Connaught Laboratories Limited v. Her Majesty the Queen, [1995] 1 CTC 216

Reed J.:—The issue in this case is whether the plaintiff is required to pay interest on taxes calculated to be payable with respect to a given year, as a result of a capital gain in that year, when the tax payable becomes zero as the result of the application of a capital loss arising in the subsequent year. In this case the plaintiff had available to it unused deductions and tax credits which could have been used, in any event, to offset the capital gain in the taxation year, to bring the tax payable to zero, if the capital loss had not been used for that purpose.

The plaintiff, Connaught Laboratories Ltd., filed a tax return for its 1981 taxation year showing nil tax payable. In 1985 the Minister reassessed the plaintiff’s return and inter alia added to the computation of its taxable income for 1981 a net capital gain in the amount of $275,423. Reassessment on this basis was not contested. In 1982, however the plaintiff had incurred a net capital loss of $273,452, and was entitled to carry this amount back to be applied against the 1981 net capital gain. At the request of the plaintiff, the 1985 reassessment was prepared on that basis and this resulted in nil taxes being payable with respect to the 1981 year.

The plaintiff had with respect to the 1981 taxation year, undeclared scientific research expenditures available of approximately $12,000,000. It had available unused investment tax credits of approximately $3,000,000. The former can be carried forward indefinitely and applied against income in future years. The latter, while also being able to be carried forward to reduce taxes payable in the future, are accorded a limited life for that purpose. In addition, capital losses have even less flexibility; they can only be applied against capital gains for the purpose of reducing taxable income. Prudent tax planning, therefore, dictates that the 1982 capital loss should be applied against the 1981 capital gain and that investment tax credits should be used, to the extent it is possible to do so, to reduce taxes payable, ahead of undeclared scientific research expenditures. This is what the taxpayer chose to do.

Subsection 161(7) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63 (the "Act") provides for the payment of interest with respect to the carryback of capital losses:

Where a taxpayer is entitled to deduct under section 111 in computing his taxable income for a taxation year an amount in respect of a loss for the taxation year immediately following the taxation year (hereinafter in this subsection referred to as "the loss year"), for the purpose of computing interest under subsection (1) or (2) on tax or a part or instalment of tax for the taxation year for any portion of the period in respect of which the interest is payable on or before the last day of the loss year, the tax payable for the taxation year shall be deemed to be the amount that it would have been if the taxpayer were not entitled to deduct any amount under section 111 in respect of that loss.

[Emphasis added.]

The Minister argues that the plaintiff owes interest with respect to the 1981 taxation year, on the $273,452 which was not paid in that year, even though as a result of the capital losses incurred in 1982 the tax payable for 1981 was reduced to zero. The capital loss was not incurred until 1982 and taxes were payable with respect to the $273,452 for the 1981 taxation year. The plaintiff argues that had there been no capital losses in 1982 it would still have had no tax payable that year because it would have used either the investment tax credits or the undetected scientific research expenditures available to it, to reduce its tax payable to zero.

I do not interpret subsection 161(7) in the same way as counsel for the plaintiff. I interpret the term "tax payable", upon which interest is to be paid, pursuant to that subsection, as referring to the tax payable on the basis of the particular way the taxpayer chooses to compute its taxable income, when there is an option available, in this regard. I do not interpret that subsection as referring to tax which might have been payable had another option been chosen. Had the taxpayer chosen to use the undetected scientific research expenditures or its investment tax credits then the tax payable in 1981 would have been zero. The taxpayer would also however not have had the amounts so used available to set off against future income or future taxes payable. Nor would the taxpayer have been able to use the capital losses which it incurred in 1982, to lower taxable income, unless it realized capital gains in the future against which to set them.

My conclusion is that the wording of the subsection 161(7) requires the interest payment which the Minister has assessed. I find no ambiguity in the wording. Nor do I find it offensive to the purpose or the objectives of the Act to interpret it as the Minister has done in the context of the plaintiffs situation.

I do not think the reasons in Stubart Investments Ltd. v. The Queen, [1984] S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305, are of assistance to the plaintiff, nor are the excerpts quoted from the comments of Senator Hayden when the Bill, which added subsection 161(7) to the Income Tax Act, was being debated (Senate Debates, 1st Sess., 22nd Pari., 1953-54, page 594). Applying the rules of statutory interpretation set out in Stubart leads to the conclusion respecting the interpretation of subsection 161(7) which I have set out above. Senator Hayden described the provision as being intended to cover the situation where a taxpayer ignores payment of taxes for one year in anticipation of a capital loss in the second. He described the provisions as being intended to cover the situation where a taxpayer in the taxation year in question makes a profit. The Senator’s comments were designed to illustrate in a general way the type of situation which the provisions were intended to cover but those comments were not intended to be an exhaustive description of the operation of the provisions. Indeed, the Senator’s comments cannot take precedence over the clear words of the subsection. The words of Chief Justice Dickson in The Queen v. Bronfman, [1987] 1 S.C.R. 32, [1987] 1 C.T.C. 117, 87 D.T.C. 5059 (S.C.R. 55, C.T.C. 129, D.T.C. 5067-68), as quoted in Trico Industries Ltd. v. M.N.R., [1994] 2 C.T.C. 2053, 94 D.T.C. 1740 (T.C.C.), are pertinent at page 2063 (D.T.C. 1747):

… The courts must deal with what the taxpayer actually did and not what he might have done....

This principle, I believe, can also apply to what a taxpayer did not do and not what he might have done.

Counsel for the plaintiff drew my attention to a technical interpretation letter, dated June 1991, issued by Revenue Canada, which states that with respect to the facts described therein, it is departmental practice not to charge interest under subsection 161(1) of the Act. The facts describe a situation in which in year one, the taxpayer had a taxable capital gain of $1,000 and non- capital losses of $1,000. The losses were applied against the gain to result in nil taxable income for the year. In year two, the taxpayer suffered a taxable capital loss of $ 1,000 and therefore wished to have that applied against the taxable capital gain of the previous year, retaining the non-capital losses of that year to be applied against future years’ income. The letter states that the department allows such a refiling by the taxpayer and that interest is not charged with respect to the capital gain of year one because no tax was payable under either the original or the amended return.

That fact situation is different from the present one. In year one, on the facts described by the letter, the capital gain was declared and no tax was payable because of non-capital losses incurred by the taxpayer. Thus when the amended return was filed it was merely a matter of substituting one type of loss for another-the taxable income remained nil. In the present case there were taxes payable at the end of year one, as a result of the undeclared taxable capital gain of that year. In the present situation, had the taxpayer declared the taxable capital gain in 1981 and offset against it the scientific research expenditures and unused investment tax credits, it may be that the department would have allowed the substitution of the subsequent capital loss in 1982 for those expenditures and credits. But that is not what occurred. This is not a situation where there were no taxes payable at year end-taxes were payable as a result of the undeclared capital gain. I do not think the two fact situations are comparable. And, in any event, a departmental interpretation letter cannot alter the unambiguous terms of a provision of the Act.

For the reasons given the plaintiff’s claim must be dismissed, except for the difference between $313,135 and $273,452 ($39,683) which I have not referred to in detail because I understood both counsel to agree that that adjustment must be made.

Appeal dismissed.