Lachance (J.M.A.) v. Canada, [1994] 2 CTC 185

Hugessen J.A.:—The Crown has appealed from a judgment of the Trial Division allowing the respondent's appeal and reversing a decision of the Tax Court of Canada which had dismissed the appeal.

The essential facts of the case may be summarized as follows. The respondent is a professional engineer. For a number of years he was a member of the partnership “Woods, Gordon" (WG) which did business in several provinces of Canada. Under an agreement between the respondent and the partnership, he retired from WG on November 15, 1983; at that time he received a payment amounting to approximately $110,000, representing his share of the income of the partnership for part of the then current fiscal year, which was to terminate on January 31, 1984. For his 1984 taxation year, the respondent reported the total income received from WG as if all that income had been earned in Quebec, where he had his residence. In 1984 the respondent had no establishment outside Quebec; however, the WG partnership had earned its income for the fiscal year ending on January 31, 1984, during which the respondent had received a share of the partnership’s income, in nine provinces including Quebec, which accounted for only 12.8 per cent of the value. The Minister assessed the respondent as if 87.2 per cent of his income had been earned in provinces other than Quebec and accordingly reduced the Quebec income tax abatement and assessed provincial income tax. The respondent contends that he should be assessed as a resident of Quebec who has no source of income outside that province, whence the appeals first to the Tax Court of Canada and then to the Trial Division of this Court.

The judge of the Trial Division allowed the respondent's appeal, if I understand the reasons for his judgment, because he was of the opinion that the language of subsection 96(1) of the Income Tax Act of Canada, S.C. 1970-71-72, c. 63, as amended, prevented it from applying to a retired member of a partnership. He stated (Appeal Case, Vol. Ill, pages 481-83):

Assuming that the agreement of November 7, 1983 between the plaintiff and the WG partnership falls within the scope of subsection 96(1.1) of the Act above, the fundamental question then is whether this provision, as the defendant contended, allowed the Minister of National Revenue to apply subsection 96(1) of the Act above so as to assess the plaintiff as he did for the 1984 taxation year. In other words, could the Minister act pursuant to subsections 96(1) and (1.1) of the Act in such a way that, in the circumstances, the plaintiff would not have all his income for the taxation year allocated only to the province of Quebec?

The purpose of subsection 96(1.1) is clearly not to determine how to calculate the income or loss of a retiring partner in connection with his assessment for a taxation year, taking into account the allowance resulting from the agreement n question, but simply to create a fiction which only applies for the purposes of subsection (1) and sections 101 and 103 of the Act. . ..

It is clear that the purposes of subsection 96(1) are strictly to determine how to calculate for a taxation year income (or a loss, as the case may be) of a taxpayer who is a member of a partnership, and no one else. This follows from the very language of the provision, which begins with the words “where a taxpayer is a member of a partnership", and then uses the possessive adjective “his” with respect to the income or loss covered by the methods of calculation provided: . . .

It accordingly seems clear that subsections 96(1) and 96(1.1) of the Act, whether taken together or separately, cannot apply to a “retiring partner" within the meaning of subsection 96(1.1) so as to determine how for the purposes of his assessment for a taxation year he is to calculate his income (or loss), and that income (or loss) must instead be calculated independently in accordance with the other provisions of the Act and Regulations.

The legislative provisions to which the trial judge referred are subsections (1) and (1.1) of section 96 of the Act. The relevant portions of subsection 96(1) read as follows:

96(1) Where a taxpayer is a member of a partnership, his income, non-capital loss, net capital loss, restricted farm loss and farm loss, if any, for a taxation year, or his taxable income earned in Canada for a taxation year, as the case may be, shall be computed as if

(a) the partnership were a separate person resident in Canada;

(b) the taxation year of the partnership were its fiscal period;

(c) each partnership activity (including the ownership of property) were carried on by the partnership as a separate person. .. . .

(f) the amount of the income of the partnership for a taxation year from any source or from sources in a particular place were the income of the taxpayer from that source or from sources in that particular place, as the case may be, for the taxation year of the taxpayer in which the partnership's taxation year ends, to the extent of the taxpayer's share thereof,

[Emphasis added.]

This provision creates a series of fictions for the purposes of the Act for a taxpayer who is a member of a partnership. Such a taxpayer’s income is calculated “as if” the partnership had a distinct legal personality. A set of rules is then laid down for computing income and various other amounts that are relevant for income tax purposes. However, the Act does not impose a duty on the fictitious person it has thus created to pay income tax; on the contrary, paragraph (f) provides that the income of the partnership is allocated to its members, in proportion to the share of each member in the partnership. If the partnership has several sources of income or sources located in different places, each member is deemed to have received his or her share from each source and from each place in the same proportions as the partnership itself. The partnership's income “flows through" to the income of each of its members.

By the language of subsection 96(1) itself, it deals exclusively with the case of a taxpayer who "is a member of a partnership". Subsection 96(1.1), on the other hand, deals with the case of a former member:

96(1.1) Allocation of share of income to retiring partner.— For the purposes of subsection

(1) and sections 101 and 103,

(a) where the principal activity of a partnership is carrying on a business in Canada and the members thereof have entered into an agreement to allocate a share of the income or loss of the partnership from any source or from sources in a particular place, as the case may be, to any taxpayer who at any time ceased to be a member of

(i) the partnership or

(ii) a partnership that at any time has ceased to exist or would, but for subsection 98(1), have ceased to exist, and either

(A) the members thereof, or

(B) the members of another partnership in which, immediately after that time, any of the members referred to in clause (A) became members

have agreed to make such an allocation

or to his spouse, estate or heirs or to any person referred to in subsection (1.3), that taxpayer, his spouse, estate or heirs, or that person, as the case may be, shall be deemed to be a member of the partnership; and

(b) all amounts each of which is an amount equal to the share of the income or loss referred to in this subsection allocated to a taxpayer from a partnership in respect of a particular fiscal period of the partnership shall, notwithstanding any other provision of this Act, be included in computing his income for the taxation year in which that fiscal period of the partnership ends.

[Emphasis added.]

A person who has ceased to be a member of the partnership (or his or her estate, as the case may be) is therefore deemed to be a member, for the purposes of subsection (1); similarly, all amounts representing that person's share in the partnership's income [1] must be included in computing his or her income "notwithstanding any other provision" of the Act.

Once again, this is a legal fiction: the Act declares that something is deemed to be what it is not. Mr. Justice Beetz, writing for the Supreme Court, has described this type of legislative technique as follows (The Queen v. Verrette, [1978] 2 S.C.R. 838, 40 C.C.C. (2d) 273, 85 D.L.R. (3d) 1, at page 845):

A deeming provision is a statutory fiction; as a rule it implicitly admits that a thing is not what it is deemed to be but decrees that for some particular purpose it shall be taken as if it were that thing although it is not or there is doubt as to whether it is. A deeming

provision artificially imports into a word or expression an additional meaning which they would not otherwise convey beside the normal meaning which they retain where they are used; it plays a function of enlargement analogous to the word “includes” in certain definitions; however, “includes” would be logically inappropriate and would sound unreal because of the fictional aspect of the provision.

[Emphasis added.]

With due respect, it seems obvious to me that the reasoning of the Trial Division judge cannot stand. It is undeniable that the first words of subsection 96(1 ) indicate that the rules that follow apply only to a "member of a partnership". However, by referring specifically to subsection 96(1), subsection 96(1.1) provides that the former member is deemed to be a member and that the amounts he or she receives from the partnership must be included in computing his or her income. It is quite simply unacceptable to do what the trial judge did and claim that the deeming provision set out in subsection 96(1.1), the purpose of which is precisely to enlarge the expression “member of a partnership" in subsection 96(1), is limited by the very expression it is intended to enlarge. The judge was wrong to hold that subsections 96(1) and (1.1) "cannot apply to a "retiring partner" within the meaning of subsection 96(1.1) so as to determine how for the purposes of his assessment for a taxation year he is to calculate his income". His interpretation would operate to deprive subsection 96(1.1) of any meaning.

At the hearing of the appeal, counsel for the respondent did not make too vigorous an attempt to defend the reasoning of the Trial Division judge. Rather, he used another argument to try to justify the result obtained, this time based on the introductory words of subsection 96(1.1), “For the purposes of subsection (1) and sections 101 and 103”. According to counsel, these words, which appear to limit the application of the deeming provision in subsection 96(1), prevent it from being taken into account in applying any other provisions of the Act. Inter alia, since the provincial abatement is computed and provincial income tax deducted in accordance with the rules set out in section 120 of the Act and sections 2600 and 2601 of the Regulations, the fiction created by subsection 96(1.1) cannot apply to that computation.

The premise of this argument cannot be disputed; the conclusion, however, is wrong. Subsection 96(1), to which the application of the fiction created by subsection 96(1.1) is limited [2] , itself creates a set of fictions for computing the income of a taxpayer who is (or is deemed to be) a member of a partnership. As we have seen, paragraph 96(1 )(f) allocates to that taxpayer his or her share of the partnership's income as if the taxpayer had received it himself or herself from the same sources, and from sources located in the same places, as the partnership itself. Section 96 is found in Division B of the Act, "Computation of Income”. That Division follows Division A, “Liability for Tax", and precedes Division C, "Computation of Taxable Income”. The scheme of the Act is logical and coherent. The computation of a taxpayer's income precedes computation of his or her taxable income and is reflected therein. The computation of taxable income, in turn, precedes and serves as the basis for the computation of tax. Any rule affecting the computation of a taxpayer’s income is therefore likely to have an effect on the computation of his or her taxable income, and then on the computation of his or her tax. The deeming provision in subsection 96(1.1) does not need to go further than subsection 96(1), because the latter subsection determines how a taxpayer to whom it applies must compute his or her income, and that computation is, in turn, necessarily reflected in the computation of the taxpayer's taxable income and tax.

More specifically, in the respondent's case, paragraph 120(4)(a) provides:

120(4) "Income earned in the year in a province".— “income earned in the year in a province” means amounts determined under rules prescribed for the purpose by regulations made on the recommendation of the Minister of Finance; and. .. .

The relevant portions of the Regulations are found in subsections 2600(1), 2600(2) and 2601(2):

2600(1) For the purposes of paragraph 120(4)(a) of the Act, “income earned in the year in a province” by an individual means the aggregate of his incomes earned in the taxation year in each province as determined in accordance with this Part.

(2) In this Part, "permanent establishment” means a fixed place of business of the individual, including an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop or a warehouse, and

2601 (2) Where an individual resided in a particular province on the last day of a taxation year and had income for the year from a business with a permanent establishment outside the province, his income earned in the taxation year in the province is the amount, if any, by which

(a) his income for the year exceeds

(b) the aggregate of his income for the year from carrying on business earned in each other province and each country other than Canada determined as hereinafter set forth in this Part.

As a former member of the WG partnership, the respondent is deemed to be a member of the partnership by virtue of subsection 96(1.1). During the partnership's fiscal year ending on January 31, 1984, he received a share of its income. He must therefore include an amount equal to his share of the partnership's income in his income for the 1984 taxation year. Under subsection 96(1), and more specifically paragraph (f) the income received by the respondent is deemed to nave been received from the same sources and from sources located in the same place as the income of the partnership itself. In practical terms, the sum of approximately $110,000 received by the respondent during the partnership's fiscal year ending on January 31, 1984 must be included in the computation of his income for the 1984 taxation year and is attributable to the same sources in the same provinces as the income of the WG partnership itself. Because WG has establishments in nine provinces and earned 87.2 per cent of its income in provinces other than Quebec, the respondent is deemed to have done the same in so far as his share of that income is concerned. The Minister was entitled to assess him on that basis.

Before closing, I should briefly note two alternative arguments raised by counsel for the respondent.

First, he invoked an administrative practice by the Minister by virtue of which, until 1983, the Minister had not applied subsections 96(1) and 96(1.1) to the letter in the case of a retired member of a partnership. That practice was never laid down in an interpretation bulletin and the respondent does not contend that he organized his affairs in reliance on the Department's interpretation. In my opinion, the language of the Act is clear and unequivocal and an administrative policy that is contrary to that language cannot be taken into consideration (Harel v. D./ M.N.R. (Quebec), [1978] 1 S.C.R. 851, [1977] C.T.C. 441, 77 D.T.C. 5438, at page 858 (C.T.C. 447, D.T.C. 5442).

Second, counsel argued that the interpretation proposed by the Minister was unconstitutional because it would give provincial tax laws extra-territorial application. I cannot give a better response to this argument than was given by the judge of the Tax Court of Canada (Appeal Book, Vol. 1, page 43):

I do not need to examine the appellant's constitutional argument in depth as the income on which the appellant was assessed was in fact earned in various provinces by means of the partnership. The partnership was not taxed. Its members are taxed as if they had themselves carried on the activities of the partnership.

I would allow the appeal with costs, I would set aside the judgment of the Trial Division and I would dismiss the respondent's action with costs.

Appeal allowed.