Joyal,
J.:—This
is
an
appeal
by
way
of
statement
of
claim
pursuant
to
subsection
172(2)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act")
from
two
notices
of
reassessment,
dated
September
26,
1988,
which
varied
the
plaintiff's
income
tax
payable
for
the
taxation
years
1985
and
1986.
Background
The
plaintiff
Hickman
Motors
Ltd.
(hereafter
Hickman),
along
with
associated
companies,
Hickman
Holdings
Ltd.
(hereafter
Holdings),
Trio
Holdings
Ltd.
(hereafter
Trio),
A.E.
Hickman
Company
Ltd.
(hereafter
A.E.),
and
Hickman
Equipment
(1985)
Ltd.
(hereafter
Equipment
85),
carries
on
business
in
the
province
of
Newfoundland
and
has
its
principal
place
of
business
in
St.John’s.
At
one
time,
Hickman
Equipment
Ltd.
(hereafter
Equipment),
not
to
be
confused
with
Equipment
85,
was
a
wholly
owned
subsidiary
of
A.E.
Its
principal
business
was
in
the
leasing
of
heavy
equipment.
Its
losses
and
liabilities
were
reflected
in
the
consolidated
financial
statements
of
the
parent.
The
management
at
Hickman
thought
it
necessary
to
correct
this
situation
by
disassociating
the
two
companies
so
as
to
make
A.E.'s
financial
situation
more
attractive
to
suppliers
and
purchasing
groups.
It
is
stated
that
John
Deere
Ltd.,
which
was
the
major
equipment
supplier
for
Equipment,
was
pressuring
the
Hickman
group
to
display
its
financial
support
for
Equipment.
In
order
to
achieve
this
end,
a
corporate
restructuring
was
undertaken
by
the
plaintiff
and
the
associated
group,
consisting
of
the
following
transactions:
1.
On
December
14,
1983,
Holdings
caused
the
incorporation
of
Trio
as
its
wholly
owned
subsidiary;
2.
On
December
15,
1983,
A.E.
invested
$860,000
in
redeemable
preference
shares
of
Trio;
3.
On
December
15,
1983,
Trio
acquired
from
A.E.
all
the
outstanding
shares
of
Equipment
for
$1;
4.
On
December
16,
1983,
Trio
invested
$860,000
in
redeemable
shares
of
Equipment;
5.
On
December
14,
1984,
all
shares
of
Equipment
were
sold
by
Trio
for
$860,000
to
the
plaintiff;
6.
On
December
28,
1984,
Equipment
was
voluntarily
liquidated
and
wound
up
into
its
parent,
the
plaintiff;
7.
On
January
2,
1985,
Trio
caused
the
incorporation
of
Equipment
85,
and
invested
$860,000
in
the
common
shares;
8.
On
January
2,
1985,
all
the
assets,
net
of
liabilities
of
Equipment
were
sold
by
the
plaintiff
to
Equipment
85
for
the
consideration
of
$860,000.
As
a
result
of
the
winding-up
of
Equipment,
there
was
transferred
to
the
plaintiff
$876,859
of
non-capital
losses
of
Equipment
and
the
undepreciated
capital
cost
balance
of
$5,196,442,
of
which
$2,029,942
was
claimed
by
the
plaintiff
as
capital
cost
allowance
in
respect
of
the
taxation
year
1984.
In
its
1984
income
tax
return,
the
plaintiff
reported
a
loss
of
$1,251,682
and
non-capital
losses
carried
forward
from
1981,
1982,
1983
and
1984
for
total
noncapital
losses
carried
forward
to
1985
of
$2,131,912.
In
its
1985
income
tax
return,
the
plaintiff
reported
a
net
income
of
$985,527
and
applied
against
that
amount
a
similar
amount
of
non-capital
losses,
thereby
yielding
nil
taxable
income.
In
its
1986
income
tax
return,
the
plaintiff
reported
a
net
income
of
$989,460
and
applied
against
that
amount
a
similar
amount
of
non-capital
losses,
thereby
yielding
nil
taxable
income.
By
notices
of
reassessment
dated
September
26,
1988,
the
defendant
disallowed
the
capital
cost
allowance
claimed
by
the
plaintiff
in
1984,
and
accordingly
varied
the
plaintiff's
income
tax
payable
for
the
taxation
years
1985
and
1986
on
the
ground
that
the
assets
were
not
acquired
by
the
plaintiff
for
the
purpose
of
gaining
or
producing
income.
By
notice
of
objection
dated
December
21,
1988,
the
plaintiff
objected
to
the
defendant's
reassessment
on
the
ground
that
it
was
not
required
to
show
that
the
assets
were
acquired
for
the
purpose
of
gaining
or
producing
income,
as
the
assets
were
transferred
as
part
of
a
business
reorganization
pursuant
to
subsections
88(1)
and
88(1.1)
of
the
Act,
and
alternatively,
if
such
a
purpose
was
necessary,
the
plaintiff
did
in
fact
acquire
and
use
the
assets
to
gain
or
produce
income.
By
notice
of
confirmation,
dated
April
27,
1989,
the
defendant
confirmed
the
reassessments
on
the
ground
that
there
was
no
non-capital
loss
for
the
1984
taxation
year
that
was
deductible
in
computing
the
taxable
income
for
the
1985
and
1986
taxation
years.
The
defendant's
case
The
defendant
alleges
that
the
claim
by
the
plaintiff
for
the
deduction
of
capital
cost
allowance
was
properly
disallowed
on
the
following
grounds:
1.
No
portion
of
the
capital
cost
of
the
property
acquired
in
the
winding-up
was
wholly
applicable
or
could
reasonably
be
regarded
as
applicable
to
the
income
from
the
plaintiff's
business
in
its
1984
taxation
year
within
the
meaning
of
paragraph
20(1)(a)
of
the
Act;
2.
The
property
acquired
in
the
winding-up
was
not
acquired
by
the
plaintiff
for
the
purpose
of
gaining
or
producing
income
from
its
business,
and
hence
was
deemed
not
to
be
depreciable
property
by
paragraph
1102(1)(c)
of
the
Regulations;
and
3.
In
any
event,
to
the
extent
that
any
portion
of
the
capital
cost
allowance
deduction
by
the
plaintiff
was
in
respect
of
property
used
for
the
purpose
of
earning
leasing
revenue,
subsection
1100(15)
of
the
Regulations
required
its
reduction
to
practically
nil,
as
the
amount
of
the
plaintiff's
income
for
the
year
from
leasing
the
property
was
insignificant.
The
plaintiff's
case
The
plaintiff
takes
the
position
that
the
transaction
entered
into
late
in
December
of
1984
fully
complies
with
the
expressed
provisions
of
subsections
88(1)
and
88(1.1)
of
the
Income
Tax
Act.
The
assets
involved
were
transferred
in
the
course
of
a
business
reorganization
of
the
kind
contemplated
in
that
section.
They
were
transferred
for
the
purposes
of
gaining
income
and
were
in
fact
used
for
such
purposes.
In
any
event,
argues
the
plaintiff,
section
88
of
the
Act
provides
for
automatic
rollover
provisions
whereby
on
the
winding-up
of
a
wholly-owned
subsidiary
into
its
parent,
all
of
the
rights
and
obligations,
including
of
course
the
losses
of
the
subsidiary,
are
transferred
to
the
parent.
That
is
all
that
section
88
provides
and
it
should
be
unnecessary
to
establish
that
the
acquired
assets
produced
income.
Further,
says
the
plaintiff,
nothing
in
its
course
of
action
was
an
abuse
of
rights
under
the
Act.
The
plaintiff
dutifully
followed
the
method
and
procedure
laid
down
in
the
Act
and
is
therefore
entitled
to
all
of
its
relieving
provisions.
The
applicable
law
The
provisions
of
the
Act
cited
to
me
by
counsel
for
the
parties
are
as
follows:
88(1.1)
Non-capital
losses,
etc.,
of
a
subsidiary—Where
a
Canadian
corporation
(in
this
subsection
referred
to
as
the
subsidiary”)
has
been
wound-up
and
not
less
than
90
per
cent
of
the
issued
shares
of
each
class
of
the
capital
stock
of
the
subsidiary
were,
immediately
before
the
winding-up,
owned
by
another
Canadian
corporation
(in
this
subsection
referred
to
as
the'
parent”)
and
all
the
shares
of
the
subsidiary
that
were
not
owned
by
the
parent
immediately
before
the
winding-up
were
owned
at
the
time
by
a
person
or
persons
with
whom
the
parent
was
dealing
at
arm's
length,
for
the
purpose
of
computing
the
taxable
income
of
the
parent
and
the
tax
payable
under
Part
IV
by
the
parent
for
any
taxation
year
commencing
after
the
commencement
of
the
winding-up,
such
portion
of
any
non-capital
loss,
restricted
farm
loss
or
farm
loss
of
the
subsidiary
as
may
reasonably
be
regarded
as
its
loss
from
carrying
on
a
particular
business
(in
this
subsection
referred
to
as
the
"subsidiary's
loss
business")
and
any
other
portion
of
any
non-capital
loss
of
the
subsidiary
from
any
other
source
for
any
particular
taxation
year
of
the
subsidiary
(in
this
sub-section
referred
to
as
the
"subsidiary's
loss
year"),
to
the
extent
that
it
(a)
was
not
deducted
in
computing
the
taxable
income
of
the
subsidiary
for
any
taxation
year
of
the
subsidiary,
and
(b)
would
have
been
deductible
in
computing
the
taxable
income
of
the
subsidiary
for
its
taxation
year
commencing
after
the
commencement
of
the
winding-
up,
on
the
assumption
that
it
had
such
a
taxation
year
and
that
it
had
sufficient
income
for
that
year,
shall,
for
the
purposes
of
paragraphs
111(1)(a),
(c)
and
(d),
subsection
111(3)
and
Part
IV,
(c)
in
the
case
of
such
portion
of
any
non-capital
loss,
restricted
farm
loss
or
farm
loss
of
the
subsidiary
as
may
reasonably
be
regarded
as
its
loss
from
carrying
on
the
subsidiary’s
loss
business,
be
deemed,
for
the
taxation
year
of
the
parent
in
which
the
subsidiary's
loss
year
ended,
to
be
a
non-capital
loss,
restricted
farm
loss
or
farm
loss,
respectively,
of
the
parent
from
carrying
on
the
subsidiary’s
loss
business,
that
was
not
deductible
by
the
parent
in
computing
its
taxable
income
for
any
taxation
year
that
commenced
before
the
commencement
of
the
winding-up,
and
(d)
in
the
case
of
any
other
portion
of
any
non-capital
loss
of
the
subsidiary
from
any
other
source,
be
deemed,
for
the
taxation
year
of
the
parent
in
which
the
subsidiary's
loss
year
ended,
to
be
a
non-capital
loss
of
the
parent
that
was
derived
from
the
source
from
which
the
subsidiary
derived
the
loss
and
that
was
not
deductible
by
the
parent
in
computing
its
taxable
income
for
any
taxation
year
that
commenced
before
the
commencement
of
the
winding-up,
except
that
(e)
where,
at
any
time,
control
of
the
parent
or
subsidiary
has
been
acquired
by
a
person
or
persons
(each
of
whom
is
in
this
section
referred
to
as
the
"purchaser")
such
portion
of
the
subsidiary’s
non-capital
loss
or
farm
loss
for
a
taxation
year
ending
before
that
time
as
may
reasonably
be
regarded
as
its
loss
from
carrying
on
a
particular
business
is
deductible
by
the
parent
for
a
particular
taxation
year
ending
after
that
time
(i)
only
if
throughout
the
particular
year
and
after
that
time
that
business
was
Carried
on
by
the
subsidiary
or
parent
for
profit
or
with
a
reasonable
expectation
of
profit,
and
(ii)
only
to
the
extent
of
the
aggregate
of
(A)
the
parent's
income
for
the
particular
year
from
that
business
and,
where
properties
were
sold,
leased,
rented
or
developed
or
services
rendered
in
the
course
of
carrying
on
that
business
before
that
time,
from
any
other
business
substantially
all
the
income
of
which
was
derived
from
the
sale,
leasing,
rental
or
development,
as
the
case
may
be,
of
similar
properties
or
the
rendering
of
similar
services,
and
(B)
the
amount,
if
any,
by
which
(I)
the
aggregate
of
the
parent's
taxable
capital
gains
for
the
particular
year
from
the
disposition
of
property
owned
by
the
subsidiary
at
or
before
that
time,
other
than
property
that
was
acquired
from
the
purchaser
or
a
person
who
did
not
deal
at
arm's
length
with
the
purchaser,
exceeds
(II)
the
amount,
if
any,
by
which
the
aggregate
of
the
parent's
allowable
capital
losses
for
the
particular
year
from
the
disposition
of
property
described
in
sub-clause
(i)
exceeds
the
aggregate
of
its
allowable
business
investment
losses
for
the
particular
year
from
the
disposition
of
that
property.
20(1)
Notwithstanding
paragraphs
18(1)(a),
(b)
and
(h),
in
computing
a
taxpayer's
income
for
a
taxation
year
from
a
business
or
property,
there
may
be
deducted
such
of
the
following
amounts
as
are
wholly
applicable
to
that
source
or
such
part
of
the
following
amounts
as
may
reasonably
be
regarded
as
applicable
thereto:
(a)
capital
cost
of
property
—
such
part
of
the
capital
cost
to
the
taxpayer
of
property,
or
such
amount
in
respect
of
the
capital
cost
to
the
taxpayer
of
property,
if
any,
as
is
allowed
by
regulation.
.
.
.
1100(15)
Leasing
properties
—
Notwithstanding
subsection
(1),
in
no
case
shall
the
aggregate
of
deductions,
each
of
which
is
a
deduction
in
respect
of
property
of
a
prescribed
class
that
is
leasing
property
owned
by
a
taxpayer,
otherwise
allowed
to
the
taxpayer
under
subsection
(1)
in
computing
his
income
for
a
taxation
year,
exceed
the
amount,
if
any,
by
which
(a)
the
aggregate
of
amounts
each
of
which
is
(i)
his
income
for
the
year
from
renting,
leasing,
or
earning
royalties
from,
a
leasing
property
or
a
property
that
would
be
a
leasing
property
but
for
subsection
(18),
(19)
or
(20)
where
such
property
is
owned
by
him,
computed
without
regard
to
paragraph
20(1)(a)
of
the
Act,
or
(ii)
the
income
of
a
partnership
for
the
year
from
renting,
leasing
or
earning
royalties
from,
a
leasing
property
or
a
property
that
would
be
a
leasing
property
but
for
subsection
(18),
(19)
or
(20)
where
such
property
is
owned
by
the
partnership,
to
the
extent
of
the
taxpayer's
share
of
such
income,
exceeds
(b)
the
aggregate
of
amounts
each
of
which
is
(i)
his
loss
for
the
year
from
renting,
leasing
or
earning
royalties
from,
a
property
referred
to
in
subparagraph
(a)(i),
computed
without
regard
to
paragraph
20(1)(a)
of
the
Act,
or
(ii)
the
loss
of
a
partnership
for
the
year
from
renting,
leasing
or
earning
royalties
from,
a
property
referred
to
in
subparagraph
(a)(ii),
to
the
extent
of
the
taxpayer's
share
of
such
loss.
Paragraph
1102(1)(c)
of
the
Regulations:
The
classes
of
property
described
in
this
Part
and
in
Schedule
II
shall
be
deemed
not
to
include
property
(c)
that
was
not
acquired
by
the
taxpayer
for
the
purpose
of
gaining
or
producing
income
.
.
.
Findings
It
is
quite
evident
that
the
situation
facing
the
Court
cannot
be
wholly
explored
without
reference
to
the
purpose
behind
the
several
transactions
in
which
the
Hickman
group
of
companies
became
involved
and
which
culminated
in
the
plaintiff
acquiring
the
assets
and
liabilities
of
Equipment,
and
turning
them
over
to
Equipment
85
some
four
days
later.
As
previously
stated,
the
plaintiff's
reorganization
was
undertaken
in
order
to
satisfy
John
Deere
Ltd.
of
the
plaintiff's
financial
support
for
one
of
its
associated
companies,
namely
Equipment.
The
purpose
was
achieved
by
having
the
plaintiff,
which
enjoyed
good
financial
stability,
hold
the
assets
and
liabilities
of
Equipment.
I
may
observe
here
that
if
this
had
marked
the
end
of
the
several
transactions,
the
issue
might
not
have
reached
the
Court.
In
fact,
however,
Equipment
85
was
then
incorporated
for
the
purpose
of
purchasing
these
same
assets
and
liabilities
from
the
plaintiff.
According
to
the
evidence,
the
plaintiff,
a
General
Motors
dealer
in
cars
and
trucks,
had
no
intention
of
carrying
on
the
business
of
a
heavy
equipment
dealer,
which
had
been
Equipment's
mainstay
and
which
Equipment
85
was
to
inherit.
It
is
also
noted
that
capital
cost
allowances
otherwise
claimable
by
Equipment
were
not
available
to
it.
It
might
therefore
be
inferred
that
the
scheme
was
merely
tax-driven
and
that
there
was
no
legitimate
business
purpose
involved.
There
might
follow
from
this
inference
that
the
tax
avoidance
provision
of
section
245
of
the
Act
is
brought
into
play.
Neither
party,
however,
has
submitted
arguments
in
favour
or
against
the
application
of
that
particular
provision
of
the
Act.
There
is
therefore
no
need
to
examine
that
issue
any
further.
There
is
need,
nevertheless,
to
go
more
thoroughly
into
the
more
fundamental
concept
of
capital
cost
allowances.
A
deduction
in
that
account
is
found
in
subsection
20(1)
of
the
Act.
A
deduction
on
account
of
business
or
property
is
allowed
thereunder
as
is
wholly
or
partly
applicable
to
"that
source"
and
is
deductible
as
to
such
part
of
the
capital
cost
or
such
amount
in
respect
of
the
capital
cost
as
is
allowed
by
regulation.
Paragraph
1102(1)(c)
of
the
Regulations
appears
to
be
consonant
with
the
sourcing
provision
of
subsection
20(1)
where
the
classes
of
depreciable
property
found
in
Schedule
II
are
deemed
"not
to
include
property.
.
.(c)
that
was
not
acquired
by
the
taxpayer
for
the
purpose
of
gaining
or
producing
income".
The
sourcing
limitation
in
section
20
as
well
as
the
business
purpose
limitation
in
paragraph
1102(1)(c)
would
indicate
to
me
that
for
the
plaintiff
to
claim
capital
cost
allowance
in
respect
of
the
assets,
it
must
establish
that
it
acquired
such
assets
for
the
purpose
of
profit
from
a
business
it
is
carrying
on.
It
is
well-settled
law
that
a
determination
of
whether
there
is
or
is
not
a
business
purpose
is
an
objective
test
which
must
be
ascertained
from
a
consideration
of
all
the
facts
and
circumstances
surrounding
the
acquisition.
In
Bolus-Revelas-Bolus
Ltd.
v.
M.N.R.,
[1971]
C.T.C.
230,
71
D.T.C.
5153
(Ex.
Ct.)
at
pages
237-41
(D.T.C.
5157-59),
Gibson,
J.
of
the
Exchequer
Court
reviews
at
some
length
the
available
case
law
on
that
point
and
he
refers
to
section
11
of
the
Act,
as
it
then
was,
providing
for
the
deductibility
of
capital
cost
allowances,
and
for
the
condition
attached
to
that
provision
under
paragraph
1102(1)(c)
of
the
Regulations.
In
the
case
of
the
plaintiff
before
me,
it
is
difficult
to
see
how
the
assets
of
a
John
Deere
franchise
owned
and
operated
by
Equipment
were
used
in
the
business
of
the
plaintiff
to
produce
income.
The
evidence
discloses
that
the
plaintiff's
sales
in
1984
were
in
excess
of
$75
million,
and
a
meagre
1.9%
of
these
sales
were
attributed
to
leasing.
The
mere
fact
that
these
assets
were
available
for
leasing
does
not,
in
my
respectful
view,
affect
the
real
purpose
of
the
acquisition.
I
should
find
that
the
short
turnover
period
of
some
four
days
is
a
pretty
clear
indication
that
there
was
neither
an
intention
nor,
for
practical
purposes,
any
more
than
a
notional
attempt
to
earn
income
from
the
assets
acquired
on
the
winding-up.
In
such
circumstances,
it
would
appear
to
me
that
paragraph
1102(1)(c)
of
the
Regulations
is
a
bar
to
the
plaintiff's
claims.
I
should
also
refer
to
paragraph
20(1)(a)
of
the
Act.
There
again,
the
deductibility
refers
to
the
sourcing
principle.
It
is
evident
to
me
that
the
capital
cost
of
the
assets
is
not
applicable
to
the
income
of
the
plaintiff's
business
of
automotive
sales
and
services
which
it
carried
on
in
its
1984
taxation
year.
There
is
left
the
plaintiff's
reliance
on
section
88
of
the
Act.
This
is
plaintiff's
strongest
argument.
The
plaintiff
emphasizes
that
this
subsection
creates
an
automatic
roll-over
in
the
winding-up
of
the
subsidiary
by
the
parent.
It
is
a
statutory
provision
allowing
the
transfer
of
all
rights
and
obligations
and
on
a
reading
of
it,
it
does
not
impose
an
"income-producing"
condition.
With
due
respect
for
the
imagination
and
skill
of
all
those
involved
in
the
several
transactions
which
occurred,
a
closer
analysis
of
the
more
pertinent
provisions
of
that
sub-section
leads
me
to
a
different
conclusion.
The
provisions
are
as
follows:
88
(1.1)
(c)
in
the
case
of
such
portion
of
any
non-capital
loss
.
.
.
of
the
subsidiary
as
may
reasonably
be
regarded
as
its
loss
from
carrying
on
the
subsidiary's
loss
business,
be
deemed,
for
the
taxation
year
of
the
parent.
.
.
to
be
a
non-capital
loss
.
.
.
of
the
parent
from
carrying
on
the
subsidiary’s
loss
business
.
.
.
.
except
that
(e)
where,
at
any
time,
control
of
the
parent
or
subsidiary
has
been
acquired
by
a
person
or
persons.
.
.
.
such
portion
of
the
subsidiary's
non-capital
loss
[.
.
.]
for
a
taxation
year
ending
before
that
time
as
may
reasonably
be
regarded
as
its
loss
from
carrying
on
a
particular
business
is
deductible
by
the
parent
for
a
particular
taxation
year
ending
after
that
time
(i)
only
if
throughout
the
particular
year
and
after
that
time,
that
business
was
Carried
on
by
the
subsidiary
or
parent
for
profit
or
with
a
reasonable
expectation
of
profit
Paragraph
88(1.1)(e)
clearly
creates
a
restriction
as
to
the
deductibility
of
non-capital
losses
when
a
change
of
control
of
either
the
subsidiary
or
the
parent
has
taken
place.
In
those
circumstances,
the
parent,
in
order
to
benefit
from
such
a
deduction,
must
show
that
it
continued
to
carry
on
the
loss
business
for
profit.
Furthermore,
such
deduction
can
only
be
applied
against
income
from
the
same
business
that
generated
it
or
from
any
other
substantially
similar
business.
(See
Arnold,
McNair
and
Young,
Materials
on
Canadian
Income
Tax
(Don
Mills:
Richard
De
Boo
Publishers,
1989),
at
page
817).
This
provision
is
indicative,
in
my
view,
that
the
element
of
business
purpose
is
maintained,
and
presumably
it
is
maintained
to
put
beyond
the
pale
what
would
otherwise
be
purely
artificial
transactions.
Subsection
88(1.1)
does
not
clearly
require
elsewhere
that
the
parent
must
have
acquired
the
assets
for
the
purpose
of
producing
income.
However,
paragraph
88
(1.1)(c)
can
be
interpreted
as
adding
another
restriction
to
the
deductibility
of
such
losses
where
it
states".
.
.
be
deemed
.
.
.
to
be
a
noncapital
loss
.
.
.
of
the
parent
from
carrying
on
the
subsidiary's
loss
business
.
.
."
(emphasis
added).
Section
111
of
the
Act
provides
the
same
restriction
to
the
deductibility
of
non-capital
losses.
In
the
present
case,
the
evidence
shows
that
the
plaintiff
could
not
have
been
carrying
on
the
business
of
Equipment
for
the
brief
period
it
owned
Equipment's
assets.
It
seems
to
me,
therefore,
that
the
principle
of
a
continuing
business
being
carried
on
by
a
parent
is
preserved
in
that
particular
enactment.
At
least
it
gives
strength
to
the
proposition
that
the
roll-over
provisions
are
only
triggered
off
when
the
capital
assets
transferred
from
a
subsidiary
to
a
parent
are
used
in
the
parent's
business,
a
condition
which
I
have
found
on
the
facts
has
not
been
met.
Such
an
interpretation
is
also
consonant
with
the
more
generic
principle
underlying
capital
cost
allowances
under
the
Income
Tax
Act
that
capital
assets
may
be
depreciated
only
when
used
in
the
business.
Admittedly,
the
issue
before
me
is
far
from
clear-cut.
According
to
plaintiff's
counsel,
the
provisions
of
section
88
of
the
Act
are
there
for
a
purpose,
i.e.,
a
consolidation
of
financial
statements
which
would
otherwise
be
denied.
Section
88(1.1)
may
be
given
a
literal
interpretation
so
as
to
allow
to
the
plaintiff
the
capital
losses
claimed.
As
mentioned
earlier,
the
company
groups
went
through
a
meticulous
series
of
transactions
to
achieve
what
was
described
as
a
business
purpose,
and
in
so
doing,
the
plaintiff
found
itself
in
the
enviable
position
of
writing
off
against
income
the
undepreciated
capital
costs
of
its
subsidiary
and
thus
reducing
its
income
to
nil.
The
matter,
as
argued
by
counsel,
should
rest
there.
The
application
of
section
88(1.1)
of
the
Act
has
not
hitherto
been
the
subject
of
judicial
scrutiny
in
the
context
of
the
circumstances
before
me.
Section
88(1.1)
itself,
together
with
that
group
of
statutory
provisions
in
the
Act
relating
to
corporate
reorganizations,
make
difficult
reading.
It
has
been
suggested,
not
without
merit,
that
they
cover
by
way
of
statutory
verbal
language
what
are
essentially
abstract
accounting
formulae
to
lend
consistency
and
conformity
to
what
are
essentially
the
rigors
of
finite
calculations
or
to
what
some
might
call
numbers
crunching.
Comments
by
tax
experts
in
various
papers
do
not
provide
ready
answers
either.
I
have
had
occasion
to
refer
to
any
number
of
them.
I
have
gone
through
the
article
on
winding-up
published
in
the
Thirty-Second
Tax
Conference
[1980],
at
page
102
et
seq.;
Vern
Krishna's
analysis
of
capital
cost
allowance
in
the
Fundamentals
of
Canadian
Income
Tax,
an
Introduction,
3rd
ed.
(Toronto:
Carswell,
1989),
at
page
355;
Howard
J.
Alper's
article
on
winding-up
in
the
Canadian
Tax
Journal,
Volume
XXII,
1974,
at
page
98;
Gilmour's
Income
Tax
Handbook,
27th
ed.,
at
page
341;
Beam
and
Laikin,
Introduction
to
Federal
Income
Taxation
in
Canada,
Tith
ed.
(Don
Mills:
C.C.H.
Canada
Ltd.,
1991)
at
page
133;
Materials
on
Canadian
Income
Tax,
by
Arnold,
McNair
and
Young,
8th
Edition,
at
page
815;
Interpretation
Bulletin
IT-302R2,
May
23,
1986.
Although
most
of
the
foregoing
deal
with
non-capital
losses
rolled-over
by
a
subsidiary
to
its
parent,
an
issue
which
is
not
a
matter
for
debate
before
me
and
which
in
any
event
the
defendant
has
fully
allowed,
I
have
found
no
route
to
enlightenment
when
dealing
specifically
with
undepreciated
capital
cost
allowances,
except
with
regards
to
a
parent
which
used
the
capital
assets
for
purposes
of
its
business
or
as
an
ongoing
concern.
Conclusion
This
is
not
the
first
time
that
a
court
has
faced
difficulties
in
dealing
with
various
provisions
of
the
Income
Tax
Act.
Generally,
it
may
be
said
that
whenever
any
particular
provision
of
the
Income
Tax
Act
is
scrutinized,
its
meaning
must
be
construed
in
a
manner
not
only
consistent
with
other
singular
provisions
to
which
that
provision
applies,
but
with
the
more
general
provisions
of
the
statute.
This
rule
has
now
been
fixed
in
contemporary
law
and
is
articulately
expressed
by
E.A.
Driedger
in
his
Construction
of
Statutes,
2nd
ed.,
at
page
87:
Today
there
is
only
one
principle
or
approach,
namely
that
the
words
of
the
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
intentions
of
Parliament.
Although
it
is
an
obvious
challenge
to
apply
this
rule
to
the
abstruse
and
esoteric
language
of
section
88,
it
nevertheless
seems
to
me
that
the
technical
approach
urged
by
the
plaintiff
must
be
consonant
and
consistent
with
the
more
generic
provisions
of
the
statute.
I
conclude
that
the
specific
processes
found
in
subsection
88(1.1)
with
respect
to
the
rollover
of
assets
and
liabilities
can
only
be
applied
in
light
of
the
other
provisions
of
the
Act
which
I
have
cited.
To
do
otherwise
would
simply
result
in
artificiality
and
create
an
imbalance
or
non-conformity
in
the
application
of
the
more
generic
provisions
of
the
statute
which
Parliament
had
no
intention
of
creating.
I
also
note
that
whereas
subsection
88(1)
contains
a
"notwithstanding
any
other
provision
of
this
Act"
clause,
subsection
(1.1)
does
not.
A
similar
situation
faced
the
Court
in
Holiday
Luggage
Mfg.
Co.
v.
The
Queen,
[1987]
1
C.T.C.
23,
86
D.T.C.
6601
(F.C.T.D.),
when
the
word
"corporation"
was
given
a
restricted
geographical
meaning
not
otherwise
found
in
the
statutory
definition
of
the
word
in
subsection
248(1)
of
the
Income
Tax
Act.
The
same
kind
of
issue
faced
the
Federal
Court
of
Appeal
in
Oceanspan
Carriers
Ltd.
v.
Canada,
[1987]
1
C.T.C.
210,
87
D.T.C.
5102,
where
it
was
determined
that
a
non-resident
without
income
from
Canadian
sources
is
not
a
"taxpayer"
within
the
otherwise
broad
definition
of
the
word
in
subsection
248(1)
of
the
Income
Tax
Act.
It
is
also
akin
to
a
similar
finding
made
by
the
Supreme
Court
of
Canada
in
Lea-Don
Canada
Ltd.
v.
M.N.R.,
[1971]
S.C.R.
95,
[1970]
C.T.C.
346,
70
D.T.C.
6271,
at
pages
99-100
(C.T.C.
348-39,
D.T.C.
273-74)
when
a
non-resident
not
carrying
on
business
in
Canada
was
found
not
to
be
a
"person"
entitled
to
a
deduction
on
account
of
the
capital
cost
of
depreciable
property.
It
follows
that
a
Court
should
be
wary
of
countenancing
an
ingenious
application
of
a
particular
statutory
provision
which
goes
against
the
grain
as
it
were
of
the
more
general
principles
underlying
the
whole
scheme
of
Canadian
taxation.
This
kind
of
curial
discipline
was
aptly
expressed
by
Lord
Reid
in
Greenberg
v.
I.R.C.
(1971),
47
T.C.
240
(H.L.),
as
cited
in
Stubart
Investments
Ltd.
v.
The
Queen,
[1984]
1
S.C.R.
536,
[1984]
C.T.C.
294,
84
D.T.C.
6305,
at
page
560
(C.T.C.
306-7,
D.T.C.
6315):
We
seem
to
have
travelled
a
long
way
from
the
general
and
salutary
rule
that
the
subject
is
not
to
be
taxed
except
by
plain
words.
But,
I
must
recognize
that
plain
words
are
seldom
adequate
to
anticipate
and
forestall
the
multiplicity
of
ingenious
schemes
which
are
constantly
being
devised
to
evade
taxation.
Parliament
is
very
properly
determined
to
prevent
this
kind
of
tax
evasion,
and
if
the
courts
find
it
impossible
to
give
very
wide
meanings
to
general
phrases
the
only
alternative
may
be
for
Parliament
to
do
as
some
other
countries
have
done
and
introduce
legislation
of
a
more
sweeping
character,
which
will
put
the
ordinary
well-intentioned
person
at
much
greater
risk
than
is
created
by
a
wide
interpretation
of
such
provisions
as
those
which
we
are
now
considering.
This
is
not
to
suggest
that
section
88
of
the
Act
is
a
trap
to
any
taxpayer
who
decides
to
follow
that
route.
On
the
other
hand,
we
are
not
dealing
here
with
an
accumulation
of
capital
losses,
but
with
the
transfer
of
capital
assets
where
depreciation
allowances
are
statutorily
limited
to
those
capital
assets
used
in
the
business.
Unless
found
to
be
used
in
the
business,
no
capital
loss
allowances
may
be
claimed.
Having
found
that
the
assets
involved
could
not
have
been
realistically
used
in
the
plaintiff's
business,
the
statutory
condition
has
not
been
met.
In
this
connection,
I
note
that
there
are
deeming
provisions
in
paragraph
88(1.1)(b)
regarding
deductibility
in
the
subsidiary's
hands
in
its
deemed
taxation
year,
and
an
assumption
that
during
that
year,
it
had
sufficient
income.
It
is
my
view,
however,
that
that
clause
must
be
read
in
the
light
of
paragraph
88(1.1)(c)
which
refers
to
the
parent"carrying
on
the
subsidiary's
loss
business”.
In
any
event,
I
should
construe
the
terms
of
the
winding-up
provision
as
requiring,
as
an
overriding
condition,
that
any
deduction
on
account
of
depreciable
assets
may
be
allowed
when
such
assets
are
used
in
the
business.
I
am
also
aware
of
the
comments
of
Wilson,
J.
in
the
Stubart
case,
supra,
at
page
540
(C.T.C.
318,
D.T.C.
6325),
that
the
sole
business
purpose
of
a
transaction
might
be
a
tax
purpose
without
inviting
a
reassessment.
This
endorses
or
recognizes
Lord
Tomlin's
dictum
in
/.R.C.
v.
Duke
of
Westminster,
[1936]
A.C.,
at
page
19
(H.L.),
to
the
effect
that:
Every
man
is
entitled
if
he
can
to
order
his
affairs
so
as
that
the
tax
attaching
under
the
appropriate
Acts
is
less
than
it
otherwise
would
be.
The
reasons
for
judgment
of
Estey,
J.
in
the
Stubart
case
also
endorse
this
principle.
Estey,
J.
found
at
pages
580-81
(C.T.C.
317-18,
D.T.C.
6324)
that
the
scheme
under
which
the
parent
taxpayer
and
its
subsidiary
made
it
possible
for
one
company
to
use
the
other
company's
tax
losses
was
provided
for
in
the
statute.
As
in
the
case
before
me,
there
was
no
doubt
as
to
the
transfer
to
the
subsidiary
of
all
the
parent's
assets
and
liabilities.
As
is
not
the
case
before
me,
the
tax
loss
company
did
carry
on
the
acquired
business
through
an
agency
agreement
between
the
two
related
companies.
The
transfer
of
the
tax
losses
covered
an
indeterminate
period
and
the
business
of
the
transfer
or
was
carried
out
by
the
transferee
for
some
three
years.
It
must
be
remembered
also
that
in
the
Stubart
case,
the
issue
was
whether,
in
the
absence
of
sham
or
artificiality,
a
transaction
could
be
set
aside
on
the
more
fundamental
grounds
of
an
absence
of
a
bona
fide
business
purpose.
Such
is
not
the
case
before
me.
If,
in
the
case
at
bar,
the
plaintiff
fails
the
business
purpose
test,
it
is
not
in
the
sense
of
the
expression
used
by
Estey,
J.
in
the
Stubart
case.
It
is
in
the
sense
used
in
the
statute
itself
when
it
deals
with
"sourcing"
under
subsection
20(1)
of
the
Act,
or
with
"gaining
or
producing
income"
stipulated
in
paragraph
1102(1)(c)
of
the
Regulations.
This
is
to
find
that
in
essence,
under
the
Act,
the
claimed
capital
losses
by
the
plaintiff,
arising
from
the
subsidiary's
capital
cost
allowances,
are
simply
not
available
to
it
in
the
years
in
which
they
were
claimed.
I
would
submit
that
this
conclusion
pays
full
respect
to
the
opinions
elaborated
by
the
Supreme
Court
of
Canada
in
the
Stubart
case
and
is
not
in
conflict
with
the
decision
of
that
Court.
I
would
therefore
dismiss
the
plaintiff's
appeal
with
costs
and
confirm
the
defendant's
reassessments.
Appeal
dismissed.
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