Urie, J.:—This is an appeal from a judgment of the Trial Division dismissing the appellant's appeal from an income tax reassessment for its 1976 to 1979 inclusive, taxation years. Briefly, the undisputed facts follow.
The appellant, which had been incorporated in Bermuda in 1972, at all material times was owned, to the extent of 50 per cent at a minimum, by MacMillan Bloedel Limited. From 1972 to 1980 it carried on a shipping business. Prior to June 15, 1976 it was a non-resident corporation for the purposes of the Income Tax Act (“the Act”). On June 15, 1976, it became a corporation resident in Canada for the purposes of the Act due to a change in its central management and control.
The appellant adopted a fiscal period, as that term is defined in the Act, ending on December 31 and on June 30, 1980, filed its first T-2 corporation income tax return in Canada for its 1976 taxation year together with T-2 returns for the 1977, 1978 and 1979 taxation years. The appellant reported a non-capital loss for tax purposes for its 1976 fiscal period of $1,225,295. In preparing its returns for the 1977 to 1979 taxation years it carried forward its 1976 non-capital loss pursuant to paragraph 111(1)(a) of the Act. In addition, it carried forward and applied its accumulated non-capital losses from the 1972 to 1975 fiscal periods in the sum of $404,118. The effect of the application of those losses was to reduce the appellant’s taxable income to nil in the 1977, 1978 and 1979 taxation years. The non-capital losses from 1972 to 1975 had, of course, been incurred during the years when the appellant was still resident in Bermuda and during which period it carried on no business in Canada the income from which was taxable in its hands as a non-resident corporation.
In July 1982, the Minister reassessed the appellant's 1976 to 1979 taxation years to disallow in toto the application of non-capital losses incurred prior to 1976. He also disallowed a portion of the 1976 loss by prorating the total loss in accordance with the number of days in 1976 before and after June 15, the day upon which the appellant became a resident in Canada for tax purposes. Certain capital cost allowance claims were also adjusted but they are not in issue in this appeal. The appellant's appeal from the reassessment was dismissed by Rouleau, J. in the Trial Division. It is from that judgment that this appeal has been brought.
The two issues before us are said by the appellant in its memorandum of fact and law to be:—
The appellant submits that the learned Trial Judge erred in holding that:
(a) non-capital losses incurred in a business not carried on in Canada by a corporation not resident in Canada at the time the loss was incurred could not be applied, pursuant to paragraph 111(1)(a) of the Income Tax Act, against income earned by the corporation after it became resident in Canada for tax purposes;
(b) the non-capital loss incurred by the appellant in the fiscal period January 1, 1976 to December 31, 1976 had to be prorated for the purposes of paragraph 111(1)(a) of the Income Tax Act so that only the portion of the loss thus considered to have occurred after June 15, 1976 could be applied against income for subsequent taxation years.
(a) Deduction of non-capital losses of a non-resident of a business not carried on in Canada
The appellant's argument on this branch of its appeal requires first that the following definitions in the Act be considered. Subsection 248(1) defines the following relevant terms:—
"FISCAL PERIOD"
“fiscal period" means the period for which the accounts of the business of the taxpayer have been ordinarily made up and accepted for purposes of assessment under this Act and, in the absence of an established practice, the fiscal period is that adopted by the taxpayer (but no fiscal period may exceed
(a) in the case of a corporation, 53 weeks, and
(b) in the case of any other taxpayer, 12 months,
and no change in a usual and accepted fiscal period may be made for the purposes of this Act without the concurrence of the Minister);
"TAXABLE INCOME"
“taxable income" has the meaning assigned by subsection 2(2).
"TAXPAYER"
"taxpayer" includes any person whether or not liable to pay tax.
Subsection 249(1) defines “taxation year" as:
249.(1) For the purpose of this Act, a "taxation year" is
(a) in the case of a corporation, a fiscal period, and (b) in the case of an individual, a calendar year,
and when a taxation year is referred to by reference to a calendar year the reference is to the taxation year or years coinciding with, or ending in, that year.
To appreciate counsel for the appellant’s ingenious argument it should be borne in mind that Division A of Part I of the Act prescribes who shall be liable for tax thereunder. At all relevant times, as well as now, it contains only one section, viz. section 2, reading 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) The taxable income of a taxpayer for a taxation year is his income for the year minus the deductions permitted by Division C.
(3) Where a person who is not taxable under subsection (1) for a taxation year (a) was employed in Canada,
(b) carried on a business in Canada, or
(c) disposed of a taxable Canadian property,
at any time in the year or a previous 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.
Division B provides the basis for the computation of taxable income for a taxation year to which section 2 refers. That is, of course, accomplished by determining in accordance with Division B, the taxpayer's income from all sources for the taxation year from which he is then entitled to the deductions and exemptions permitted under Division C. Division D provides the basis for the determination of the taxable income of non-residents.
The relevant sections of Division B and C for the purposes of the appellant's argument, are sections 3(d) and 9 and paragraphs 111(1)(a) and 111(8)(b). They read as follows at the material time, namely, 1976:—
(From Division B)
3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:
(d) determine the amount, if any, by which the remainder determined under paragraph (c) exceeds the aggregate of amounts each of which is his loss for the year from an office, employment, business or property;
and the remainder, if any, obtained under paragraph (e) is the taxpayer's income for the year for the purposes of this Part.
9. (1) Subject to this Part, a taxpayer's income for a taxation year from a business or property is his profit therefrom for the year.
(2) Subject to section 31, a taxpayer’s loss for a taxation year from a business or property is the amount of his loss, if any, for the taxation year from that source computed by applying the provisions of this Act respecting computation of income from that source mutatis mutandis.
(3) In this Act, “income from a property" does not include any capital gain from the disposition of that property and “loss from a property" does not include any capital loss from the disposition of that property.
(From Division C)
111. (1) For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted from the income for the year such of the following amounts as are applicable:
(a) non-capital losses for the 5 taxation years immediately preceding and the taxation year immediately following the taxation year, but no amount is deductible in respect of non-capital losses from the income of any year except to the extent of the taxpayer’s income for the year minus all deductions permitted by the provisions of this Division other than this paragraph, paragraph (b) or section 109;
111. (8) In this section,
(b) “non-capital loss” of a taxpayer for a taxation year means the amount, if any, by which
(i) the aggregate of all amounts each of which is the taxpayer's loss for the year from an office, employment, business or property and all amounts deductible under section 112 or subsection 113(1) from the taxpayer's income for the year
exceeds
(ii) the amount determined under paragraph 3(c).
Paragraph 115(1)(c) is the only portion of Division D to which reference will be made. In 1976 it read as follows:
115. (1) For the purposes of this Act, a non-resident person's taxable income earned in Canada for a taxation year is the amount of his income for the year that would be determined under section 3 if
(c) the only losses referred to in paragraph 3(d) were losses from businesses carried on by him in Canada,
minus the aggregate of such of the deductions from income permitted for the purpose of computing taxable income as may reasonably be considered wholly applicable and of such part of any other of the said deductions as may reasonably be considered applicable.
The appellant’s submissions shortly put are these. The appellant, although not liable to pay tax, was a “taxpayer” within the broad definition of the word, when its losses were incurred in 1972 to 1976. They were "non-capital losses” as that term is defined by paragraph 111(8)(b). In those years it had a “taxation year” for the purposes of the Act because it had a “fiscal period”. That was the calendar year. By virtue of paragraph 249(1)(a) its "taxation year” was the calendar year in 1972 to 1976 inclusive. Therefore, since "non-capital loss” is defined in paragraph 111(8)(b) to include business losses of a "taxpayer” (which be definition included the appellant) for a “taxation year” which for the appellant was its calendar year, it was entitled, in computing its taxable income for the taxation years 1976, 1977 and 1978, after it became a resident corporation, to deduct its non-capital losses for the years 1972 to 1976 inclusive notwithstanding that it was not a resident corporation during those years. The Act during those years, counsel said, did not contain any qualification on the origin or source of the tax loss which a resident corporation was entitled to deduct nor upon the tax status of the taxpayer.
I do not agree. To show why I disagree it is necessary to revert to first principles as disclosed by the scheme of Divisions A to D inclusive, of the Act, the most basic one of which is that both residents and non-residents are liable to pay tax on income earned from a source inside Canada. A non-resident who has no income from any source in Canada is not liable to pay tax in Canada. Both residents and non-residents who derive income from Canadian sources are included, by definition, in the term "taxpayer”, whether liable to pay tax or not. Their income is computed in accordance with Division B. By virtue of subsection 2(2) to ascertain their "taxable income” they are entitled to the deductions and exemptions referred to in the Division C. It is only at the conclusion of that exercise that it is determined whether or not they are “liable to pay tax”. It follows that a corporate non-resident which has no income derived from Canadian sources, is not required to compute its taxable income, as that word is defined, supra, and, thus, has no need to utilize the deductions permitted by Division C, including those permitted under paragraph 111 (1)(a) — non-capital losses. Such a corporation is not “‘liable to pay tax".
I put the reasoning in another way. The definition of "taxpayer", properly understood in its context in the whole of the scheme of the Act, shows, indisputably in my view, that it refers to resident individuals or corporations who may be liable to pay tax at some time whether or not they are, at any given time, liable therefor. A non-resident without income from Canadian sources can never be liable to pay tax under the Act on its foreign income. It is not, therefore, a corporation contemplated by the definition of "taxpayer" in the Act. By the same token, as a non-resident corporation, any losses which it may have incurred as the result of its business activities outside of Canada are irrelevant under the Act. It is hard to conceive how they could become relevant and capable of utilization under paragraph 111(1)(a), by osmosis, as it were, after the non-resident corporation becomes a resident any more than if it had operated profitably as a nonresident, such profit could be taxed in Canada after it became a resident.
I find further support for this view from the following. Until it becomes a "taxpayer" a non-resident corporation does not have “[f]or the purpose of this Act”, a "taxation year. .." within the meaning of paragraph 249(1 )(a) of the Act, supra. When it becomes a resident, the Act becomes applicable to it because it becomes liable to pay tax. It is then that it becomes a "taxpayer" by definition. Before that that term had no application to it. Consequently, until then, the definition of “taxation year" was inapplicable to it. It further follows that paragraph 111(1)(a) does not apply to it because that paragraph is referrable to the "5 taxation years immediately preceding ... the taxation year. . . ." During those five years the appellant, “for the purpose of the Act”, had no "taxation year". It could not, therefore, deduct its non-capital losses incurred offshore in the calendar years 1972, 1973, 1974 and 1975.
Counsel for the appellant, however, argued that because the appellant had, in 1980, filed T-2 returns for the taxation years 1976 to 1979 inclusive on the basis of its 1972 to 1975 "fiscal periods" which in each case was the calendar year and because these were “‘accepted for purposes of assessment under [the] Act" as required by the definition of “fiscal period" in section 248(1) of the Act, they became taxation years for purposes of the Act. The short answer to that submission is that, as earlier stated, a nonresident not carrying on business in Canada cannot have a taxation year for Canadian tax purposes. I fail to understand how it can be given one retroactively. The appellant's contention, thus, cannot withstand analysis.
I find support for the foregoing views in the judgment of the Supreme Court of Canada in Lea-Don Canada Limited v. M.N.R., [1970] C.T.C. 346 at 349; 70 D.T.C. 6271 at 6273-74 where, admittedly in another context, Hall, J., on behalf of the Court, held:
The argument that the provisions of the Income Tax Act authorizing a deduction on account of the capital cost of depreciable property are applicable to nonresidents who are not subject to assessment for income tax under Part I of the Act because such deduction is from income is wholly untenable. It is clear that section 20(4) is concerned with taxpayers entitled to a deduction, not with persons who are not subject to assessment under Part I. A non-resident not carrying on business in Canada is not a person entitled to such a deduction and therefore section 20(4) cannot properly be said to be “applicable” to him. [Emphasis added.]
A fortiori, a corporation which incurs losses from business activities outside Canada when it is neither a resident nor had income from a source in Canada, and thus is not subject to assessment under the Act, is not entitled to deduct such losses to reduce taxable income to nil on income derived after it becomes a Canadian resident.
The appellant's appeal with respect to the deductibility of losses in the years 1972 to 1975 inclusive must, therefore, fail.
(a) Deduction of non-capital losses incurred in 1976 during which year the appellant became a resident
It is the appellant’s contention that Parliament did not intend the rules in Division D to apply to a corporation where it became a resident of Canada part way through a taxation year. Moreover, in counsel's submission, the learned trial judge erred in prorating the non-capital loss for 1976.
Counsel for the respondent replies by arguing that a non-resident not carrying on business in Canada cannot have a taxation year for Canadian tax purposes, a contention with which I agree as has been seen. The appellant, however, having become a resident and having elected to adopt the calendar year as its fiscal period, could only, counsel says, have a taxation year dating from June 15, 1976, the date upon which it took up residence in Canada. In 1976, therefore, its fiscal period for tax purposes was June 15 to December 31. Therefore, only non-capital losses incurred in that period could be deducted pursuant to paragraph 111(1)(a) of the Act. In counsel’s view, there is nothing in the Act which requires that a taxation year or a fiscal period for a corporation be for a minimum period. All that is required is that the period not be in excess of 53 weeks. In such circumstances as here prevail, the Minister is entitled to prorate losses, as he did, between the periods of non-residency and residency of the corporation.
The learned trial judge dealt with these submissions in the following way (A.B. p. 122):
To these arguments it needs only to be mentioned that the absence of explicit provisions enabling the Minister to prorate plaintiff’s losses is not a bar to the solution chosen by the Minister, especially in view of the fact that the proration of plaintiff’s losses was employed as a consequence of the fiscal period selected and the system of accounting that was chosen by the plaintiff. The methodology employed by the Minister was merely an extension of the statutory restraint of jurisdiction imposed by the legislation in the assessment of the tax liability of a taxpayer.
The competing contentions can be dealt with briefly. The starting point is subsection 2(1), the relevant portion of which states that:
An income tax shall be paid ... upon the taxable income for each taxation year of every person resident in Canada at any time in the year. [Emphasis added.]
In the case of an individual, as opposed to a corporation, section 114 of the Act* permits a prorating of income earned in Canada. The effect of the rule is that only income earned during the portion of the taxation year in which the individual is resident in Canada is to be chargeable to tax unless, during the balance of the year, he was employed in Canada or carried on business in Canada. If he was employed or carried on business in Canada, the whole of his world wide income for the year would be taxable under subsection 2(1).
There is no equivalent section to 114 applicable to corporations. Thus, if a corporation becomes a resident of Canada part way through its fiscal period, tax is payable on its taxable income for the entire year irrespective of its source. Logic, common sense, fairness and harmony within the Act dictates that non-capital losses incurred in the same factual situation should be treated in the same way. Therefore, when a non-resident corporation whose fiscal period has been the calendar year becomes a resident part way through that fiscal period, and does not change its fiscal period, that becomes its taxation year. That being so, reading subsection 2(1), paragraphs 3(a), (c) and (d) and the definitions of “fiscal period” and "taxation year” together, it is abundantly clear, in my view, that Division D, in those circumstances, has no application. Moreover, if it were otherwise, there would have been no necessity to enact section 114 to prescribe a rule applicable only to individuals. Non-capital losses incurred in the fiscal period are, therefore, deductible from income earned during that period without establishing that they were incurred only during the time that it was a resident.
The trial judge therefore erred, in my opinion, in assimilating the prorating rule applicable to individuals who are residents of Canada for only part of a taxation year to that of corporations in a similar factual situation. To do so, as I see it, flies in the face of the statute.
Accordingly, I would dismiss the appeal on the first issue and allow the appeal on the second issue with costs both here and below. I would remit the matter to the Minister of National Revenue for reassessment in respect of the appellant's 1976 taxation year in a manner not inconsistent with the reasons for judgment.
Appeal allowed in part.
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