Date: 19990406
Docket: 97-618-IT-G
BETWEEN:
WARREN J.A. MITCHELL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Bell, J.T.C.C.
[1] All references to sections are in respect of the Income
Tax Act (the "Act").
ISSUES:
[2] The issue is whether the Appellant is, for his 1988, 1989
and 1990 taxation years, entitled to deductions in respect of
Canadian explorations expense ("E")[1] and Canadian development expense
("D")[2]
where,
(a) A "joint exploration corporation"
("JEC") as defined in paragraph 66(15)(g)
renounced E and D pursuant to subsections 66(10.1) and
66(10.2) to its shareholder corporation ("SC") as
defined in paragraph 66(15(i), and
(b) SC renounced that E and D to the Appellant under a
"flow-through share" ("FTS")
arrangement pursuant to subsections 66(12.6) and 66(12.62).
FACTS:
[3] The parties filed an AGREED STATEMENT OF FACTS which
included the following statement:
The parties agree that the questions of fact in this appeal
will be limited to the following facts and to the attached
documents, and that there will be no witness and no other
documents produced during the hearing of this appeal.
[4] It is agreed that:
(1) JEC, was a "joint exploration corporation"
within the meaning of paragraph 66(15)(g).
(2) SC was a "shareholder corporation" within the
meaning of paragraph 66(15)(i) and owned 51% of the voting
rights of JEC.
(3) The Appellant was a director and the sole shareholder of
SC.
(4) JEC was incorporated on December 30, 1987 and commenced
business on June 9, 1988. Its taxation years ended on
December 30, 1988, December 30, 1989 and December 12,
1990, it having been dissolved on this latter date.
(5) SC was incorporated on December 30, 1987 and commenced
business on June 9, 1988. Its taxation years ended on
January 31 in each year commencing in 1989.
(6) By agreement dated June 9, 1988 ("Renunciation
Agreement"), JEC agreed to issue voting shares to SC for
$300,000 and to incur E and D in that total amount and renounce
to SC those expenses pursuant to subsections 66(10.1) and
66(10.2).
(7) By agreement dated June 9, 1988 ("Flow-Through
Agreement"), SC agreed to issue to the Appellant 300,000
common shares for $300,000, to incur $300,000 of E and D during
the period commencing on June 9, 1988 and ending on February 28,
1990 and to renounce those expenses to the Appellant.
(8) SC did not expend any of its funds on activities which
qualified as E or D and hence did not itself incur any E or D
between the above dates.
(9) JEC incurred:
(a) $154,909 of E in its 1988 taxation year,
(b) $120,091 of E in its 1989 taxation year, and
(c) $25,000 of D in its 1989 taxation year.
(10) On May 29, 1989, JEC filed with Revenue Canada an
election dated April 26 1989 to renounce E in favour of SC in the
amount of $154,909 incurred by JEC before the end of its 1988
taxation year.
(11) On April 28, 1989, SC filed with Revenue Canada, a
prescribed form renouncing to the Appellant, effective December
31, 1988 ("1988 Renunciation"), the $154,909 of E
incurred by JEC and renounced to SC.
(12) On April 16, 1990, JEC filed with Revenue Canada an
election dated April 12, 1990 to renounce E to SC in the amount
of $120,091 incurred by JEC before the end of its 1989 taxation
year and D of $25,000 incurred by JEC before the end of its 1989
taxation year.
(13) On May 14, 1990, SC filed with Revenue Canada a
prescribed form renouncing to the Appellant, effective December
31, 1989 ("1989 Renunciation"), $120,091 of E and
$25,000 of D.
(14) The Appellant added the amounts of $154,909 and $120,091
to his "cumulative Canadian exploration expense"[3] for his 1988 and
1989 taxation years respectively and the amount of $25,000 to his
"cumulative Canadian development expense"[4] for his 1989 taxation
year.
(15) The Minister of National Revenue, for the Appellant's
1988, 1989 and 1990 taxation years, disallowed all such
additions.
The parties made written submissions to the Court, no hearing
having been held.
APPELLANT'S SUBMISSIONS
[5] The Appellant's position is straight forward and
clear. The pertinent portion of subsection 66(10.1) reads:
A joint exploration corporation may, in any particular
taxation year or within 6 months from the end of that year, elect
in prescribed form in respect of that year to renounce in favour
of another corporation an agreed portion of the aggregate of such
of the joint exploration corporation's Canadian exploration
expenses as were incurred by it during a period (ending before
the end of the particular taxation year) throughout which the
other corporation was a shareholder corporation ... and, on the
making of the election, the said [expenses]... shall be
deemed, for the purposes of paragraph 66.1(6)(a) and (b), to be a
Canadian exploration expense incurred by the other corporation
during its taxation year in which the particular taxation year
ends ...".
(emphasis added)
There are analogous provisions for renounced D in paragraphs
66(10.2).
[6] Paragraphs 66.1(6)(a) defines "Canadian
exploration expense" of a taxpayer to be
"any expense incurred ... that is"
one of a number of defined expenses, the nature of none of
which is in question in this case.
[7] Counsel submits, therefore, that the E and D incurred by
JEC become, under the deeming provisions, E and D incurred for
all purposes by SC. Such E and D, by virtue of
paragraphs 66.1(6)(b) and 66.2(5)(b), fall
into SC's "cumulative Canadian exploration expense"
and "cumulative Canadian development expense".
[8] Counsel then says that by virtue of subsections 66(12.6)
and 66(12.61), such E may be renounced and, by virtue of
subsections 66(12.62) and 66(12.63), such D may be renounced to
the Appellant, and are thereby deemed to be E and D incurred by
the Appellant and never to have been incurred by SC. Those
provisions[5] read
as follows:
66(12.6) Where a person has given consideration under an
agreement to a corporation for the issue of a flow-through share
of the corporation and, during the period commencing on the day
the agreement was entered into and ending 24 months after the end
of the month that included that day, the corporation has incurred
Canadian exploration expenses, the corporation may ... in respect
of the share and within that period or within 30 days thereafter,
renounce, effective on the date on which the renunciation is made
or on such earlier date as may be set out in the form prescribed
... to the person in respect of the share ... those expenses
incurred by it during that period.
[9] Subsection 66(12.61) reads:
"Where a corporation renounces an amount to a person
under subsection (12.6):
(a) the Canadian exploration expenses to which the amount
relates shall be deemed to be Canadian exploration expenses
incurred in that amount by the person on the effective date of
the renunciation; and
(b) the Canadian exploration expenses to which the amount
relates shall, except for the purposes of that renunciation,
be deemed on and after the effective date of the renunciation
never to have been Canadian exploration expenses incurred by the
corporation."
(emphasis added)
Counsel then referred to subsection 66(12.67) which reads:
"A corporation shall not renounce under any of
subsections (12.6), (12.62) and (12.64) any expenses that are
deemed to have been incurred by it by virtue of a renunciation
under this section by another corporation that is not related to
it."
It is implicit in Counsel's submission that because SC
controlled JEC, those two corporations were related within the
meaning of the Act.
[10] Appellant's Counsel, in his written submission, said
that there is no debate that had SC actually incurred the
expenses it could have renounced them to the Appellant. He
further said that the effect of the deeming rule is that the
expenses that were deemed to be incurred by SC are treated as if
actually incurred by SC. He submitted that it is through deeming
rules that Parliament indicates its intention to treat a thing as
something that it is not. He then quoted from
R. v. Verrette [1978] 2 S.C.R. 838 at 845:
A deeming provision is a statutory fiction; as a rule it
implicitly admits that a thing is not what it is deemed to be but
decrees that for some particular purpose it shall be taken as if
it were that thing although it is not or there is a doubt as to
whether it is. A deeming provision artificially imports into a
word or an expression an additional meaning which they would not
otherwise convey beside the normal meaning which they retain
where they are used; it plays a function of enlargement analogous
to the word "includes" in certain definitions; however,
"includes" would be logically inappropriate and would
sound unreal because of the fictional aspect of the
provision.
ANALYSIS and CONCLUSION
[11] I agree with the Appellant's submissions.
[12] I shall set forth Respondent's main submissions
together with my responses thereto.
[13] Respondent's counsel suggested that the deeming
provisions found in the joint exploration corporation rules are
not broad enough to contemplate a "double renunciation"
and that, therefore, the expenses claimed by the Appellant do not
fit within the letter of the renunciation rules. She submitted
that subsection 66(10.1) only deems the expenses to have
been incurred by the "other corporation, in this case, SC,
"for the purposes of paragraph 66.1(6)(a) and
(b) of the Act". She then submitted that the deeming
provisions were merely intended to be mechanisms to allow the
"other corporation", in whose favour the renunciation
was made, to treat the expenses as having been incurred by it for
the purpose of calculating its various pools of expenses from
which it could then claim its deductions. She continued with the
statement that the language is specific enough for those purposes
but does not deem the expenses to have been incurred for all
purposes. I find no reason to construe the language to that end.
Subsection 66(10.1) in deeming the E renounced by JEC to SC to
have been incurred by SC, clearly and simply does just that
– nothing more and nothing less. Neither that subsection
nor paragraphs 66.1(6)(a) and 66.1(6)(b) limit the
use of such E. The same reasoning applies to subsection 66(10.2)
and paragraphs 66.2(5)(a) and 66.2(5)(b) respecting
D.
[14] The written submission continued:
Subsection 66(10.1) then goes on to deem the expenses to have
been incurred "during a particular taxation year of the
other corporation" [i.e. SC]. However, it does not deem
them to have been incurred at any particular time during the
taxation year. While this is all that is required to enable [SC]
to add the expenses to its own resource pools, it is not broad
enough language to convert these expenses into [SC's]
expenses for all purposes.
In fact, the words used by counsel, namely "during a
particular taxation year of the other corporation" are not
an accurate quote. As set forth above, subsection 66(10.1)
states that a joint exploration corporation may, in any
particular taxation year, renounce by election and on so
doing, the expense
shall be deemed, for the purposes of paragraphs
66.1(6)(a) and (b), to be a Canadian exploration
expense incurred by the other corporation during its taxation
year in which the particular taxation year ends ...
(emphasis added)
[15] Counsel states further that
...because those provisions do not specify the day the
expenses were deemed to have been incurred, the possibility of
such expenses qualifying for treatment under provisions requiring
that the expense be incurred at a particular point in time is
thereby eliminated.
In the case at hand the FTS provisions (subsections 66(12.6)
and 66(12.62) of the Act) upon which the Appellant relies
require that the expense be incurred "during the period
commencing on the day the agreement was entered into and ending
24 months after the end of the month that included that
day".
She then stated that
As the expenses in question are not deemed by virtue of
subsection 66(10.1) and 66(10.2) of the Act to have been
incurred on a particular day, it cannot be concluded that they
were incurred during the particular time period referred to in
subsections 66(12.6) and 66(12.62) of the Act.
I do not agree. There is no provision requiring an expense to
be incurred "at a particular point in time" or on a
"particular day". Subsection 66(12.6) provides that
where a person (Appellant) has given consideration ($300,000)
under an agreement (Flow-Through Agreement) to a corporation (SC)
for the issue of a flow-through share and,
during the period commencing on the day the agreement was
entered into [June 9, 1988] and ending 24 months after the end of
the month that included that day [July 1, 1990]
the corporation has incurred E, it may within that period or
within 30 days thereafter, renounce
effective on the date on which the renunciation is made or on
such earlier date as may be set out in the form prescribed
... to the person in respect of the share [Appellant]
the amount of expenses incurred by it during that period.
[16] All of the E and D were deemed to have been incurred by
SC in the above described period. The $154,909 of E incurred by
JEC in its taxation year ended December 30, 1988 is deemed to
have been incurred by SC in its 1989 taxation year.[6] It is agreed that SC
renounced that E, effective on December 31, 1988, to the
Appellant.[7] The
$120,091 of E and $25,000 of D incurred by JEC in its taxation
year ended December 30, 1989, is deemed to have been incurred by
SC in its 1990 taxation year.[8] It is agreed that SC renounced that E and D,
effective on December 31, 1989, to the Appellant.[9]
[17] Respondent's counsel then compared the language used
in the joint exploration corporation deeming provisions [66(10.1)
and 66(10.2)] with the language used in the flow-through share
deeming provisions [66(12.61) and 66(12.63)]. She went on to
refer to budget proposals respecting subsection 66(12.67)
and the "statutory scheme" of the Act relating
to resource expenditures. She referred to "tax incentive
schemes" upon which the Appellant relies and described the
history of the introduction of the joint exploration corporation
concept in 1962 including a statement respecting the object of
the joint exploration corporation provisions. She also referred
to "Technical Notes to a Notice of Ways and Means Motion
Relating to Income Tax" issued by the Minister of Finance in
October 1986. There followed a discussion of object and spirit
submitting that the joint exploration corporation provisions and
flow-through share provisions were conceived with a different
object in mind and that if this were not so, there would be no
need for two different incentives with two different sets of
rules providing for the renunciation of expenses by one person to
another.
[18] In studying this approach I do not agree with this
construction of these statutory provisions. In this regard, with
specific reference to the object and spirit of the legislation,
the Supreme Court of Canada has commented on several occasions.
In Antosko et al v. The Queen, 94 DTC 6314 (SCC),
Iacobucci, J. at 6321 said:
Where the words of the section are not ambiguous, it is not
for this Court to find that the appellants should be disentitled
to a deduction because they do not deserve a
"windfall", as the respondent contends. In the absence
of a situation of ambiguity, such that the Court must look to the
results of a transaction to assist in ascertaining the intent of
Parliament, a normative assessment of the consequences of the
application of a given provision is within the ambit of the
legislature, not the courts.
[19] In Duha Printers (Western) Ltd. v. Her Majesty the
Queen, 98 DTC 6334 (SCC) at 6350 Iacobucci, J. said:
Moreover, this Court emphasized in Antosko supra, ...
that, although various techniques may be employed in interpreting
the Act, "such techniques cannot alter the result
where the words of the statute are clear and plain and where the
legal and practical effect of the transaction is
undisputed".
[20] In Mattabi Mines Ltd. v. Ontario (Minister of
Revenue) [1988] 2 C.T.C. 294 (SCC) at 304, Wilson
J. said:
Interpretation according to the "object and spirit"
of the legislation cannot, in my view, overcome a clear statutory
definition. This is not a case in which the Court has a choice of
the interpretations it may put upon the language used by the
legislature. The legislature has specifically addressed the
subject.
[21] Estey, J. in Stubart Investments Ltd. v. The
Queen, 84 DTC 6305 (SCC) at 6323 said that
E.A. Driedger, in "Construction of Statutes"
2nd ed. (1983) at p. 87 "put the modern rule
succinctly", namely:
Today there is only one principle or approach, namely, 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.
[22] In Neuman v. M.N.R., 98 DTC 6297 (SCC) at 6305,
the Supreme Court of Canada said:
We should not be quick to embellish the probation at issue
here when it is open for the legislator to be precise and
specific with respect to any issue to be avoided.
[23] In Friesen v. The Queen, 95 DTC 5551 (SCC) Major,
J. said at 5553,
I accept the following comments on the Antosko case in
P.W. Hogg and J.E. Magee, Principles of Income Tax
Law (1995), Section 22.3(c) 'Strict and purposive
interpretation; at p. 453-454:
It would introduce intolerable uncertainty into the Income
Tax Act if clear language in a detailed provision of the Act
were to be qualified by unexpressed exceptions derived from a
court's view of the object and purpose of the provision ...
[The Antosko case] is simply a recognition that "object and
purpose" can play only a limited role in the interpretation
of a statute that is as precise and detailed as the Income Tax
Act. When a provision is couched in specific language that
admits of no doubt or ambiguity in its application to the facts,
then the provision must be applied regardless of its object and
purpose. Only when the statutory language admits of some doubt or
ambiguity in its application to the facts is it useful to resort
to the object and purpose of the provision.
[24] As stated above, the language in subsection 66(10.1)
deems the E renounced by JEC to SC:
for the purposes of paragraph 66.1(6)(a) and
(b), to be Canadian exploration expenses incurred by
SC. There is no limitation upon the E so incurred by SC. The
same reasoning applies to D renounced under subsection 66(10.2).
The language is clear and plain. No research of object and spirit
is necessary.
[25] The E and D has been claimed by the Appellant and can
only be claimed once. That is the "legal and
practical"[10] result of the pertinent legislation. No one other
than the Appellant would be entitled to the deductions claimed by
the Appellant. One of the incidents of incentive legislation is
that deductions are given. The fisc in no way suffers from the
Appellant's success in this case.
[26] For the reasons outlined, the appeals are allowed with
costs.
Signed at Ottawa, Canada this 7th day of April
1999.
"R.D. Bell"
J.T.C.C.
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