Indalex Ltd. v. The Queen, 86 DTC 6039, [1986] 1 CTC 219 (FCTD), aff'd 88 DTC 6053, [1988] 1 CTC 60 (FCA)

Reed, J.:—The dispute in this case is one concerning the amount of income tax payable by the plaintiff. It arises out of dealings between the plaintiff and Pillar International Services Limited, a Bermuda corporation. It relates to what is called transfer pricing — prices charged for products or service traded between commonly controlled or related corporations.

The Minister of National Revenue reassessed the income tax payable by the plaintiff for the years 1971 through 1974 on the basis that an additional $2,644,309 plus interest should have been included by the plaintiff in its reported income. In addition, the Minister reassessed the plaintiff for the same years for an amount in excess of $342,000 on the ground that this should have been withheld from payments made to a non-resident of Canada. Tax payable for subsequent years has been reassessed on a similar basis.

The plaintiff is engaged in the extrusion (molding) of aluminum billet (the metal in a primary state). Extrusions are used in the fabrication of various products including aluminum doors, windows, ladders, etc. The plaintiffs source of supply for the billet was, during the years in question, Alcan Ingot, a subsidiary of Alcan Aluminum of Canada Ltd. In general the billet was delivered to the plaintiffs premises in Toronto and Montreal originating from Alcan smelters at Arvida, Quebec.

The purchase orders for the billet were placed, however, through Pillar International Services (hereinafter referred to as Pillar International). When ordering billet, which occurred on a weekly basis, the plaintiff sent a purchase order to Pillar International in Bermuda, sending a copy at the same time to Alcan Ingot. On receipt of the purchase order, Pillar International masked out the plaintiff’s letterhead, replacing it with its own (keeping the original invoice number), and forwarded that order to Alcan Ingot. Alcan Ingot acted on receipt of the copy which had been received from the plaintiff but the official order was the one received from Pillar International. Once the billet had been delivered by Alcan Ingot to the plaintiff, Alcan Ingot invoiced Pillar International at the Alcan list price and Pillar International invoiced the plaintiff at the same price.

When payment was subsequently made, on what was called settlement day, the plaintiff credited Pillar International's Bermuda bank with the invoiced price, Pillar International credited Alcan Ingot's Montreal bank with the identical sum and Alcan Aluminum Limited of Canada paid to Pillar International's Bermuda bank (Butterfield) which had an account in a Canadian bank in Montreal, a discount attributable to the purchase price. This discount was paid partly in U.S. dollars and partly in Canadian dollars. The U.S. dollars were forwarded to Bermuda to the credit of Pillar International's bank account there; the Canadian dollars were forwarded to the credit of the plaintiff's Canadian bank in Toronto. The payment by the plaintiff to Pillar International, by Pillar International to Alcan, and the payment of the related discounts all took place simultaneously on the same day, through electronic banking facilities, in accordance with standing instructions filed with the respective banks.

A similar arrangement (in reverse) prevailed with respect to scrap returns. The governing contract allowed for the return to Alcan, of scrap generated in the extrusion process (up to a certain percentage), on a no profit no loss basis. Thus, with respect to such returns, credit notes flowed from Alcan Ingot to Pillar International and from Pillar International to the plaintiff. The metal itself moved physically from the plaintiff’s Toronto and Montreal premises to Alcan's remelt facility in Kingston, Ontario. (Initially scrap return credits were calculated by reference to the gross price of the billet, later the discounted price was used.)

It is the discounts generated by the metal purchases, which were retained in Bermuda by Pillar International that underlie the dispute between the plaintiff and the defendant.

The defendant characterizes these as income which should have been included in the plaintiff's income for the year because:

(1) they were in reality earned by the plaintiff; the involvement of Pillar International was a sham, and the purchases were made pursuant to an incomplete and ineffective contract; or

(2) they were expenses in respect of a transaction, that if allowed would unduly or artificially reduce the taxpayer's income: section 245 (formerly section 137) of the Income Tax Act, R.S.C. 1952, c. 148 as amended by S.C. 1970-71-72 c. 63, S. 1; or

(3) they were payments made to someone with whom the taxpayer was not dealing at arm's length at an amount in excess of fair market value, and therefore for the purpose of computing income should be deemed to have been acquired by the taxpayer at fair market value: sections 67 and 69(2) (formerly subsection 12(2) and section 17) of the Income Tax Act, R.S.C. 1952, c. 148 as amended by S.C. 1970-71-72 c. 63.

In addition, the defendant contends that withholding tax should have been paid with respect to the payments retained in Bermuda because:

(1) they were benefits conferred on a shareholder which pursuant to subsection 15(1) (formerly subsection 8(1) of the Income Tax Act) are deemed, when the shareholder is non-resident, to have been paid as a dividend: paragraph 214(3)(a) (formerly paragraph 108(5)(a) of the Income Tax Act);

(2) they were payments made pursuant to the direction of a taxpayer — subsection 56(2) (formerly subsection 16(1)) of the Act which again by virtue of paragraph 214(3)(a) (formerly paragraph 108(5)(a)) are deemed to be dividends paid to a non-resident; or

(3) they were benefits conferred, as described in subsection 245(2) of the Act (formerly subsection 137(2)), which are deemed thereby to be payments to a non-resident person to which Part XIII (formerly Part III) of the Act applies.

Corporate Relationships

The plaintiff, Indalex, is and was a Canadian corporation and a wholly owned subsidiary of Indal Limited also a Canadian corporation. Prior to March 1970, Indal Limited was controlled by a United Kingdom corporation named Pillar Holdings Limited. That name was subsequently changed to Pillar Limited, but for the purpose of these reasons the name Pillar Holdings will be used as referring to the company, whatever its name, as it existed prior to March 1970. In March 1970, Pillar Holdings was taken over by Rio Tinto-Zinc Corporation Limited and became RTZ-Pillar. Again the name varied over time but for purposes of these reasons the designation RTZ-Pillar will be used.

Pillar Holdings was originally (i.e.: in 1960) a small London-based publicly quoted holding company with interests in seven or eight different businesses. It was built from that base by Messrs. Paterson (a former employee of Alcan) and Fredjohn into a successful aluminum extruding company having subsidiaries in, at least, Canada and Germany, as well as the United Kingdom.

Pillar’s control of Indal (be it by the original Pillar Holdings or later by RTZ-Pillar) was by way of a holding company. This was, until April 1974, a dormant United Kingdom company, Alreco No. 2 Limited, and after that date, an Ontario corporation, Rallip Limited. The holding company in both instances held 58 per cent of the shares of Indal. Indal’s shares were publicly listed on the Toronto and Montreal stock exchanges.

As well as the Canadian hierarchy of companies (Rallip, Indal and Indalex) there were comparable national structures elsewhere. Pillar Holdings had aluminum extrusion subsidiaries in Germany (Indalpress) and in the United Kingdom (Indalex-U.K.). After the take-over by RTZ this network of extruders and holding-management companies became even more extensive, expanding at least to Portugal (Portalex), Sweden and Australia.

The Bermuda company (Pillar International) was established in 1969-1970. Pillar Holdings Limited made arrangements in mid-1969 to acquire a dormant Bermuda company called Aurora. That company became wholly owned by Pillar Holdings in December 1969. Its name was subsequently changed to Pillar International on February 9, 1970. In March 1970, with the acquisition of Pillar Holdings by RTZ the Bermuda company became wholly owned by RTZ-Pillar. During 1970 the company was administered through Arthur Young and Company, a firm of international chartered accountants (the local Bermuda firm of accountants being known as Morrison Kempe). In January 1971, Pillar International hired its first full time employee, Mr. Sechiari, as managing director. He rented 1,500 square feet of office space and hired a secretary.

Mr. Sechiari and his successor, Mr. Johnson administered the billet purchasing contracts, not only for the plaintiff but also for at least some of the other Pillar extruders some of the time. They managed the paper flow; they seemed to have some authority to resolve minor administrative matters; they accompanied, at least on some occasions, Messrs. Paterson and Fredjohn (later Mr. Greenwood) when prices were being negotiated. They also ensured that the banking arrangements worked smoothly and they arranged for loans from the Bermuda bank account to RTZ-Pillar Pacific Limited in Australia, and Rallip (Canada), as well as to other Pillar subsidiaries, when directed to do so by RTZ-Pillar.

The evidence is clear that one motivation, at least, for the establishment of the Bermuda company was to allow Pillar Holdings (RTZ-Pillar) to establish a pool of capital offshore free from United Kingdom income tax and exchange controls. Whether it was created or used to avoid Canadian taxes as well is not something one would expect to hear from the mouths of the plaintiffs witnesses. Nothing stands or falls on the failure to find in the evidence any express intention in this regard.

Contractual relationships

The purchases of aluminum billet by the Pillar group extruders took place under an umbrella agreement between Alcan Aluminium Limited (the parent of Alcan Aluminum of Canada), Pillar International and Pillar Holdings (RTZ-Pillar). Pillar Holdings (RTZ-Pillar) guaranteed Pillar International’s performance of the agreement. The agreement was signed in February 1970 but expressed to be effective as of January 1 of that year. It was a successor agreement to one originally signed by Alcan Aluminium Limited (at the time named Aluminium Limited) and Pillar Holdings in 1965.

The 1965 umbrella agreement had provided that the Pillar group companies (excluding those over which Pillar did not have effective control, either directly or indirectly, and excluding those for which it directly controlled purchasing policies) would acquire a certain percentage of their aluminum requirements from the Alcan group companies. Each extruding company in, for example, Germany (and subsequently Portugal) was required to purchase 50 per cent of its aluminum requirements from an Alcan group company. Each of the extruding companies in Canada and the United Kingdom was to purchase 80 per cent of their requirements from an Alcan company. The 1970 agreement provided that Pillar International would purchase these quantities, rather than the extruding companies doing so directly.

The 1970 agreement was expressed to run for 15 years (the 1965 agreement had been for a 20-year term). In fact, it was terminated in 1974, being replaced at that time by another agreement which lasted for a further two years. The 15-year term was not given much credence by either party — the effective terms were negotiated on a much shorter time span.

The umbrella agreement contained a "competition clause” whereby a Pillar extruder (before 1970), and Pillar International (after 1970) would not be required to purchase from an Alcan supplier if there was available from another source at least four months' supply of aluminum, equal in quality, on terms no less favourable and at prices two per cent below those offered by Alcan. Alcan agreed in return to require one or more of its subsidiaries to pay to Pillar Holdings in London (before 1970), Pillar International (after 1970), a discount of one and one-half per cent of the total value of the purchases made by the Pillar group during the year.

Running with the 1970 umbrella agreement was a letter agreement dated December 31, 1969 but signed February 16, 1970 by Alcan Aluminium Limited and Pillar International. This agreement (except for two aspects) had in fact been negotiated in July 1969 by Pillar Holdings and Alcan Aluminium Limited. It was the successor to previous letter agreements between the two companies, modifying the 1965 umbrella agreement. The February 1970 letter provided that Alcan would charge extruders in Germany, the United Kingdom and Canada, the list price respectively in each of those countries and that it would give Pillar International a minimum discount on the "gross" value of the purchases of: eight per cent in Germany, nine per cent in the United Kingdom and 10 per cent in Canada. These discounts were to be paid contemporaneously with payment for the billet (on a monthly basis in serling, Canadian dollars or Deutsche marks as Pillar International should direct). Sixty-day credit terms were to prevail in the U.K. (subsequently changed’to 90 days); those pertaining to consignment stocks (90 days) were to prevail elsewhere. A competition clause released Pillar from purchasing from Alcan if a one per cent better price could be obtained elsewhere. Terms were set out in the letter agreement for the buying back of scrap by Alcan.

In a schedule to the letter, the maximum amount of billet Alcan would be required to provide in each of Canada, Germany and the United Kingdom for the three years 1970, 1971 and 1972 was set out, as was a minimum amount that Pillar would be required to purchase. The letter provided that by October of any given year Pillar would advise Alcan of the precise tonnages (between the maximum and minimum figures) which it wished to purchase during the coming year. The schedule to the December 31, 1969 letter agreement also listed the tonnages for 1970 which had been agreed upon the preceding October.

On November 4, 1970 the plaintiff, Indalex, signed an agreement with Pillar International which referred to Pillar International’s December, 1969 agreement with Alcan. It indicated that Alcan had designated Alcan Ingot as its Canadian supplier for the purposes of that agreement. It stated that the plaintiff would purchase billet from Pillar International on terms to be agreed upon by the parties from time to time or as evidenced by their course of dealing. The price to be paid was the official list price minus an amount for scrap returns calculated at such rates as the parties should from time to time agree. Pillar was to pay the plaintiff a discount from the list price such as to render the price to Pillar competitive. This rate of discount was to be six per cent for the first 12 months (in fact this was changed within six months) and then after as the parties would agree.

Price Negotiations: Alcan/Pillar

The price which the Pillar group companies paid Alcan before 1970 and which Pillar International paid thereafter was negotiated by Mr. Fredjohn, (later succeeded by Mr. Greenwood) and sometimes Mr. Paterson. From the date of the takeover by RTZ until 1973 Mr. Fredjohn was chairman and managing director of RTZ-Pillar, after that time Mr. Greenwood moved into that position. During the years in question Mr. Paterson was finance director of RTZ, as well as a director of RTZ-Pillar. Prior to the RTZ takeover of 1970, Mr. Paterson had been chairman of Pillar Holdings and Mr. Fredjohn managing director of that company.

Both men were also directors of Pillar International. The plaintiff's witnesses were careful to refer to the price negotiations with Alcan as having been carried on by these gentlemen as directors of Pillar International. That is a conclusion I am not willing to accept. Pillar International was clearly a vehicle for carrying out the purposes of RTZ-Pillar. Messrs. Paterson and Fredjohn (later Mr. Greenwood) when negotiating price were operating in the interests of RTZ-Pillar (as the apex of the pyramid of the Pillar Group companies).

Despite the fact that the Pillar/Alcan letter agreement, with respect to the Canadian market, called for a minimum discount of 10 per cent from list there is no evidence that this was ever an operative part of the price setting mechanism between the parties. From documents and figures prepared by the plaintiff it is clear that from mid-1970 until September 1972 the effective transaction price was more than 10 per cent below the list price (i.e.: discounts of 12 per cent, 13 per cent and 17 per cent off list prevailed). This had also been the case in 1968 and 1969. From September 1972 until November 1973 no list price was published for Canada; again it was the effective transaction price which governed (exhibits D-2; D-4 and P-1-109). The situation between mid-November 1973 and December 1974, as set out in the plaintiff’s documents, is less clear.

The defendant argues that even during this period of time the list price was ineffective in determining the transaction price. It is argued that from mid-November 1973 to December 1974 Alcan’s published list price was merely adjusted upward (from 30.5¢ per lb. to 32.0¢ per lb. to 34.5¢ per lb. to 36.7¢ per lb. to 40.0¢ per lb. to 43.0¢ per lb.) in lock step with the effective transaction price. That would certainly seem to have been the case. Mr. Adams, an expert witness called by the plaintiff testified that in 1973-74 effective transaction prices were at a premium over list. It was a period of tight supply. Mr. Adams’ statement was general in nature, not supported by any concrete evidence with respect to the Canadian Alcan list price as it related to the effective transaction price. Nor does Mr. Culver’s evidence establish the plaintiff's contention. There is no reliable evidence from which I can conclude that during the November 1973-December 1974 period (or for the first six months of 1970) the 10 per cent played any effective role with respect to the price paid by Pillar. Whether the minimum discounts played any role with respect to the price paid in the United Kingdom or German markets is not clear. The list prices prevailing in those countries and the prices paid by the Pillar extruders there were not subjects of evidence in this case.

Price Negotiation: Indalex/Pillar International

Considerable evidence was led to try and establish that despite Pillar Holding's (RTZ-Pillar’s) control of both Indalex and Pillar International, the prices paid by Indalex to Pillar for aluminum billet were really the result of arm's length type negotiations. Mr. Stracey (the Chairman and Chief Executive Officer of Indal, and President of Indalex) who negotiated for Indalex was described as a “hard bargainer", “a tough negotiator". There was evidence that the RTZ-Pillar philosophy was to treat each subsidiary as an independent profit centre. Reference was made to a profit-sharing agreement Indalex had with at least one of its employees (Macklem), and the Pillar group of companies were described as being very decentralized and loosely knit. Reference was also made to the fact that there were minority shareholder interests to be considered in the case of Indal.

While I accept all these statements as true, they must be put in context. In context it is simply not credible to conclude that anyone other than RTZ- Pillar (in the persons of Messrs. Fredjohn (Greenwood) and Paterson) determined the price to be paid by Indalex to Pillar International. Messrs. Stracey, Fredjohn (Greenwood) and Paterson were all directors of Indal, RTZ-Pillar and Pillar International, although Mr. Stracey's involvement in this last was perhaps not extensive. An illustration of the lack of differentiation between the roles these individuals played as officers of Pillar International, Pillar Holdings (later RTZ-Pillar) and Indal is demonstrated by Exhibit P-1-127. That exhibit is a letter written by Mr. Fredjohn as an officer of Indal to Alcan concerning the price being negotiated which all the Pillar extruders would pay, including those in Germany and the United Kingdom.

Mr. Stracey avowed that despite being named a director he had no involvement at all in Pillar International. This may indicate no more than that the existence of Pillar International, as a separate corporate entity, was in reality ignored by those involved. Or it may indicate merely that Mr. Stracey did not want to reveal his involvement with that company. I note that Mr. Stracey's evidence was often very evasive. On more than one occasion he refused to answer simple questions to which he would obviously know the answer. I do not take at face value his assertion that he had absolutely no involvement with Pillar International. He would not have had to go to Bermuda to have been involved in the decision making respecting that company. But equally apart from being named as director, there is no evidence that he was involved. I make no finding in this respect.

Whatever the legal formalities of the corporate structure, there was clearly a hierarchical structure of control with RTZ-Pillar controlling both Pillar International and the plaintiff. Mr. Stracey considered Mr. Paterson to be his boss (see his evidence re: being asked by Mr. Paterson to become a member of the Pillar International board). Decisions, with respect to the setting up of the Bermuda company and the role it would play were made in London by Pillar Holdings (later RTZ-Pillar), and the extruders were told how the arrangement would work. Telexes introduced by the plaintiff to show its independence from Pillar International (exhibits P-1-52 and P-1-61) demonstrate that the price Indalex would pay was not determined in Bermuda but in London (the only reasonable inference being by RTZ-Pillar). Mr. Stracey may have been vigorous in discussions as to price. From his demeanour on the witness stand, I would expect this to have been the case. But after all was said and done I have no doubt that it was RTZ-Pillar in the person of Messrs. Fredjohn (later Greenwood) and Paterson who finally determined the price.

Sham — Incomplete Transaction

(a) Sham — no bona fide business purpose

Prior to the recent Supreme Court decision in Stubart Investments Ltd. v. The Queen, [1984] C.T.C. 294; 84 D.T.C. 6305, there was developing in the jurisprudence a rule of interpretation to the effect that when a taxpayer entered into a transaction or arrangement solely for the purpose of avoiding tax, and with no other bona fide business purpose, the transaction or arrangement would be ignored for tax purposes as a “sham”. In the Stubart decision, Mr. Justice Estey, at 302 (D.T.C. 6311), speaking for the Court, rejected that tendency, thereby resuscitating the rule in /.R.C. v. Duke of Westminster, [1936] A.C. 1 at 19:

Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay . . .

The decision, at 313(D.T.C. 6320), quoting from Snook v. London & West Riding Investments, Ltd., [1967] 1 All E.R. 518 at 528, held that for a sham to exist there had to be acts taken:

. . . which are intended by them to give to third parties or to the courts the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.

Thus the sham test when applied as a general principle of statutory interpretation requires that for a transaction to be disregarded by the Court it must exhibit an element of deception, not merely be found to have no business purpose other than tax avoidance.

I cannot find from the facts set out above that a sham existed in the Snook sense of that word*. [1] There was some evidence of direct dealing be- tween Indalex and Alcan Ingot (exhibit D-1, Tabs 41, 42, 43, 45, 46 and 53), and I am sure that on a daily basis many aspects of the transactions were dealt with directly by the plaintiff. Also, Indalex or Indal, in the person of Mr. Stracey, would have been the major source of market information on which price negotiations with Alcan respecting the Canadian market proceeded. Equally, the quantity of billet to be purchased was determined by Indalex — by providing three-year projections and then the yearly October request to Pillar International. The evidence of Mr. Sechiari was that Pillar International “distilled” the projections received from the Pillar group extruders and passed them on to Alcan. I think a fair inference is that Pillar International did not perform much more than a collating or post office function in this regard. But, the evidence indicates that Indalex did not directly negotiate price with either Alcan or Alcan Ingot. The price which Pillar paid to Alcan was negotiated by Messrs. Fredjohn (later Mr. Greenwood) and sometimes Paterson. The price with Indalex paid to Pillar International was equally dictated by these gentlemen.

(b) Ineffective/incomplete transaction

Counsel for the defendant argues that should I find the contract for the purchase of billet signed by Indalex and Pillar International to be incomplete and ineffective I am still entitled on the basis of the Stubart decision to “look through all the paper that was flying around”, apply the no bona fide business purpose test, and treat the transactions as a nullity for tax purposes.

The contract was expressed to be governed by the law of Bermuda. Mr. Mello, a barrister and attorney of Bermuda gave evidence that in his opinion the Indalex-Pillar International agreement was an enforceable contract in Bermuda. Mr. Smedley, also a barrister and attorney in Bermuda gave opinion evidence that it was not. The Bermuda law relevant to the issue is the same as the common law of England. Both experts cited: May & Butcher, Ltd. v. The King, [1934] 2 K.B. 17 (H.L.); Hillas & Co., Ltd. v. Arcos Ltd., [1932] All E.R. Rep. 494 (H.L.); Foley v. Classique Coaches, Ltd., [1934] 1 K.B. 2 (C.A.); Courtney and Fairbairn Ltd. v. Tolaini Brothers (Hotels) Ltd., [1975] 1 All E.R. 716 (C.A.); Mallozzi v. Carapelli S.P.A., [1976] Lloyd's Rep. 407; British Crane Hire Corp. v. Ipswich Plant Hire Ltd., [1975] Q.B. 303 (C.A.); Victoria Fur Traders Ltd. v. Roadline (U.K.) Ltd. and British Airways Board, [1981] Lloyd's Rep. 570. Mr. Mello referred as well to British Bank for Foreign Trade Ltd. v. Novimex Ltd. (1949), 1 All E.R. 155 and Bushwall Properties Ltd. v. Vortex Properties Ltd. (1975), 2 All E.R. 214.

The issue between the two experts does not involve the applicable law, but the conclusions that derive from its application. Mr. Mello had access to discussions with Mr. Stracey concerning the course of dealing between the parties. Mr. Smedley did not, although he did consider the documentary background, such as the letter agreement between Pillar International and Alcan dated December 31, 1969. Obviously there was no previous course of dealing with Pillar International before 1970; it did not exist before that time.

I accept Mr. Mello’s opinion that the contract was enforceable. While quantity is not set out in the agreement, that could be ascertained from the Alcan-Pillar letter of December 31, 1969. What is less immediately apparent are the facts on which Mr. Mello relied for his opinion that the price was also certain or ascertainable. Mr. Mello’s affidavit refers to conversations with Mr. Stracey and the course of dealings between the parties. In oral testimony he referred to the written terms of the contract which referred to the official list price minus six per cent.

I think a fair inference to be drawn from the evidence as a whole is that the price which Indalex would pay to Pillar International was not uncertain because when all was said and done, Messrs. Paterson and Fredjohn (later Mr. Greenwood) would determine that amount. Mr. Mello was naturally reluctant to expressly base his opinion on that fact. Nevertheless, I consider it to be the unspoken premise of his opinion and to follow as an inference from the reference to discussions with Mr. Stracey, the previous dealings between the parties, from the rest of the evidence that has been given in this case.

Artificial or Undue Restriction of Income

Subsection 245(1) of the Income Tax Act, R.S.C. 1952, chapter 148 as amended by section 1 of chapter 63, S.C. 1970-71-72 (the “New Act”) provides:

In computing income for the purposes of this Act, no deduction may be made in respect of a disbursement or expense made or incurred in respect of a transaction or operation that, if allowed, would unduly or artificially reduce the income.

Subsection 137(1) of the Income Tax Act, R.S.C. 1952, chapter 148 prior to amendment by section 1 of chapter 63, S.C. 1970-71-72 (the “Old Act") contained identical provisions.

While Mr. Justice Estey in the Stubart decision rejected the bona fide business purpose test as a general rule of statutory interpretation in tax cases, he did so because the Canadian Income Tax Act contains express provisions respecting tax avoidance (e.g.: subsection 245(1) re: artificial transaction). This is different from the legislation existing in the United States (page 302 (D.T.C. 6312) of the Stubart decision) in the United Kingdom (page 305 (D.T.C. 6316)) but not in Australia (pages 304 (D.T.C. 6313- 14)). Implicit, if not explicit in the Stubart decision is the admonition that arrangements (or transactions) which lack a bona fide business purpose are to be considered within the context of subsection 245(1) of the Act. At 308 (D.T.C. 6317) of the Stubart decision, Mr. Justice Estey noted:

. .. Section 137 might arguably apply on the grounds that the transaction falls within the reach of the expression “‘artificial transaction” but the taxing authority has not advanced this position in support of the tax claim here made. . . .

Mr. Justice Strayer in Consolidated-Bathurst Limited v. The Queen, [1985] 1 C.T.C. 142 at 148; 85 D.T.C. 5120 at 5124 has recently noted:

. .. the absence of a bona fide business purpose is not a condition precedent to the application of subsection 245(1) if artificiality is otherwise established, . . .

I agree with that conclusion and therefore do not find it necessary to determine whether or not Pillar International had a bona fide business purpose.

Mr. Justice Strayer went on to cite Don Fell Limited et al. v. The Queen, [1981] C.T.C. 363; 81 D.T.C. 5282 (F.C.T.D.); Sigma Explorations Ltd. v. The Queen, [1975] F.C. 624 at 632; [1975] C.T.C. 215 at 217 and Shulman v. M.N.R., [1961] Ex. C.R. 410 at 425; [1961] C.T.C. 385 at 399. The conclusion which arises from those cases is that subsection 245(1) is directed “not only to sham transactions but to something less as well . . .”, and that “artificially” carries the meaning “not in accordance with normality”. Such arrangements are not “usual and natural ones”. Applying this test, it is clear that the arrangements existing in the present case had a great deal of artificiality about them and I would hold that the purchasing by Indalex from Pillar International and by Pillar International from Alcan Ingot were artificial transactions.

That does not dispose of the matter however because subsection 245(1) requires not only a finding of artificiality but also a “reduction of income”: Spur Oil Limited v. The Queen, [1981] C.T.C. 336 at 343; 81 D.T.C. 5168 at 5173 (F.C.A.). Thus, subsection 245(1) will only be applicable if the price paid by the plaintiff to Pillar International resulted in a reduction of income otherwise payable. The sole issue becomes a determination as to the reasonableness of the price paid or fair market value under sections 67 and 69.

Sections 67 and 69 — Reasonable in the Circumstances — Fair Market Value

Section 67 provides:

In computing income, no deduction shall be made in respect of any outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.

Sections 69(1)(a) and 69(2) provide:

Except as expressly otherwise provided in this Act,

(a) where a taxpayer has acquired anything from a person with whom he was not dealing at arm's length at an amount in excess of the fair market value thereof at the time he so acquired it, he shall be deemed to have acquired it at that fair market value;

69. (2) Where a taxpayer carrying on business in Canada has paid or agreed to pay, to a non-resident person with whom he was not dealing at arm's length as price, rental, royalty or other payment for or for the use or reproduction of any property, or as consideration for the carriage of goods or passengers or for other services, an amount greater than the amount (in this subsection referred to as “the reasonable amount’’) that would have been reasonable in the circumstances if the non-resident person and the taxpayer had been dealing at arm's length, the reasonable amount shall, for the purpose of computing the taxpayer's income from the business, be deemed to have been the amount that was paid or is payable therefor.

Whether an “expense reasonable in the circumstances” for the purposes of section 67 and subsection 69(2) requires the same test as “fair market value” in paragraph 69(1 )(a) has not been raised. They have been treated by counsel as raising identical considerations.

(a) Market considerations

Expert opinion evidence was given by a Mr. Snapp to the effect that the market from which Indalex would purchase aluminum billet was North American (Canada and the United States) if not smaller in geographical size. His opinion was based on an analysis of factors such as transportation costs, the supplier’s cost of production, trade restrictions (e.g.: tariffs) and shipping data. in addition, I think one can take judicial notice of the fact that in this country when transportation costs are a significant factor, trade patterns develop in a north-south direction, not on a continent wide basis. Mr. Snapp concluded that prices for a North American purchaser would be de- termined by supply and demand conditions in the North American (or smaller) market and not by conditions elsewhere. This opinion is consistent with the evidence given by other witnesses.

The price paid to the various Alcan group companies by Pillar International was negotiated on a market by market basis: Canada, the United Kingdom, Germany and Portugal being separate markets (as was Australia, although the Pillar extruder there did not purchase from Alcan). These negotiations took place from time to time (sometimes at six month intervals, sometimes at three) as market conditions dictated.

There seems little doubt that Alcan could meet or undercut any competitor for the plaintiff's business (because of low cost of production, geographical proximity, and the existence of a geographical strategic remelt facility). That does not mean however, that the price in the Canadian market was completely within the control of Alcan. Dr. Berry's opinion was that the price which Canadian extruders could be charged for billet depended upon the price at which fabricated products could be brought into the Canadian market and by the potential of imports from Alcan’s United States billet competitors. Other potential suppliers did exist (e.g.: Reynolds at Baie Comeau). Mr. Culver's evidence makes it abundantly clear that the price in the Canadian market was determined (or driven by) that existing in the United States. Mr. Culver, now the president and chief executive officer of Alcan Aluminum Limited, was during 1970-1974 chief sales officer of that corporation. He and his subordinate Mr. Runkle, were the Alcan officers with whom Messrs. Paterson and Fredjohn negotiated.

The plaintiff made much of the scrap return arrangements it had with Alcan. It argued that other potential suppliers could not be competitive because they did not have remelt facilities available in a geographically competitive area. I do not place much credence on the plaintiff's arguments concerning the scrap return arrangements. It is clear that part of Alcan’s marketing strategy was to discourage customers from acquiring their own remelt facilities. The inference I draw is that Indalex was able to obtain certain price concessions by using Alcan's remelt facility. It does not make sense to assume that the plaintiff let itself be a captive of Alcan by choosing not to instal a remelt facility. Zimmcor, a much smaller extruder company had such a facility.

(b) arm's length comparables

The aluminum industry is a highly integrated one. Thus, there are few instances of arm’s length purchases for aluminum billet

Evidence respecting the price at which two other independent extruder companies had purchased billet from Alcan was led. The two companies were Daymond and Zimmcor. For comparison purposes adjustments were made for: differences in credit terms; differences in geographical location; different contract terms respecting scrap return; and different discount terms in the various contracts.

There is no dispute that Zimmcor does not constitute a valid comparable for the purposes of establishing what would be a fair market value price (or a reasonable price) to Indalex. Zimmcor was, during the time in question, in considerable financial difficulty. Alcan, in an attempt to ensure collection of its accounts receivable took a five or 10 per cent interest in the company and had a seat on the board. There was some evidence of retroactive price rebates. The price Zimmcor paid Alcan was lower, on a four-year average, than that which Indalex paid Pillar.

Daymond, however, is also not a valid market comparable. The price it paid Alcan (30.82(t on a four-year average) was in the same range as that which Indalex paid Pillar (30.77¢ on a four-year average). However over the four years in question Indalex purchased three times as much billet (97,291 short tons) as Daymond and Zimmcor combined (32,770 short tons). Indalex was Alcan’s largest independent Canadian extruder customer — by as much as two-thirds to one-third to all the other customers combined.

While it may be true that there are no volume discounts (in the sense of a price per unit discount) in the aluminum billet market (apart from premiums paid for very small orders) that does not make Indalex as a customer, comparable to Daymond, Mr. Culver’s evidence is significant (Volume IV, pages 117-118). He indicated that size was a significant factor in determining comparability of price as between customers. (See also Volume IV, page 77.)

I accept the contention that the closest arm's length comparable to a sale by Pillar International to Indalex is that by Alcan to Pillar International. Each shipment of billet to Indalex was in fact purchased at arm’s length by Pillar International under circumstances that are virtually identical to the purchases of the same billet by Indalex: same product; same quantities; same shipping destination; same transportation logistics; same credit terms; same scrap return arrangements. Thus I accept Dr. Berry's position that:

At a first approximation an arm’s length price for Indalex is that which Pillar paid . . .

The question remains what adjustment should be made for the purposes of equating an Indalex purchase from Pillar International to a Pillar International purchase from Alcan. There is little dispute that some adjustment should be made; the dispute is with respect to quantum.

(c) assessment of adjustment quantum

(i) rate of return on investment

The defendant adduced expert evidence, from Professor Quirin, to the effect that the reasonableness of the price charged to Indalex by Pillar International could be assessed by reference to the profit margin on its sales to the plaintiff and by making a direct comparison between such and the mark ups received by firms performing similar functions but dealing at arm's length in a competitive setting. Alternatively it was noted that the same could be ascertained by indirect comparison to the return on investment required by those firms. Because of the uniqueness of Pillar International's functions, the indirect comparison route was chosen. This involved: (1) determining an appropriate rate of return on investment for an enterprise with risk characteristics of Pillar International; (2) determining the amount of capital needed to support Pillar International’s sales; (3) using the aforementioned factors to determine an appropriate profit margin as a percentage of sales.

Professor Quirin chose banks and utility companies, particularly telephone companies as having a risk factor comparable to Pillar International. From this he calculated a rate of return of 9.8 per cent. He did not apply the rate of return to capital actually invested in Pillar International because, as is obvious there was considerable redundant capital held by that company. He chose for comparison purposes a group of companies that were listed in Moody's Industrial Manual as either dealers in base metals or steels to determine appropriate capitalization for a firm like Pillar International. After adjustments to reflect the fact that these companies had investment in plant and inventories (which Pillar International did not) Professor Quirin deter mined that operating assets took up 58-68 days sales and current liabilities varied between 46-59 days sales. From this analysis and his analysis of Pillar International, Professor Quirin concluded that Pillar International, or a firm like it, could expect to turn over its assets in 60 days, and to obtain current liability financing of 45 days sales. Thus, a sufficient capitalization to support Pillar International’s trading operations was estimated to be 15 days sales. From this he determined that the profit margin necessary to support a firm like Pillar International was between .4 per cent and .8 per cent of sales.

Since the profit margin generated on sales by Pillar International to the plaintiff during the years in question (actually he considered 1970 - 1976, not merely the taxation years under review in this case — 1971 - 1974) was between 3.13 per cent and 5.27 per cent he concluded that the price charged was not reasonable.

This analysis was challenged by the plaintiff on two grounds: the companies chosen as comparables from Moody's carried on activities considerably different from those of Pillar International; and in any event the analysis did nothing to assess the value of the Pillar International contract with Alcan (i.e.: if that contract were indeed a very advantageous one, there is nothing in Professor Quirin's analysis to reflect that fact).

I find the analysis done by Professor Quirin useful as a bottom line approach, i.e.: the analysis shows what profit margin would have been required to sustain a company such as Pillar International in business (with a reasonable return on investment). But, I am not convinced that the analysis, without more, demonstrates a lack of reasonableness in the price charged.

In any event, the burden of proof of demonstrating that the price paid to Pillar International was reasonable rests with the plaintiff.

(ii) pre-1970 arrangements

The plaintiff contends that the reasonableness of the price should be assessed by reference to certain discounts received by Pillar Holdings from Alcan prior to the RTZ take-over in 1970. As noted above, under the original 1965 agreement Alcan agreed to pay Pillar Holdings a discount of 1 /2 per cent on gross sales. Subsequently, in 1967-68 an additional 31/2 per cent discount was given. As I understand the argument it is that since prior to the RTZ takeover Pillar Holdings was getting a 5 per cent discount (1 /2 per cent plus 31/> per cent) on gross sales from Alcan, it was reasonable for RTZ-Pillar to impose a 5 per cent mark-up on the price it obtained from Alcan, when it resold billet to the plaintiff. The theory is that this 5 per cent was attributable to RTZ-Pillar’s world wide purchasing power and was therefore properly earned by it and not by the plaintiff.

I have looked at the documents and the evidence concerning these earlier discounts carefully and am not convinced that they are attributable to the factors which the plaintiff claims. Instead, there are grounds supporting the defendant's claim that from 1965 forward transfer pricing for the purpose of lodging with the parent, profits actually earned by the plaintiff occurred.

I do not read the original 1965 umbrella agreement which provided for a 1 /2 per cent discount to Pillar as one under which Pillar gave a long-term purchase commitment to Alcan, in return for a guaranteed lower price. Under the contract Pillar group extruders were required to buy from Alcan suppliers, unless they could get a two per cent better price elsewhere. In return, Alcan paid Pillar Holdings in London 11/2 per cent on gross sales and a lump sum payment of £40,000. My interpretation of that agreement is that Pillar Group extruders were potentially required to pay up to two per cent more for billet than what the market would would require, and Pillar Holdings was paid directly the 1 /2 per cent and the £40,000.

With respect to the 3 /2 per cent discount, the plaintiff's evidence is that reference to it originally appeared in a letter, dated July 24, 1967, written by a Mr. Gardner of Alcan, to Mr. Peterson.

(c) In consideration of the performance of the undertaking in (b) above Pillar will be entitled to special discounts on all its billet purchases from Alcan at Indalex: U.K., Indalex: Canada, Indalpress and Minex on a basis discussed and agreed verbally with Alcan, and such discounts will be calculated at 31st January and 31st July, 1968 [Emphasis added.]

The undertakings in paragraph (b) of the letter were: (1) that Pillar would increase its purchases of aluminum to 100 per cent (from the 80 per cent in Canada and the U.K., and from the 50 per cent in Germany required under the 1965 umbrella agreement) and; (2) that Pillar would use its best endeavours “‘to achieve the same result at Minex." Minex was a new extrustion operation, 50 per cent owned by Pillar.

Subsequently, in June, 1968 Pillar Holdings wrote to Alcan:

We were also pleased to receive your agreement to a waiving of the understanding we had with you that with the exception of special alloys in Germany we would buy 100% of our billet requirements from Alcan. In present market conditions this is unwise and impracticable and we feel it is in your interest as well as ours that we revert to our contractual undertaking to buy a minimum of 80% of our requirements from you .. .

In response to questions from counsel, Mr. Fredjohn left the impression that the reduction in commitment only related to Germany, even though the text of the June letter seems to be more general in nature. Mr. Fred- john's evidence at a later point, however, (volume V, page 115 of the transcripts) was:

. . . We tried to remain reasonably loyal in all markets, but we also tried to keep a second source available. In the U.K., we always bought some of our tonnage . . . you will remember that there was a 20 per cent that we could buy from elsewhere most of the time and we used to buy it from British Aluminium and from Kaiser . . . [Emphasis added.]

Certainly the commitment with respect to Germany was not kept — because of intense competition in that market. The commitment as far as the United Kingdom is concerned was by and large not kept. And in so far as Canada is concerned, the commitment was of little consequence since the plaintiff at all times purchased 100 per cent of its billet from Alcan. Yet, no adjustment in the 3 /2 per cent discount was made when much of the commitment to which it related was not kept. I have considerable difficulty, then, in accepting the plaintiffs characterization of the 3 /2 per cent discount.

I note that Mr. Adams gave evidence that in the mid-1960s the price for aluminum was essentially established by the producers; that, at that time, discounting from the list price was either minimal or non-existent. This changed gradually over the years subsequent thereto until in 1976 aluminum became a commodity on the London Metals Exchange. Thus, it is entirely credible that the 3% per cent was related to these changes that were taking place in the market and may not have been any more effective than the nominal 10 per cent discount was in the Canadian market post-1970.

The contention that the reasonableness of the price charged to Indalex should be assessed by reference to the pre-1970 discounts is based largely on the evidence of Mr. Fredjohn. I am forced to treat that evidence with some degree of scepticism. When asked to describe the negotiations with Alcan post-1970 which took place in various parts of the world and at different times he stated:

The Pillar International 5 per cent as it usually was, which emanated from the master agreement, the 1 /2 and the 3 /2 rarely took much time because that was a constant. Although as we will have seen, there were sometimes exceptional payments made, particularly prior to 1970. (Volume V, page 102)

But the negotiations with Alcan were not of that nature. Mr. Culver's evidence made this clear. Mr. Fredjohn's statement was obviously designed to leave an impression with the Court that was some considerable distance from the truth. In the light of all these factors I cannot accept that the pre-1970 five per cent discount was given to Pillar on account of its world purchasing power and that the new pricing arrangements between Pillar International and Indalex merely rolled the previous discounts into a different form.

(iii) economic benefits as part of the Pillar group

Counsel for the plaintiff argues that the additional amount charged to Indalex by Pillar International over what Pillar International paid Alcan can be justified on the ground of additional economic benefits which flowed to Indalex as a result of that contract. These were enumerated as the possibility of metal switches with other members of the Pillar extruder group (if Indalex should under-estimate or over-estimate its billet requirements); the extension of the billet purchase contracts by Alcan in December 4, 1973 in tight market conditions; refusal in 1974 to allow Alcan to call force majeure because of a strike at Arvida, Quebec on the ground that the contract for billet was with Alcan Aluminium Ltd. and not with Alcan Aluminum of Canada Ltd.; discount payments on billet upcharges as well as on the base metal price; 90-day credit terms, instead of the 30 days prevailing in the North American market; excellent scrap return terms; simultaneous settlement of invoice payments and discounts; regular efforts by Pillar to prevent or defer price increases or increases in scrap tolling charge or reduction in the credit terms (see P-1-105).

With respect to the first three alleged benefits (metal switches; continuation of supply in a tight market; no force majeure) I cannot conclude that Pillar International’s involvement added any significant value for Indalex. I cannot believe that the ability to arrange metal switches with other Pillar extruders was dependent on the existence or role of Pillar International (or of a comparable centralized metal purchasing division in RTZ-Pillar or elsewhere). Such surely could have and would have been arranged, as between members of the pillar group extruders in any event. With respect to the agreement to continue to supply the Pillar group extruders (specifically Indalex) in 1973, and the alleged inability to call force majeure in 1974, I can see no reason for concluding that the results would have been any different had Indalex alone been dealing with Alcan. There is no evidence, for example, that Alcan cut off either Daymond or Zimmcor during these periods — customers of much less importance to Alcan than Indalex. The market data collected by Mr. Cowlen indicated that the quantities of billet sold to Daymond and Zimmcor during those years continued in the same proportion as that sold to Indalex.

What then of the remaining advantages (discount terms; credit terms; scrap return terms; times of payment). In my view in order to conclude as counsel suggest, I have to find (1) that these advantages or ones of an economically equivalent nature are ones which Indalex could not have obtained for itself without the interposition of Pillar International (RTZ-Pillar); and (2) that as a matter of quantum they are worth the additional amount paid by Indalex to Pillar International over what Pillar International paid Alcan. That is, the question becomes whether the plaintiff negotiating on his own could have obtained the price in the same range as that which Alcan charged Pillar International or whether the plaintiff could only have obtained the price similar to that which it paid Pillar International.

(iv) price Indalex could have negotiated on its own

Despite excellent argument and presentation by counsel for the plaintiff I cannot find that the plaintiff negotiating on its own would have had to pay Alcan a price of the same order that it paid Pillar International. On reviewing the evidence carefully, I cannot find that the plaintiff has discharged the burden of proof on it and demonstrated that the price it paid was reasonable in the circumstances.

In the first place it is clear that there was no particular rationale for the amount of money retained in Bermuda by Pillar International. There was no attempt made to quantify the so-called extra benefits (except for the reference to the pre-1970 agreements). Mr. Fredjohn spoke of the amount retained in Bermuda as arising from "overall and sometimes somewhat nebulous conditions .. .".

Secondly, it was argued that Alcan gave Pillar International a much better price than it would have given Indalex alone in order to obtain a share of Pillar’s European market (the European market being much more highly competitive than the Canadian one). A most compelling response to this contention was made by Dr. Berry. He pointed out that sales to Pillar International were not at a single price for a combined volume. They were negotiated on a market by market basis with reference to the conditions prevailing in each market separately. Under the terms of the Pillar/Alcan contract, Alcan had to be competitive (within one per cent) in each market. It is simply not reasonable to conclude that in those circumstances Alcan would give to Pillar International an additional discount or concession, of the magnitude claimed here, over that which it would give to Indalex negotiating on its own.

Lastly, I attach considerable, indeed crucial, importance to the evidence of Mr. Culver. When asked about the size of the extra discount he would have accorded to Pillar over Indalex alone, he responded:

In other words, in saying that every time I would look at Pillar as a Canadian customer I saw the shadow of their other markets behind me [sic], and I couldn't give you à ... I couldn’t say that of any discount given exactly “x” per cent was because of the shadow and “y” per cent was because of the market, I couldn’t say that.

In my view, had the extra been anything more than very small (i.e.: one per cent or less) Mr. Culver would have spoken in more expansive terms. I think he would not have talked about Pillar's importance as a "shadow" effect.

There is other testimony by Mr. Culver which at first glance seems to contradict that conclusion. He responded affirmatively to a question asking whether Pillar International had obtained a significantly higher percentage discount than that which Indalex could have negotiated on its own. This question was objected to on the ground that it was hypothetical. I reserved judgment. I think the question and the response are admissible. But that does not assist the plaintiff since there is no precise evidence as to what Mr. Culver meant by “significant.” There is no evidence from which I can conclude that he had in mind a five per cent differential as opposed to a one per cent differential. Mr. Cowlen, when discussing the weight based and time based comparative price analyses he had done, referred to differences of /2¢ a lb. as significant. In dealing with purchases of a commodity such as aluminum billet I see no reason to think that a price differential of one per cent or even less, would not be significant. Accordingly, Mr. Culver's statement that Pillar International obtained a discount "significantly" better than Indalex alone could have obtained is quite consistent with a finding that a one per cent or less differential was the additional discount obtained by Pillar International over what the plaintiff could have negotiated on its own. The plaintiff has not proven that the amounts it paid for billet was a reasonable price in the circumstances.

Withholding Tax

(a) Subsection 15(1) — Benefit Conferred on a Shareholder

Subsection 15(1) provides:

Where in a taxation year

(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction,

(b) funds or property of a corporation have been appropriated in any manner whatsoever to, or for the benefit of, a shareholder, or

(c) a benefit or advantage has been conferred on a shareholder by a corporation,

the amount or value thereof shall, except to the extent that it is deemed to be a dividend by section 84, be included in computing the income of the shareholder for the year.

Paragraph 214(3)(a) of the Act deems any payment made or benefit conferred on a non-resident shareholder, pursuant to subsection 15(1) to be dividends from a corporation. Part XIII tax is thus charged on the amount received by the non-resident pursuant to subsection 212(2) of the Act.

I cannot accept that subsection 15(1) of the Act applies. Neither RTZ-Pillar nor Pillar International were at any time a "shareholder" of the plaintiff. The plaintiff was a wholly owned subsidiary of Indal which in turn was a subsidiary first of Alreco No. 2 Limited, and then of Rallip Limited. Counsel for the plaintiff cites Army and Navy Department Store v. M.N.R., [1953] C.T.C. 293; 53 D.T.C. 1185 (S.C.C.). "Shareholder" is defined in subsection 248(1) of the Act (formerly paragraph 139(1)(ao)) as including a member or other person entitled to receive payment of a dividend. I have not been presented with a convincing argument that the defendant's assessment of the plaintiff for withholding tax can proceed on the basis of subsection 15(1).

(b) Subsection 56(2)

Subsection 56(2) of the Act provides:

A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer's income to the extent that it would be if the payment or transfer had been made to him.

Paragraph 214(3)(a) of the Act (formerly 108(5)(a)) deems any payment made or benefit conferred on a non-resident, pursuant to subsection 56(2) to be dividends from a corporation. Part XIII tax is thus charged on the amount received by the non-resident pursuant to subsection 212(2).

Subsection 56(2) does not appear to encompass the situation at hand. The subsection is aimed at preventing a taxpayer from reducing his income by directing that income payable to him be paid elsewhere; a key element of the subsection lies in ascertaining whether the amount in question would be included in the taxpayer's income by some other provisions of the Act if the taxpayer had received it directly. In the situation at hand the excess payments to Pillar International were not done at the direction of the plaintiff. They were really determined by RTZ-Pillar, as noted above, in the persons of Messrs. Fredjohn (later Greenwood) and Paterson. In addition, in so far as RTZ-Pillar is concerned I could not find that the excess payments if not made to Pillar International, would necessarily have become income in the hands of RTZ-Pillar. Accordingly, I have not been convinced that the defendant's assessment of the plaintiff for withholding tax on the basis of subsection 56(2), is appropriate.

(c) Subsection 245(2)

Subsection 245(2) provides:

Where the result of one or more sales, exchanges, declarations of trust, or other transactions of any kind whatever is that a person confers a benefit on a taxpayer, that person shall be deemed to have made a payment to the taxpayer equal to the amount of the benefit conferred notwithstanding the form or legal effect of the transactions or that one or more other persons were also parties thereto; and, whether or not there was an intention to avoid or evade taxes under this Act, the payment shall, depending upon the circumstances, be

(a) included in computing the taxpayer's income for the purpose of Part I,

(b) deemed to be a payment to a non-resident person to which Part XIII applies, or

(c) deemed to be a disposition by way of gift.

Only paragraph 245(2)(b) is relevant for present purposes.

The plaintiff argues that paragraph 245(2)(b) is deficient for the purpose of imposing on Pillar International an obligation pursuant to Part XIII to pay tax as a non-resident on the benefit received and consequently, it is ineffective to require the plaintiff to withhold and remit such taxes pursuant to section 215 (formerly section 109) of the Act (particularly subsections 215(1) and 215(6) — formerly subsections 109(1) and 109(5)).

This argument, as I understand it, is that subparagraph 245(2)(b) when read together with section 212 of Part III (the main charging section of Part III) is unclear and imprecise. Subsection 212(1) provides:

Every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to him as, on account or in lieu of payment of, or in satisfaction of, . . .

Then follows descriptions of specific items, including management fees, interest, estate or trust income, rents, royalties, alimony, patronage dividends, pension benefits, retiring allowances, payments under specified savings plans and funds and certain annuity payments. The benefit obtained by Pillar International does not fit into any of the specifically listed categories.

It is argued that subparagraph 245(2)(b) is not clear enough, on its own, to impose a tax liability. I quote from the written argument filed by counsel for the plaintiff:

Part XIII applies to a great number of payments to non-residents. It provides that some of these payments (e.g., dividends, rentals, royalties) are subject to the 25% tax imposed thereunder, and provides that certain other payments (e.g. interest described in subparagraphs 212(1)(b)(i) through (ix), copyright royalties, payments under bona fide cost sharing agreements, reimbursement of specific expenses, superannuation or pension benefits described in subparagraphs 212(1) (h)(i) through (iv), etc.) are not subject to the tax. Subsection 245(2) fails to provide that an amount described therein is deemed to be a payment on which Part XIII levies the tax imposed thereunder rather than one which the Part provides is not subject to the tax. It is a basic rule of statutory construction that in order for a tax to be imposed on a subject the statutory language so doing must be clear and unequivocal: Partington v. Attorney-General (1869), L.R., 4 H.L. 100, and subsection 245(2) is not.

There is no doubt that subparagraph 245(2)(b) when read together with Part XIII of the Act lacks clarity. Nevertheless, Mr. Justice Estey, speaking for the Supreme Court in Stubart Investments Ltd. v. The Queen, [1984] C.T.C. 294 at 316; 84 D.T.C. 6305 at 6323 referred to the demise of the strict interpretation rule for the construction of taxing statutes:

Courts today apply to this statute the plain meaning rule, but in a substantive sense so that if a taxpayer is within the spirit of the charge, he may be held liable

He referred to the modern rule as described by E. A. Dreidger in Construction of Statutes, 2nd ed. (1983) at 87:

Today there is only one principle or approach, namely, the words of an Act are to read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

There is no doubt about the intention of Parliament, whatever the infelicity of the language of subsection 245(2). It was intended that a benefit of the kind in question in this case be taxed as though it were specifically enumerated as a subsection of section 212. In W. L. Craddock v. M.N.R., [1969] 1 Ex. C.R. 23 at 31; [1968] C.T.C. 379 at 386, subsection 137(2) of the then Act, the predecessor of 245(2), was interpreted as in effect adding a new subclause to each of Parts I, III and IV of the then Act as appropriate.

In The Queen v. Immobiliaire Canada Ltd., [1977] C.T.C. 481; 77 D.T.C. 5332 Mr. Justice Addy upheld an assessment imposing a 15 per cent withholding tax in respect of a benefit conferred on a non-resident. The issue of the clarity of subsection 245(2) or scope of Part XIII of the Act does not appear to have been argued.

The intention of Parliament is clear, and that is that a benefit of the kind in question in this case was intended to be taxable in the hands of a nonresident under Part XIII of the Act, at the rate of tax provided for by subsection 212(1).

Subsection 245(2) only relates, however, to the "benefit” conferred, i.e.: excess amount paid over a "fair market price” or a price “reasonable in the circumstances.” Given my preceding conclusions, the "benefit” conferred on Pillar International by the plaintiff is not the full amount of the discount retained in Bermuda, but rather approximately 80 per cent thereof. (No more than one per cent of the five per cent discount usually retained in Bermuda.) See also Guilder News Company (1963) Ltd. v. M.N.R., [1973] C.T.C. 1; 73 D.T.C. 5048 (F.C.A.) where the Chief Justice stated:

If, in fact, a company simply sold a property to its sole shareholder on express terms that the price payable was an amount equal to fair market value and provided a fair manner to determine such value, I would agree with the contention on behalf of the appellants that there could not, as a matter of law, be a benefit owing out of the sale. [at 6 D.T.C. 5051]

No claim for a penalty payment was made with respect to the non-payment of the withholding tax — the defendant has been clear in its representations in that regard. Reassessments were originally issued claiming a 15 per cent withholding tax, these were subsequently re-issued claiming 10 per cent. It is not clear to me why this readjustment was made, obviously the plaintiff is unlikely to object. The reassessments claimed interest, although I understood counsel for the defendant at trial to indicate that interest was not being claimed. In any event there being some confusion concerning the exact quantum of the defendant's claim in this regard a judgment will issue directing reassessment by the Minister to give effect to these reasons, but with leave to the parties to apply to make further representations concerning the question of the quantum payable in so far as the withholding tax is concerned, if this issue cannot be resolved by the parties.

Conclusion

As noted above, a judgment will go directing reassessment in accordance with these reasons, subject to the right to counsel to make further representations on the question of the quantum payable in so far as it relates to the withholding tax.

I make no award as to costs. The defendant's handling of its case at trial was confused and disorganized. I do not think it appropriate in the circumstances to award costs to the defendant.

Appeal allowed in part.