Maple Leaf Mills, Limited v. Minister of Revenue, [1979] CTC 156

Keith, J:—This is an appeal under subsection 82(1), of The Corporations Tax Act, RSO 1970, c 91, from the reassessment by the Minister of Revenue Ontario, of the tax liability of the appellant company for its fiscal year ending December 31, 1971.

The appellant company, which is a large corporation, has interests in a considerable number of other companies both Ontario, federal, extraprovincial, and perhaps, indeed, international.

A number of these companies it can fairly be said are wholly-owned subsidiaries. In other instances the appellant company holds significant, but not controlling, share interests. In a third group there are smaller investments in certain companies.

Commencing in the latter part of the 1960’s the auditors of the company on the instructions, no doubt, of the Board of Directors of the appellant, commenced reporting to its shareholders by way of a consolidated balance sheet in which the results of the operations and the capital position of the companies in which it had investment interests in its own particular field of commerce were reflected in order to give the shareholders a true picture of the overall health or otherwise of the appellant company.

The figures included were not figures belonging to the appellant company itself, but, as I have stated, were placed in there to indicate how, in the overall picture, shareholders of the appellant company might fairly regard the operation of their company.

In 1971, the year in question, a similar procedure was adopted and, I am sure, was informative to persons such as shareholders, security commissions and stock exchanges, as to the inherent background in support of the company’s shares held by the public or otherwise.

In the same year, however, the accountants, the auditors for the company, prepared for the directors the financial statements of the appellant only and these, stripped of the detailed figures for the companies either controlled or heavily invested in which the appellant company was interested in, showed the true picture for the appellant company and, indeed, in the report to the directors of the company the auditors stated as follows:

A consolidated statement in which the financial statement of this company has been consolidated with those of its subsidiary companies has been reported to by us as auditors of the company for presentation to the shareholders at the Annual Meeting. Only information in regard to the increase in subsidiaries and the net earnings of the subsidiaries is included in this financial statement.

In other words, what the auditors were directing the persons responsible for the management of the appellant companies attention to was the picture of that individual, separate corporation, something that was absolutely essential for those directors to know, that being the assets and liabilities with which they had to deal with on a day to day basis, and the only assets and liabilities that they could deal with.

The appellant’s tax return was duly filed, based on the financial statements that I have just referred to, that were restricted to the appellant company. Accompanying the tax return was a copy of that financial statement and also a schedule of investments and related income that showed the appropriate adjustment to be made as between the consolidated balance sheet and the corporations financial statements, in order to pre sent a true picture of the taxpayer for the taxpayer’s position with respect to capital.

There is a capital tax in Ontario provided for by The Corporations Tax Act. Various deductions are provided for. But one must, in order to determine the figure to which the appropriate rate of tax is applicable, determine what the paid-up capital of the corporation for the fiscal year in fact is.

This, I am satisfied, is precisely what was done by the appellant in its tax return, because it has stripped out of its paid-up capital properly calculated, the sum of $3,354,000 which was properly attributable to unrealized potential capital or, indeed, perhaps income available for dividend purposes in its hands of what has been generally called its subsidiaries, whether controlled or not.

The Minister disallowed this deduction and held that these figures (which appear on the books of the company quite properly) were indeed a true surplus to be included in the calculation of paid-up capital. This was a strange position to take in view of the fact that the same reasoning was not applied to the income of the various subsidiaries or depreciation on behalf of the various subsidiaries or, indeed, any other factor that has to be taken into account in calculating the corporation’s financial position.

The result of the disallowance was to increase for statutory purposes the total paid up capital by the amount that was disallowed, attracting a tax of over $270,000.

What the Minister was doing here was taxing another corporation’s capital as if it was the capital of the appellant corporation and at the same time taxing the subsidiary corporations on the same capital, a demonstrably wrong position to take.

There are no cases directly on point with respect to these situations. Counsel for the Minister urges on me that the definition such as it is contained in section 70 of the statute is sufficiently wide to embrace the reassessment, to support the reassessment that is being made in this case.

The language on which he relies is as follows:

The paid-up capital of the corporation for a fiscal year is its paid-up capital as it stood at the close of the fiscal year and includes the paid-up capital stocks of the corporation and its earned capital and any other surplus, all its reserves, et cetera.

He emphasises the language “any other surplus”. It would seem to me self evident that when the Statute talks of any other surplus it must talk of a surplus that belongs to and is under the control of the directors of the Corporation, a test which this patently does not fit.

There is, in my view, no statutory basis whatever for the tax that has been imposed in this case. Taxing statutes must be construed strictly and unless a clear basis for taxation appears in the Statute the taxing authority must fail in its efforts to reach the taxpayer’s pocket.

I think that perhaps with those words I should perhaps say no more in this day and age.

The appeal, therefore, is allowed, and the respondent is directed to reassess the appellant, deleting the tax levied on the amount incorrectly included in its calculation of the appellant’s paid-up capital under section 70.

I think I should like to add that in the event that this goes further, for the assistance of any reviewing court, I reserve the right to review and expand on these reasons wherever it seems to be proper.

I endorse the record, order to go as asked in its prayer for relief. Monies paid in Court including accrued interest to be paid up to the appellant. Costs to the appellant.