Upper Lakes Shipping Ltd. v. MNR, 92 DTC 2381, [1993] 1 CTC 2011 (TCC)

Christie, A.C.J.T.C.:—The appellant was created by the amalgamation on December 31, 1988, of Leitch Transport Ltd. (“Leitch”), Leitch Transport Canada Ltd. and Upper Lakes Shipping Ltd. Upon the amalgamation the appellant became liable for the income tax indebtedness of Leitch.

The 1979, 1980, 1981 taxation years of Leitch are under review. Its year-end in each of those years and in prior years was March 31.

At all times relevant to these appeals Leitch was a corporation resident in Canada and included in its business was shipping on the Great Lakes and internationally. On April 27, 1970, Leitch entered into a shareholder's agreement with Wilhelmsens Dampskibsaktieselskab ("Wilhelmsens"), a company incorporated under the laws of Norway. They dealt with each other at arm's length. Open Bulk Carriers Ltd. ("Open Bulk”) is a corporation incorporated on September 25, 1969, under the laws of Bermuda. Open Bulk was created in conjunction with a joint venture by Leitch and Wilhelmsens for the purpose of transporting bulk commodities between North American and European ports.

Paragraphs 8 and 9 of the shareholder's agreement read:

8. Forthwith after the execution hereof each of the parties hereto shall subscribe and pay for 5,995 shares of open bulk at par.

9. As regards any additional moneys required by open bulk during the term of this agreement, as established by its board of directors:

(a) the parties hereto shall endeavour to obtain such amounts by way of loan from one or more banks, and each of the parties hereto shall, if required in connection with any such loan, guarantee the repayment thereof, and the payment of interest thereon, by open bulk; and

(b) to the extent that such amounts cannot be obtained by way of loan from one or more banks, the same shall be provided to Open Bulk, as to one half by each of the parties hereto, either by way of loan payable on demand and bearing interest at the rate of five per cent per annum (or such other rate as the parties hereto may from time to time agree) payable yearly or by way of the purchase at par of non-cumulative, non-voting, redeemable preference shares of open bulk, and the parties hereto shall cause the increase of the authorized capital of Open Bulk, as and when required, to include any preference shares required for such purpose;

provided that the aggregate amount guaranteed and provided by the parties hereto pursuant to this paragraph shall not exceed $200,000 or such greater amount as the parties hereto may from time to time agree.

Paragraph 8 was complied with. Bank loans were not secured pursuant to paragraph 9(a) so in each of years 1971 to 1977 inclusive Leitch made demand loans with interest at five per cent per annum to Open Bulk in accordance with paragraph 9(b). It is emphasized that they were all made prior to January 1, 1979. The significance of this will be apparent shortly.

When the shareholder's agreement was negotiated the rate of five per cent was included in paragraph 9(b) at the urging of Leitch. The motivation for this was the five per cent per annum stipulated under subsection 19(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). Under Statutes of Canada 1970-71-72, c. 63, subsection 19(1) became subsection 17(1). In these reasons up to January 1, 1979, reference to subsection 17(1) includes reference to both. There was no subsequent agreement between the parties to alter the rate of five per cent under the words in parentheses in paragraph 9(b). At the times the loans were made subsection 17(1) of the Act provided:

17(1) Where a corporation resident in Canada has loaned money to a non-resident person and the loan has remained outstanding for one year or longer without interest at a reasonable rate having been included in computing the lender's income, interest thereon, computed at five per cent per annum for the taxation year or part of the year during which the loan was outstanding, shall, for the purpose of computing the lender's income, be deemed to have been received by the lender on the last day of each taxation year during all or part of which the loan has been outstanding.

The subsection was amended by Statutes of Canada 1977-78, c. 1. Section 10 thereof reads:

10(1) Subsection 17(1) of the said Act is repealed and the following substituted therefor:

“17(1) Where a corporation resident in Canada has loaned money to a nonresident person and the loan has remained outstanding for one year or longer without interest at a reasonable rate having been included in computing the lender’s income, interest thereon, computed at a prescribed rate per annum for the taxation year or part of the year during which the loan was outstanding, shall, for the purpose of computing the lender's income, be deemed to have been received by the lender on the last day of each taxation year during all or part of which the loan has been outstanding.”

(2) Subsection (1) is applicable with respect to the computation of interest deemed to have been received by a lender after December 31, 1978.

Subsection 4300(5) of the Income Tax Regulations provided:

(5) For the purposes of subsection 17(1) of the Act, the rate of interest for a period referred to in that subsection is hereby prescribed to be

(a) 9 per cent per annum in respect of that portion of the period that is after December 31, 1978 and before January 1, 1980;

(b) 11 per cent per annum in respect of that portion of the period that is after December 31, 1979 and before January 1, 1981; and

(c) 12 per cent per annum in respect of that portion of the period that is after December 31, 1980.

In computing its income for taxation years after it commenced to make loans to Open Bulk pursuant to the shareholder's agreement Leitch included interest at the rate of five per cent per annum on the amounts outstanding in respect of those loans. This encompassed Leitch's 1979,1980 and 1981 taxation years. In reassessing for the 1979 taxation year the respondent added an amount to Leitch's income pertaining to the period January 1, 1979 to March 31, 1979, that is the difference between five per cent and the rate for that period that was prescribed under subsection 4300(5) of the Regulations. Regarding the 1980 and 1981 taxation years the amounts added to income also had reference to the difference between five per cent and the prescribed rates, but pertained to the whole of those taxation years.

The question to be answered is this: in computing its income was Leitch entitled to add only five per cent per annum in relation to the outstanding loans throughout its 1979, 1980 and 1981 taxation years or did the prescribe rates apply to those loans commencing January 1, 1979?

It strikes me that, in the context of subsection 17(1) of the Act as it read prior to the amendment effective January 1,1979, Parliament clearly implied that five per cent per annum was interest at a reasonable rate regarding loans preceding that date and this obtains even though it could be demonstrated that, for example, with respect to a loan made on October 15, 1973, five per cent per annum was not in reality a reasonable rate of interest if objectively regarded in light of considerations like rates of interest prevailing in domestic borrowing and lending markets on that date. In ascertaining what is to be regarded as interest at a" reasonable rate” for the purpose of the subsection reference can properly be made to "five per cent per annum" as both are directly associated therein. [1] When a loan was made "without interest at a reasonable rate" the remedial rate for the purpose of computing the lender's income was “five per cent per annum".

Leitch having in fact included interest at five per cent on the loans to open bulk in computing its income for its taxation years prior to 1979, the words “shall, for the purposes of computing the lender's income, be deemed to have been received by the lender" in subsection 17(1) did not come into operation with reference to those loans at that time.

I do not construe section 10 of Statutes of Canada 1977-78, c. 1, as expressly or by necessary implication having the retrospective effect of creating new obligations on Leitch regarding the amount of interest to be included in computing its income commencing January 1, 1979, with respect to the loan transactions it had entered into with open bulk prior to that date.

In Gustavson Drilling (1964) Ltd. v. M.N.R., [1977] 1 S.C.R. 271, [1976] C.T.C 1, 75 D.T.C. 5451, Dickson, J. (later Chief Justice) said at page 6 (D.T.C. 5454):

First, retrospectivity. The general rule is that statutes are not to be construed as having retrospective operation unless such a construction is expressly or by necessary implication required by the language of the Act. [2]

In Craies on Statute Law, 7th (1971) ed. this is said at page 387:

A statute is to be deemed to be retrospective, which takes away or impairs any vested right acquired under existing laws, or creates a new obligation, or imposes a new duty, or attaches a new disability in respect to transactions or considerations already past.

In Hornby Island Trust Committee v. Stormwell et al. (1989), 53 D.L.R. (4th) 435, Lambert, J.A., speaking for a majority of the British Columbia Court of Appeal said at pages 441-42:

A retroactive statute operates forward in time, starting from a point further back in time than the date of its enactment; so it changes the legal consequences of past events as if the law had been different than it really was at the time those events occurred. A retrospective statute operates forward in time, starting only from the date of its enactment; but from that time forward it changes the legal consequences of past events.

A statute should not be given a retroactive construction that has adverse effects, or a retrospective construction that interferes with "vested" rights, unless it is clear that the legislature intended that the legislation should have such a construction. The reason is that the legislature should not be presumed to have enacted a statute that treats those it affects, or some of them, not just adversely, but unfairly, with respect to acts they have undertaken in the past.

The same underlying principle requires that if a retroactive construction that has adverse effects, or a retrospective construction that interferes with "vested" rights, is intended by the legislature, those constructions should not be taken further than the legislation clearly dictates.

Subsection 10(2) stipulates the circumstances under which the prescribed rates provided for under the amended subsection 17(1) become applicable. This enactment simply decrees that they apply with respect to the computation of interest deemed to have been received by a lender after December 31, 1978. But under subsection 17(1) before and after that date a condition precedent to interest being deemed to have been received is the failure to have included interest at a reasonable rate in computing the lender's income. For reasons already stated, when the loans were made by Leitch to open bulk, five per cent per annum was in law a reasonable rate with reference to the subsection and this quality was not lost regarding those loans under the amending legislation.

The appeals are allowed with costs.

Appeals allowed.