30 April 1987 Income Tax Severed Letter

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

April 30, 1987

MONTREAL DISTRICT OFFICE

Mr. Real Joly Chief of Appeals

HEAD OFFICE Appeals Branch J.P. Simard Tel: (613) 957-2214

Notice of Objection - 1980

This is in reply to your memorandum (E. Dahms) dated October 30, 1986, requesting our view with respect to the application of paragraph 1205(b) of the Income Tax Regulations ("Reg. 1205(b)") and the deductibility of certain expenses referred to as the XXXX.

You will find enclosed additional representation letters submitted by the taxpayer on March 4 and 6, 1987, dealing with Reg. 1205(b). A meeting was held on March 23, 1987, with XXXX tax counsel for the taxpayer.

XXXX argumentation could be summarized as follows:

- In the interpretation of statutes, there is a presumption against retrospective operation "unless by express words or necessary implication it appears that such was the intention of the legislature" (Driedger, Elmer A: The Construction of Statutes, 1983, Butterworth & Co. (Canada) Ltd. (2nd ed.) at p. 185 quoting Willis J. in Phillips v. Eyre);

- Regulations shall not be retroactive in operation, unless the statute expressly provide. Mr. Berwick quotes M. Louis Philippe Pigeon who stated that "le règlement ne peut avoir d'effet rétroactif" (L.P. Pigeon, Rédaction et Interprétation des Lois, 1965, à la p. 46). In Mr. Berwick's view, subsection 221(2) I.T.A. provides for "retroactivity" but not for "retrospectivity";

- Reg. 1205(b), currently 1205(1)(b), is ambiguous and consequently it should be interpreted in favor of the taxpayer (ref. Canterra Energy Ltd. v. The Queen [1987] CTC 89);

- In light of the decision in Agnew Estate v. The Queen [1978] CTC 351 (FCA), Reg. 1205(b) must be interpreted in such a way that retrospectivity is avoided;

- Interpreting Reg. 1205(b) as being retrospective would render it ultra vires;

- The retrospective interpretation of Reg. 1205(b) would be prejudiciable to the taxpayer, as illustrated in Tables 1 and 2 of his letter March 4, 1987.

We have reviewed the taxpayer's representations, the relevant jurisprudence and the back-up material with respect to the June 6, 1990 (date of registration), amendment to Reg. 1205(b) which substituted the words "capital cost" for the word "cost". We cannot agree with XXXX opinion for the following reasons:

1. In our view, the wording of Reg. 1205(b) is not ambiguous. In computing its earned depletion base as of any particular time from May 6, 1980, the taxpayer must aggregate a number of items, namely the capital cost to him of property, acquired after May 8, 1972 and before the particular time, that is included in Class 10 by virtue of paragraph k). Capital cost of such property must be computed in accordance with the rules applicable at the particular time. Consequently, investment tax credits claimed prior to that time must be deducted pursuant to subsection 13(7.1) of the Act. The decision in Canterra Energy Ltd. does not appear relevant to us.

2. The Department of Finance has confirmed that this "retroactive" effect was intended. An all District Offices memorandum (AU 81-17) was issued on April 22, 1981, by Mr. J.L. Courlay, then Director General, Compliance Directorate, confirming that intent.

Had the Governor-in-Council's intention been different, he would have used a different wording. For example, some of the provisions of Order-in-Council, P.C. 1980 - 1483, dated June 5, 1980, were made effective in respect of periods before this Regulation was published in the Canada Gazette (on June 25, 1980) commencing at different dates and as far back as "in respect of taxation years ending after May 6, 1974." When Schedule II CCA classes are amended, it is standard practice to indicate the effective date when it is different from the publication date. Different techniques are used. For example, Class 27, preceding paragraph (a) was amended by deleting "acquired before 1980", by P.C. 1979-1487, dated May 22, 1979. Class 28, subparagraph (d)(iii) was amended to add a reference to paragraph (1) of Class 10, by P.C. 1980-3279 dated December 4, 1980, and effective in respect of property acquired after December 11, 1979. In this latter case, the effective date does not appear in the revised wording of Class 2E.

There is a "general rule of literal construction that nothing is to be added to or taken from a statute unless there are adequate grounds to justify the inference that the legislature intended something which it omitted to express".(1) Had the Governor-in-Council intended to grandfather assets acquired prior to June 6, 1980, in Reg 1205(b), he would have stated so.

(1) Maxwell on the Interpretation of Statutes, 12th Edition. London, Sweet & Maxwell. 1969, at page 33.

3. Our reading of the authorities does not lead us to the same conclusion as XXXX with request to "retrospectivity" and "retroactivity".

Subsection 221(2) of the Act, as it read in 1980, stated:

"No regulation made under the 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."

It does not use the terms "retroactive" and "retrospective".

It is not the Department's position that earned depletion base computations as of any particular time prior to May 6, 1980, should use capital cost rather than cost even if such computations are made after publication of the amendment in the Canada Gazette. However, it is our view that subsection 221(2) is applicable in the present case. We consider that the reference to "capital cost" of property acquired after "May 8, 1972 and before the particular time" (therefore possibly before June, 1980) can be viewed as a "reference to a period before it was published" specifically provided for in the Regulation.

We are of the views that our interpretation of Reg. 1205 (b) does not contravene the rule expressed by Willie J. in Philips v. Eyre as by "necessary implication it appears that such was the intention" of the Governor-in-Council.

It is XXXX view that subsection 221(2) of the Act gives authority, under certain conditions, for a regulation to be retroactive but not to be retrospective. His reading of M. L.F. Pigeon lead him to believe that a regulation cannot be retrospective.

It should be noted that M. L.P. Pigeon was making no distinction between "retroactivity" and "retrospectivity". Furthermore, on p. 46 of Rédaction et Interprétation des Lois, immediately after the sentences quoted by XXXX M. Pigeon was adding in the same paragraph:

"Or s'il y a une chose qui est certaine, c'est qu'à moins qu'un texte ne le permette expressément, celui qui a le pouvoir de faire un règlement ne peut pas rendre ce règlement rétroactif".

On page 47, he was further adding:

"Pour que l'on puisse invoquer la présomption que la loi ou le rèlement n'a pas d'effet rétroactif, il faut avoir un 'substantive right'. Notons d'abord que l'on n'a pas de "substantive right" à la permanence de la législation. Pour avoir un "substantive right", il faut avoir an droit distinct de celui des autres citoyens. En d'autres termes, il faut que ce soit un droit particulier."

The matter of substantive rights has been discussed in certain tax cases. Based on the comments made by Cattanach J. in Barkman Developments Ltd. et al v. MNR, 67 DTC 5227, (confirmed by the Supreme Court, 67 DTC 5306), at p. 328 and on the decisions reached in

Classic's Little Books Inc. v. HMQ., 1973 CTC 94, Les Magasins Continental Ltée v. HMQ, 81 DTC 5175, and Gustavson Drilling (1964) Ltd v. MNR, 75 DTC 5451,

M. Daniel Verdon in his thesis "Les Principes du droit transitoire fiscal au Canada" expressed the view, at p. 123 "qu'on ne peut parler de droits acquis à un statut particulier en vertu de la Loi de l'impôt sur le revenu.'

Although Mr. Driedger distinguishes between a retroactive statute and a retrospective statute, M. L.P. Pigeon did not and, in our view, his comments on the retroactivity of regulations and substantive rights are equally applicable to "retrospectivity". See definition of "retrospective" in 4 below.

4. It is our view that if the Department's Interpretation of Reg. 1205(b) gives it a retrospective effect, it is an intended one. However, in determining whether the application of a provision gives it a retroactive effect, the terms "retroactive" and "retrospective" take a special meaning as illustrated by comments from Mr. R.S.W. Fordham, QC, of the Income Tax Appeal Board, in Kenneth Sinclair Russell v. MNR, 54 DTC 401, at page 403:

"Counsel for the appellant also argued that, in any event, the proposed application of section 8(3) gave it a retroactive effect, as it related to what has occurred in 1944. This point has only been raised once before and then it was not necessary to decide it, on account of the disposition made of the particular appeal in which it arose. It requires to be dealt with now, however. It appears to me that as the deduction of capital cost allowance is an annual matter, Parliament was not proceeding retroactively in enacting that the amount of capital cost allowance deductible should be referable to the original cost rather than to the later cost of the asset involved. While, at first glance, such an enactment may appear to be retroactive and therefore contrary to the general rule that unless specifically stated so to be, a statute shall not have retroactive effect, I do not think that the section in question can be viewed as retroactive in the sense in which that term is generally understood. Moreover, it has long been settled that a statute is not retrospective, in the sense here discussed, because a part of the requisites for its action is drawn from a time antecedent to its passing. See Maxwell's The Interpretation of Statutes, 9th Ed., et the top of page 228, and cases there cited."

If we accept the definition given by Craies on Statute Law of a retrospective statute, i.e. one "which takes away or impairs any vested right acquired under existing laws, or creates a new obligation, or imposes a new duty, or attaches a disability in respect to transactions or transactions already past", and the preceding comments from Messers Fordham and Verdon, we must conclude that Reg 1205(b) is not retrospective. Consequently, even if we would accept XXXX presumption, which we don't, that a retrospective regulation would be ultra vires, Reg 1205(b) would not be, as it is not retrospective in the legal sense.

5. With regard to the Agnew Estate decision, in our view, the conclusion was reached on a basis other than "retroactivity":

Section (sic) 221(2) and 159(7) of the Act should, if possible be read, so as to be consistent with the other. If section 221(2) is read in the manner urged upon us by the respondent (i.e. that by virtue of Section 58 of the 73-74 amendment and subsection 221(2) of the Income Tax Act, the authority given the Governor-in-Council under 159(7) to prescribe a rate of interest (Reg. 4600(1)) for purposes of that section is properly retroactive to the date of the election made in this case, then the result is to render the words "at the time of the election" as used in Section 159(7) meaningless and of no effect. Court will avoid such a construction if at all possible ... where the legislation is capable of two interpretations, the one retrospective and the other not, refrain from applying the retrospective interpretation. (Underlining and comments in bracket are ours)

As pointed out by XXXX the Court did not hold that Reg. 4600(1) was ultra vires. It concluded that it was not retroactive. In the present case, the "two possible interpretations" and the "meaningless" aspects are not present.

Consequently the re-assessment should be maintained with respect to the depletion allowance. XXXX With respect to the XXXX issue, based on our review of the jurisprudence and of Legislative Branch positions, we agree with your position that the expenditures incurred constitute a deductible expense.

Consequently, please issue the necessary reassessment under paragraph 165(3)(a). The taxpayer has been informed accordingly (copy attached).

Original Signed by Section Chief Appeals and Referral Division