Citation: 2008TCC529
Date: 20081212
Docket: 2002-4838(IT)G
BETWEEN:
SAKITAWAK DEVELOPMENT CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan, J.
[1] The issue in
this appeal is whether the Appellant, a municipal corporation, is entitled to an
exemption from tax on income earned outside the boundaries of its incorporating
municipality under paragraphs 149(1)(d.5) and 149(1.2)(a) of the Income
Tax Act.
[2] The hearing of
this appeal proceeded on the basis of legal argument with an Agreed Statement
of Facts and Joint Book of Documents. The agreed facts are as follows:
1.
Since October 1, 1983, Ile a la Crosse (“IOX”) has been a Northern
Municipality pursuant to The Northern Municipalities Act.
2.
Sakitawak Development Corporation (“SDC” or “Appellant”) was operating
under the authority of The Northern Municipalities Act s. 70 and s.
111.7.
3.
Section 111.7 is an amendment to The Northern Municipalities Act
that took effect in 1988-89 which allowed Northern Municipalities to
incorporate municipal development corporations.
4.
The Northern Administration District (“NAD”) essentially comprises all of
Northern Saskatchewan (excluding for administrative purposes only the
geographic areas comprising Indian Reserves, Northern Municipalities and in one
instance a Military Bombing Range).
5.
Pursuant to The Northern Municipalities Act, IOX passed Bylaw No.
102 on January 23, 1998 confirming
SDC’s status as a municipal development corporation as contemplated by s. 111.7
of The Northern Municipalities Act.
6.
The majority of the Appellant’s income since incorporation was earned
outside the geographic boundaries of IOX in the area municipally and
geographically described as the Northern Administration District (“NAD”). The
income sought to be taxed is for the year 1999. The NAD is comprised of
Provincial Lands.
7.
Prior to 1999 the Appellant enjoyed taxation exemption pursuant to s.
149(d) of the Income Tax Act (“the Act”).
[3] After
the hearing of the appeal I invited and duly received, written submissions from
the parties on the following question:
Whether Bylaw
No.2 signed on January 23, 1998 entered as an exhibit is an “agreement in
writing” within the meaning of paragraph 149(1)(d.5) and paragraph 149(1.2)(a)
of the Income Tax Act.
Background
[4] Ile-a-la-Crosse is a village in northern Saskatchewan, a region of the province prescribed under The
Northern Municipalities Act[3]
as the “Northern Saskatchewan Administration District”[4]. The Northern Saskatchewan Administration District
comprises a vast area of Provincial Lands[5],
effectively the northern half of Saskatchewan extending between its borders with Alberta and Manitoba and
bounded on the north by the Northwest
Territories. Its southern border is a
line stretching across the province north of the communities of Meadow Lake, Prince Albert
and Nipawin[6].
[5] The Northern Municipalities Act provides for the
establishment of municipalities within the Northern Saskatchewan Administration
District. A “northern municipality”[7]
is defined as a “town”[8], “northern village”[9], “northern hamlet”[10] or “the district”[11]. Paragraph 2(1)(i) defines the “district” as
“the Northern Saskatchewan Administration District not including any area
within the boundaries of a town, northern village or northern hamlet”. From
this it follows that there is a legal distinction between the “Northern
Saskatchewan Administration District” and the “district”, the former being the
totality of the prescribed area of northern Saskatchewan; and the “district”,
just one of the northern municipalities located within it. (The northern
municipality that is the district is referred to hereinafter as the “District”).
The geographical boundaries of the District can only be determined relative to the
municipal boundaries of the other northern municipalities in the Northern
Saskatchewan Administration District, the towns, northern villages and northern
hamlets.
[6] In 1983, pursuant
to The Northern Municipalities Act, the northern village of
Ile-a-la-Crosse became the northern municipality of Ile-a-la-Crosse with an
elected mayor, municipal council and various officials. By contrast, the
northern municipality of the District is administered by the Province of
Saskatchewan under its Northern Municipal Services Branch[12]. Its “council”[13] is the provincial minister responsible for northern Saskatchewan; its
“clerk”[14], the provincial administrator appointed by that minister.
By way of illustration, in 2006, Randy Braaten, the Director of
Northern Municipal Services of Saskatchewan Government Relations, was appointed
to the office of clerk of the District by Minister’s Order dated December 19,
2006.
[7] The powers and duties of municipal councils are set out in
Part VIII of The Northern Municipalities Act. Pertinent to
the present appeal is section 70 which reads:
70(1) Subject to subsection (3) and to any other express limitation in this
or any other Act, a northern municipality has full power and authority to:
(a) engage in any commercial, industrial
or business undertaking within or outside the northern municipality;
(b) participate in partnership or in any
other manner that council considers appropriate with any person in any
commercial, industrial or business undertaking, within or outside the northern
municipality;
(c) incorporate a company for the
purpose of engaging in any commercial, industrial or business undertaking
within or outside the northern municipality;
and
(d) acquire shares in a corporation
engaged in any commercial, industrial or business undertaking.
(2) For the purposes of this Act, an
activity engaged in by a northern municipality pursuant to subsection (1) is a
municipal purpose.
[8] In 1988-89, the Government of Saskatchewan amended The
Northern Municipalities Act to permit
a northern municipality, subject to the approval of the provincial minister, to
enact a bylaw incorporating an economic development corporation.
Under subsection 111.7(3), a northern municipality “shall submit” the bylaw to the
Minister who, under subsection 111.7(4), has absolute discretion over its
approval. The objects and purposes of such a corporation are set out in
subsection 111.7(2):
(2) Notwithstanding
the Act under which the corporation was incorporated, the objects and purposes
of a corporation incorporated pursuant to subsection (1) are:
(a)
the identification of economic and social development opportunities and
the preparation and amendment of an economic and social development strategy or
plan for the northern municipality or for the parties to the agreement;
(b)
the establishment and maintenance of communications with the Government
of Canada and the Government of Saskatchewan, and agencies of those
governments, to become aware of and utilize programs of those governments and
agencies that promote economic and social development in northern Saskatchewan;
(c)
the establishment and maintenance of communications with northern
municipalities and other bodies respecting economic and social development in
northern Saskatchewan;
(d)
the formulation and carrying out of economic and social programs that
benefit persons residing in northern Saskatchewan;
(d.1) the establishment and carrying out of industrial and
commercial activities that are intended to promote economic and social
development in northern Saskatchewan;
(e)
any other objects or purposes relating to economic and social
development in northern Saskatchewan that may be prescribed in the regulations.
[9] When these
amending provisions were introduced in the Saskatchewan Legislative Assembly, the
Minister then responsible explained the purpose behind conferring such powers
on northern municipalities:
[…]
Mr. Speaker, there is one other section of this Bill I wish to draw to the
members' attention. Section 20 empowers northern municipalities to establish or
participate in the establishment of economic development corporations. In
the southern part of the province, urban and rural municipalities are empowered
through The Rural Development Act to jointly participate in this type of
corporation. Widely separated communities in northern Saskatchewan,
in the absence of a rural municipal structure, make the southern model
inappropriate for the North.
Up until now, northern municipalities have been resourceful and
innovative in fostering economic activities in their communities, but
have been restricted by the existing legislation from turning their ideas into
ongoing activities with long-term benefits. The proposed amendments will offer
a vehicle whereby individual, jointly with other northern municipalities or
with other persons or entitled northern municipalities, will be able to
undertake long-term economic activities with the promise of lasting benefits to
the community and its residents.[16]
[Emphasis added.]
[10] In 1990, the northern municipality of Ile-a-la-Crosse took advantage of these changes to incorporate the
Appellant.
[11] In
1991, certain technical amendments were made to the municipal corporation provisions
in The Northern Municipalities Act. In presenting these
amendments to the Saskatchewan Legislative Assembly, the new Minister, the
Honourable Carol Carson, reiterated the policy behind the original amendments regarding
municipal development corporations:
…
Since the Act was amended in 1988, several northern municipal economic
development corporations have been established in the North. At this time they
are engaged primarily in forestry related activities in northern Saskatchewan.
And I understand they are pursuing economic opportunities in construction,
mining, and the use of other northern resources. [18]
[12] During the debate the
Member of the Legislative Assembly for Cumberland, a constituency in northern
Saskatchewan, spoke of the kinds of activities already being carried on in that
area:
…
As a member of Cumberland, I'm strongly supporting this particular
amendment. And I think many of the activities, whether in mining development or
whether in forestry development or whether in fishing and wild rice and many
other economic activities that are taking place, the people that are involved
in it will be very pleased of this amendment.[19]
[13] Later, in the
Committee of the Whole, Minister Carson answered the following question in this
fashion:
…
Mr. Martens: -- Mr. Chairman, the next question that I have has to
do with changes in the structure. I know that there are some . . . some of the
communities there are -- like Patuanak for example, part of the village is
outside of the reservation and some of it is inside. And what's inside gets
federal government grants; what's outside is strictly the responsibility of the
provincial government.
Is there some direction to include some of these things in negotiations
as it relates to the benefit that could accrue in developing the industrial
base in that framework if the federal government were more directly involved?
Hon. Ms. Carson: -- Mr. Speaker, that’s a good question and we
appreciate it. And I think what this Act does allow is for joint ventures to
be developed between communities within the municipality and communities
outside of the municipality.
So certainly that will be looked at and I appreciate that perspective.[20]
[Emphasis added.]
[14] Since its incorporation, the Appellant has carried on economic activities in
the District. Sometime prior to January 23, 1998, the minister responsible
notified the northern municipality of Ile-a-la-Crosse that it had “through inadvertence” neglected to pass the
bylaw required under subsection 111.7(2) of The Northern
Municipalities Act. As a
result, Bylaw No. 02 was passed for the purpose of, among other
things, confirming the Appellant’s status as a “municipal development
corporation” under section 111.7 of The Northern Municipalities
Act.
[15] It was against this
backdrop that in 1999, the Appellant was earning income from its economic activities
in the District. In all prior years, its income had been exempt under paragraph
149(1)(d) of the Income Tax Act. In 1998, however, the Income
Tax Act provisions applicable to municipal corporations were amended. When assessing
the Appellant’s income for 1999, the Minister of National Revenue determined
that the Appellant was not exempt from tax because it did not satisfy the new criteria.
[16] But for the
amendments to the Income Tax Act, the Appellant’s 1999 income from its
activities would have continued to be tax exempt. It goes without saying,
however, that whatever the prior law, a taxpayer’s liability in a particular
taxation year must be assessed in accordance with the current provisions.
Legislation
[17] Prior to the amendments, where a municipal
corporation carried on its income-generating activities was not a factor in the
determination of its tax-exempt status. The formerly applicable provision was paragraph 149(1)(d), the relevant portions of
which read:
149.(1) Miscellaneous
exemptions. No tax is payable under this Part on the taxable income of a
person for a period when that person was
…
(d) Municipal
or provincial corporations – a corporation … not less than 90% of the
shares or capital of which was owned by … a Canadian municipality …
[18] Under the new
legislation, a second condition for eligibility for a municipal corporation tax
exemption was added. Paragraph 149(1)(d.5) of the Act states:
149.(1) Miscellaneous
exemptions. No tax is payable under this Part on the taxable income of a person
for a period when that person was
…
(d.5) Municipal
corporations – subject to subsections (1.2) and (1.3), a
corporation, commission or association not less than 90% of the capital of
which was owned by one or more municipalities in Canada, if the income for
the period of the corporation … from activities carried on outside the
geographical boundaries of the municipalities does not exceed 10% of its income
for the period; [Emphasis added.]
…
[19] Paragraph
149(1)(d.5) is subject to paragraph 149(1.2)(a) of the Act,
the relevant portions of which read:
(1.2) Income
test. For the purposes of paragraphs (1)(d.5) …, income of a
corporation … from activities carried on outside the geographical boundaries of
a municipality does not include income from activities carried on
(a) under
an agreement in writing between
(i)
the corporation … , and
(ii)
a person who is Her Majesty in right of … a province …
within the
geographical boundaries of
…
(iii)
where the person is Her Majesty in right of a province …, the province,
…
[21] The Respondent concedes that because the Appellant was 100% owned by the northern municipality of Ile-a-la-Crosse, it meets the capital ownership requirements in
paragraph 149(1)(d.5). However, because more than 10%, (indeed,
virtually all) of its 1999 income came from activities carried on outside the geographical
boundaries of the northern municipality
of Ile-a-la-Crosse, it does not satisfy the second prong of the
criteria. Accordingly, resort must be had to paragraph 149(1.2)(a). According
to the Respondent, this provision is of no help to the Appellant because, in
1999, there was no “agreement in writing” of any kind between the Appellant and
the Province of Saskatchewan.
[22] The
Respondent contends that, on a proper reading of paragraph 149(1.2)(a),
the meaning of “agreement in writing” must be restricted to a formal contract “between”
the municipal corporation and the outside jurisdiction in which they are named as
“parties” and which is signed by them. The Respondent argues further that each
and every activity must be identified in the written agreement if the income
from that activity is to be exempt under paragraph 149(1.2)(a).
[23] I can see no
justification for reading these additional requirements into paragraph
149(1.2)(a). Other than being the interpretation favoured by his client,
no basis for such an interpretation was put forward by counsel for the Respondent.
While Parliament could have expressed itself to impose such conditions on the
taxpayer, it chose not to do so. As written, paragraph 149(1.2)(a)
speaks simply of an “agreement in writing” without the embellishments urged by
the Respondent.
Appellant’s
Submissions
[24] The Appellant contends first, that it can (either in
its own right, or acting as the agent of the northern municipality of Ile‑a‑la‑Crosse)
claim the exemption granted to a “municipality” under paragraph 149(1)(c)
of the Act. I agree with the Respondent that this argument cannot
succeed. Because the Income Tax Act makes separate provision for the
respective tax treatment of municipalities and municipal corporations, the
Appellant’s liability for tax must be determined in accordance with paragraph
149(1)(d.5), the provision expressly applicable to municipal
corporations.
[25] Alternatively, the Appellant submits that Exhibit A-4, a
written agreement executed on February 4, 2008, is an “agreement in writing”
under paragraph 149(1.2)(a). Approximately
two weeks before the hearing of this appeal, Mr. Braaten, representing the
Province of Saskatchewan in his capacity as Clerk of the northern municipality
of the District, and the authorized signing officers of the northern
municipalities of Ile‑a‑la‑Crosse and Buffalo Narrows and
their respective municipal corporations executed Exhibit A-4 in which the
parties declared their intentions to confirm in writing, among other things, an
agreement between the Appellant and the Province of Saskatchewan under which
the Appellant had carried on, was carrying on and would continue to carry on its
income-generating activities in the northern municipality of the District. Mr. Braaten
was present at the hearing of this appeal, along with Mr. Favel, the Mayor
of the Northern Village of Ile-a-la-Crosse; Mr. Woods, the Mayor of the
Northern Village of Buffalo Narrows and Mr. Eddy, the Chief Executive Officer
of the municipal development corporation of Buffalo Narrows.
[26] The Appellant argues that Exhibit A-4 is an “agreement in
writing” within the meaning of paragraph 149(1.2)(a) because it is a
written agreement between the Appellant and the Province of Saskatchewan and, in deference to the
Respondent’s interpretation of paragraph 149(1.2)(a), is “signed by” the
“parties”. Though not executed until February
4, 2008, Clause 4 of Exhibit A-4 provides that it is to apply
retroactively to December 31, 1997, well before the amendments to the municipal
corporation provisions. Further, Clause 1 of Exhibit A-4 sets out what is and
was agreed between the Appellant and the Province of Saskatchewan in respect of the Appellant’s activities in the
District:
THEREFORE the
parties pursuant to the provisions of the NMA, and without limiting the
foregoing, Section 131 thereof, for good and valuable consideration and the
mutual covenants herein exchange, legally intending to be bond, now agree as
follows:
ACKNOWLEDGEMENTS
AND AGREEMENTS:
1.
The District is agreeable and hereby confirms and agrees that IOX and
its municipal corporation, SDC and BN and its municipal development corporation
BNDC may continue to conduct or pursue the activities contemplated by Section
70 within the NSAD for the purposes identified in Section 70 and Section 111.7
of the NAD.
2.
This agreement is conditional upon and subject to the IOX, SDC, BN &
BNDC otherwise being compliant with and meeting all the requirements of The
Northern Municipalities Act, and without limiting the foregoing. Section
70, Section 111.7 and the requirement in Section 111.7(3) that the by-law
authorizing the creation of a municipal development corporation be approved by
the Minister of the Ministry of Municipal Affairs.
3.
The parties agree for the purposes of this Agreement that “activities”
in the NSAD contemplate continuation and expansion of current commercial and
entrepreneurial activities and without limiting the foregoing, in the mining,
forestry, woodfibre, excavation, construction, accommodations, transportation,
and fisheries sectors along with the provision of labour, infrastructure and
services for such industries and industrial activity in the NSAD, all with a
view of effecting the purposes and intentions expressed in Section 70 of the
NMA.
[…]
[27] The Respondent
rejects the Appellant’s position arguing firstly, that although Exhibit A-4 is
in the form of a contract, it is not an “agreement in writing” because it does
specify each and every activity carried on by the Appellant in the District.
For the reasons given above, I do not accept that an “agreement in writing”
under paragraph 149(1.2)(a) necessarily requires that degree of
detail. In my view, Exhibit A-4 is sufficiently clear with regard to the
income-generating activities that the Appellant was carrying on in 1999. The
second prong of the Crown’s argument, however, is more compelling: that Exhibit
A-4 is not an “agreement in writing” as contemplated by paragraph 149(1.2)(a)
because it was not in place in 1999. The relevant time for determining whether
the Appellant satisfied the exempting criteria is the taxation year for which
an exemption is sought. The provision in Exhibit A-4 for retroactive
application does not alter the fact that in 1999, the document was not yet in
existence. Accordingly, Exhibit A-4 is not in itself an “agreement in
writing” within the meaning of paragraph 149(1.2)(a). However, more will
be said about the effect of this document later.
Written
Submissions Regarding Bylaw No. 02
[28] Finally, regarding my query as to whether Bylaw No.
02 is an “agreement in writing” within the meaning of paragraph 149(1.2)(a),
the Respondent’s answer in full is as follows:
The Respondent states Bylaw No. 2 is not an
agreement in writing between the Appellant and the province as contemplated by
paragraph 149(1)(d.5) as the Appellant is not a party to the agreement. It is a
Bylaw passed by the Northern Municipality of Ile a la Crosse restructuring and
confirming the Appellant as a Municipal Corporation under section 111.7 of the Northern
Municipalities Act.
[29] Not surprisingly, the Appellant takes the contrary view. According
to the Appellant, the phrase “under an agreement in writing between” the
Appellant and the Province of Saskatchewan
ought to be read as “with the consent in writing of” the Province of Saskatchewan to the Appellant’s
activities. Under this interpretation and, in the particular circumstances of
the Appellant’s situation, Bylaw No. 02 is an agreement in writing under
paragraph 149(1.2)(a).
[30] In its Supplementary Submissions, the Appellant cited the
following passage from Bank of Nova Scotia v. Canada
(Minister of National Revenue) concerning the governing
principles for statutory interpretation:
Driedger in Construction of Statutes, 3rd Ed. (London, Butterworths, 1994)
131 states the following as the modern rule of interpretation of statutes:
There is only one rule in modern statutory
interpretation, namely, courts are obliged to determine the meaning of
legislation in its total context, having regard to the purpose of the
legislation, the consequences of proposed interpretations, the presumptions and
special rules of interpretation, as well as admissible external aids. In other
words, the courts must consider and take into account all relevant and
admissible indicators of legislative meaning. After taking these into account,
the court must then adopt an interpretation that is appropriate. An appropriate
interpretation is one that can be justified in terms of (a) its plausibility,
that is, its compliance with the legislative text; (b) its efficacy, that is, its
promotion of the legislative purpose; and (c) its acceptability, that is, the
outcome is reasonable and just.
[31] Driedger was also cited by the Supreme Court of Canada in Québec (Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours in respect of the interpretation
of tax legislation:
… the interpretation of tax legislation should be
subject to the ordinary rules of construction. At page 87 of his text Construction
of Statutes (2nd ed. 1983), Driedger fittingly summarizes the
basic principles: “… the words of an Act are to be 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”.
[32] Starting then, with the ordinary meaning of “agreement in
writing”, I agree with the Appellant’s argument that while capable of including
the interpretation favoured by the Respondent, its dictionary meaning is also broad
enough to extend to the notion of written consent:
agree·ment
Pronunciation: \ə-ˈgrē-mənt\
Function: noun
Date: 15th
century
1 a: the act or fact of agreeing b:
harmony of opinion, action, or character: CONCORD
2 a: an arrangement as to a course of
action b: COMPACT, TREATY
3 a: a contract duly executed and legally binding b:
the language or instrument embodying such a contract
[33] I accept as well the Appellant’s contention that the meaning of the word “agreement” need not be
restricted to a formal contract. In support of its position, the Appellant
cited the following passage from Bow River Pipe Lines Ltd. v. Canada[28], referred to by Bowie, J. in General Motors of
Canada Ltd. v. Canada[29]:
What,
then, is the object or purpose of [the transitional provision]? To my mind the answer is that if
a taxpayer has expended time or money or both with the intention of relying on
[the repealed paragraph] in conducting its affairs the repeal of the paragraph
is not applicable where that intention is evinced by agreements in writing, not
necessarily contractual in nature, entered into prior to December 4, 1985. But
those agreements must set in motion the taking of steps that lead directly to
the making of agreements of the kind described in [the transitional provision]
after that date that do give rise to contractual obligations. I do not think
that reference to an agreement in legislation or in some other context means
that the agreement must create contractual rights and obligations.[30]
[Emphasis added.]
[34] This point was specifically considered and upheld by the Federal Court of Appeal in Bow River Pipe Lines,
stating that this principle had already been “made clear” in its decision in Canada v. Trade Investments Shopping Centre Ltd.. Although ultimately
concluding that the taxpayer had not been bound to acquire the property prior
to the statutory deadline, the appellate court specifically accepted the
finding of the trial judge in Bow River Pipe Lines that a series of
letters between the parties was sufficient to constitute an “agreement in writing”
notwithstanding that, as of the deadline in the transitional provision, certain
conditions for the creation of a binding contractual obligation to acquire the
property had not yet been fulfilled.
[35] In the General Motors case, to claim the benefit of a transitional provision, the
taxpayer had to show that certain property had been acquired “pursuant to an
obligation in writing” prior to the legislative deadline. After considering the
passage from Bow River Pipe Lines cited above, Bowie, J.
distinguished the document relied on by the taxpayer from the series of letters
in Bow River Pipe Lines, finding that its terms did not “speak at all to
the acquisition by the Appellant” of the relevant property; accordingly, it did not
constitute an “obligation in writing” within the meaning of the transitional
provision.
[36] In reaching his decision, Bowie, J. also considered Trade Investments.
In that case, the transitional
provision under interpretation excluded from the purview of the new legislation
“… dispositions [of
certain property] occurring pursuant to
the terms of an agreement in writing entered into on or before” a specified date. The issue
was whether a lease containing a purchase option clause for a shopping centre
was an “agreement in writing” within the meaning of the legislation. The Minister
took the position (with which, “strictly speaking”, the Court agreed) that the agreement in writing pursuant to which the
disposition of the shopping centre actually occurred was the purchase and sale
agreement executed when the option in the lease agreement was ultimately
exercised, an event which occurred well beyond the time allowed by the
transitional provision.
[37] Noël,
J. (as he then was) rejected the limited interpretation urged by the Minister, preferring
instead to examine the purpose of the transitional provision and then to
determine whether the effect of the purchase option clause in the lease was in keeping
with that purpose so as to permit the taxpayer to claim the benefit of the
transitional provision. After determining that the transitional provision “…
was enacted exclusively to protect a seller who had obligated himself to effect
a sale under the old law …, the Court went on to consider whether the lease
created an irrevocable contractual obligation on the taxpayer (the seller of
the shopping centre) to dispose of it, even though at the relevant time, it
remained unknown whether the seller would ultimately be held to the performance
of that obligation. Convinced that this was indeed the effect of the lease
agreement, the Court held that it was in keeping with the purpose of the
transitional provision and was, therefore, an “agreement in writing”.
[38] As
in Bow River Pipe Lines and General Motors, the Court in Trade
Investments considered the substance of the document relied on by the
taxpayer, not just its form. Such an approach is consistent with the rules of
interpretation enunciated by the Supreme Court of Canada in Québec
(Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours: “… [s]ubstance should be given precedence over form to the
extent that it is consistent with the wording and objective of the statute”.
[39] What is the objective of paragraphs 149(1)(d.5) and
149(1.2)(a)? According to
departmental publications, the relevant purpose of the amendments to the
municipal corporation provisions in the Income Tax Act was:
… to prevent
municipally-owned (sic) corporations from competing in commercial
activities on a tax‑free basis outside the municipal boundaries. Allowing
municipal corporations latitude to earn up to 10% of their income outside the
geographical boundaries of their municipalities serves to balance promotion of
economic development with the prevention of an unfair advantage over
competitors.
[40] In
its written submissions, the Respondent reiterated this view, arguing that “… [t]he existence of a written agreement pursuant to s. 149(1.2)
will enable a municipal corporation to remain exempt if it earns more than 10%
of its income outside the geographical boundaries of the municipality”[39]. Counsel expanded to some extent on the department’s
position in oral argument:
The purpose behind
the exemption is you don’t want municipal development corporations entering
into the commercial and economic mainstream and competing against other people
who don’t enjoy the same exemption.
…
… it might be
a very restrictive approach, but the rationale is clearly evident because if there’s
an agreement in writing for every activity, then the province who enjoys the
exemption already is sharing their exemption with the corporate taxpayer, and
it’s clearly associated with the commercial activity, and the same applies to a
municipality.
[41] The Supreme Court of Canada has recognized that in
addition to raising revenue, tax legislation may have social and economic
purposes. The Minister’s goal of ensuring a
balance between “the promotion of
economic development with the prevention of an unfair advantage over
competitors” discloses the economic aspect of the objective behind paragraph
149(1.2)(a). Accordingly, the reality in which the Appellant was
carrying on its commercial activities, i.e. as the municipal corporation of one
municipality (tax exempt) operating in another municipality administered by the
Province of Saskatchewan (also tax exempt) in a region of the province also under
its jurisdiction is a relevant consideration.
[42] What constitutes an “agreement
in writing” will vary depending on the particular legislative provision in
question and the nature of the document relied upon by the taxpayer in all the
circumstances of its individual situation. Notwithstanding its frequent use in the Income Tax Act,
the term “agreement in writing” is not defined in the statute; nor does it have
a fixed technical meaning. From this it may be inferred that, in employing this
general term in paragraph 149(1.2)(a), Parliament intended to build into
the provision sufficient flexibility to accommodate the infinitely various
circumstances of individual taxpayers.
[43] In the trilogy of cases discussed above, what lay at the heart
of the legislation in question was a transaction (acquisition or disposition) which
by its very nature, gave rise to contractual obligations which, under the legislation,
had to be in writing. The same cannot be said of paragraph 149(1.2)(a). The
purpose of the municipal corporation amendments was to balance the prevention
of an unfair competitive advantage with the promotion of economic development; thus,
unlike the provisions considered above, the essence of the relationship between
the municipal corporation and the outside jurisdiction as contemplated by
paragraph 149(1.2)(a) is not one of mutual contractual obligation
evidenced by a written agreement. The purpose of the “agreement in writing” in
paragraph 149(1.2)(a) is to provide a means of substantiating that the
outside jurisdiction was aware of the municipal corporation’s activities and
agreed to their being carried on within its borders. In my view, the effect of Bylaw No.
02, when considered in the context of The Northern Municipalities Act
and the role of the Province of Saskatchewan in all aspects of that legislation
and vis-à-vis the Appellant, is in keeping with this legislative purpose:
it provides written proof that the Appellant’s activities in the District were
carried on with the knowledge and agreement of the Province of Saskatchewan. In
these circumstances, no harm can come from allowing the Appellant to share the
tax- exempt status enjoyed by the Province of Saskatchewan in respect of the Appellant’s activities in the District.
[44] The fact is that Bylaw No. 02
came about after the Province of Saskatchewan advised the northern municipality of Ile-a-la-Crosse that it was not in compliance with section
111.7 of The Northern Municipalities Act. At that time, the
Appellant was already carrying on activities in the District. The northern
municipality of Ile-a-la-Crosse responded to the provincial minister’s friendly
nudge by instructing its lawyers (who were acting in a dual capacity for the
Northern Municipality of Ile-a-la-Crosse and the Appellant) to ensure its compliance with The
Northern Municipalities Act. It was recommended by their solicitors
that:
… it may be in the best interest of the Northern Village and
[the Appellant] to bring [the Appellant] under section 111.7 of The Northern
Municipalities Act and without limiting the foregoing, to
2.5.1
to protect the Northern Village
from a challenge that the present Corporation is ultra vires the present powers
of the Municipal Council;
2.5.2
to protect the members of the
Municipal Council and the Board of Directors from possible criticism in
continuing the Corporation in its present form;
2.5.3
to secure the tax-exempt status
provided for Municipal Corporations under The Income Tax Act, s.149.”
[45] Article 2.5.3 specifically referred to the desire to
“secure” the Appellant’s exemption as a municipal corporation under section 149
of the Income Tax Act.
[46] Under Article 2.6 was expressed the “wish” of the
northern municipality
of Ile‑a‑la-Crosse and the Appellant “to
regularize” the Appellant and that “… to do so [they] have agreed that the
Municipal Council of the Northern Village of Ile‑a‑la‑Crosse should effect this
Bylaw.” Article 2.7.3 was aimed at
ensuring the Appellant’s compliance with the objects and purposes of a municipal corporation under The
Northern Municipalities Act which include carrying on economic
activities in northern Saskatchewan,
both within and outside of its incorporating municipality. This purpose was clearly
enunciated by the provincial minister when The Northern
Municipalities Act was amended and I repeat, for ease of reference, the key
portion of the speech cited above:
The proposed
amendments will offer a vehicle whereby individual, jointly with other northern
municipalities or with other persons or entitled northern municipalities, will
be able to undertake long-term economic activities with the promise of lasting
benefits to the community and its residents.[45]
[47] This goal was
reiterated when, in 1991, The Northern Municipalities Act was
further amended: “… [w]hat this Act does allow is for joint ventures to
be developed between communities within the municipality and communities
outside of the municipality”[46].
[48] A review of the debates recorded in Hansard reveals that it was the
lack of opportunity within the geographical boundaries of the towns, northern
villages and northern hamlets that prompted the Province of Saskatchewan to
empower northern municipalities to exploit the resources in the District
through the vehicle of the municipal corporation. In this way, the northern
municipalities could improve the economic lot of the people in settled areas by
using their municipal corporations to carry on economic activities in the
resource-rich, but virtually unpopulated, northern municipality of the District:
activities such as “… forestry … construction, mining, and the use of other
northern resources[47], “fishing and the
cultivation of wild rice …”[48] and “uranium mining. From a practical perspective, these activities, by their very nature,
were likely to be carried on outside the municipal boundaries of the towns,
northern villages and northern hamlets.
[49] Briefly summarized, then, it
was the Province of Saskatchewan that recognized
the economic needs of municipalities in northern Saskatchewan, conceived of the policy whereby northern municipalities
could incorporate municipal corporations and ultimately, enacted the
legislation to permit municipal corporations like the Appellant to carry on
economic activities in the District. It was the Province of Saskatchewan itself that reminded the northern municipality of Ile-a-la-Crosse that it needed to get its paperwork
in order to ensure compliance with The Northern Municipalities Act. And
it was against this background that the provincial minister (knowing that the
Appellant was already carrying on economic activities in the District) exercised
his discretion to approve Bylaw No. 02 in which were listed the Appellant’s activities
in the District over which, it must be remembered, that same minister had
municipal administrative authority. Absent the provincial minister’s approval, under
the Northern Municipalities Act the Appellant would have been unable to
carry on its commercial activities. In these circumstances, there was no
risk of the evil paragraph 149(1.2)(a) was aimed at preventing: Bylaw
No. 02 provides sufficient evidence of the agreement of the Province of
Saskatchewan to activities it had itself ordained, activities from which the
Appellant earned its income in 1999.
[50] I mentioned above that I would make
further comment in respect of Exhibit A-4, the written agreement between the Appellant and the Province of
Saskatchewan dated February 4, 2008. While it is not
necessary to the conclusion that Bylaw No. 02 is an “agreement in writing”
under paragraph 149(1.2)(a), Exhibit A-4 is consistent with and
buttresses further that finding. In my view, Exhibit
A-4 is analogous to
the contract ultimately signed in Bow River Pipe Lines subsequent to the
series of letters that were found to be an “agreement in writing”. Although not
in themselves giving rise to contractual obligations, the letters constituted
an agreement in writing because they “…
set in motion the taking of steps that [led] directly
to the making of agreements of the kind described in [the transitional
provision] after [the deadline] date
that [did] give rise to contractual obligations”. Similarly, Bylaw No. 02 evinces the written agreement of the Province of
Saskatchewan to the Appellant’s activities in 1999; it also paved the way for Exhibit
A-4, a formal contract of the type favoured by the Respondent between the Appellant
and the Province of Saskatchewan authorizing the Appellant’s activities in the
District.
[51] Also consistent with both Exhibit A-4 and Bylaw No. 02
are the intentions expressed in Exhibit A-3, a letter to the then Minister of
National Revenue drafted under Mr. Braaten’s authority to provide assurance of
the agreement of the Province of Saskatchewan to the Appellant’s activities.
Exhibit A-3 is described by counsel for the Appellant as follows:
Now, there is a -- there is a document put before you, A-3. I originally
had referenced this document in -- under that bullet, but I realized, as I was
doing the final draft, I hadn’t cleared it with my learned friend, so I pulled
it. But I have cleared it with my learned friend, so I can introduce this thing
to you. This kind of goes back to last day. This is where we were last day when
we were going to argue before you, and we didn’t, and we’ve come here with an
additional reason. We thought the wraparound on this agreement in writing was
to get a letter from Mr. [Braaten], the Province of Saskatchewan, to the
federal government saying with respect to 149, hey, this is how it was, this is
how it is, and this is how it’s going to continue to be. The initials here -- I
got Mr. [Braaten], just for -- that’s his handwriting at the top. “This may be
directed to all northern municipalities in the NAD,” and he initialed it off
this morning, just for peace of mind, and my learned friend agrees it can go in
front of you. At the bottom it has Mayor Duane Favel and Mayor Bobby Woods
referenced there, and Ina Fietz-Ray, New North, Saskatchewan Association
Northern Municipality -- that’s the equivalent of … SUMA [Saskatchewan
Urban Municipalities Association] and SARM [Saskatchewan Association of Rural
Municipalities]. It’s an association of northern municipalities. What this says
is -- what the agreement says, what Hansard says, what I’ve been saying, this
agreement is a bit of a wrap on that, and so I won’t go through it. I’ll just
leave it with the Court.
[52] One final point before concluding: counsel for the
Respondent argued that “[i]n tax law, form matters, and to qualify for an
exception, you must put yourself squarely within the four corners of that
exemption, otherwise the exemption will not apply.” Counsel for the Appellant seemed to be of the same view. However, in Québec
(Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours the Supreme Court of Canada established that there is no longer a presumption
against a taxpayer’s entitlement to an exemption. Thus, the taxpayer’s task is to show, on a proper interpretation of the governing provision,
that it has met the statutory criteria. This the Appellant has done.
[53] For the reasons set out above, I am satisfied that Bylaw No. 02 is an “agreement in writing” within
the meaning of paragraph 149(1.2)(a) and accordingly, the Appellant
is entitled to the tax exemption under paragraph 149(1)(d.5) of the
Income Tax Act. The appeal is allowed with costs.
Signed at Ottawa, Canada this 12th day of December, 2008.
"G. A. Sheridan"
APPENDIX
Municipal commercial undertakings
70(1) Subject to subsection (3) and to any other express limitation
in this or any other Act, a northern municipality has full power and authority
to:
(a) engage in any commercial, industrial or business undertaking
within or outside the northern municipality;
(b) participate in partnership or in any other manner than council
considers appropriate with any person in any commercial, industrial or business
undertaking, within or outside the northern municipality;
(c) incorporate a company for the purpose of engaging in any
commercial, industrial or business undertaking within or outside the northern
municipality;
and
(d) acquire shares in a corporation engaged in any commercial,
industrial or business undertaking.
(2) For the purposes of this Act, an activity engaged in by a
northern municipality pursuant to subsection (1) is a municipal purpose.
(3) Except as otherwise provided in this or any other Act, no
northern municipality shall:
(a) guarantee the payment of any bonds or debentures issued by any
commercial, industrial or business undertaking; or
(b) guarantee loans made to any person.
[…]
Municipal development
corporations
111.7(1) Notwithstanding any
other provision of this Act but subject to subsections (2) and (3), a northern
municipality may, by bylaw:
(a) direct
that a memorandum of incorporation be drafted; or
(b) enter into
agreements with:
(i)
another northern municipality;
(ii) Her Majesty the Queen in right of Saskatchewan;
(iii) any Crown corporation or an agency of a Crown corporation;
(iv) Her Majesty the Queen in right of Canada;
(v)
a band as defined in the Indian Act (Canada), as amended from time to
time;
(vi) any person; or
(vi)
any combination of the persons and entities mentioned in subclauses (i)
to (vi);
for the
purposes of securing the incorporation of a corporation pursuant to The
Business Corporations Act, The Non-profit Corporations Act, The
New Generation Co-operatives Act or The Co-operatives Act.
(2) Notwithstanding the Act under
which the corporation was incorporated, the objects and purposes of a
corporation incorporated pursuant to subsection (1) are:
(a) the
identification of economic and social development opportunities and the
preparation and amendment of an economic and social development strategy or
plan for the northern municipality or for the parties to the agreement;
(b) the
establishment and maintenance of communications with the Government of Canada
and the Government of Saskatchewan, and agencies of those governments, to
become aware of and utilize programs of those governments and agencies that
promote economic and social development in northern Saskatchewan;
(c) the
establishment and maintenance of communications with northern municipalities
and other bodies respecting economic and social development in northern Saskatchewan;
(d) the
formulation and carrying out of economic and social programs that benefit
persons residing in northern Saskatchewan;
(d.1) the
establishment and carrying out of industrial and commercial activities that are
intended to promote economic and social development in northern Saskatchewan;
(e) any other
objects or purposes relating to economic and social development in northern Saskatchewan
that may be prescribed in the regulations.
(3) A northern municipality that
proposes to make a bylaw pursuant to subsection (1) shall submit the proposed
bylaw to the minister for approval prior to the bylaw receiving third reading.
(4) The minister may approve or
disapprove a bylaw submitted pursuant to subsection (3).
(5) Where, the minister approves
a bylaw pursuant to subsection (4), the minister may impose any terms or
conditions with respect to the implementation of the bylaw that the minister
considers advisable.
(6) Notwithstanding:
(a) any other
provision of this Act; or
(b) any other
Act;
a northern municipality may
become a member of, or purchase shares, bonds, debentures or other securities
of, a corporation incorporated under an agreement made pursuant to subsection
(1).
(7) Notwithstanding any other
Act:
(a) the
Lieutenant Governor in Council, on the application of a corporation
incorporated pursuant to subsection (1), may wind up the affairs of the corporation
and dissolve the corporation, and in doing so may make any disposition of its
assets and deal with its obligations in a way that may be considered advisable
for the public good; and
(b) the Clerk
of the Executive Council, at least three weeks before winding- up proceedings
are commenced, shall publish in the Gazette and in one issue of a newspaper
circulating in the place in which the head office of the corporation is located
a notice of the intended winding-up setting forth:
(i) the proposed disposition of the assets; and
(ii) the proposed dealings with respect to the obligations of the
corporation.
(8) The minister may provide
financial assistance by way of grant, loan guarantee or other similar means, in
accordance with any terms or conditions that are prescribed in the regulations,
to any corporation incorporated pursuant to subsection (1).
(9) Subject to the regulations,
the minister may make grants or awards to any corporation incorporated pursuant
to subsection (1), northern municipality or other person whose records of
achievement in the promotion of economic and social development in northern Saskatchewan
is of outstanding significance.
(10) The Lieutenant Governor in
Council, on the recommendation of the minister, may make regulations:
(a) excluding
the application of, in whole or in part, or varying any of the provisions of
the Act under which a corporation is incorporated in order that the corporation
may more effectively and practically carry out its objects and purposes;
(b) prescribing
objects and purposes for any corporation or class of corporations in addition
to those set out in clauses (2)(a) to (d.1);
(c) for the
purposes of subsections (8) and (9).
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