Great Atlantic and Pacific Tea Co. Ltd. v. The Queen, 79 DTC 5401, [1979] CTC 509, [1980] 1 SCR 670

Supreme Court of Canada

Great Atlantic and Pacific Tea Co. Ltd. v. The Queen, [1980] 1 S.C.R. 670

Date: 1979-11-20

The Great Atlantic and Pacific Tea Company Limited Appellant;

and

Her Majesty The Queen Respondent.

1979: February 20; 1979: November 20.

Present: Martland, Ritchie, Dickson, Estey and McIntyre JJ.

ON APPEAL FROM THE FEDERAL COURT OF APPEAL

Taxation—Income tax—Income calculation—Transitional provisions—Allowable refund—Non‑resident-owned corporation—Income Tax Act, R.S.C. 1952, c. 148, as amended by 1970‑71-72 (Can.), c. 63, ss. 133(6), 133(8)(a),(d), 133(9)(a),(b), 164(3), (4), (5).

The appellant, a corporation incorporated under the Canada Corporations Act and constituted as a corporation by Letters Patent of Amalgamation dated January 5, 1971, was at all material times a non-resident-owned investment corporation. The fiscal year in question (called “the straddle year”) began on February 28, 1971 and ended on February 26, 1972. The appellant-taxpayer that year had taxable income of $3,160,057.29 on which tax was exigible at the rate of 15 per cent producing a tax of $474,008.59. Appellant claimed however that no tax was payable on an account of an “allowable refund in respect of taxable dividends paid during the year…”. The Trial Division ordered that the Crown make a refund of the $474,008.59 but this was reversed by a majority in the Federal Court of Appeal.

Held: The appeal should be dismissed.

By subs. (6) of s. 133 as it applied in the 1972 taxation year the Minister was required to make refund to the taxpayer of “its allowable refund for the year”. A corporation’s allowable refund is defined by subs. (8)(a) and may be presented in the form of the equation:

[Page 671]

The application of the formula required the determination of the ART and CTI of the appellant at the time in question i.e. immediately prior to the payment of the dividend on February 24, 1972.

As stated in the Federal Court of Appeal allowable refunds can only be claimed for a taxation year which ended before the dividends generating the right to the refund were paid. This would mean that in the straddle year the dividends paid in the 1972 taxation year could not apply because the taxable income for that year could not have been calculated until after February 26, 1972, a date after the dividends had been paid. An examination of subs. 9(a) and 9(b) indicates that subpara, (v) is an integral part of a statutory pattern. In such a situation it is not open to a Court to interpret the section as though the subclause did not exist simply because it leads to the hardship of deferral which is all in reality that the taxpayer here suffers.

APPEAL from a judgment of the Federal Court of Appeal[1] allowing an appeal from a judgment of Collier J.[2], in an income tax appeal, ordering a refund of $474,008.59 in respect of taxable dividends paid during the 1972 taxation year. Appeal dismissed.

J.A.F. Miller, Q.C., and E.G. Nazzer, for the appellant.

Wilfrid Lefebvre and Pierre Barnard, for the respondent.

The judgment of the Court was delivered by

ESTEY J.—The appellant seeks a refund of taxes paid by it as a non-resident-owned investment corporation as the term is defined in the Income Tax Act according to the transitional provisions of the Income Tax Amendment Act enacted with effect December 23, 1971 and being c. 63, Statutes of Canada 19-20-21 Eliz. II, which is herein referred to as the amending Act. The issue here arising is complicated and calls for an interpretation of certain provisions of the amending Act. In order to resolve these issues, it is necessary to outline the facts which I should say are not the subject of any dispute.

[Page 672]

The appellant is a corporation incorporated under the Canada Corporations Act and constituted as a corporation by Letters Patent of Amalgamation dated January 5, 1971, but the parties agreed that nothing herein turns on its amalgamation origin. At all material times the appellant’s status under the taxing statute was that of a non-resident-owned investment corporation, herein referred to as an NRO.

The fiscal year in question of the appellant corporation commenced on February 28, 1971 and ended on February 26, 1972. The appellant-taxpayer, in its 1972 taxation year, which ended February 26, 1972, had taxable income in the amount of $3,160,057.29 on which tax was exigible at the rate of 15 per cent producing a tax of $474,008.59. In its taxation return the appellant claimed, in the following terms, that no tax was payable:

LESS:	ALLOWABLE REFUND IN RESPECT OF TAXABLE DIVIDENDS PAID DURING THE YEAR BY THE COMPANY (See letter of April 27, 1972 from your Technical Interpretations Division to our auditors, attached) 15% of Taxable Dividends paid (15% of $4,700,000)	$705,000.00
FEDERAL TAX PAYABLE		NIL

Contingent upon the question of the amount of tax, if any, payable in respect of the taxation year 1972 is the question as to whether interest is payable on the unpaid tax, or conversely, whether the appellant can recover interest on the tax ($474,008.59) and interest thereon ($14,193.61) it has already paid.

Whether tax be exigible for these earnings in the appellant’s 1972 taxation year turns upon the interpretation of s. 133 of the Income Tax Act as amended by Chapter 63, S.C. 1970‑71‑72 and certain other provisions of that statute. It is agreed that the appellant is classified under the Income Tax Act at the material time as a non-resident-

[Page 673]

owned investment corporation. During the fiscal period noted above the appellant declared and paid the following dividends:

At the time these dividends were paid, the appellant withheld 15 per cent and remitted these taxes in the amount of $705,000 to the respondent.

By the amending Act, extensive amendments were effected to the Income Tax Act of 1948, and while Chapter 63 is technically framed as “an Act to amend the Income Tax Act and to make certain provisions and alterations in the statute law related to or consequential upon the amendments to that Act”, Chapter 63 is colloquially referred to as “the new Tax Act” (contrary to s. 8 of Chapter 63 which says in part: “‘amended Act’ means the Income Tax Act as amended by section 1”). This legislation was assented to on December 23, 1971, took effect January 1, 1972, and hence was not the income tax law in effect at the time of the declaration of dividends by the appellant in June and December of 1971. Section 9 of the Income Tax Application Rules, 1971, being Part XIII of the amended Act, provides: “Subject to the provisions of the amended Act and subject to this Part, section 1 of this Act applies to the 1972 and subsequent taxation years.” Section 10 of those rules provides, however, that Part XIII of the amended Act, which includes provisions relating to NRO corporations, is applicable “to amounts paid or credited after 1971”; and but for the suspending effect of s. 10, the provisions relating to withholding taxes in the Income Tax Act prior to these amendments would have applied and further serious questions would have arisen. In any event, the respondent in its statement of defence, para. 5, has

[Page 674]

stated:

5. In the reasons hereinafter set forth, the Deputy Attorney General of Canada, in order to simplify the argumentation, will make reference only to the dividend of $1,950,000.00 paid on 24 February, 1972, but similar reasons apply mutatis mutandis in respect of the dividend of $750,000.00 paid on 1 June, 1971, and the dividend of $2,000,000.00 paid on 29 December, 1971.

The appellant’s eligibility for an allowable refund is therefore approached on the basis of the dividend of February 24, 1972 and the result with respect to that dividend will be applied to the other two dividends for the purpose of disposing of this appeal. Clearly withholding tax at the rate of 15 per cent was applicable to the February 1972 dividend and was collected and remitted by the appellant. Nothing appears on the record or in the submissions placed before this Court by the parties as to why withholding tax was paid by the NRO on dividends paid in June and December 1971 when s. 106(1)(a) of the then existing Income Tax Act exempted such dividends from withholding tax (unless paid out of non-NRO surplus). However, the appellant in its statement of claim makes no claim for the refund of this withholding tax, but rather concerns itself entirely with the NRO tax paid in August 1972 with respect to the 1972 taxation year. The statement of defence of the respondent places the issue for determination squarely on the basis of the February 1972 dividends and nothing filed in response by the appellant indicates any unwillingness to have the issue so determined, and I have done so.

Under the former Tax Act (that is the Act in effect prior to January 1, 1972), a non‑resident‑owned investment corporation paid income tax on its taxable income at the rate of 15 per cent, but dividends paid by it to its shareholders were exempted from withholding tax otherwise applicable to dividends paid to non-residents (see s. 106(1)(a) of the former Act), which tax was generally at the rate of 15 per cent; the only exception being dividends paid out of pre-NRO status surplus. The result was that a non-resident sharehold-

[Page 675]

er received his return on his investment after it had been subjected to the same taxation as would have been the case had such non-resident shareholder held the interest in the underlying operating companies directly.

The new Tax Act introduced taxation of capital gains, and for this and other reasons, the mechanics by which non-resident-owned investment corporations’ income was taxed were altered. The plan adopted in the new Tax Act in general terms provided for the continuation of the taxation of the income of an NRO at 15 per cent (in 1976 the rate was to increase to 25 per cent), and for the application of withholding tax on taxable dividends paid by the NRO at the rate of 15 per cent. However, the plan provided for the refund of the tax paid by the NRO on its taxable income upon the distribution of that income by way of taxable dividends to its shareholders. The overall result-might be said to be comparable to that achieved under the former Tax Act except that the balancing payment by way of refund of tax remains inside the NRO and is subject to reprocessing if later distributed by way of dividend to the non-resident shareholder. If the plan includes, as is urged by the respondent, a delay of one year in the making of the tax refund, this then is a further distinction or disparity between the old and the new Act.

The new legislation provides the mechanics for refund in s. 133 (set out in full in Schedule 1) and the issue therefore to be resolved is whether s. 133 provides for a refund of the tax paid by the appellant-NRO in respect of the 1972 taxation year income by reason of the dividends declared and paid in the 1972 taxation year; or whether the refund of taxes paid by the NRO on its 1972 income is conditional upon the payment of further dividends after the close of the 1972 taxation year in such amount as the formula prescribed by s. 133.

The difficulty arises, of course, because the 1972 taxation year of the appellant straddles the introduction of the amended Act on January 1, 1972 (and the parties for brevity referred to the 1972

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taxation year as the “straddle year”). The effects of the new Act reach back into 1971, in the case of the appellant, to February 28, 1971 being the commencement of the fiscal year which ended on February 26, 1972. Both the appellant and the respondent find in transitional provisions in s. 133 support for what each contends is the equitable taxation of taxpayers who find themselves in the special circumstances here prevailing. The appellant argues that a taxpayer with a straddle fiscal period is allowed a refund during the straddle year because in that taxation period the taxpayer did not know what the applicable law was at least until 10 months of the taxation year had been completed; and so s. 133(9) allows exceptional treatment during that period to avoid inequity. The respondent on the other hand points out that until the end of the taxation year 1972 the appellant could not calculate its taxable income for such taxation year and therefore could not calculate its cumulative taxable income (CTI) or its NRO taxation, or the allowable refundable tax (ART), and consequently could not calculate its allowable refund (AR); and furthermore, given the interpretation urged by the appellant, the taxpayer with a straddle year ending in 1972 would receive preferential treatment over a taxpayer having a 1972 taxation year coincidental with the calendar year. According to the respondent’s line of reasoning, the result of the appellant’s submission would be that the dividends paid during the 1972 taxation year would be reapplicable for refund of NRO taxation in the 1973 taxation year or subsequently, because s. 133(9) makes no provision for deduction of these dividends from the CTI.

Before turning to the detailed provisions of the Act, it should be pointed out that the parties to this appeal are in agreement as to the facts as summarized above; and furthermore, the parties are agreed that:

(a) nothing turns on the fact that the appellant was formed as a result of the amalgamation on January 5, 1971 of two companies;

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(b) we are not here concerned with any question as to whether there is involved a surplus account which has its origins in a company that was not at all times classified as an NRO under the then applicable Tax Act:

(c) the appellant’s cumulative taxable income determined under s. 133 includes the income for the 1972 taxation year, being $3,160,057.29;

(d) the appellant’s allowable refundable tax as determined under s. 133 includes the taxes paid on the appellant’s 1972 taxation year income, being $474,008.59;

(e) the application for the applicable refund was properly made in accordance with all applicable provisions of statute and regulation;

(f) nothing turns on the form of the claim as made in the Federal Court by the appellant as being either proceedings following a Notice of Objection under the Income Tax Act or an action in the Trial Division in the Federal Court of claiming a refund of moneys paid together with interest thereon; and that

(g) there are no capital gains included in any of the transactions here in question.

It is on this basis that we come now to the application of s. 133 of the amended Income Tax Act to the business of the appellant during its 1972 taxation year.

By subs. (6) of s. 133 the Minister is authorized, and indeed required, to make refund to the taxpayer of “its allowable refund for the year” and as has been noted, the parties are in agreement that the appellant has properly made application therefor. But a corporation’s allowable refund is defined by subs. (8)(a) as being the taxable dividend paid by the NRO multiplied by a fraction, the numerator of which is the NRO’s allowable refundable tax on hand (ART) immediately before the dividend was paid and the denominator of which is the greater of the amount of all such dividends and the NRO’s cumulative taxable income (CTI) immediately before the dividend in question was paid. This equation may be represented in this form:

[Page 678]

The application of this formula thus requires the determination of the ART and the CTI of the appellant at the time in question, which time is, for our purposes, immediately prior to the payment of the dividend on February 24, 1972.

The quantities ART and CTI are respectively defined in subss. (9)(a) and (9)(b) of s. 133. Because the former incorporates by reference part of the latter it is convenient to discuss first the quantity CTI. Section 133(9)(b) provides as follows:

(b) “cumulative taxable income” of a corporation at any particular time means the amount, if any, by which the aggregate of

(i) its taxable incomes for taxation years commencing after 1971 and ending before the particular time, and

(ii) where the corporation’s 1972 taxation year commenced before 1972, the amount, if any, by which its taxable income for that year exceeds the aggregate of

(A) all amounts received by the corporation as described in paragraph 196(4)(b), and

(B) the lesser of the amount determined under paragraph 196(4)(e) in respect of the corporation and the amount, if any, by which the aggregate of amounts determined under paragraphs 196(4)(d) to (f) in respect of the corporation exceeds the aggregate of amounts determined under paragraphs 196(4)(a) to (c) in respect of the corporation,

exceeds the aggregate of amounts each of which is

(iii) an amount in respect of the 1972 taxation year or any taxation year referred to in subparagraph (i), equal to the amount, if any, by which the aggregate of the corporation’s taxable capital gains for the year from dispositions after 1971 of property described in paragraph (1)(c) exceeds the aggregate of

(A) its allowable capital losses for the year from dispositions after 1971 of property described in that paragraph and

(B) the amount deductible from its income for the year by virtue of paragraph (2)(c)

(such gains and losses being computed in accordance with the assumption set forth in paragraph (1)(d),

(iv) 4/3 of any amount paid or credited by the corporation, after the commencement of its 1972 taxation

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year and before the particular time, as, on account or in lieu of payment of, or in satisfaction of interest, or

(v) the amount of any taxable dividend paid by the corporation on a share of its capital stock before the particular time and after the commencement of its first taxation year commencing after 1971.

The primary position taken by the respondent is that these quantities cannot be determined, and therefore the formula prescribed in subs. (8)(a) for the computation of allowable refund cannot be determined, until the close of the fiscal period in question, here the 1972 fiscal year, ending on February 26, 1972, two days after the declaration of the dividend in question. The Federal Court of Appeal adopted this submission and Urie J., speaking for himself in allowing the appeal of the now respondent, stated:

1) As stated earlier, one of the principles applicable to “allowable refunds” is that they can only be claimed for a taxation year which ended before the dividends generating the right to a refund were paid. In the straddle year this would mean, in the case of the Respondent, that the dividends paid in the 1972 taxation year could not apply because the taxable income for that year could not have been calculated until after February 26, 1972, a date after the dividends had been paid. Section 133(8)(a) clearly supports the view that the calculation envisaged by that section could be made only in respect of the cumulative taxable income of a corporation immediately before the dividend was paid.

Le Dain J., concurring in the result with Urie J., put it this way:

It was not necessary to repeat that the 1972 taxation year in such case must have ended before payment of the dividends in question; subparagraphs (ii) of paragraphs 133(9)(a) and (b) clearly refer to a taxation year that would necessarily have ended before the taxation years contemplated by subparagraphs (i) thereof. The terms of subsection 133(9) as a whole reinforce what is laid down as a general principle by subsection 133(8) in the definition of allowable refund: that the allowable refundable tax on hand must have been established before the dividends which give rise to the refund were paid. It could only be so established at the end of a taxation year. In the result, dividends paid in the course of a 1972 taxation year cannot give rise to allowable refund whether that year commenced before or after the

[Page 680]

end of 1971.

The appellant takes the position that the closing of the fiscal year is not required by the proper construction of subs. (b) because the transitional period, being the 1972 taxation year, is provided for in an encapsulated code by subs. (ii) in which it is not stipulated that the taxation year in question must have been completed prior to the declaration of a dividend upon which the taxpayer relies in making his claim for refund of NRO taxes paid. To resolve these contrary submissions, it is necessary to examine subs. (9)(b) in detail. The mechanics of the subsection require the addition of quantities (i) and (ii), from which aggregate is substracted the total of quantities (iii), (iv) and (v). We are not here concerned with quantity (i) which deals with taxation years commencing after 1971, because it is agreed by the parties that in the accounts of the appellant there are, at the times here in issue, no taxation years which commenced after 1971.

This brings us to subs. (ii) where one finds the only reference in subs. (b) to the circumstance where the 1972 taxation year commenced prior to the calendar year 1972, or in the words adopted by the parties, is a “straddle year.” It is said by the appellant that because subs. (ii) alone omits the reference “and ending before the particular time”, the 1972 taxation year (unlike all other taxation years) need not be completed before the payment of the dividend in question. It is true that subss. (iv) and (v) clearly employ the term “before the particular time” as does subs. (i). The expression is not found in subs. (iii) but the calculation of the amount discussed in that subsection does not require the use of the expression.

Le Dain J. concludes that it was unnecessary to include the expression “before the particular time” in subs. (ii) because “It was not necessary to repeat that the 1972 taxation year in such case must have ended before payment of the dividends in question; subparagraphs (ii) of paragraphs 133(9)(a) and (b) clearly refer to a taxation year that would necessarily have ended before the taxation years contemplated by subparagraphs (i)

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thereof.” In those cases where, as in this case, the contest arises before the application of subs. (i) is relevant, it is not, in my view, helpful to interpret subpara. (ii) in the light of subpara. (i) because the chronological order has, for some reason, been reversed in both subss. (9)(a) and (b). In such cases, no consideration of subpara. (i) is required in determining the taxation position of the taxpayer under subpara. (ii). Similarly, Urie J. concludes that it was not necessary to repeat this phrase in subpara. (ii) because subpara. (ii) was not inserted in the Act to enable the calculation of allowable refund for a straddle year by itself, but rather as part of a formula established by subs. (8) of s. 133 to calculate generally the allowable refund of the corporation. His Lordship’s reasoning then continues: “That is, it was not necessary to specify that the taxable income be established before the particular time for the calculation under clause (ii) because the figure reached under it is merely part of the aggregate figure established by adding to it the calculation under clause (i) which does specify the termination date…” While these observations are by no means irrelevant, they do not, in my view, conclude the question and we must look elsewhere to determine the significance or the consequence of the omission of the phrase from subs. (ii).

Taken by itself, subpara. (ii) would appear to be a specific provision directed to one problem and one problem only, namely the calculation of an amount with reference to the 1972 taxation year of an NRO when such year straddles the introduction of Chapter 63, which amount is to be taken into account in determining the CTI of that NRO for the purposes of subs. (8). It is trite law that in the field of taxation the taxpayer is not liable for payment of taxes unless the transaction in question is clearly caught within the tax net as established in the applicable statute and regulation. Where, for example, Parliament has omitted some operative term essential to the establishment of tax liability in the taxpayer, the courts have long applied the principle that the tax collector may not, in such circumstances, recover the taxes

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claimed. No doubt this principle is rooted in the simple line of reasoning that Parliament, in determining the procedure for recovering the cost of government from the community, must have intended to recover from a particular taxpayer his share of that cost only where the taxing statute clearly defines that share. But that principle is not here of any application if on an examination of the whole of subpara. (b) one can discern a system for the determination of tax liability of a taxpayer in the position of the present appellant.

I proceed therefore to examine the balance of subs. (ii) and the other subclauses in further detail. Subparagraph (ii) provides the second quantity to be aggregated with subs. (i) in step 1 of the process by which CTI is determined. The amount to be determined under subs. (ii) may in paraphrase be calculated as follows:

The excess of the taxable income of the NRO in the straddle year over the total of:

(1) All dividends received by the NRO during that part of the calendar year 1971 included in the taxation year 1972, that is between February 26, 1971 and December 31, 1971

plus

(2) The lesser of

(a) all dividends paid by the NRO from and after February 26, 1971 to and including December 31, 1971;

and,

(b) the excess of

(i) tax-paid undistributed income of the NRO under the former Act in circumstances not here relevant;

and,

(ii) all dividends paid by the NRO during that part of the 1972 taxation year which falls into the calendar year 1971;

and,

(iii) any amounts on which the NRO has made certain elections under the new Act, not here applicable;

over the total of

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(iv) undistributed income of the NRO arising under the former Act not here applicable; and,

(v) all dividends received by the NRO during that part of the 1972 taxation year falling within the calendar year 1971; and,

(vi) an amount which, for our purposes, is deemed to be 0.

This takes us to the next step wherein the amount produced under subpara. (ii) with reference to the straddle year and the amount produced under subpara. (i) with reference to subsequent taxation years (here inapplicable), are added together and the resulting total is then reduced by an amount equal to the total of the amounts prescribed in subparas. (iii), (iv) and (v). Subparagraphs (iii) and (iv) are concerned with capital gains and interest respectively, and are not herein relevant. Subparagraph (v) I come to in a moment. The amount resulting (if any) is the CTI for the NRO “at any particular time”.

The same process is applied to s. 133(9)(a) in which subpara. (ii) incorporates by reference the computation procedure established in s. 133(9)(b)(ii) already examined here, modified only to the extent that para. (a) is dealing with the refund of tax already collected, whereas (b) is dealing with the income in respect of which tax is exigible. The result is the isolation of the ART (if any) of the NRO “at any particular time”. This means, in our circumstances, that the procedure will be applied at the time of each dividend which is said to trigger a claim for “allowable refund” (AR) under subpara. (8)(a). Since both subparas. (9)(a) and (b) require the computation of CTI and ART “at any particular time”, it follows that the accounting periods involved in these twin computations must be closed. Subparagraphs (i), (iv) and (v) make this abundantly clear by repeating the expression “particular time”. The omission of the repetition of the phrase in subpara. (ii), applicable as it is to the straddle year only, does not of itself require an interpretation of the whole of s. (9)(a) and (b) which would make (ii) exceptional to the result achieved under the other subparagraphs.

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Nor does it require an interpretation which makes subpara. (ii) exceptional to the introductory language of both (9)(a) and (9)(b) which prescribes the rules for these computations “at any particular time”. The introduction to each of subparas. (a) and (b), together with the practical requirement that the ascertainment of the various quantities going into the computations in these subparagraphs must be possible at the moment in question, lead me to conclude that the argument of the appellant with respect to subpara. (ii) must fail. We therefore are required to go on to other considerations.

I return to subpara. (v) which is common to both subss. (9)(a) and (b) with the variation noted above. This subparagraph provides for the reduction of the CTI by the amount of all dividends paid by the NRO after the straddle year. There is no provision for the deduction for dividends paid during the straddle year. The result is, therefore, that the CTI would continue to include the amount of a straddle year dividend at the time like computations are made in subsequent years. The ART similarly would continue to include that proportion of such dividends that would have been in the ART prior to their payment. Consequently, the formula for computing AR, involving as it does the procedures for computing CTI and ART, would in the future produce a second refund (on the payment of further taxable dividends by the NRO) unaffected by the AR paid out in the straddle year in respect of straddle year dividends, if the submission of the appellant on the meaning of s. 133(9) is correct.

As Justice Urie has pointed out in his reasons, such an interpretation would produce diametrically opposed results as between two NROs, one with a straddle year fiscal period and the other with a calendar year fiscal period for the taxation year 1972. The former would be allowed an immediate AR whereas the latter would be required to pay dividends subsequent to the 1972 taxation year in order to release the AR with reference to 1972 NRO taxes paid.

There are other lines of analysis leading to the same result. Subparagraph (ii)(B) of s. 133(9)(b)

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provides that in calculating the CTI for an NRO in order to apply for an AR, one must deduct from the taxable income of the NRO those dividends paid in that part of the straddle year included in the calendar year 1971. Thus, since these dividends form no part of the appellant’s CTI, they form no part of the computation leading to an AR in respect of the 1972 NRO taxes paid by the appellant. As for the balance of dividends which were paid by the NRO in the straddle year, namely those dividends paid in that part of the straddle year included in the calendar year 1972, these dividends may not be deducted from the CTI because subpara. (v) limits such deductions to post-straddle year dividends, and hence an amount equal thereto remains in the CTI of the NRO, and thus is available in the future for AR when eligible dividends are paid. As mentioned earlier, this provision in (v) is required in this rather complex pattern in order to preclude two ARs in respect of the one taxable dividend paid out. Read otherwise, subpara. (v) would only prevent a triple AR with reference to the straddle year dividend. These comments apply equally to (v) of subs. (9)(a) where the deduction permitted in computing the ART is an amount equal to the NRO tax paid by the NRO on that part of its income equal to the dividends paid out in the taxation year after the straddle year, which formed part of its taxable income in the straddle year.

The appellant recognizes the serious gap in its argument created by the wording of subpara. (v). In its factum the following appears:

Clause (v) in subsection (9)(b), if read literally, does not include taxable dividends paid during the straddle year; likewise, clause (v) of subsection (9)(a), if read literally, does not include any amount in respect of taxable dividends paid during the straddle year. It follows, therefore, from a literal reading of clause (v) in these subsections that taxable dividends paid in the straddle year would not reduce CTI and that a refund of tax based on those dividends would not reduce ART so that an inference can be drawn from such a literal reading which is inconsistent with the basic, paramount intention of Parliament clearly established by clauses (i) and (ii) of these subsections

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that taxable dividends paid in the straddle year can give rise to a refund of tax.

It is submitted that this clause (v) in these subsections is clearly of a subordinate nature. Its purpose is simply to state a mere truism of a purely bookkeeping nature, viz. that if a taxpayer receives a refund of tax its ART will be reduced by the amount of that refund and if it pays a taxable dividend its CTI will be reduced by the amount of that dividend or, put in homely fashion, that if you pour something out of a bucket, you have that much less in the bucket.

This argument is more an expression of a hope than an interpretative submission. Where a clause is an integral part of a statutory pattern, as (v) is in subss. (9)(a) and (b), a court may not interpret the section as though the subclause did not exist simply because it leads to the hardship of deferral, which is all, in reality, that the taxpayer here suffers. For reasons to which I have already referred, clause (v) has indeed a functional purpose, a purpose which coincides with the literal interpretation mentioned by the appellant in the foregoing excerpt.

It may be said in further support of the appellant’s position that construed in this fashion, s. 133 provides for a compulsory lending program by the taxpayer. In effect, the taxpayer loans to the tax collector the NRO taxes paid for a minimum of one year but, in any event, for a period not less than the period commencing with the payment of the NRO tax and ending with the payment of the taxable dividend after the close of the fiscal year in respect of which that NRO tax was paid. Even then, this lending program is conditional for its termination on the NRO earning income after the close of the fiscal year in respect of which it paid the 15 per cent tax now sought to be refunded. This second qualification may not occur if the NRO did not declare any dividends in the first year (here the straddle year) and hence carried forward a cash position to support the payment of dividends after the close of the straddle year. In spite of the fact that the section does not reveal the time lag as clearly as one would wish, s. 133 can

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only be interpreted as prescribing a program which has this result.

Furthermore, it cannot be said that s. 133 creates a situation completely parallel to that of the 1971 Tax Act in respect of the avoidance of double taxation of income passing through an NRO. This is so because the refund, if and when recovered, is paid back into the NRO and hence must be reprocessed through the dividend channel and subjected to the hazards of the formula imposed by s. 133 and the hazards of commerce which produce the cash flow to support the future dividends. Be that as it may, it may well be that the draftsman, given the task of including the taxation of capital gains for the first time in the NRO taxation program, as well as other complications such as non-NRO accumulated surplus, may have found it necessary to adopt a plan with these delay characteristics in order to avoid other inequities. In any case, the task of this Court is but to construe the statute and to apply it to the facts which are here agreed upon.

For these reasons, I conclude that a proper interpretation of s. 133 requires the rejection of the appeal. By reason of this disposition, it is not necessary to deal with the other issues relating to interest. I would therefore dismiss the appeal with costs.

SCHEDULE I

133. (1) In computing the income of a non-resident-owned investment corporation for a taxation year,

(a) no deduction may be made in respect of interest on its bonds debentures, securities or other indebtedness, and

(b) no deduction may be made under subsection 65(1),

and its income and taxable income shall be computed as if

(c) the only taxable capital gains and allowable capital losses referred to in paragraph 3(b) were taxable capital gains and allowable capital losses from dispositions of taxable Canadian property or property that

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would be taxable Canadian property if at no time in the year the corporation had been resident in Canada.

(d) any taxable capital gains or allowable capital loss of the corporation were an amount equal to 2 times the amount thereof otherwise determined, and

(e) subsection 83(2) were read without reference to paragraph (b) thereof.

(2) In computing the taxable income of a non-resident-owned investment corporation for a taxation year, no deduction may be made from its income for the year, except

(a) interest received in the year from other non-resident-owned investment corporations,

(b) taxes paid to the government of a country other than Canada in respect of any part of the income of the corporation for the year derived from sources therein, and

(c) net capital losses for taxation years preceding and the taxation year immediately following the taxation year, as provided for by section 111.

(3) The tax payable under this Part by a corporation for a taxation year when it was a non-resident-owned investment corporation is an amount equal to 25% of its taxable income for the year.

(4) No deduction from the tax payable under this Part by a non-resident-owned investment corporation may be made under section 124 or in respect of taxes paid to the government of a country other than Canada.

(5) For the purposes of this Act,

(a) in computing the 1971 undistributed income on hand of a non-resident-owned investment corporation at any time, there shall be deducted the amount, if any, by which

(i) the corporation’s 1971 undistributed income on hand at that time otherwise determined

exceeds

(ii) the corporation’s surplus, determined in prescribed manner at the end of its 1971 taxation year, for taxation years ending before 1972 for which it was not taxable under section 70 of this Act as it read in its application to the 1971 taxation year; and

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(b) in computing the 1971 capital surplus on hand of a non-resident-owned investment corporation at any time, there shall be added to the amount thereof otherwise determined the amount of the excess described in paragraph (a).

(6) If the return of a non-resident-owned investment corporation’s income for a taxation year has been made within 4 years from the end of the year the Minister

(a) may, upon mailing the notice of assessment for the year, refund, without application therefor, its allowable refund for the year; and

(b) shall make such a refund after mailing the notice of assessment if application therefor has been made in writing by the corporation within 4 years from the end of the year.

(7) Instead of making a refund that might otherwise be made under subsection (6), the Minister may, where the taxpayer is liable or about to become liable to make any payment under this Act, apply the amount that would otherwise be refunded to that other liability and notify the taxpayer of that action.

(7.1) Where at any particular time after 1971 a dividend has become payable by a non-resident-owned investment corporation to shareholders of any class of shares of its capital stock, if the corporation so elects in respect of the full amount of the dividend, in prescribed manner and prescribed form and at or before the particular time or the first day on which any part of the dividend was paid if that day is earlier than the particular time, the following rules apply:

(a) the dividend shall be deemed to be a capital gains dividend to the extent that the portion thereof in excess of the corporation’s 1971 undistributed income on hand immediately before the particular time does not exceed the corporation’s capital gains dividend account immediately before the particular time; and

(b) any amount received by another non-resident-owned investment corporation in a taxation year as, on account or in lieu of payment of, or in satisfaction of the capital gains dividend shall not be included in computing its income for the year.

(8) In this section

(a) “allowable refund” of a non-resident-owned investment corporation for a taxation year means the aggregate of amounts each of which is an amount in

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respect of a taxable dividend paid by the corporation in the year on a share of its capital stock, equal to that proportion of the dividend that

(i) the corporation’s allowable refundable tax on hand immediately before the dividend was paid

is of

(ii) the greater of the amount of the dividend so paid and the corporation’s cumulative taxable income immediately before the dividend was paid;

(b) “Canadian property” means property other than foreign property within the meaning assigned by section 206;

(c) “capital gains dividend account” of a non-resident-owned investment corporation at any particular time means the amount, if any, by which the aggregate of the following amounts in respect of the period commencing January 1, 1972 and ending immediately after its last taxation year ending before the particular time, namely:

(i) the corporation’s capital gains for taxation years ending in the period from dispositions in the period of Canadian property or shares of another non-resident-owned investment corporation, and

(ii) amounts received by the corporation in the period as, on account or in lieu of payment of, or in satisfaction of capital gains dividends from other non-resident-owned investment corporations,

exceeds the aggregate of

(iii) the corporation’s capital losses for taxation years ending in the period from dispositions in the period of Canadian property or shares of another non‑resident-owned investment corporation,

(iv) 25% of the amount, if any, by which the aggregate of the corporation’s capital gains for taxation years ending in the period from dispositions in the period of taxable Canadian property or property that would be taxable Canadian property if at no time in the period the corporation had been resident in Canada, exceeds the aggregate of its capital losses for those years from dispositions in the period of such property, and

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(v) all capital gains dividends that became payable by the corporation before the particular time;

(d) “non-resident-owned investment corporation” means a corporation incorporated in Canada that, throughout the whole of the period commencing on the later of June 18, 1971 and the day on which it was incorporated and ending on the last day of the taxation year in respect of which the expression is being applied, complied with the following conditions:

(i) all of its issued shares and all of its bonds, debentures and other funded indebtedness were

(A) beneficially owned by non-resident persons (other than any foreign affiliate of a taxpayer resident in Canada),

(B) owned by trustees for the benefit of non-resident persons or their unborn issue, or

(C) owned by a non-resident-owned investment corporation, all of the issued shares of which and all of the bonds, debentures and other funded indebtedness of which were beneficially owned by non-resident persons or owned by trustees for the benefit of non-resident persons or their unborn issue, or by two or more such corporations;

(ii) its income for each taxation year ending in the period was derived from

(A) ownership of or trading or dealing in bonds, shares, debentures, mortgages, hypothecs, bills, notes or other similar property or any interst therein,

(B) lending money with or without security,

(C) rents, hire of chattels, charterparty fees or remunerations, annuities, royalties, interest or dividends,

(D) estates or trusts, or

(E) disposition of capital property;

(iii) not more than 10% of its gross revenue for each taxation year ending in the period was derived from rents, hire of chattels, charterparty fees or charterparty remunerations;

(iv) its principal business in each taxation year ending in the period was not

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(A) the making of loans, or

(B) trading or dealing in bonds, shares, debentures, mortgages, hypothecs, bills, notes or other similar property or any interest therein;

(v) it has, not later than 90 days after the commencement of its first taxation year commencing after 1971 elected in prescribed manner to be taxed under this section; and

(vi) it has not, before the end of the last taxation year in the period, revoked in prescribed manner the election so made by it;

except that in no case shall a new corporation (within the meaning assigned by section 87) formed as a result of an amalgamation after June 18, 1971 of two or more predecessor corporations be regarded as a non-resident-owned investment corporation unless each of the predecessor corporations was, immediately before the amalgamation, a non-resident-owned investment corporation; and

(e) “taxable dividend” does not include a capital gains dividend.

(9) In paragraph (8)(a),

(a) “allowable refundable tax on hand” of a corporation at any particular time means the amount, if any, by which the aggregate of

(i) all amounts each of which is an amount in respect of any taxation year commencing after 1971 and ending before the particular time, equal to the tax under this Part payable by the corporation for the year, and

(ii) 15% of the amount determined under subparagraph (b)(ii) in respect of the corporation

exceeds the aggregate of amounts each of which is

(iii) an amount in respect of the 1972 taxation year or any taxation year referred to in subparagraph (i), equal to 25% of the amount, if any, by which the aggregate of the corporation’s taxable capital gains for the year from dispositions after 1971 of property described in paragraph (1)(c) exceeds the aggregate of

(A) its allowable capital losses for the year from dispositions after 1971 of property described in that paragraph, and

(B) the amount deductible from its income for the year by virtue of paragraph (2)(c)

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(such gains and losses being computed in accordance with the assumption set forth in paragraph (1)(d),

(iv) 1/3 of any amount paid or credited by the corporation after the commencement of its 1972 taxation year and before the particular time, as, on account or in lieu of payment of, or in satisfaction of interest, or

(v) an amount in respect of any taxable dividend paid by the corporation on a share of its capital stock before the particular time and after the commencement of its first taxation year commencing after 1971, equal to the amount in respect of the dividend determined under paragraph (8)(a); and

(b) “cumulative taxable income” of a corporation at any particular time means the amount, if any, by which the aggregate of

(i) its taxable incomes for taxation years commencing after 1971 and ending before the particular time, and

(ii) where the corporation’s 1972 taxation year commenced before 1972, the amount, if any, by which its taxable income for that year exceeds the aggregate of

(A) all amounts received by the corporation as described in paragraph 196(4)(b), and

(B) the lesser of the amount determined under paragraph 196(4)(c) in respect of the corporation and the amount, if any, by which the aggregate of amounts determined under paragraphs 196(4)(d) to (d) in respect of the corporation exceeds the aggregate of amounts determined under paragraphs 196(4)(a) to (c) in respect of the corporation,

exceeds the aggregate of amounts each of which is

(iii) an amount in respect of the 1972 taxation year or any taxation year referred to in subparagraph (i), equal to the amount, if any, by which the aggregate of the corporation’s taxable capital gains for the year from dispositions after 1971 of property described in paragraph (1)(c) exceeds the aggregate of

(A) its allowable capital losses for the year from dispositions after 1971 of property described in that paragraph and

(B) the amount deductible from its income for the year by virtue of paragraph (2)(c)

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(such gains and losses being computed in accordance with the assumption set forth in paragraph (1)(d)),

(iv) 4/3 of any amount paid or credited by the corporation, after the commencement of its 1972 taxation year and before the particular time, as, on account or in lieu of payment of, or in satisfaction of interest, or

(v) the amount of any taxable dividend paid by the corporation on a share of its capital stock before the particular time and after the commencement of its first taxation year commencing after 1971.

Section 133(9)(a) was amended by S.C. 1974-75, c. 26, s. 90(3) and s. 90(4):

(3) Paragraph 133(9)(a) of the said Act is amended by striking out the word “and” at the end of subparagraph (i) thereof, by adding the word “and” at the end of subparagraph (ii) thereof and by adding thereto, immediately after subparagraph (ii) thereof, the following subparagraph:

“(ii.1) where the corporation’s 1972 taxation year commenced before 1972, 10% of the amount that would be determined under subparagraph (b)(iii) if the reference in that subparagraph to “the 1972 taxation year or any taxation year referred to in subparagraph (i)” were read as a reference to “the 1972 taxation year” ”

(4) This section is applicable to the 1972 and subsequent taxation years.

Appeal dismissed with costs.

Solicitors for the appellant: Miller, Thomson, Sedgewick, Lewis and Healy, Toronto.

Solicitor for the respondent: Roger Tassé, Ottawa.