Intertan Canada Ltd. v. Minister of National Revenue, [1993] 1 CTC 2311, 93 DTC 354

Bonner, T.C.C.J.:—On August 8, 1991, the Minister of National Revenue (the "Minister") reassessed Intertan Canada Ltd. (the "appellant"), under the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") for interest in the amount of $373,814.39 on what he found to be insufficient instalment payments in respect of the 1985 taxation year. The appellant asserts in this appeal that the Minister erred in applying subsection 5301(1) of the Income Tax Regulations (the" Regulations") as amended by P.C. 1985-2277 to its 1985 taxation year. The basic thrust of the appellant's arguments is that the amended regulation applies prospectively, not retroactively. The issue is whether subsection 5301(1) of the Regulations as amended by P.C. 1985-2277 applies to the calculation of the appellant's "first instalment base”.

The facts are not in dispute. The appellant is a Canadian corporation. At all material times its fiscal year ended on June 30. It was of course liable to pay its tax in instalments. Pursuant to subparagraph 157(1)(a)(ii) of the Act, it chose to pay monthly an amount equal to 1/12 of its "first instalment base” for the year in question. Subsection 157(4) of the Act provides that the meaning of “first instalment base" is that prescribed by regulation. Before the amendment in question subsection 5301(1) of the Regulations defined "first instalment base" in such a way to permit the deduction of scientific research tax credits allowed by virtue of section 127.3 of the Act. Subsection 5301(1) read:

5301.(1) Subject to subsections (6) and (8), for the purposes of subsections 157(4) and 161(9) of the Act, “first instalment base” of a corporation for a particular taxation year means the amount equal to the product obtained when the tax payable by the corporation under Part I of the Act, computed without reference to sections 123.3 to 123.5 thereof, for its taxation year immediately preceding the particular year, is multiplied by the ratio that 365 is of the number of days in that preceding year.

The appellant calculated its first instalment base for the 1985 taxation year in accordance with this regulation. It deducted the tax credit allowed by virtue of section 127.3 of the Act, that is to say, it calculated ”. . . tax payable by the corporation under Part I” for the 1984 taxation year as $5,704,134.87 being Part I tax after deducting a scientific research tax credit of $8,225,000 under section 127.3. It paid 12 monthly instalments of $500,000 each for the 1985 taxation year. If "tax payable” had been computed without reference to section 127.3 of the Act as required by the amended version of the Regulations then the appellant's instalment base would have been calculated with reference to $13,929,134.87 (its 1984 tax liability without the deduction of the scientific research tax credit).

On February 15, 1984, four and a half months before the commencement of the appellant's 1985 taxation year, the Department of Finance issued a press release in which it announced the intention of the government to change the calculation of the instalment base. The release read in part:

SPECIAL INVESTMENT TAX CREDITS WILL NOT REDUCE TAX INSTALMENT REQUIREMENTS

The proposed amendments require that the instalment base for a taxation year be calculated before deducting these tax credits. Further, where a taxpayer acquires a scientific research tax credit or share purchase tax credit investment during his taxation year, the amount of the tax credit shall not be taken into account in estimating his tax instalment for the year.

The proposed amendments will not affect scientific research tax credits and share purchase tax credits earned on investments before February 16, 1984. Also, the proposed amendments will not apply with respect to scientific research or share purchase tax credits in respect of investments acquired before March 1, 1984, providing arrangements for the issue of the security are substantially advanced today.

The scientific research tax credits claimed by the appellant for the 1984 and 1985 taxation years were in respect of debt obligations acquired by it after March 1, 1984.

An agreed statement of facts filed at the hearing indicates that the appellant was unaware of the proposal to change the law. Paragraph 18 of the agreement reads in part:

. . . a wholly-owned subsidiary of a U.S. corporation in the Tandy Corporation group of companies. The preparation of Canadian income tax returns and other Canadian tax compliance matters including calculating and paying tax instalments was, during the appellant's 1985 taxation year administered from the offices of Tandy Corporation in Fort Worth, Texas without assistance or review by Canadian accountants. When calculating and making the instalment payments . . . neither the appellant nor the individuals administering the appellant’s Canadian tax compliance knew of the proposed change in the law described in the press release.

Subsection 5301(1) of the Regulations was amended by P.C. 1985-2277, subsection 16(1), to create the new definition of "first instalment base" as follows:

5301.(1) Subject to subsections (6) and (8), for the purposes of subsections 157(4) and 161(9) of the Act, the “first instalment base” of a corporation for a particular taxation year means the product obtained when the tax payable by the corporation under Part I of the Act, computed without reference to sections 123.3 to 123.5, 127.2 and 127.3 thereof and before taking into consideration any amount referred to in any of subparagraphs 161 (7)(a)(i) to (vii) thereof that was excluded or deducted, as the case may be, for its taxation year immediately preceding the particular year, is multiplied by the ratio that 365 is of the number of days in that preceding year.

The amendment was not made until July 24, 1985, some 24 days after the close of the appellant's 1985 taxation year. It was registered on July 25,1985 as SOR/85-696. It was published in the Canada Gazette Part II on August 7, 1985. Subsection 22(9) of SOR/85-696 reads:

Sections 15 and 16 are applicable with respect to (a) amounts deducted under sections 127.2 and 127.3 of the Act in respect of shares, debt obligations and rights acquired after February 15, 1984, other than shares, debt obligations or rights acquired before March 1, 1984 where arrangements, evidenced in writing, for the issue of the shares or debt obligations or granting of the rights were substantially advanced before February 16, 1984; and . . . .

In making the assessment now under appeal the Minister computed the first instalment base for the appellant's 1985 taxation year, on the basis that no amount was deductible in respect of the scientific research tax credit. His assessment rested on the premise that the amendment to paragraph 5301(1) of the Regulations precluded the deduction. Consequently, he assessed interest in respect of insufficient instalment payments for the appellants 1985 taxation year pursuant to subsection 161(2) of the Act.

Counsel for the appellant argues that:

A retroactive regulation, i.e. one that changes past consequences of past actions, is ultra vires and invalid unless the statute which authorizes the making of the regulation authorizes the making of retroactive regulations expressly or by necessary implication.

In the year in question, subsection 221(2) of the Act read:

(2) No regulation made under this Act has effect until it has been published in the Canada Gazette but, when so published, a regulation shall, if it so provides, be effective with reference to a period before it was published.

There can be no doubt that an unauthorized regulation has no force but, in my view subsection 221(2), expressly authorizes the making of regulations having retrospective effect. In Omstead v. M.N.R., [1991] 2 C.T.C. 2615, 91 D.T.C. 1244, Sarchuk, T.C.C.J., considered subsection 22(9) of SOR/85-2277 in relation to the effective date of the amendment to subsection 5300(1)(a) of the Regulations which deals with scientific research tax credits in the calculation of the instalment base for individuals. At page 1247, he stated:

The language of subsection 22(9) of SOR/85-696 makes Regulation 5300(1)(a) applicable to amounts deducted under sections 127.2 and 127.3 of the Act in respect of shares, debt obligations and rights acquired after February 15, 1984. The words used by the legislators in my view clearly express that the Regulation is to be effective with reference to a period before it was published, that period being all relevant times after February 15, 1984. These words are sufficient to comply with the requirement contained in subsection 221(2) of the Act.

I agree.

Counsel for the appellant also submits that if a regulation made under the Act, is to be effective with respect to a period prior to the day on which it is made, it must comply both with paragraph 9(1)(a) of the Statutory Instruments Act, S.C. 1970-71-72, c. 38, and with subsection 221(2) of the Act. I disagree. Subsection 9(1) of the Statutory Instruments Act provides that:

No regulation shall come into force on a day earlier than the day on which it is registered unless

(a) it expressly states that it comes into force on a day earlier than that day and is registered within seven days after it is made, or

(b) it is a regulation of a class that, pursuant to paragraph (b) of section 27, is exempted from the application of subsection (1) of section 5,

in which case it shall come into force, except as otherwise authorized or provided by or under the Act pursuant to which it is made, on the day on which it is made or on such later day as may be stated in the regulation.

[Emphasis added.]

Subsection 9(1) is not obscure. It enacts a general rule but contemplates the creation of exceptions. In Omstead, supra, Sarchuk, T.C.C.J., stated the position as follows at pages 2619-20 (D.T.C. 1247):

I have concluded that the sections of the Statutory Instruments Act and the Interpretation Act referred to do not apply in view of the existence of a specific provision regarding regulations made by the Governor General in Council pursuant to the authority granted by section 221 of the Income Tax Act. In particular I refer to subsection 221(2) thereof which at the relevant time read as follows:

The amendment before me clearly provides that it was to be effective with respect to transactions occurring prior to its enactment. The intention of the legislators is not uncertain and its expression in the amendment to the Regulations is not ambiguous.

Again, I agree. Subsection 221(2) of the Act was intended to place regulations under the Act which contain the requisite provision in a category excepted from the general rule laid down in subsection 9(1) of the Statutory Instruments Act.

Counsel for the appellant argued that subsection 22(9) of SOR/85-696 only says that section 16 is applicable to deductions under section 127.3 of the Act in respect of a certain category of shares, debt obligations and rights namely, those acquired after February 15, 1984 and those acquired after that date and before March 1, 1984 where the requisite arrangements were appropriately advanced. This manner of describing the ambit of section 16 does not, he submitted, comply either with the requirements of paragraph 9(1)(a) of the Statutory Instruments Act or of subsection 221(2) of the Act. It is not, counsel said, an express statement of a day prior to registration or a reference to a period prior to publication. Counsel went on to assert that language of the kind contemplated and required by paragraph 9(1)(a) of the Statutory Instruments Act and subsection 221(2) of the Act is found in subsections 22(4), (6) and (7) of SOR/85-696. It is, I think, an unduly literal approach to construction to assert that the Governor-in-Council can only exercise its authority under section 221 of the Act to make regulations having retrospective effect by referring to a period of time and not to transactions which take place during a period. In effect, in subsection 22(9) of SOR/85-696, the Governor-in-Council says (subject to an exception) that subsection 5301(1) of the Regulations, as amended, excludes from the computation of first instalment base section 127.3 deductions in respect of debt obligations acquired during the period after February 15, 1984. The message is clear. I do not read subsection 221(2) as a provision intended to restrict the freedom of expression of the Governor-in- Council. Clarity of language is required and not the use of a specific formula of words.

Counsel for the appellant further submits that:

. . . the Department of Finance press release dated February 15, 1984 does not support or justify giving retroactive effect to the amendment. The appellant made instalment payments in accordance with the law as it was, and as the appellant knew it, throughout the appellant’s 1985 taxation year. A press release is not law and a taxpayer should not be expected to comply with a press release as if it were law. Changes to income tax law announced in government press releases do not always get enacted and do not always get enacted as first announced. A taxpayer also should not be deemed or expected to know the content of all government press releases as he is deemed to know the law.

He explains:

If the appellant had paid its instalments for 1985 based on the press release and the change to the law had not been made, the appellant would not have been entitled to interest with respect to such overpayment. It is submitted that the appellant should not be penalized for not complying with proposed changes in the law which might not be enacted when there was a potential detriment to the appellant in such a course of action.

However all of that is quite beside the point. The force of the amended regulation does not depend in any way on the issuance of the press release or the appellants knowledge of it. The facts on which counsel relies do not permit the courts to ignore otherwise valid statutory provisions.

It was submitted that:

. . . the purpose of the relevant sections of the Act and the Income Tax Regulations having to do with instalment payments and instalment interest is to ensure pay- ment on a regular basis throughout a taxation year of tax liability for the year. In this context the concept of first instalment base is intended to benefit taxpayers by requiring payments and interest only in respect of the lesser of the previous year’s actual liability or an estimate of the current year's liability. To exclude valid scientific research tax credit and share purchase tax credit deductions which reduce actual liability in the current year or previous year is inconsistent with and antithetical to the purpose of the instalment provisions. Accordingly, there is no basis in the purpose of the relevant provisions for construing the amendment to section 5301 of the Income Tax Regulations as having retroactive effect.

I disagree with the conclusion. The basis for construing the amendment as having retroactive effect is to be found in the unambiguous language of subsection 22(9) of SOR/85-696. Nothing more is needed.

Counsel for the appellant notes that subsection 22(9) of SOR/85-696 provides that the part of the amendment contained in section 16 of SOR/85-696 relating to deductions under sections 127.2 and 127.3 becomes effective in one way and the part of the amendment relating to deductions described in subsection 161(7) becomes effective in another way. He states that this is tantamount to providing two different effective dates for a single regulation and submits that subsection 221(2) of the Act does not authorize this. He submits that subsection 22(9) of SOR/85-696 is ultra vires and invalid on this basis. In my opinion, nothing in subsection 221(2) requires that a single regulation must have only one effective date.

I cannot find that the assessment is not authorized by the law. The appeal will be dismissed.

Appeal dismissed.