Attorney General of Quebec v. Imperial Oil Limited, [1945] CTC 233

THE COURT has heard the witnesses; examined the proceedings and documentary proof; heard the Parties, upon the merits of the present case; and has, upon the whole, deliberated.

This action is based upon the Corporation Tax Act, as in force during the years 1939 to 1942, i.e. Chapter 77 of the Revised Statutes of Quebec, 1941.

The main point in issue is the tax calculated on paid-up capital provided for by section 3, with what might be called the faculative modification thereof referred to in section 4 of the Statute. The relevant portions of these two sections read as follows :

"‘3. In order to provide for the exigencies of the public service of the Province, every one of the following companies, corporations, partnerships, associations, firms, business houses and persons, doing business in this Province, in his or its own name or under a firm name or through any person paid by salary or commission or in any other manner, acting as employee, vendor, agent, representative or otherwise, shall pay annually to His Majesty in the rights of the Province, at the time and in the manner hereinafter provided, the following taxes :

14. GASOLINE COMPANIES

In the case of every company producing, selling, distributing or delivering gasoline or any other liquid products prepared or compounded for the purpose of generating power, a tax of three-eights of one per centum on its paid up capital and also the tax upon places of business payable by ordinary companies. ‘ ‘

(It is to be noted here that Defendant admittedly comes under this pargraph 14 and that there is no dispute as to the tax on "‘places of business. ‘‘)

14. Upon the Treasurer’s recommendation to the Lieutenant- Governor in Council, the latter may fix, at a sum less than that hereinabove prescribed, the tax payable on capital of any company which:

a. Does part only of its business in the Province.”

The connotation of the expression ‘‘paid-up capital” is explained in sub-section 3 of section 2, which reads as follows: "3 The words ‘paid-up capital’ mean and include:

a. The paid-up capital stock of the company comprising ordinary and preferred stock ;

b. Its surplus and reserve funds except any reserve for ordinary wear and tear, the creation of which is allowed as a charge against revenue under this act;

e. All indebtedness of the company, whether assumed or undertaken by the company, and represented by bonds, mortgages, debentures, income bonds, income debentures, liens, notes and any security to which the property of the company is subject;

d. Every other indebtedness of a capital nature;

e. Every other undivided interest or other participating interest, in the nature of capital stock such as ‘units,’ " trustee shares,’ "trustee certificates’ and the like.

However, when goodwill is included as an asset, a deduction may be allowed to the extent that such goodwill, in the opinion of the Treasurer, has no value.

Provided also that, when the balance sheet submitted to shareholders shows a defiicit, the amount of such deficit may be deducted from the amount of such paid-up capital;''

With reference to section 4, Plaintiff produced, as Exhibit P-1, a copy of. Order in Council No. 3081, dated 19 November, 1941, the body of which reads as follows :—

"WHEREAS the Lieutenant Governor in Council may determine the amount of the annual tax on Paid-up Capital of Incorporated Companies coming under Section 4 of Chapter 26 of the Revised Statutes of Quebec, 1925, as enacted by 3 Georges VI, Chapter 19, under certain conditions;

WHEREAS the following Company meets the conditions required by said Section 4 of the Corporation Tax Act,

WHEREFORE, IT IS ORDERED, upon the recommendation of the Honourable the Treasurer of the Province, that the amount of the annual Tax on Paid-up Capital of the following Company be fixed at the sum herein set forth, opposite

its respective name, to wit :—
Imperial Oil Limited	1939-40 $109,563.98
Imperial Oil Limited	1940-41	100,154.27
Imperial Oil Limited	1941-42	99,366.12”

The three sums mentioned in this Order in Council are those claimed in the action and it was admitted, in open Court, that the tax calculated according to paragraph 14 of section 3, if based upon the entire paid-up capital of the Company Defendant, as defined by the Statute, would be for higher amounts.

On the face of the Statute, therefore, so far as the main point is concerned Plaintiffs action appears well founded. But Defendant contends that the Statute, in so far as it purports to tax that part of Defendants capital which is outside the Province, is ultra vires and unconstitutional.

The question of the constitutionality of the tax involves, of course, the application to the situation of paragraph 2 of section 92 of the British North America Act, under which the Province may legislate with respect to: ”Direct taxation within the Province in order to the raising of a Revenue for Provincial Purposes. ’

The relevant facts are not in dispute. The main points are as follows :—

The Defendant was incorporated in 1880 by Dominion Letters Patent. Its head office and administrative offices are situated in Ontario, where all questions of policy are determined and where all appointments of managerial officers are made. The business carried on in the Province of Quebec consists of a Refining Division and a Marketing Division, each of which has a Provincial Manager. The two provincial managers have very limited powers and are subject to close and constant control by the executive officers in Ontario.

The Province contends that the question before the Court is settled by the decision of the Judicial Committee in Bank of Toronto v. Lambe, 12 A.C. 575 (1887). That case involved the interpretation of the Quebec Statute 45 Vict. cap. 22, entitled "An Act to Impose certain Direct Taxes on certain Commercial Corporations.’’ The relevant portions of the Statute read as follows:

1. In order to provide for the exigencies of the public service of this Province, every Bank carrying on the business of banking in this Province . . . shall, annually, pay the several taxes mentioned and specified in section three of this act, which taxes are hereby imposed upon each of such commercial corporations respectively. ‘ ‘

3. The annual taxes, imposed upon and payable by the commercial corporations mentioned and specified in section one of this act, shall be as follows:

1. BANKS.

(a) Five hundred dollars, when the paid up capital of the bank is five hundred thousand dollars or less than that sum; one thousand dollars, when the paid up capital is from five hundred thousand dollars to one million dollars; and an additional sum of two hundred dollars for each million or fraction of a million dollars of the paid up capital from one million dollars to three million dollars and a further additional sum of one hundred dollars for each million or fraction of a million dollars of the paid up capital over three million dollars.

(b) An additional tax of one hundred dollars for each office or place of business in the Cities of Montreal and Quebec, and of twenty dollars for each office or place of business in every other place.’’

It will be noted that the terms of this statute resemble closely those of the statute now in question. The principal facts in the ease were also similar to those under consideration, as will appear from the following passage cited from the remarks of Lord Hobhouse, at page 580 of the report :—

“The appellant bank was incorporated in the year 1855 by an Act of the then parliament of Canada. Its principal place of business is at Toronto, but it has an agency at Montreal. Its capital is said to be kept at Toronto, from whence are transmitted the funds necessary to carry on the business at Montreal. The amount of its capital at present belonging to persons resident in the province of Quebec, and the amount disposable for the Montreal agency, are respectively much less than the amount belonging to other persons and the amount disposable elsewhere. ‘ ‘

The Bank of Toronto took the position that the Statute was unconstitutional in that it purported to tax extra-provincial property because the greater part of its capital was situated outside the Province of Quebec. Lord Hobhouse, after deciding that the tax was "‘direct’’ (as the present one admittedly is), proceeded as follows (page 584-5) :

“The next question is whether the tax is taxation within the province. It is urged that the bank is a Toronto corporation, having its domicil there, and having its capital placed there; that the tax is on the capital of the bank; that it must therefore fall on a person or persons, or on property, not within Quebec. The answer to this argument is that clause 2 of sect. 92’ does not require that the persons to be taxed by Quebec are to be domiciled or even resident in Quebec. Any person found within the province may legally be taxed there if taxed directly. This bank is found to be carrying on business there, and on that ground alone it is taxed. There is no attempt to tax the capital of the bank, any more than its profits. The bank itself is directly ordered to pay a sum of money; but the legislature has not chosen to tax every bank, small or large, alike, nor to leave the amount of tax to be ascertained by variable accounts or any uncertain standard. It has adopted its own measure, either of that which it is just the banks should pay, or of that which they have means to pay, and these things it ascertains by reference to facts which can be verified without doubt or delay. The banks are to pay so much, not according to their capital, but according to their paid-up capital, and so much on their places of business. Whether this method of assessing a tax is sound or unsound, wise or unwise, is a point on which their Lordships have no opinion, and are not called on to form one, for as it does not carry the taxation out of the province it is for the Legislature and not for Courts of Law to judge of its expediency. ‘ ‘

The Defendant in the present case admits that the main facts are, in substance, identical with those in the Bank of Toronto ease, but lays great stress upon the differences between the two statutes. The following extract from Defendant’s Factum includes the points of difference upon which it relies (p. 4-5) :

" ‘It will be noted that the facts in the Lambe case were identical with the facts in the case presently under discussion with the notable exception that the statute which was considered in the Lambe case was so worded that it was abundantly clear that the taxes ‘. . are hereby imposed upon . . . such corporations’ and that the capital was used only as a ‘yard stick’ or means of reference by which the amount of the tax payable by a company was ascertained. The Quebec Legislature had indeed ‘adopted its own measure . . . of that which it is Just the bank should pay. ’

The Quebee Corporation Tax Act however as now in force provides that ‘everyone of the following companies . . . shall pay . . . the following taxes : . . . ”

It will be noted that, so far, the Act does no more than impose a tax without specifying its nature. It requires that the company shall pay the tax but does not thus far provide that it is to be a tax ‘upon . . . such corporoation.’ The Act then goes on to provide for “. . . a* tax of three-eights of one per centum on its paid up capital. . . .’ It is submitted that it is here that the character and the subject matter of the tax are specified. To strengthen this contention we find in see. 4 the words '. . . the Lieutenant-Governor in Council may fix . . . the tax payable on capital of any company which :—

(a) does part only of its business in the province.”

It will be noted that Defendant attaches considerable importance to the use of the preposition ‘‘on’’ in connection with the word "capital,” pointing out that in the earlier statute the preposition ‘‘for’’ was used. To this the Province answers:

(1) That in the former statute the tax was not calculated on a percentage basis and that, accordingly, "for” was the appropriate word rather than ‘‘on’’; whereas the reverse is so in the present instance; and (2) That in the present statute the preposition ‘‘on’’ must be read with the words ‘‘three eights of one per centum.’’ It seems to the undersigned that the appropriate preposition in the statute in question would have been ‘‘of’’; but must the statute be declared unconstitutional because of such a fine distinction? As Counsel for the Province points out, several other sections of the statute indicate that the tax is imposed not ‘‘on the capital” but ‘‘on the companies’’; e.g.

sections 17 and 21 begin with the words: "‘Every company on which a tax is imposed by this act shall

Counsel for Defendant admits that the Bank of Toronto case is the only relevant decision dealing specifically with corporation taxes as such; but he refers to others relating to income taxes and succession duty taxes which discuss the distinction between taxes on persons and taxes on property or the transmission of property. On this aspect of the question, Counsel for the Province points out that while a tax may be imposed upon specific assets, it cannot logically be imposed upon “paid-up capital” as described in section 2(3) of the statute (see citation, pp. 234-35 supra).

Among the cases cited by Defendant is Kerr v. Superintendent of Income Tax and Attorney-General of Alberta, [1943] Canada Tax Cases 97. The holding in that case is clearly against Defendant, but the latter relies on certain dicta of Rinfret J. (now C.J.) The undersigned, however, has found nothing in the judgment which outweighs the decision on the main point, which was that the tax in question was a personal tax, although the statute provided “There shall be assessed, levied and paid upon the income . . ”

Defendant refers also to the earlier Alberta case of Provincial Treasurer of Alberta v. Kerr, [1933] A.C. 710, concerning succession duties. The question there was whether the tax was imposed on property or on persons in respect of the transmission of property to them. The undersigned finds nothing in the reported judgment which supports the contention of. the Defendant in this case. Indeed, the remarks of Lord Thankerton, at: page 718, are favourable to the Plaintiff: “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’ interest in property or in respect of transactions or actings of the taxpayers. ‘ ’

After considering the Statute as a whole, in so far as it concerns what may be loosely called the “capital tax,” the Court reaches the conclusion that the tax is imposed on the corporations therein described, in respect of the amount of their paid-up capital.

Defendant further contends that the real purpose of the Statute, in so far as it concerns paid-up capital, is to make available to the fiscal authorities of the Province of Quebec assets which are situated outside the province and, in this connection, cites various authorities dealing with what is called the 6( Pith and Substance Rule. ff For the moment, at least, the undersigned does not think it is necessary to consider this rule, because the Statute seems to be what it purports to be, namely, a taxing statute. It may, however, be of interest to explain briefly what steps were taken in applying section 4 (see p. 234 supra). At the trial, Counsel for the Province objected to any evidence on this aspect of the matter, taking the position that it is immaterial how the Lieutenant-Governor in Council arrived at the amount of the tax imposed, provided it did not exceed the amount calculated according to paragraph 14 of section 3. The objection was reserved.

The method followed was described by the witness Georges Henri Shink, who had for some years been Controller of Provincial Revenue. His testimony on the point may be summarized as follows:

On receipt of the returns and the certified copies of the balance sheet and profit and loss or operating account which Defendant (and other companies in a similar position) are required by the Statute to submit, the information therein contained is studied by the Controller’s Department, which sets out the result on a form designated as C-5. (A copy of this form C-5 relating to the fiscal year 1939-40 for Defendant was produced as Exhibit D-16. Copies of the returns and other documents filed by Defendant were produced as Exhibit D-3, each one being designated by a letter of the alphabet). Form C-5 indicated, inter alia, that the Company’s paid-up capital, calculated according to the terms of the Statute, amounted to $159,695,349.46. The next step was to determine the ratio of the Company’s assets located in Quebec to its total assets and the ratio of the sales in Quebec to its total sales. Then the Department calculated what the tax would be if based 011 the total paid-up capital (as defined by the Statute), without any reduction ; what it would be if based on the ratio of Quebec assets to the total assets ; and, finally, what it would be if based on the ratio of the Quebec sales to the total sales. The results of these calculations are set out in Form C-6 (Exhibit D-17). The information contained in Forms C-5 and C-6 was then submitted to the Controller himself, who made his recommendation to the Provincial Treasurer. In this instance, the Controller recommended that the tax be based on the ratio of Quebec sales to the total sales, which would make the tax for the year 1939-40 amount to $109,563.98. The Treasurer submitted the recommendation to the Lieutenant-Governor in Council, who accepted it. The same procedure was followed for the years 1940-41 and 1941-42 and in each case the Controller’s recommendation, made on the same basis, was accepted. Indeed, the same procedure had been followed and a similar recommendation had been made and accepted in previous years, without protest on the part of Defendant; but the rate of the tax had been only ⅒ of 1% up to May 1st, 1939, when it was raised to /8 of 1%. This meant an increase of more than 300% and Defendant then protested and refused to pay the total amount claimed.

It should be added that, according to the Controller, the same method was followed and recommendations on the same basis were made and accepted in the case of other companies in a situation similar to that of Defendant.

It should also be stated that the Department accepted the figures submitted by Defendant in all respects, except with regard to the distinction between the assets situated within the Province and those situated outside, concerning which there is a considerable difference. This difference, however, need not concern the Court, unless the latter accepts Defendant’s contention that the only legal method of calculating the tax is to base it on those assets of Defendant which are situated within the Province.

As to this contention having decided that the tax is imposed not on the capital but on the Company, the Court considers that the decision of the Judicial Committee in the Bank of Toronto case must be followed. In that case, the tax was calculated with regard to the paid-up capital of the Bank, irrespective of the location of the assets. It is true that in the present instance a different basis has been adopted under section 4; but the principle is not altered. It might be argued that it would have been more in accord with economic principles to adopt the basis for which Defendant contends; but the Court is not concerned with the wisdom of the enactment; nor should the Court interfere with the discretion exercised by the administrative or executive authorities, provided such discretion was, in fact, exercised within the limits of the statute, as it undoubtedly was in this instance.

In view of the foregoing, the Court rejects Defendant’s contention that the statute is ultra vires, even in part.

There remain to be decided two other points, concerning two items of credit claimed by Defendant and not allowed by Plaintiff.

The first concerns the trifling sum of $29.47, which is the amount of an overpayment made by Defendant in 1938. It is explained in Exhibit D-l and in the deposition of Holland (at pages 7-8 of the transcript). At the trial, Plaintiff did not dispute the overpayment; but, as his Counsel pointed out, com- pensation cannot be invoked against the Crown, the only remedy being a petition of right.

The second point is more important. It involves the sum of $5,406.77, and is invoked in paragraph 29 of the Amended Special Plea in the following terms:

“. . . a credit in favour of the defendant of $5,406.77, being two-twelfths of the sum of $32,440.63 paid by the defendant for its 1938-39 capital tax for the period ended 30th June 1939, in which was included a period of two months (1 May to 30 June 1939) covered by the tax payment made by the defendant for the capital tax 1939-40, the period of which was 1 May, 1939 to 30 April 1940."

In further explanation, it should be mentioned that in 1939, a new Corporation Tax Act was enacted (3 Geo. VI, cap. 19), to replace chapter 26 R.S.Q., 1925. The latter provided that the taxation year expired on the 1st July, whereas the 1939 statute changed the date to the 1st May—without any provision for adjustment. Here again, Plaintinf did not contest the amount as such; but his Counsel argues that the Legislature, within its jurisdiction, is supreme and that the Court cannot interfere. The situation thus created is obviously inequitable; but the Court is reluctantly obliged to conclude that it is powerless to intervene.

With regard to the amount of the action, the Court has not discussed the figures in detail, because, on the basis adopted by the Province, there is no dispute with respect thereto (save for the two special items just mentioned). The balance due for the period in question (i.e. the years 1939-40, 1940-41 and 1941-42), after allowing for payments made by Defendant up to the date of the Declaration, 21st December, 1942, was, in capital, $148,998.21. To this was added interest up to the last mentioned date, amounting to $17,886.12, making a total of $166,884.33, which Plaintiff claims, with interest from 21st ‘December, 1942, and costs. On the 20th April, 1943, however, Defendant made a further payment of $18,533.95, for which, of course, credit must be given, leaving a balance of $148,350.38.

Accordingly, judgment will go for $148,350.38 with interest on $166,884.33 from 21st December, 1942, till 20th April, 1943, and interest on $148,350.38 from 20th April, 1943, till date of payment, and costs.

FOR THE FOREGOING REASONS:

THE COURT:

WHEREAS by this action, instituted in December, 1942, Plaintiff sued Defendant for the sum of $166,884.33, the amount of the balance allegedly due by Defendant under the Corpora- tion Tax Act for the taxation years 1939-40, 1940-41 and 1941-42, including interest calculated up to 21st December, 1942; and claimed interest from the last mentioned date and costs;

WHEREAS on the 20th April, 1943, Defendant paid the sum of $18,533.95, representing the balance payable according to Defendant under the said Act for the three taxation years aforesaid ;

WHEREAS the difference between the amount claimed in the action and the amount which Defendant admits to be payable is explained by Defendant, in substance, as follows:

(1) The amount of the tax provided for by the Statute as payable in relation to paid-up capital could be legally imposed only with respect to that part of Defendant’s capital which is situated within the Province of Quebec; whereas the tax actually imposed greatly exceeds what it would be on that basis; and the Statute is to that extent ultra vires and the amount claimed is to that extent excessive ;

(2) In any event, Plaintiff has failed to give credit to Defendant for an overpayment of $29.47 made in the year 1938;

(3) Furthermore, and in any event, there should be deducted from the amount claimed the sum of $5,405.77, which represents two-twelfths of the payment of $32,440.63 made by Defendant for the taxation year 1938-39 which ended, under the Statute then in force, on the 30th June, 1939; because the Corporation Tax Act enacted in 1939 (3 Geo. VI cap. 19) provided that the taxation year 1939-40 should run from the 30th April, 1939, and no adjustment was provided for or made for the two months which were thus included in two taxation years ;

CONSIDERING as to the first point, that the tax in question is Imposed not on the paid-up capital of the corporations concerned (including Defendant), but on the said corporation with respect to their paid-up capital; and that, in consequence, the Province was not legally bound, in calculating the tax, to take into account only that part of the paid-up capital or that part of the assets which is situated within the Province;

CONSIDERING further, as to the same point, that the tax actually charged with respect to the paid-up capital, pursuant to the Order in Council passed in virtue of section 4 of the Corporation Tax Act in foree during the period in question, was less than it would have been had the calculation been made, at the rate provided, on the paid-up capital of Defendant as defined by the Statute;

CONSIDERING, again as to the same point, that the amount actually charged as aforesaid was calculated, at the rate pro- vided, upon that portion of Defendant’s entire paid-up capital (as defined by the Statute) which represents the ratio of the sales made by Defendant in the Province of Quebec to Defendant’s total sales; which method of calculation, while the economic soundness thereof might be questioned, is not ultra vires or illegal;

CONSIDERING, as to the second point, that compensation cannot be invoked against the Crown ;

CONSIDERING, as to the third point, that, while the situation created by the changing of the date for the beginning of the taxation year 1939-40 by the Statute 3 Geo. VI cap. 19, without any provision for adjustment, appears inequitable, the Legislature did not exceed its powers in that respect;

CONSIDERING, on the whole, that Plaintiff’s action is well founded and that Defendant’s Special Amended Plea thereto is unfounded ;

SEEING that, as aforesaid, Defendant paid, on the 20th April, 1943, the sum of $18,533.95 in reduction of its indebtedness, which sum must be deducted from the amount sued for, leaving a balance of $148,350.38;

DOTH MAINTAIN Plaintiff’s action to the extent aforesaid and DOTH CONDEMN Defendant to pay the sum of $148,- 350.38, with interest on $166,884.33 from 21st December, 1942, till 20th April, 1943, and interest on $148,350.38 from 20th April, 1948, till date of payment, and costs.