Sydney Lerner- v. Deputy Minister of Revenue of the Province of Quebec, [1973] CTC 688, 73 DTC 5546

Lande, J:—The Court having examined the proceedings, studied the law and the written notes of the parties and having deliberated on the whole.

This is an appeal from a decision of the Minister of Revenue of the Province of Quebec with respect to the appellant’s income tax return for the year 1963, by which the Minister reassessed the appellant by adding the sum of $131,101.20 to his income for the said year 1963. This sum was the proceeds of the sale of appellant’s Class “A” shares in a private company of which he was a shareholder called Longueuil Meat Exporting Company Lid. In that year the company’s shares were restructured as part of a plan to withdraw the surplus of the company on a tax-free basis by a process then in vogue which was commonly referred to as “stripping”. By this procedure the controlling shares were sold to a third party. The federal government considered the money received for the sale of these shares as income and assessed the petitioner for the full amount he received. Subsequently, a settlement was effected between the petitioner and the federal Department of National Revenue by which the corporation was deemed to have paid a dividend out of designated surplus under section 105B of the federal Income Tax Act. A tax of 16 2/3% was assessed, and the Longueuil Meat Exporting Company Ltd paid in this respect a tax of $243,993.90. This was an alternative to be assessed on a personal basis.

The Provincial Income Tax Act, subsection 112(2) states as follows:

112. (2) When a taxpayer, during a taxation year, receives or is deemed to have received within the meanng of subsection (1), an amount from the undistributed income on hand of a corporation, such amount shall be considered as a separate and distinct income, not to be taken into account when computing the tax payable under the other provisions of this Act; but such amount is taxed at the rate of two and one-quarter percent.

This provision applies only to the undistributed income on hand of a corporation, which is considered tax-paid under the Federal Income Tax Act,

The petitioner argues that the net amount of money which the corporation has retained after the tax paid to the federal government aforesaid is in fact “the undistributed income on hand of a corporation which is considered tax-paid under the federal Income Tax Act", in the sense of subsection 112(2), second paragraph, aforementioned. In consequence, the provincial government is only entitled to assess him a tax of 274%.

The respondent disagrees with this conclusion. It submits, in effect, that the expression “undistributed income on hand of a corporation which is considered tax-paid under the federal Income Tax Act" as used in subsection 112(2), second paragraph, of the Provincial Income Tax Act, must be strictly interpreted and is inseparably and closely bound by the definition given to this expression by paragraph 82(1 )(b) and section 105 of the federal Income Tax Act. Consequently, according to the respondent, the petitioner cannot avail himself of the 2 A% tax referred to in the first paragraph of subsection 112(2), but must pay the tax at the regular rate on the full amount of the dividend he has received.

Throughout this judgment the following expressions shall have the meaning indicated beside them:

UIOH = undistributed income on hand;

TPUI = tax-paid undistributed income;

112(2) refers to subsection 112(2), second paragraph, of the Provincial Income Tax Act;

82(1)(a), 82(1)(b), 28(2)(b), 105 and 105B shall mean sections of the federal Income Tax Act.

Respondent’s Argument

Respondent refers to paragraphs 82(1 )(a) and (b) of the federal Act which define UIOH and TPUI respectively.

Respondent notes that the second paragraph of subsection 112(2) became law effective January 1, 1954. At that date paragraphs 82(1)(a) and 82(1 )(b) were already existing law. However, on that date section 105B (under which petitioner’s company paid its tax to the federal government) did not exist. Therefore, the expression “undistributed income on hand of a corporation, which is considered tax-paid under the federal Income Tax Act" used by the provincial legislature could not possibly have referred to section 105B of the federal Act which was then non-existent.

Furthermore, Part II of the federal law deals with tax to be paid on undistributed revenue of a corporation, beginning with section 105.

The definitions in paragraphs 82(2)(a) and 82(1 )(b) made a specific reference to Part II of the federal law and referred only to section 105 of the federal Act. In neither of these paragraphs is there any reference to section 105B, although 82(1 )(b) refers to 105C and 82(1 )(a) refers to 105A.

In fact, up to the time of the tax year involved in the present case section 82 was never amended to include 105B and has always been given a strict and restricted definition in consequence.

The learned counsel for the respondent further argues that in all fiscal matters the law must be strictly interpreted; that expressions which may appear to have ordinary meanings when used in fiscal law have very strict and restrictive connotations. Thus the expression “undistributed income on hand” in general use means the surplus of a corporation. However, in fiscal law it has a very technical meaning and must be so interpreted.

In consequence, the expression “tax-paid undistributed income” must be used in the restrictive sense of the definition conferred upon it by paragraph 82(1 )(b) of the federal Act. While this definition makes reference to section 105 of the federal law, it ignores 105B. Therefore, the wording of subsection 112(2) “undistributed income on hand of a corporation, which is considered tax-paid under the federal Income Tax Act” can only refer to tax-paid undistributed revenue in virtue of section 105 of the federal Act, and not in virtue of 105B.

Dispositifs

Section 105 and its various subsections of the federal Income Tax Act deals with the manner of liberating the undistributed income of a corporation. Sections 105, 105A, 105B and 105C all deal with the various procedures by which the undistributed income of different categories of corporations can be distributed to its shareholders upon the payment of certain rates of tax specified in these sections of the law.

In the case of the petitioner, the latter receives his dividend from a category of undistributed income described by the federal statute as “designated surplus”. Section 105B provided the mechanism by which the government permitted a flat tax (in this case 16 2/3%) where the dividend was paid out of “designated surplus”. Subsection 105B(3) was inserted to make it clear that once these dividends had been paid, the tax on the income of such dividends would not have to be paid again by the recipient but was “deemed” to have been paid by the company. By this method, when the Longueuil Meat Exporting Company Ltd filed its return showing dividends paid out of “designated surplus”, the federal government did not demand a further tax from the shareholders on dividends received by them and therefore did not demand a further tax from the petitioner on the amount of $131,101.20 which he received in virtue of these dividends.

The respondent has insisted that where subsection 112(2) speaks of “undistributed income on hand of a corporation, which is considered tax-paid under the federal Income Tax Act’’ this subsection refers only to section 105 of the federal Income Tax Act and not to any of its subsections, such as section 105B.

It is essential that all pertinent sections of the federal Income Tax Act should be considered in a matter of this kind. The respondent has restricted his interpretation to paragraphs 82(1 )(a) and (b). However, another very pertinent section has been overlooked, namely subsection

28(2) of the: federal Income Tax Act which describes a “designated surplus” by stating that, if the control of a corporation in any given year changes hands, its undistributed income on hand at the end of the preceding fiscal year is called its “designated surplus”. Therefore, the “designated surplus” as defined by paragraph 28(2)(b) of the federal Act is nothing more than undistributed income of a controlled corporation. Consequently, if the phrase in subsection 112(2) of the provincial Act, which reads “an amount from the undistributed income on hand of a corporation” is read as “an amount from the designated surplus on hand of a corporation”, no change of meaning has been made and the section is still valid.

If we carry this reasoning one step further, since by subsection 105B(3) the tax on this ‘‘designated surplus” is deemed to have been paid, then the text of the second paragraph of subsection 112(2) which reads “This provision applies only to the undistributed income on hand of a corporation, which is considered tax-paid under the Federal Income Tax Act” remains consistent and still has full validity if it were read as being “This provision applies only to the designated surplus on hand of a corporation, which is considered tax-paid under the Federal Income Tax Act”.

Furthermore, section 111 of the Provincial Income Tax Act states:

111. In this act, the expression “undistributed income on hand” has for a taxation year the meaning given to it for such year in the Federal Income Tax Act, . . .

Since paragraph 28(2)(b) of the federal Income Tax Act describes “designated surplus” as undistributed income on hand, it follows that section 111 of the Provincial Income Tax Act includes the expression “designated surplus” as defined in the federal Act.

It should also be noted that the language of subsection 112(2) does not say “as defined under the federal Income Tax Act” or “in accordance with section 82(1 )(b) of the federal Act”, but uses the language “considered tax-paid under the federal Income Tax Act’’. This is much broader in its implications. These words should be given their normal and customary meaning to include any tax-paid surplus declared so by the federal Act. Nowhere does the provincial statute say these are restricted to those mentioned in section 82 and its subsections. If the legislator intended to do so, subsection 112(2) would have said so. If the legislator intended to restrict the meaning of 112(2) to the definitions in 82(2)(a) and (b) of the federal Act, he would have used the exact text of the definition. However, he did not. In fact, he used the expression “undistributed income on hand of a corporation, which is considered tax-paid”. Paragraph 82(1 )(b) uses the expression “tax-paid undistributed income”. The former is much broader, the latter more technical. Consequently, the language of the second paragraph of subsection 112(2) should be used in its ordinary everyday meaning, and not In the restricted and technical sense of paragraph 82(1)(b).

For the foregoing reasons, the Court concludes that the income received by the petitioner from the “designated surplus” of the Longueuil Meat Exporting Company Ltd in 1963 was “income on hand of a cor- poration, which is considered tax-paid under the federal Income Tax Act”.

CONSIDERING that the petitioner has established the essential allegations of his petition;

CONSIDERING that the respondent has erred in not applying to the income received by the petitioner subsection 112(2) of the Provincial Income Tax Act:

FOR THESE REASONS:

DOTH ANNUL and DECLARE invalid assessment MBR 530311 levied by the respondent against the petitioner for the tax year 1963;

DOTH ORDER the respondent to assess the petitioner in accordance with subsection 112(2), first paragraph of the Provincial Income Tax Act by levying upon the petitioner a tax at two and one-quarter percent, without interest and without penalty, the whole with costs.