Immobiliare Canada LTD v. Minister of National Revenue, [1981] CTC 2049

Roland St-Onge:— The appeals of the company Immobiliare Canada Ltd came before me on November 12,1980, at the City of Montreal, Quebec, and the issue is whether the appellant is allowed to deduct a business loss in its 1972 and 1973 taxation years.

At the hearing, counsel filed an agreed statement of facts which reads as follows:

1. In the 1967 taxation year, the taxpayer incurred non capital losses amounti g to $519, 666.94;

2. In the 1968 taxation year, the taxpayer incurred non capital losses amounting to $749,041.87;

3. In calculating the taxpayer’s income for its 1967 taxation year, the taxpayer deducted the sum of $645,429.63 representing interest payable in respect of that year on debentures issued by the taxpayer to SGI International Company (“SGI”), the principal shareholder of the taxpayer;

4. The said sum of $645,429.63 was deductible by the taxpayer in computing its income for its 1967 taxation year, the whole in accordance with the provisions of paragraph 11 (1 )(c) of the Income Tax Act, RSC 1952, c 148, as amended (the “Act”);

5. In caluclating the taxpayer’s income for its 1968 taxation year, the taxpayer deducted the sum of $739,004.50 representing interest payable in respect of that year on debentures issued by the taxpayer to SGI;

6. The said sum of $739,004.50 was deductible by the taxpayer in computing its income for its 1968 taxation year, the whole in accordance with the provisions of paragraph 11 (1 )(c) of the Act;

7. Payment of the interest, payable by the taxpayer in respect of its 1967 and 1968 taxation years, was, in fact, waived by SGI in March 1969;

8. At the date of issuance of the notices of reassessment for the taxpayer’s 1972 and 1973 taxation years, more than 4 years had elapsed from the date of the Original notices of assessment for the taxpayer’s 1970 and 1971 taxation years;

9. The sole issue to be decided on this appeal is whether the Minister of National Revenue is entitled, in reassessing for the 1972 and 1973 taxation years and for the purpose of computing the amount of non-capital loss of the taxpayer available for deduction in those years, to recompute the taxpayer’s taxable income for the 1970 and 1971 taxation years on the basis that the sums of $645,429.63 and $739,004.50 should have been added to the income of the taxpayer for its 1970 and 1971 taxation years respectively and that the non-capital loss incurred in the taxpayer’s 1967 taxation year was deductible in the taxpayer’s 1970 taxation year and that the loss incurred in the Taxpayer’s 1968 taxation year was deductible, in part, in the taxpayer’s 1970 taxation year and, as to the balance, in the taxpayer’s 1971 taxation year, notwithstanding the fact that at the date of such reassessments for the 1972 and 1973 taxation years, 4 years had elapsed from the date of the original notices of assessment for the taxpayer’s 1970 and 1971 taxation years.

On the other hand, the respondent reassessed the appellant on the following presumptions of facts:

6. In assessing the appellant for its 1973 taxation year, the respondent relied, inter alia, on the following presumptions of facts:

(a) During the relevant year, the method regularly followed by the appellant in computing its profit was the accrual basis method;

(b) In computing its income for its 1968 taxation year, the appellant claimed to deduct an amount of $739,004.50 in respect of interest payable, to SGI International;

(c) In the month of March 1969, SGI International Co agreed to waive its right to the accrued interest payable by the appellant as of December 31, 1968;

(d) At all relevant time, the appellant was not dealing at arm’s length with SGI International Inc.

Counsel for the appellant argued as follows:

The appellant suffered the following losses: In 1966—$138,694; in 1967— $519,666.94 and in 1969—$749,041.87.

On September 5, 1973, the Minister sent the following notices of reassessment and T7WC forms therewith with the result that the 1966 declared losses were applied as follows:

Consequently, the balance of losses not applied was $8,373, the reassessment nil and effectuated after the four-year limit.

In 1972, the appellant reported a net income of $33,012 and deducted an equal amount as losses from his 1967 non-capital losses of $519,666.94.

In 1973, the same thing happened. The appellant deducted losses for an amount equal to his declared income which was $72,073.

Consequently, in each year, there was a nil assessment.

The Minister then assessed the appellant on $33,012 and $72,073 respectively for the 1972 and 1973 taxation years, without allowing any deduction for losses because the non-capital losses represented interest payable by the taxpayer to SGI Co, the principal shareholder of the taxpayer in the 1968 taxation year. The said sum was waived by SGI Co in the month of March 1969, effective December 31, 1968.

Referring to sections of the Income Tax Act and more particularly to subsection 152(4) and paragraph 152(5)(a), counsel for the appellant argued that the Minister cannot achieve indirectly what he was not able to do directly. In other words, the Minister has assumed that there was no misrepresentation. In such a case, he would be precluded from reassessing beyond the four-year limit.

In the case at bar, he is trying to reassess by recomputing the amount of the losses.

He also argued that because the 1970 and 1971 taxation years were reassessed conclusively and the deductions were accepted as losses, the Minister is not authorized to reassess after the four years and because of these facts, the New St James Limited decision cited below is not applicable to the case at bar.

He then referred the Board to the following cases:

Pure Spring Company Limited v MNR, [1946] CTC 169; 2 DTC 845;

New St James Limited v MNR, [1966] Ex CR 977; [1966] CTC 305; 66 DTC 5241; and

Alexis Nihon Company Limited v MNR, [1969] CTC 39; 69 DTC 53.

Counsel for respondent argued that the Minister was entitled to reassess to refuse the losses carried forward because in those years, from 1970 to 1973, there were nil assessments; no losses were available; there was no reopening of these years; there was no tax payable and, consequently, no appeal.

The main issue is not the determination of income but the liability to pay tax. In Pure Spring Comapny Limited (supra), it was not the calculation of income but a mere determination of tax.

In New St James Limited, the Minister was recalculating the losses beyond the four-year limited for the calculation of income for the years under appeal and there is no difference with the case at bar. The Minister used the proper methods to reassess the appellant as he did because he could not challenge the assessment before 1972.

The duty of the Board is to determine the tax payable in 1972 and 1973. The interest became non-payable at the end of 1969 and, consequently, the Minister added that money as income in 1970.

In reply, counsel for the appellant argued that the 1972 taxation year was not the first year because the 1971 taxation year had taxable income and the question is whether the amount should have been included in 1970 and 1971 as income. He concluded by saying that the Minister did indirectly what he could not do directly.

According to the New St James Limited decision, it is obvious that the Minister is entitled to recalculate the losses beyond the four-year limit for the calculation of income with respect to the years under appeal.

The Minister could not challenge the assessment before 1972 because there were nil assessments.

The interest became non-payable at the end of 1969. In 1973 the Minister then added that money as income in 1970, ie this was done by recalculating the losses with the result that the Minister had no other choice but to add that money as income in 1970.

It cannot be said that the Minister did indirectly what he could not do directly. The Minister did directly what he could do, namely recalculate the losses with the direct result of increasing the taxable income in 1970. This was done in conformity with the principle enunciated in the New St James Limited decision and I quote from the headnote:

(1) Section 46(4) imposed no restriction as to any year other than 1955. The section, having no application to the years 1956 to 1959, did not preclude reassessments for those years being made in accordance with the provisions of the Act. The carried-forward loss had to be taken as provided by the Act, not as implied in the assessment for the year 1955.

There is no substantial difference between the New St James Limited case and the case at bar. In the light of this decision, the appeal is dismissed.

Appeal dismissed.