14 February 1992 Administrative Letter 9120036 F - Logging Tax Deduction, Interest on Logging Taxes

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

February 14, 1992

Attention: Mervyn Scott         Forestry/Mining Specialist         (West)

Logging Tax Deduction - Interest on B.C. Logging Taxes

We are writing in reply to your memorandum of July 16, 1991, wherein you requested our opinion whether interest on B.C. logging taxes would be included in "logging taxes paid" in the calculation of a logging tax deduction amount under subsection 127(1) of the Income Tax Act (Canada) (the "Act"). We apologize for the delay in replying you.

Facts

Our understanding of the facts is as follows:

1.     Subsection 127(1) of the Act provides for a deduction from federal income tax for logging taxes paid to a province. The amount of deduction allowed is the lesser of 2/3 of the logging taxes paid to a province in the year or 6 2/3% of the taxpayer's income for the year derived from logging operations in the province.

2.     The Logging Tax Act (B.C.) (the "B.C. Act") levies a tax on income derived from logging operations in B.C. Section 2 of the B.C. Act imposes a tax equal to the lesser of:

(a)     10% of a taxpayer's income derived from logging operations in B.C., or

(b)     150% of the credit that would be allowable under subsection 127(1) of the Act, as if the tax referred to in (a) above was paid.

3.     Mervyn Scott discussed the matter in respect of interest on B.C. logging taxes with an official of the B.C. Finance Department, which administers the B.C. Act and has a direct interest in the administration of the Income Tax Act (B.C.) (the "B.C. Tax Act"). Mervyn Scott was told by the official that the definition of "taxes" (i.e. taxes include taxes, penalties and interest, see 7 below for details) has been in the B.C. Act for many years and that the best explanation for such definition is that the drafters wished to avoid repeating the words "taxes, penalties and interest". Section 6 of the B.C. Tax Act permits a deduction from provincial income tax otherwise payable of 1/3 of the logging taxes paid to the Province of B.C. If penalties and interest on B.C. logging taxes were considered as "logging taxes" for the purposes of the B.C. Act and the B.C. Tax Act, Mervyn Scott is very doubtful that the Province of B.C. would accept the result of the above-noted treatment - a greater deduction amount would be allowed under section 6 of the B.C. Tax Act.

4.     It is the understanding of Mervyn Scott that the District Offices of B.C. and Quebec have always assessed on the basis that any arrears or instalment interest on logging taxes should not be included in "logging taxes paid" for the purpose of subsection 127(1) of the Act, and that this has never been an issue on any appeal.

Your Opinions

5.     In your opinion, subsection 127(1) of the Act permits a deduction, with respect to only logging taxes and not interest, from the tax otherwise payable by a taxpayer under Part I of the Act. Accordingly, interest on B.C. logging taxes should not be included in "logging taxes paid" in the calculation of the logging tax deduction amount under subsection 127(1) of the Act.

Our Opinions

6.     We agree with your view that interest on B.C. logging taxes should not be included in "logging taxes paid" in the calculation of the logging tax deduction amount under subsection 127(1) of the Act. The rationale for our opinion is given in the following paragraphs.

7.     There is an argument that the expression "logging taxes paid" used in paragraph 127(1)(a) of the Act could be considered to include all taxes and all penalties and interest that are or may be added to taxes under the B.C. Act. Pursuant to paragraph 127(2)(b) of the Act, "logging tax" means a tax imposed by the legislature of a province that is declared by regulation to be a tax of general application on income from logging operations. Pursuant to Regulation 700(3), the tax imposed under the B.C. Act and under Part VII of the Taxation Act (Quebec) (the "Quebec Act") are each declared to be a tax of general application on income from logging operations. Martland J. said on behalf of the Court in the case of British Columbia Forest Products Ltd., 71 DTC 5178 (SCC), at page 5185:

In summary, it is my opinion that, in applying s. 41A (now section 127), the computation required under para. (a) of subs. (1) (now paragraph 127(1)(a)) is based upon the logging tax actually paid to the province.... (Underlines are mine.)

Judson J. said on behalf of the Court in the case of Rio Algom Mines Ltd., 70 DTC 6046 (SCC), at page 6048:

I now turn to an examination of Regulation 701(1)(a) (now Regulation 3900(1)(a)), which provides the first alternative: "taxes paid in respect of his income derived from mining operations in the province for the year" can only have one meaning - that is the income referred to must be computed under the provincial Mining Tax Act. The elaborate definition of "income derived from mining operations" contained in Regulation 701(2)(a) (now Regulation 3900(2)(a) and (b)) cannot be applied to Regulation 701(1)(a) without rendering the paragraph meaningless, since no mining taxes are paid to the province in respect of income computed under the Income Tax Act (Canada) and Regulation 701(2)(a). (Underlines are mine.)

In the case at hand, based upon the above-noted jurisprudence, in our opinion, there is a respectable argument that the expression "logging taxes paid" used in paragraph 127(1)(a) of the Act must be interpreted in the context of the B.C. Act. Pursuant to section 1 of the B.C. Act, for the interpretation of this Act, "taxes" includes all taxes on income imposed, assessed, assessable or payable under this Act and all penalties and interest that are or may be added to taxes under this Act. (Underlines are mine.)

8.     In rebuttal of the argument in 7 above, we note that the definition of "taxes" uses the word "includes" instead of "means", which indicates that a reference to "taxes" is not always considered as a reference to all taxes and all penalties and interest. In certain circumstances, it refers to taxes only and nothing else (e.g. the calculation of taxes under section 2 of the B.C. Act). Also, there is no similar provision to include interest as taxes in the Quebec Act. If we took a position that "taxes" should include taxes, penalties and interest as defined in the B.C. Act for the purpose of paragraph 127(1)(a) of the Act, there would be inconsistency between the Provinces of B.C. and Quebec on the calculation of the logging tax deduction amount. Furthermore, if we took such position, it is doubtful that the Province of B.C. would accept the result of such treatment - a greater deduction amount would be allowed to the taxpayer under section 6 of the B.C. Tax Act. Finally, the official of the Province of B.C. opined that the definition of "taxes' in the B.C. Act has been in this Act for many years and it was intended by the drafters to avoid repeating the words "taxes, penalties and interest".

9.     Based upon the above analysis, in our opinion, the better view is that penalties and interest on B.C. logging taxes are not included in "logging taxes paid" in the calculation of the logging tax deduction amount under subsection 127(1) of the Act. This conclusion is equally applicable to penalties and interest on the Quebec logging taxes.

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We hope that our comments are helpful to you.

DirectorManufacturing Industries, Partnershipsand Trusts DivisionRulings Directorate