been made " " Covering such cases where the Minister is unable to determine or order information required to ascertain the income within the Province of a company or joint stock company carrying on a trade and business within and without the Province.” It is provided that “where the income of the taxpayer is derived principally from the manufacture or sale of personal property . . . the proportion of income thereof attributable to business within the Province shall be taken to be such percentage of the total of such income as the sales within the Province bear to the total sales. ‘ ‘

These regulations therefore settle the method of assessment in those eases where the return is insufficient. Corporations carrying on business in the province are presumed to know the law and to know that in their cases, where their head offices are outside of the province and the province has not the control and not the opportunity to require and check information that the province may exercise in respect to its domestic corporations, that this method-of computing the company’s profits will be followed, unless the taxpaying corporation in its return submits satisfactorily to the commissioner such information concerning its business affairs as will enable the commissioner to determine therefrom the actual profit. In the absence of such a return, the commissioner may assess in accordance with the regulation. If he had reason to conelude that was below the actual profit, it would be his duty to explore the matter further. That I need not discuss. In this ease he acted on the regulation and assessed accordingly.

As I interpret the Act and regulations the purpose is to ascertain and tax actual earned income within the province of these extra-provincial companies, and no constitutional question can be raised under the notice of intention to raise the contention that it is "‘beyond the jurisdiction of a provincial Legislature to impose income tax on an extra-provincial company unless that company has actually earned income with the province and then only to the extent of the income actually earned there.’’ No attempt is made to do otherwise, and the alleged constitutional issue does not in my opinion arise in this appeal.

The appeal is dismissed with costs.

Appeal dismissed.