Industries P.W.I. Inc. v. Minister of National Revenue, [1993] 1 CTC 2453

P.R. Dussault, T.C.C.J. (orally):—These are appeals from assessments made by the respondent under the provisions of paragraph 214(3)(a) and subsections 15(2), 212(2), 215(1), 215(6) and 227(8) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), as well as subsection X(3) of the tax convention between Canada and the United States for the 1984, 1985 and 1986 taxation years. In those assessments, the respondent demanded payment of a ten per cent income tax which the appellant had failed to withhold on loans of $40,096.81, $23,906 and $24,862.24 for 1984, 1985 and 1986 respectively which were considered as dividends deemed paid to P.W.I. (U.S.A.) Inc. A penalty of ten per cent of the tax not withheld was also assessed in the amounts of $400.97, $239.06 and $248.62 for 1984, 1985 and 1986 respectively.

An agreement as to the facts was filed by counsel for the parties. It reads as follows:

1. The appellant and the corporation P.W.I. (U.S.A.) Inc. are related corporations.

2. The appellant is a corporation that resides in Canada, whereas P.W.I. (U.S.A.) Inc. is a non-resident corporation, residing in Lowville in the State of New York.

3. During 1982, P.W.I. (U.S.A.) Inc. proceeded with a redemption of 41 of the 42 common shares of its own capital stock which Henri Samson held, for the sum of $83,400.

4. During 1982, P.W.I. (U.S.A.) Inc. also purchased all the common and preferred shares of the appellant's capital stock which Henri Samson and Estelle Samson held, for the sum of $116,600.

5. P.W.I. (U.S.A.) Inc. thus became the holder of 47.3 per cent of the appellant's stock in 1982 and remained so during the years in issue, 1984, 1985 and 1986.

6. P.W.I. (U.S.A.) Inc., Henri Samson and Estelle Samson agreed in 1982 that payment to Henri Samson and Estelle Samson of this $200,000 ($83,400 plus $116,600) would be made in weekly instalments of $478.12.

7. Since P.W.I. (U.S.A.) Inc. did not have the sum required to pay Henri Samson and Estelle Samson for the shares acquired, the appellant lent the sums required to P.W.I. (U.S.A.) Inc. in order for it to do so.

8. The loans made by the appellant to P.W.I. (U.S.A.) Inc. were made without interest or repayment terms.

9, The amounts of the appellant's loans to P.W.I. (U.S.A.) Inc. were $40,096.81 in 1984, $23,906 in 1985 and $24,862.24 in 1986.

10. No amount of tax on the amounts of these loans was deducted at source or remitted to the Receiver General by the appellant on behalf of P.W.I. (U.S.A.) Inc.

11. On January 19, 1989, for 1984, 1985 and 1986 respectively, the respondent issued notices of assessment Nos. A-155389, A-155388 and A-155387 respectively, in which he claimed from the appellant:

(a) the ten per cent income tax under Part XIII and the Canada-United States Tax Convention Act, 1984 which the appellant failed to withhold on the loans of $40,096.81 in 1984, $23,906 in 1985 and $24,862.24 in 1986, which according to the respondent were deemed paid to P.W.I. (U.S.A.) Inc. as dividends;

(b) a penalty corresponding to ten per cent of the tax not withheld by the

appellant, that is $400.97 in 1984, $239.06 in 1985 and $248.62 in 1986.

12. The parties agree that the loans made by the appellant to P.W.I. (U.S.A.) Inc. do not fall under the exceptions provided in paragraphs 15(2)(a) and 15(2)(b) of the Income Tax Act.

13. The appellant objected, within the prescribed time limits, to the assessments mentioned in paragraph 11 of the present agreement.

14. On September 1, 1989, the respondent notified the appellant that the assessments concerned in paragraph 11 of the present agreement were ratified.

[Translation.]

In reality, the only point at issue concerns the application of paragraph 214(3)(a) of the Act to the loans made by the appellant to P.W.I. (U.S.A.) Inc. This provision reads as follows:

For the purposes of this Part,

(a) where section 15 or subsection 56(2) would, if Part I were applicable, require an amount to be included in computing a taxpayer's income, that amount shall be deemed to have been paid to the taxpayer as a dividend from a corporation resident in Canada. . . .

Counsel for the appellant contended that the crux of the matter was the interpretation of the words “if Part I were applicable". He claimed that the taxpayer mentioned in this provision must be treated as a resident, since Part I applies to non-residents only in respect of the matters mentioned in sections 115 and 116, not in respect of that mentioned in section 15, more particularly in subsection 15(2). He continued, saying that, if the taxpayer concerned were thus treated as a resident, it must, if it is a corporation, be treated as a resident corporation for the purposes of the application of subsection 15(2). Since this last provision contains an exception where a shareholder is a corporation resident in Canada, it follows that there would be no requirement that an amount be included in its income, and paragraph 214(3)(a) would thus become meaningless where the shareholder concerned were a corporation, resident or not.

According to counsel for the appellant, this appears to be the most logical interpretation and the only one which also treats resident corporations and non-resident corporations in the same manner. This interpretation is based mainly on the remarks of Robert F. Lindsay at the 1985 Annual Conference of the Canadian Tax Foundation. Commenting on the application of paragraph 214(3)(a) of the Act, the author wrote as follows, at pages 21:20 and 21:21:

An interesting argument arises as to whether paragraph 214(3)(a) effectively applies to subject a non-resident corporation in categories (1) to (8) above to Part XIII tax in connection with subsection 15(2). For the purposes of this Part, that paragraph reads as follows:

where section 15 or subsection 56(2) would, if Part I were applicable, require an amount to be included in computing a taxpayer's income, that amount shall be deemed to have been paid to the taxpayer as a dividend from a corporation resident in Canada.

The assumption “ if Part I were applicable” is difficult to apply because Part I applies on two different bases, depending on whether the taxpayer is a resident or nonresident. If the assumption is applied on the basis that the taxpayer is a nonresident, nothing has to be included in the taxpayer's income because the subsection 15(2) amount is not picked up under section 115. In fact, this interpretation probably cannot be given to the paragraph because none of the section 15 or subsection 56(2) amounts is picked up in section 115, and the interpretation would therefore render the paragraph meaningless.

Consequently, the condition “if Part I were applicable” arguably must be read on the assumption that the taxpayer is a resident of Canada. If this is done, subsection 15(2) includes nothing in the corporation's income, since it does not apply to loans made to corporations resident in Canada. This interpretation does not render paragraph 214(3)(a) meaningless, since it still applies to subsection 15(1) and 56(2) amounts.

Counsel also referred to the decision in Euramca International Co. v. M.N.R., [1985] 1 C.T.C. 2038, 85 D.T.C. 57, in which Judge Taylor appeared to adopt the same approach in his analysis of paragraph 214(3)(a), when he stated, at page 2040 (D.T.C. 58):

As I understand it, there is no dispute between the parties that the amount at issue would be included in income, if, the taxpayer were a resident of Canada, and paid tax as such a resident.

While acknowledging the new approach adopted in the interpretation of tax laws since the Supreme Court of Canada judgment in Stubart Investments v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305, counsel for the appellant, relying on Clifford v. Commissioner of Inland Revenue, [1896] 2 Q.B. 187, 65 L.J.Q.B. 582 (Div. Ct.) insisted on a strict interpretation of a provision subjecting a taxpayer to the tax, particularly since subsection 215(6) of the Act was here being used to make the appellant pay a tax for another person, P.W.I. (U.S.A.) Inc., and since this could therefore be considered as a punitive provision.

Counsel for the respondent argued that paragraph 214(3)(a) was applicable in the circumstances such that the loans made by P.W.I. Inc. to P.W.I. (U.S.A.) Inc. must be considered as dividends paid to P.W.I. (U.S.A.) Inc. by P.W.I. Inc., hence the obligation to withhold tax and the application of penalties for failure to do so. This argument was based first on the text of subsection 15(2) itself, in which the exception, stated in parentheses, specifically applies only to corporations resident in Canada. According to her, one must not try to add to the text by assuming for the purposes of paragraph 214(3)(a) that the taxpayer must be resident in order for subsection 15(2) to apply. In her view, the two provisions are complementary because the subsection 15(2) exception does not include non-resident corporations, and paragraph 214(3)(a) applies to nonresidents, including non-resident corporations.

The second argument of counsel for the respondent was of an historical nature and intended to explain the exception of corporations resident in Canada for the purposes of the application of subsection 15(2). This argument was in fact based on an analysis of the provisions of the Act in their entire context, in accordance with the approach recommended by Dreidger in his book Construction of Statutes (2nd ed. 1983), at page 87, and cited approvingly by Estey, J. of the Supreme Court of Canada (as he then was) in his judgment in Stubart, supra, (see note 1 at page 578 (C.T.C. 316, D.T.C. 6323)). Counsel for the respondent first explained that loans to shareholders have been treated at least since 1948 as dividends, whether those shareholders were resident or non-resident. On this point, she referred to subsection 8(2) of Part I and subsection 97(6) of Part Il (the equivalent of the current Part XIII) of the 1948 version of the Act. Then, through the amendments that have since been made, she traced the different ways in which intercorporate dividends paid by corporations resident in Canada have been treated, depending whether those dividends were received by a corporation resident in Canada or by a non-resident corporation. While the former have generally been exempted from the Part I tax on such dividends (via an inclusion and deduction mechanism) [sic] provided in paragraph 82(1)(a) and section 112, the latter continue to be subject to the Part XIII tax. The treatment of loans to shareholders as dividends therefore justifies the subsection 15(2) exception that applies to resident corporations and which, through a technical amendment, simply replaces the equivalent treatment that was provided by the last part of that subsection before April 1977. The same treatment was never considered for loans to non-resident corporations, any more than the non-taxation of dividends paid to them. Consequently, Part XIII applies to dividends paid to those corporations and, under paragraph 214(3)(a), also to loans made to them by a corporation resident in Canada.

In my view, one must follow the principle or approach to so-called "modern" interpretation recommended by Dreidger, particularly when ascertaining the meaning of complex provisions in the context of a statute which contains a number of parts that in some way hinge on one another. I take the liberty here of simply recalling that author’s remarks as cited in the Supreme Court judgment in Stubart, supra, referred to above and which read as follows:

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.

One should examine the true scope of paragraph 214(3)(a) of the Act by bearing in mind the differences in the treatment of intercorporate dividends depending whether the shareholder corporation which receives them is resident or non-resident in Canada, or, alternatively, the differences in treatment in this matter established respectively under Part I and Part XIII of the Act. One must also remember that the treatment of loans to shareholders that are corporations has long since been determined on the basis that such loans are in principle the equivalent of dividends.

Subsection 214(3) begins with the words, "For the purposes of this Part". The part in question is of course Part XIII. Through a source deduction mechanism, subsection 212(1) subjects a non-resident person to a special tax "on every amount that a person residing in Canada pays or credits, or is deemed by Part I to pay or credit, to him as, on account or in view of payment of, or in satisfaction of,” the items enumerated in the many paragraphs of this subsection. Those paragraphs of course cover different amounts considered as income from property (such as interest, dividends, rents, etc.) or transfer payments (such as pension payments, etc.) which are not taxed under Part I of the Act, given the wording of subsection 2(3) and of sections 115 and 116 of the Act, even though they have their source in Canada.

The purpose of subsection 2(3) is of course to subject non-residents to the tax of Part I of the Act solely in respect of income from the three sources stated in the various paragraphs and which are:

(a) employment in Canada,

(b) the operation of a business in Canada,

(c) disposal of a taxable Canadian property.

The other items that constitute income for residents whose subjection to the tax is based on their international income from all sources, such as dividends, interests and rents, are not part of the tax basis of non-residents for the purposes of the application of Part I, but rather are subject to the withholding tax of Part XIII. The purpose of this two-part system for non-residents is clear and lies in ease of income tax collection, given the absence from the country of more or less permanent items concerning the very source of that income. Such a system is also in effect in most so-called industrialized countries, as well as in many others.

It is in this global context, of which I have sketched only the outlines, that one must interpret paragraph 214(3)(a) of the Act, more particularly the words, “if Part I were applicable”.

The meaning to be given to this clause, which is placed between commas in paragraph 214(3)(a), must obviously reflect the preamble to subsection 214(3), which reads, "For the purposes of this Part . . .", which, in my view, means “For the purposes of determining a tax on non-residents with respect to certain items”. Knowing then that Part I is not applicable to non-residents in respect of revenue items relating to the provisions mentioned at the start of paragraph 214(3)(a), including section 15, the paragraph continues with the clause, “if Part I were applicable”. These words can express only one thing: an assumption or a supposition. Their meaning is thus equivalent to "supposing Part I were applicable” to non-residents in respect of items referred to in section 15 or subsection 56(2). It is thus only supposed that Part I applies to non-residents in respect of these items for the purposes of taxing them under Part XIII. The error of interpretation lies in claiming that the clause does not express an assumption or a supposition that Part I applies to non-residents in respect of certain items, but rather that it does actually apply to residents who are the only persons to whom it in fact applies in respect of those items. The error in Mr. Lindsay's argument, the text of which is cited above and on which the interpretation of counsel for the appellant is mainly based, consists in supposing that Part I applies to residents, whereas such a supposition is pointless since it actually applies entirely to them, and in not supposing that it applies to non-residents, when such a supposition is necessary since Part I does not apply to them in respect of the provisions referred to, particularly section 15. In addition, one indeed wonders why one would make an assumption or a supposition concerning residents, when paragraph 214(3)(a) enacts a presumption for the purposes of subjecting non-residents to the tax of Part

XIII. As regards Judge Taylor's remark in Euramca, supra, I believe it is also only an observation of the obvious nature of the application of the provisions of Part I to a person who is a resident. Seen in this light only, it is hard to disagree with that remark.

Interpreting the clause “if Part I were applicable” as a mere assumption or supposition that is made with respect to non-residents is akin to the position adopted by counsel for the respondent, and she was the only person in my view who took the approach of analyzing the provisions of the Act in their entire context. In this perspective, the exception provided in subsection 15(2) for corporations resident in Canada clearly cannot be extended to those not resident here for the purposes of the application of paragraph 214(3)(a). I therefore conclude that this paragraph applies to the loans made by the appellant to the non-resident corporation P.W.I. (U.S.A.) Inc., since the conditions for the application of subsection 15(2) were met. It follows that subsections 212(2), 215(1), 215(6) and 227(8) of the Act and paragraph X(3) of the tax convention between Canada and the United States are also applicable, having regard to the circumstances and facts on which the parties agreed.

For these reasons, the appeals are dismissed.

Appeals dismissed.