Allied Farm Equipment Limited (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Heald J.—Ottawa, March 2 and
9, 1972.
Income tax—Associated companies—Whether associa
tion with foreign company sufficient—Income Tax Act, s.
39(4) and (5), s. 139(1)(h).
Each of three brothers was the controlling shareholder of
a Canadian tax paying corporation in which neither of the
other brothers held shares, but the three brothers were
equal and sole shareholders of a United States corporation
which was not liable to Canadian income tax.
Held (affirming income tax assessments of each of the
three Canadian corporations for 1960 to 1964), the three
Canadian corporations were during those years associated
with one another within the meaning of s. 39(5) of the
Income Tax Act because during those years each was
associated with the United States corporation within the
meaning of s. 39(4). The United States corporation though
not taxable in Canada was nevertheless a "corporation"
within the meaning of those provisions having regard to the
definition of "corporation" in s. 139(1)(h) of the Income
Tax Act.
International Fruit Distributors Ltd. v. M.N.R. [1953]
Ex.C.R. 231, applied; Lea-Don Canada Ltd. v. M.N.R.
[1969] C.T.C. 85; [1970] C.T.C. 346, distinguished.
Philip F. Vineberg for appellant.
L. P. Chambers for respondent.
HEALD J.—This is an appeal from a decision
of the Tax Appeal Board rendered on Decem-
ber 7, 1970 dismissing the appeal by the appel
lant from re-assessments for income tax with
respect to its 1960, 1961, 1962, 1963 and 1964
taxation years.
The parties have agreed to a special case
stated by consent pursuant to Rule 475. The
special case so stated reads as follows:
1. At all material times
(1) the Appellant was a corporation
(a) which was
(i) incorporated pursuant to the laws of the Province
of Manitoba,
(ii) resident in Canada, and
(iii) carried on business in Canada, and
(b) all of whose issued and outstanding shares were
owned as follows:
Class A
Common Preference Preference
Shares Shares Shares
Alexander J. Kanter 98 400 900
Eugene V. Paskewitz 1 —
George Linden Higgins ' 1 — —
Total shares 100 400 900
(2) Falcon Equipment Company Limited was a
corporation
(a) which was
(i) incorporated pursuant to the laws of the Province
of Ontario,
(ii) resident in Canada, and
(iii) carried on business in Canada, and
(b) all of whose issued and outstanding shares were
owned as follows:
Common Preference
Shares Shares
James I. Kanter 20,005 500
C. Perry 1
H. Chadwick 1 —
Total shares 20,007 500
(3) Northwest Farm Equipment Limited was a
corporation
(a) which was
(i) incorporated pursuant to the laws of the Province
of Alberta,
(ii) resident in Canada, and
(iii) carried on business in Canada, and
(b) all of whose issued and outstanding shares were
owned as follows:
Common Preference
Shares Shares
Solomon Kanter 999 400
Dennis Sammen 1 —
Total shares 1,000 400
(4) Middle West Farm Equipment Export Corporation
was a corporation
(a) which was
(i) incorporated pursuant to the laws of the United
States of America or one of the states thereof,
(ii) was not resident in Canada, and
(iii) did not carry on business in Canada, and
(b) all of whose issued and outstanding shares were
owned as follows:
Common
Shares
Alexander J. Kanter 30
James I. Kanter 30
Solomon Kanter 30
Total shares 90
2. Alexander J. Kanter, James I. Kanter and Solomon
Kanter are brothers.
3. By the reassessments which are the subject matter of
the Appellant's appeal the Respondent reassessed the
Appellant with respect to the 1960, 1961, 1962, 1963 and
1964 taxation years on the basis that at all relevant times
the Appellant was a corporation which was associated
with Falcon Equipment Company Limited and Northwest
Farm Equipment Limited, within the meaning of subsec
tion (5) of section 39 of the Income Tax Act, on the
grounds that at all material times each of the Appellant,
Falcon Equipment Company Limited and Northwest
Farm Equipment Limited was associated with Middle
West Farm Equipment Export Corporation, within the
meaning of subsection (4) of section 39 of the Act.
4. The facts above stated are agreed by the Appellant and
the Respondent.
5. The question for the opinion of the Court is whether
Middle West Farm Equipment Export Corporation was at
all material times a corporation which was associated
with each of the Appellant, Falcon Equipment Company
Limited and Northwest Farm Equipment Limited, within
the meaning of subsection (4) of section 39 of the Income
Tax Act.
6. The Appellant and Respondent agree:
(1) that if the Court shall be of opinion in the positive,
then the Appellant, Falcon Equipment Company Limit
ed and Northwest Farm Equipment Limited were
associated with each other pursuant to the provisions
of subsection (5) of section 39 of the Income Tax Act,
and the appeal shall be dismissed with costs payable to
the Respondent, and
(2) that if the Court shall be of opinion in the negative,
then the appeal shall be allowed with costs payable to
the Appellant and the reassessments with respect to the
1960, 1961, 1962, 1963 and 1964 taxation years
referred back to the Respondent for reconsideration
and reassessment on the basis that the Appellant was
not associated with Falcon Equipment Company Limit
ed and Northwest Farm Equipment Limited, within the
meaning of section 39 of the Income Tax Act.
At the trial, an additional fact was agreed on
by both parties and to prove same, counsel for
the appellant tendered in evidence as Exhibit
A-1, a letter to him from respondent's counsel
dated January 13, 1972, the relevant portion of
which is as follows:
It is not my intention to argue that Middle West Farm
Equipment Export Corporation was "employed in Canada".
From this and from the agreed fact that Middle West Farm
Equipment Export Corporation was neither resident in
Canada nor carried on business in Canada it therefore
follows that that company was not subject to taxation in
Canada under the Income Tax Act, and it is certainly not
my intention to argue that it otherwise is subject to such
taxation.
Section 39(4) for the purposes of the 1960
taxation year reads as follows:
39. (4) For the purpose of this section, one corporation is
associated with another in a taxation year if, at any time in
the year,
(a) one of them owned directly or indirectly 70% or more
of all the issued common shares of the capital stock of
the other, or
(b) 70% or more of all the issued common shares of the
capital stock of each of them is owned directly or indi
rectly by
(i) one person,
(ii) two or more persons jointly, or
(iii) persons not dealing with each other at arm's length
one of whom owned directly or indirectly one or more
of the shares of the capital stock of each of the
corporations.
Section 39(4) for the purposes of the 1961
and subsequent taxation years reads as follows:
39. (4) For the purpose of this section, one corporation is
associated with another in a taxation year if, at any time in
the year,
(a) one of the corporations controlled the other,
(b) both of the corporations were controlled by the same
person or group of persons,
(c) each of the corporations was controlled by one person
and the person who controlled one of the corporations
was related to the person who controlled the other, and
one of those persons owned directly or indirectly one or
more shares of the capital stock of each of the
corporations,
(d) one of the corporations was controlled by one person
and that person was related to each member of a group of
persons that controlled the other corporation, and one of
those persons owned directly or indirectly one or more
shares of the capital stock of each of the corporations, or
(e) each of the corporations was controlled by a related
group and each of the members of one of the related
groups was related to all of the members of the other
related group, and one of the members of one of the
related groups owned directly or indirectly one or more
shares of the capital stock of each of the corporations.
The Court's opinion is asked as to whether
Middle West Farm Equipment Export Corpora
tion (hereafter Middle West) was at all material
times a corporation which was associated with
each of the appellant, Falcon Equipment Com
pany Limited (hereafter Falcon) and Northwest
Farm Equipment Limited (hereafter North
west), within the meaning of subsection (4) of
section 39 of the Income Tax Act. If the Court's
opinion is in the positive, then the parties agree
that the appellant, Falcon and Northwest were
associated with each other pursuant to the
provisions of subsection (5) of section 39 of the
Income Tax Act and they further agree that, in
such event, the appeal shall be dismissed with
costs.
Appellant submits that all of the subsequent
sections of Part I of the Income Tax Act are
conditioned by section 2 of the Income Tax
Act.
Section 2 of the Income Tax Act reads as
follows:
2. (1) An income tax shall be paid as hereinafter required
upon the taxable income for each taxation year of every
person resident in Canada at any time in the year.
(2) Where a person who is not taxable under subsection
(1) for a taxation year
(a) was employed in Canada at any time in the year, or
(b) carried on business in Canada at any time in the year,
an income tax shall be paid as hereinafter required upon his
taxable income earned in Canada for the year determined in
accordance with Division D.
(3) The taxable income of a taxpayer for a taxation year
is his income for the year minus the deductions permitted
by Division C.
Thus, said section 2 imposes liability for
Canadian income tax on the following:
(a) every person resident in Canada,
(b) every person employed in Canada, and
(c) every person who carried on business in
Canada.
Thus, appellant has established by paragraph 4
of the stated case and by Exhibit A-1, that
Middle West does not come within any of the
above categories liable for tax under section 2
of the Income Tax Act.
Appellant's counsel expressed the situation in
rather a colourful way. He said that section 2 of
the Income Tax Act established who were the
"customers" and who were the "non-custom
ers" of the Income Tax Department.
On the basis of the agreed facts, there can be
no argument but that Middle West is outside of
section 2 and thus a "non-customer" of the
Canadian Income Tax Department.
Developing his argument, appellant's counsel
submits that sections 3 and 4 of the Income Tax
Act are conditioned by section 2 thereof and
that when they refer to income of a taxpayer,
they are talking about income and taxpayers
covered by section 2.
Counsel then directed my attention to section
44 of the Income Tax Act which requires "a
corporation" to file an annual income tax
return. He submits that "corporation" in that
section relates to only those corporations cov
ered by section 2 and is qualified by section 2
so that the requirement to file a return has no
application to the "non-customers", as he
describes them, of the Minister of National
Revenue.
Appellant's counsel then turns to section 39
of the Income Tax Act and argues, that as in all
the other sections of Part I, section 39 must be
conditioned by section 2 and be read subject to
section 2.
Counsel refers firstly to subsection (1) of
section 39 and refers to the words therein: "The
tax payable by a corporation under this Part."
He observes that Middle West is not taxable
under this Part, is a "non-customer" and there
fore obviously the word "corporation" as used
in section 39(1) does not include Middle West.
Turning to subsection (2) of section 39, coun
sel quotes the first words therein: "(2) Where
two or more corporations (italics mine) are
associated with each other in a taxation year,
the tax payable by each of them ..." and then
he asks the question: "How can a corporation
that is not subject to tax be covered under
section 39(2)?"
Counsel then moves on to section 39(3). This
subsection allows associated corporations to
file an agreement with the Minister under which
they agree to the manner of allocation of
$35,000 of income between them on which the
lower rate of income tax is payable. Counsel
then asks the same question as before: "How
could the word `corporation' as used in subsec
tion (3) possibly include a corporation that is
not taxable in Canada?"
Counsel uses the same argument in subsec
tion (3)(a). Subsection (3)(a)- covers the case
where the associated corporations have not
agreed to the allocation of the first $35,000 of
income between them and, in such an eventual
ity, requires the Minister to make the allocation
amongst said associated companies. Counsel
argues that if "corporation" as used in subsec
tion (3)(a) means any corporation, including a
"non-customer" like Middle West, then the
Minister would be able to allocate the low
income tax rate to a corporation like Middle
West, where it could not be used. His submis
sion is that such a construction would give a
ridiculous result and that Parliament cannot be
presumed to have intended such a consequence.
He says that it is perfectly apparent that "cor-
poration" as us'éd in subsection (3)(a) must
mean a Canadian corporate taxpayer if it is to
have any sensible meaning at all.
Appellant's counsel cited another section in
Part I of the Act—namely section 27(1)(e).
This subsection permits a taxpayer to deduct
from income, business losses sustained in the
five taxation years immediately preceding and
the taxation year immediately following the tax
ation year.
Said counsel gives an example of a United
States corporation in years 1, 2 and 3 operating
only in the United States and losing $100,000
per year. Then in the fourth year, said United
States corporation comes to Canada and does
business here. The further assumption is that in
the fourth year, said corporation makes $300,-
000 in Canada. Counsel says that if respond
ent's interpretation of the word "corporation" is
correct, then it means "any" corporation "any-
where" and that accordingly, on these facts, the
said losses of said corporation in the years
when it was a "non-customer" of the Canadian
Income Tax Department could be charged
against the Canadian profit in year four with the
sensational result that said foreign corporation
would have no taxable income in Canada in
year four.
Appellant's counsel cites this example to
dramatize his submission that respondent's
interpretation of the word "corporation" in sec
tion 39 would produce a ridiculous result, thus
distorting the meaning of the section and the
intention of Parliament.
On the other hand, counsel for the respond
ent acknowledges that Middle West is not sub
ject to tax in Canada. He also acknowledges
that appellant is not associated with Falcon and
Northwest under the terms of section 39(4) of
the Income Tax Act but says that the appellant
is associated with Falcon and Northwest under
section 39(5), because of the relationship exist
ing between the appellant and Middle West.
Respondent's counsel says that the question
to be decided here is whether Middle West is a
"corporation" within the meaning of section
39(4). If the answer to that question is in the
affirmative, then the appellant and Falcon and
Northwest are covered by section 39(4)(b)(iii)
with respect to the taxation year 1960 and by
section 39(4)(d with respect to the taxation
year 1961 and subsequent years and would
therefore be held to be associated with Middle
West.
His further submission is that by virtue of
subsection (5) of section 39, the appellant and
Falcon and Northwest are thus deemed to be
associated with each other. Section 39, subsec
tion (5) reads as follows:
39. (5) When two corporations are associated, or are
deemed by this subsection to be associated, with the same
corporation at the same time, they shall, for the purpose of
this section, be deemed to be associated with each other.
I agree with respondent's counsel's submis
sion that the key question for decision here is
whether the word "corporation" as used in sec
tion 39(4) and 39(5) is wide enough to include a
corporation such as Middle West. I also agree
with his analysis of the consequences if the
Court answers that question in the affirmative.
Respondent's counsel cites the definition of
corporation as contained in section 139(1)(h) of
the Income Tax Act which reads as follows:
139. (1) (h) "corporation" includes an incorporated com
pany and a "corporation incorporated in Canada" includes a
corporation incorporated in any part of Canada before or
after it became part of Canada;
He also cites in support of his position, the
judgment of President Thorson (as he then was)
in the case of International Fruit Distributors
Ltd. v. M.N.R. [1953] Ex.C.R. 231. This deci
sion was affirmed by the Supreme Court of
Canada without written reasons.
In that case, all the issued shares of the
appellant and another Canadian company were
owned by a United States company. At that
time, the applicable section of the Act was, for
all practical purposes, the same as section 39(4)
as it was here for the 1960 taxation year. Sec
tion 39(5) was also, for all practical purposes,
the same then as it is now. President Thorson
held, in that case, that the word "person" as it
appeared in the section, included the foreign
corporation and that accordingly the appellant
was a related corporation (as they were then
described in the Act) within the meaning of the
section.
President Thorson said at page 233 thereof:
As I understand this definition the term "person" in
section 36(4)(b)(î) of the Act clearly includes a corporation.
Indeed, it includes "any" corporation and there is no reason
for holding that it does not extend to a foreign corporation
such as Pacific Gamble Robinson Company. I am unable to
find any ambiguity in its meaning by reason of the use of
the term "corporations" in section 36(5).
After careful consideration, I have reached
the conclusion that the International Fruit deci
sion (supra) is on all fours with the instant case
in its relevant facts and that I am bound by it.
It is true that International Fruit was decided
under section 39(4)(b)(i) but I do not think it
would have been decided any differently under
section 39(4)(b)(iii) as both subsections were
for the 1960 taxation year. Nor do I think it
would have been decided any differently under
section 39(4)(d) as it was for the 1961 and
subsequent taxation years.
At page 232 of said judgment, President
Thorson said:
The submission of counsel for the appellant, put shortly,
is that the term "person" in section 36(4)(b)(i) does not
extend to a corporation or, alternatively, does not extend to
a foreign corporation. It was urged that if it was read as
extending to a corporation then section 36(5), which reads
as follows:
36. (5) When two corporations are related, or are
deemed by this subsection to be related, to the same
corporation at the same time, they shall, for the purpose
of this section, be deemed to be related to each other.
would be unnecessary surplusage, that the specific refer
ence in it to corporations has the effect of excluding a
corporation from the meaning of the term "person" in
section 36(4)(b)(i), that this creates an ambiguity in its
meaning and that such ambiguity should be resolved in the
appellant's favor.
I am unable to agree. It is not a proper approach to the
construction of The Income Tax Act to regard it as neces
sarily consistent in the use of its various terms throughout
the Act or to assume that inconsistency in their use neces
sarily result in ambiguity in their meaning. (Italics mine).
In my opinion, the italicized portion of the
above quotation from President Thorson is a
complete answer to the appellant's submission
that all the subsequent sections of Part I of the
Income Tax Act must be read subject to section
2. I think it also answers his comments with
respect to subsections (1), (2), (3) and (3a) of
section 39. I am not here asked to interpret
"corporations" in those subsections. I am con
cerned here with subsections (4) and (5) and I
have the opinion that the word "corporations"
as used therein must be given its plain, ordinary
meaning as defined in section 139(1)(h) of the
Act.
Learned counsel for the appellant relied on
the case of Lea-Don Canada Ltd. v. M.N.R.
[1969] C.T.C. 85 (Exchequer Court); affirmed
by the Supreme Court [1970] C.T.C. 346. The
section of the Income Tax Act under considera
tion there was section 20(4) which provided:
20. (4) Where depreciable property did, at any time after
the commencement of 1949, belong to a person (hereinafter
referred to as the original owner) and has, by one or more
transactions between persons not dealing at arm's length,
become vested in a taxpayer, the following rules are ...
applicable ....
There, appellant sought to argue that the word
"taxpayer" would include a non-resident corpo
ration, not liable for Canadian income tax. This
argument was rejected by my brother, Cat-
tanach J. in the Exchequer Court and by Mr.
Justice Hall who wrote the judgment of the
Supreme Court. Mr. Justice Hall held that sec
tion 20(4) was concerned only with taxpayers
entitled to a deduction and not with persons not
subject to assessment under Part I.
In my view, the Lea-Don decision (supra)
does not assist appellant. First of all, it inter
prets an entirely different subsection of the Act
and it is interpreted in the context of the words
as used in that subsection. Secondly, the factual
situation here is different in that the application
of the rules in section 39(4) and (5) to Middle
West does not result in any tax liability to
Middle West whereas in the Lea-Don case
(supra), the Court was dealing with a deduction
section and the applicability or non-applicability
of which would result in a change in the liability
for tax.
The other case relied on by the appellant is in
the same category as Lea-Don (supra). It is the
case of Office Overload Co. v. M.N.R. 65 DTC
690. In that case, the Court was again required
to interpret a deduction section, section 85D
which deals with the rules to be applied in
claiming the bad debt component of accounts
receivable, as a deduction.
In both of those cases, the interpretation of
the section or subsection in question affected
the tax liability of both entities involved. This
one characteristic effectively distinguishes both
cases from the case at bar. In the case at bar,
the interpretation asked for, regardless of which
way it goes, will not affect the tax liability of
Middle West in any way.
Maxwell on Interpretation of Statutes, (12th
ed.) says at page 28:
The first and most elementary rule of construction is that
it is to be assumed that the words and phrases of technical
legislation are used in their technical meaning if they have
acquired one, and otherwise in their ordinary meaning, and
the second is that the phrases and sentences are to be
construed according to the rules of grammar.
And then again on page 43:
The so-called "golden rule" is really a modification of the
literal rule. It was stated in this way by Parke B.: "It is a
very useful rule, in the construction of a statute, to adhere
to the ordinary meaning of the words used, and to the
grammatical construction, unless that is at variance with the
intention of the legislature, to be collected from the statute
itself, or leads to any manifest absurdity or repugnance, in
which case the language may be varied or modified, so as to
avoid such inconvenience, but no further".
It seems to me that it is necessary to read
subsections (4) and (5) of section 39 in conjunc
tion with the definition of "corporation" in sec
tion 139(1)(h). When this is done, I fail to see
how "corporation" can be read as excluding a
foreign corporation. To do so, I would have to
read something into section 39(4) and (5) that is
not there. The authorities establish that I must
give this word its plain and ordinary meaning
unless to do so would lead to manifest absurdity
or repugnance.
In the case at bar, I do not believe that any
such manifest absurdity or repugnance will
re suit.
In conclusion, and in answer to paragraph 5
of the special case, it is the opinion of the Court
that Middle West Farm Equipment Export Cor
poration was at all material times a corporation
which was associated with each of the appel
lant, Falcon Equipment Company Limited and
Northwest Farm Equipment Limited, within the
meaning of subsection (4) of section 39 of the
Income Tax Act.
The appeal is accordingly dismissed with
costs payable to the respondent.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.