Kerr v. Superintendent of Income Tax for Alberta, [1938-39] CTC 241

EWING, J.:—In this action, the plaintiff claims a declaration that the plaintiff is not liable to pay income tax with respect to certain dividends earned and declared in the state of Washington outside the province of Alberta and further, if The Income Tax Act of the province, 1932, ch. 5, purports to impose such a tax, then such Act is to that extent beyond the powers of the province.

A statement of the facts were agreed upon by the parties and signed by their respective solicitors. This statement may be summarized as follows:

The plaintiff is the owner of 600 shares in the Weyerhaueser Timber Company, which corporation declared and paid the dividends in question. This company was incorporated under the laws of the state of Washington and has its head office at Tacoma in the said state. It has no office in the province of Alberta and does not carry on any part of its business in the said province. From time to time during the years 1933 to 1936 inclusive, this company declared and paid dividends in respect of the plaintiff’s 600 shares, which dividends amounted during these years to about $11,100. The plaintiff is domiciled in Calgary but spent the winter months during the said years either at Los Angeles in California or at Victoria in British Columbia. The dividends in question were declared and were payable at Tacoma. Cheques were issued for the dividends, which cheques were payable at Tacoma.

Having regard to the use made by the plaintiff of her dividend cheques, these cheques fall into three classes, viz.:

(1) Those cheques which never came into Alberta but were deposited by the plaintiff in banks either in British Columbia or in California and no part of the moneys represented by these cheques was ever brought by the plaintiff into Alberta.

(2) Those cheques which were received by the plaintiff in Alberta and either cashed in Alberta or deposited in banks in Alberta.

(3) Those cheques which were received by the plaintiff in Alberta and endorsed by her and then forwarded to British Columbia or California for deposit in banks there.

It is admitted that these dividends constitute "income’‘ of the plaintiff for the said years within the meaning of that word as contained in sec. 3 of The Income Tax Act. As this section defines ‘‘income’’ as including ‘‘profit, gain or gratuity * * * whether derived from sources within Alberta or elsewhere,’’ it is clear that in terms it includes the dividends in question and the only question arising in this action is the validity of that portion of the statute which imposes a tax on income originating elsewhere than in the province.

It is clear that the province has not an unlimited power to tax. Clause 2 of sec. 92 of the B.N.A. Act, 1867, ch. 3, gives to the province, ‘‘ Direct Taxation within the Province in Order to the Raising of a Revenue for Provincial Purposes.’’ It is argued here that the tax in question does not fall within the language above quoted. It is not argued that if the tax does fall within class 2 of sec. 92, it is necessary to look at sec. 91 or other parts of the Act to cut down the full meaning of the words used in sec. 92 to the extent that they do not cover the tax in question.

The above-quoted language imposes two limitations on the taxing power of the province. The first is a limitation as to the kind of tax to be levied, namely, a "‘direct’’ tax, as distinguished from an “indirect” tax. The second is a territorial limitation, that is to say, the taxation must be ‘‘within the Province.” In this case we are concerned only with the territorial limitation. There is a rather surprising lack of authority on the point in issue here. In England there is no constitutional limitation on the power of Parliament to tax. Consequently, the present issue cannot arise there. The cases on income tax in England are necessarily concerned with the interpretation rather than with the validity of the statute. The same situation prevails with respect to taxing statutes of the Federal Parliament, the taxing power of the Federal Parliament being unlimited. Many of the provinces of Canada have imposed income taxes for many years but the point in issue here does not seem to have been directly dealt with.

In 1918, The Edmonton Charter, 1913, ch. 23, was amended to permit the city to levy an income tax. The city thereupon levied an income tax and The Swift Canadian Company, Limited, operating a large packing plant in Edmonton, appealed. The statute affected or might affect four branches of the company’s business, two of which were as follows : Distribution of products to other branches in Alberta and British Columbia; distribution of its products to persons outside of Canada. The matter came before the Appellate Division in Swift Canadian Co. v. Edmonton 17 Alta. L.R. 135, [1921] 3 W.W.R. 196. The Court was concerned mainly with the interpretation of the statute but it is worthy of note that it was admitted that income under class 4 should be excluded because no income from this branch of the business was received in Edmonton.

The Chief Justice said, in part:

“The city’s right to tax can be no broader than what the province can give. Under our constitution, the province can tax only such property as is within the province. This being a tax on income, the income must be within the province, or we may say for the present case. within the city. Such being the case any income which did not come to the Edmonton branch, even in respect of business controlled or carried on in or from Edmonton, could not be taxed.”

It is true that the Chief Justice was in this case delivering a dissenting judgment but there was no dissent as to the matters referred to in the above quotation.

The argument for the defence is very brief and is to the effect that the tax is a personal tax and that the income which the taxpayer receives is merely the basis on which the tax is computed or the yardstick by which it is measured. In this view it is said that the origin or situs of the income is of no importance.

In the first place, the language of the Act does not give support to this view.

Sec. 8, which is the main operative section, provides that “There shall be assessed, levied and paid upon the income during the preceding year of every person ***.‘‘

Sec. 9, which empowers the Minister in certain cases to determine what constitutes the taxpayer’s chief occupation, provides that "the income therefrom shall be taxed accordingly.”

Sec. 10 provides that income accumulating in trust "‘shall be taxable in the hands of the trustee * * *. ”

Sec. 11 declares that ‘‘ Dividends * * * shall be taxable income of the taxpayer * * *.”

This language clearly indicates that income is the subject of the taxation.

Kerr v. Prov. Treas. of Alta. and Atty.-Gen. for Alta. [1933]

A.C. 710, 3 W.W.R. 38, 102 L.J.P.C. 137, was a case in which the province of Alberta sought to impose succession duties with respect to, inter alia, personal property situate locally outside of Alberta. In that case, as in the case at bar, the validity of the taxation imposed depends on the interpretation to be placed on the limited power contained in the words of the B.N.A. Act above quoted, viz., ‘‘ Direct Taxation within the Province. ‘ ‘ Lord Thankerton in delivering the judgment of the Privy Council said, with reference to taxation within the province:

“Generally speaking, taxation is imposed on persons, the nature and amount of the liability being determined either by individual units, as in the case of a poll tax, or in respect of the taxpayers’ interests in property or in respect of transactions or actings of the taxpayers. It is at least unusual to find a tax imposed on property and not on persons—in any event, the duties here in question are not of that nature. In considering the limits placed on provincial taxation, the Courts have invariably had regard to the basis or subject-matter in respect of which the taxation is imposed, and their Lordships agree with the statement of Anglin, J. [later C.J.C.] in Cotton v. Reg. (1912) 45 8.C.R. 469, at 936, where he said :

"‘In order that a provincial tax should be valid under the British North America Act, in my opinion the subject of taxation must be within the province. ‘ ‘ ‘

Just as in the Kerr case, supra, the subject of the taxation was personal property outside the province, so in the case at bar the subject of the taxation is income and as far as the class first above mentioned is concerned it is income outside the province. It cannot be argued factually that income which originated outside the province and which never came within the province is In any sense income within the province.

On the argument, I was referred to Commr. of Taxes v. Union Trustee Co. of Australia [1931] A.C. 258, 100 L.J.P.C. 21. The facts in this case are peculiar and, although somewhat similar, in some respects, to the case at bar, the decision is not, in my opinion, particularly useful here. The taxpayer was a resident of Queensland, Australia, and held shares in an association incorporated in the state of Victoria, Australia. No part of the association’s business was carried on in Queensland and no part of the moneys distributed by the association among its shareholders originated in Queensland. These distributions were received by the taxpayer in Queensland. After an extended review of the language of the statute the Court concludes as follows :

“In the result, in their Lordship’s judgment, provision (ii)(&) is not so framed as bring within its scope such a company as the association has been shown to be and the assessment upon the testator cannot be justified by reference to it. If the Queensland Legislature essay without ambiguity of phrase to include such a company as the association within the ambit of the enactment a very serious question as to its validity must arise. But that question, in their Lordships’ view of the provision in its present form, does not yet call for decision.”

In view of this conclusion the Court did not consider the question as to whether or not the receipt by the taxpayer in Queensland of the distributions from the Victoria association rendered them liable to income tax. In any case, it is apparent that, in this aspect, the Queensland statute is quite different from the Alberta statute.

I have also carefully examined L. & S.A. Inv’t Trust v. Br. Tobacco Co. [1927] 1 Ch. 107, 96 L.J. Ch. 58, which was specially referred to me. It presents those difficulties which are never absent when a decision with respect to certain statutes is sought to be applied to other and quite different statutes. In this case, Tomlin, J. after examining the Commonwealth of Australia Constitution Act, 1900, ch. 12—which is quite different from the British North America Act—finds that the powers of taxation conferred upon the Commonwealth Legislature do not extend to authorize the imposition of taxation upon a person who is not resident or domiciled within the Commonwealth in respect of property which is not situate within the Commonwealth.

The learned Judge then proceeds to establish that the shares, the dividends of which it was sought to tax, were situate in England and that, therefore, the dividends had the same situs. It is at once evident that the power of taxation conferred upon the Alberta Legislature is limited by the words above quoted, namely, "Direct Taxation within the Province,” and that the Legislature of Alberta purporting to act within these powers imposes taxation only upon persons who are resident within the province with the few qualifications set out in par. 8 of the Act. Tomlin, J. said, in part:

"‘The shares then being situate in England, can it be said that the deft to which a declaration of dividend upon these Shares gives rise is situate elsewhere than in the habitation of the shares? Is a tree in one close and the fruit in another? I think not. ‘ ‘

There does not seem to me to be any doubt that the situs of the shares in the case at bar is in Washington and that, therefore, the dividend has the same situs. I, therefore, hold that, with reference to the first class above mentioned, namely, income which originated outside the province and which never came within the province, such income is not subject to taxation by the province and, to the extent that The Income Tax Act purports to impose taxation in respect of such income, it is beyond the constitutional powers of the province.

The second class above mentioned seems to me to present even greater difficulties. It must be assumed that the dividend has the same situs as the shares but this does not settle the question. Until severance the tree and fruit are in the same close. But the fruit may be removed to another close and may there take on all the characteristics of fruit within the latter close.

This matter came before the Appellate Division of the High Court of Ontario in McLeod v. Windsor (City) (1925) 57 O.L.R.

15. In that case McLeod, as surviving trustee of the estate of John Curry, was assessed by the city corporation of Windsor in respect of the income of an estate which, by the will of the testator, he was directed to receive and accumulate until 1933. The executor received certain income from the estate of the testator in Michigan which was later transferred to the executor’s account in Windsor. One of the questions which came before the Court was whether the income received by the trustee from the estate of the deceased in Michigan was assessable for income under the Ontario tax Act. Ferguson, J.A., delivering the judgment of the Court, said in part:

"'All the income sought to be assessed is admittedly in the hands of McLeod and in his custody in the Province of Ontario, and it was not contended that the Province could not authorize an assessment of property actually within the Province, and direct the payment of the taxes from that property, but it was contended that because part of the income in McLeod’s hands came into his possession in the State of Michigan, as income derived from the Michigan estate, and was subsequently transferred to McLeod’s bank-account in Windsor, the Michigan income was not assessable under the wording of sec. 13 as amended.

‘‘In my opinion, the intention and purpose of the Legislature, as expressed in these sections, is that the trustee shall be taxable in respect to such moneys as he has in his possession in Ontario, irrespective of the source of the income, and that the main question on this appeal is: Is the tax imposed by the assessment of McLeod a direct or indirect tax?”

In the case at bar, some of the dividends sought to be charged are or were admittedly in the plaintiff’s hands in the city of Calgary.

The Alberta Act imposed a tax on income whether derived from sources within Alberta or elsewhere. Applying the principle set out in the McLeod case, supra, it is difficult to see any good reason why this money being admittedly income and being within the province is not subject to taxation under the provincial Income Tax Act.

Without going into refinements as to what takes place when a cheque is issued in payment of a dividend, I think that what admittedy took place here is not different in legal result from what would have taken place if the plaintiff had received her dividends in cash in Tacoma and brought the money so received into Alberta. It is true that certain difficulties are likely to arise in connection with the identity of the money in Alberta as being the money paid in respect of the dividends in question but when, as here, that identity is admitted, I think it is subject to taxation.

As to the third class above mentioned, namely, those cases in which the cheques were merely sent by mail to Alberta where they were endorsed by the plaintiff and then sent by mail for deposit in banks outside the province of Alberta, I do not think that this constitutes bringing the funds into Alberta. A cheque is merely an order to transfer the amount of the funds therein named or a corresponding credit to the payee or his order. The actual transfer does not take place until the cheque is cashed or deposited. In these circumstances, the funds did not, in my opinion, come into Alberta.

There will be a declaration that the plaintiff is not liable to any tax with respect to those dividends which fall under classes 1 and 3 and that The Income Tax Act of Alberta in so far as it purports to affect these two classes of income is beyond the constitutional powers of the Alberta Legislature.

The plaintiff has been successful in the main and is I think entitled to her costs of the action. I have not sufficient information before me to determine the scale upon which these costs should be taxed but if the parties are unable to agree upon the scale the matter may be spoken to again.

Judgment accordingly.