Date: 19990624
Docket: 97-2140-IT-G
BETWEEN:
LAMONT MANAGEMENT LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] This is an appeal concerning the Appellant's 1993
taxation year. The issue is whether the meaning of "income
earned or realized by any corporation after 1971" referred
to in subsection 55(2) of the Income Tax Act
(the "Act") is limited to the income
specified in paragraphs 55(5)(b), (c) and
(d) of the Act.
[2] These provisions of the Act read as follows:
55(2) Where a corporation resident in Canada has after April
21, 1980 received a taxable dividend in respect of which it is
entitled to a deduction under subsection 112(1) or 138(6) as part
of a transaction or event or a series of transactions or events
(other than as part of a series of transactions or events that
commenced before April 22, 1980), one of the purposes of which
(or, in the case of a dividend under subsection 84(3), one of the
results of which) was to effect a significant reduction in the
portion of the capital gain that, but for the dividend, would
have been realized on a disposition at fair market value of any
share of capital stock immediately before the dividend and that
could reasonably be considered to be attributable to anything
other than income earned or realized by any corporation after
1971 and before the transaction or event or the commencement
of the series of transactions or events referred to in paragraph
(3)(a), notwithstanding any other section of this
Act, the amount of the dividend (other than the portion
thereof, if any, subject to tax under Part IV that is not
refunded as a consequence of the payment of a dividend to a
corporation where the payment is part of the series of
transactions or events)
(Emphasis added)
(a) shall be deemed not to be a dividend received by
the corporation;
(b) where a corporation has disposed of the share,
shall be deemed to be proceeds of disposition of the share except
to the extent that it is otherwise included in computing such
proceeds; and
(c) where a corporation has not disposed of the share,
shall be deemed to be a gain of the corporation for the year in
which the dividend was received from the disposition of a capital
property.
(5) For the purposes of this section,
(a) the portion of any capital gain attributable to any
income that is expected to be earned or realized by a corporation
after the time of receipt of the dividend referred to in
subsection (2) shall, for greater certainty, be deemed to be a
portion of the capital gain attributable to anything other than
income;
(b) the income earned or realized by a corporation
for a period throughout which it was resident in Canada and not a
private corporation shall be deemed to be the aggregate
of
...
(c) the income earned or realized by a corporation
for a period throughout which it was a private corporation
shall be deemed to be its income for the period otherwise
determined on the assumption that no amounts were deductible by
the corporation by virtue of paragraph 20(1)(gg) or
section 37.1;
(d) the income earned or realized by a corporation
for a period ending at a time when it was a foreign affiliate of
another corporation shall be deemed to be the aggregate of
the amount, if any, that would have been deductible by that other
corporation at that time by virtue of paragraph 113(1)(a)
and the amount, if any, that would have been deductible by that
other corporation at that time by virtue of paragraph
113(1)(b) if that other corporation
(i) owned all of the shares of the capital stock of the
foreign affiliate immediately before that time,
(ii) had disposed at that time of all of the shares referred
to in subparagraph (i) for proceeds of disposition equal to their
fair market value at that time, and
(iii) had made an election under subsection 93(1) in respect
of the full amount of the proceeds of disposition referred to in
subparagraph (ii);
(Emphasis added)
[3] An Agreed Statement of Facts was filed. I will reproduce
most of it:
1. The Appellant was incorporated under the laws of the
Province of Manitoba by Certificate dated November 6, 1992
as 2940796 Manitoba Ltd. ("2940796"). On
December 14, 1992, 2940796 filed Articles of Amendment and
changed its name to Lamont Management Ltd.
2. At all materials, David Kaufman ("Kaufman")
was a businessman resident in Canada.
3. On or about February 12, 1986 Kaufman was issued 250
common shares (the "Kaufman Shares") in the capital
stock of CANPAC Enterprises Ltd. ("Canpac") for a total
subscription price of $25.00. Canpac was at all material times a
private corporation and a taxable Canadian corporation within the
meaning assigned by subsection 89(1) of the Income Tax
Act, R.S.C. 1985, c.1 (5th Supplement) as amended (the
"Act") (attached hereto as
Exhibit "A" is a chart illustrating the ownership
of all relevant entities).
4. Kaufman is married to Nora Kaufman, the sister of Evelyn
Rady. Evelyn Rady is married to Ernest Rady ("Rady").
As a result, Kaufman and Rady are connected by marriage pursuant
to paragraphs 251(2)(a) and 251(6)(b) of the
Act and thus are related to one another for the purposes
of the Act.
5. On or about February 12, 1986, the Ernest Rady Trust
was issued 250 common shares in the capital stock of Canpac
for a total subscription price of $25.00.
...
7. Kaufman, and members of his family who also owned shares in
Canpac, wished to sell to the Rady family, their interest in
American Assets Inc. ("AAI"), Western Thrift Financial
Corporation ("Westcorp") and Western Insurance Holdings
Inc. ("Western Insurance"), which interests were held
by them through their shares of Canpac.
8. Westcorp is a California Corporation that, for Canadian tax
purposes is neither a private corporation nor a public
corporation and that, directly through its wholly-owned
subsidiaries, carries on a banking business in California.
9. Western Insurance is a California Corporation that, for
Canadian tax purposes, is neither a private corporation nor a
public corporation and that directly or indirectly through its
wholly-owned subsidiaries, carries on an insurance
business.
10. AAI is the successor, as a result of a merger ("the
merger") which occurred on December 31, 1991, to Sorb
Holdings Inc. ("SORB") and American Assets, Inc.
("former AAI") (collectively "the predecessor
corporations"). From the date of the merger until
December 15, 1992, Canpac had a 17.8% equity percentage in
AAI.
11. SORB was a foreign affiliate, within the meaning assigned
by subsection 95(1) of the Act, of Canpac at all
material times before the merger, and AAI was a foreign affiliate
of Canpac at all material times after the merger.
12. As a consequence of the merger, AAI acquired all the
shares of Westcorp and all the shares of Western Insurance, which
shares were previously owned by the predecessor corporations,
resulting in AAI having a 55% equity interest in Westcorp and a
92% equity interest in Western Insurance.
13. Canpac, through its ownership of shares of the predecessor
corporations before the merger and its ownership of shares of AAI
after the merger, held, for the limited purpose of
subsection 55(2) of the Act, an indirect equity
interest ("indirect interest") in Westcorp at all
relevant times during the holding period (the "Holding
Period") of the Kaufman Shares from when they were issued on
February 12, 1986 until they were purchased for cancellation
on December 15, 1992, which indirect interest was under 10%
but greater than 9%.
14. Canpac, through its ownership of shares of the predecessor
corporations before the merger and its ownership of shares of AAI
after the merger, held an indirect interest in Western Insurance
at all relevant times during the holding period (the
"Holding Period") of the Kaufman Shares from when they
were issued on February 12, 1986 until they were purchased
for cancellation on December 15, 1992, which indirect
interest was 16.38%.
15. Accordingly, during the Holding Period, Western Insurance
was a foreign affiliate of the predecessor corporations and then
of Canpac, while Westcorp was at no time during the Holding
Period a foreign affiliate of Canpac nor for its predecessor
corporations.
16. Approximately $12,622,469 (Cdn) of the gain inherent in
Canpac's shares of AAI was attributable to income earned and
retained by Westcorp during the Holding Period.
17. Approximately $15,966,735 (Cdn) of the inherent gain in
Canpac's shares of AAI was attributable to income earned and
retained by Canpac, AAI, Western Insurance and other foreign
affiliates of Canpac during the Holding Period.
18. Kaufman's 36.23% share of the income of Westcorp and
Western Insurance was $4,573,121 (Cnd) ("Westcorp
Income") and $5,784,749 (Cdn) ("Western Insurance
Income"), respectively. The Western Insurance Income was
reduced by $209,560 to take into account Kaufman's share of
the Canpac deficit account yielding a total of $5,575,189.
...
21. On December 14, 1992, before the Kaufman Shares were
purchased for cancellation, Kaufman transferred them, on a
tax-deferred basis under subsection 85(1) of the
Act, to the Appellant in exchange for shares in the
capital stock of the Appellant.
22. On December 15, 1992, Canpac purchased the Kaufman Shares
for cancellation for a total purchase price of $7,282,926. At
that time, 690 shares in Canpac had been issued of which 250
were owned by the Appellant, 250 were owned directly or
indirectly by Rady and the remaining 190 shares were owned by
others.
23. One of the results of Canpac purchasing the Kaufman Shares
for cancellation was a significant reduction in the portion of
the capital gain, but for the deemed dividend under
subsection 84(3) of the Act, would have been realized
on the disposition at fair market value of the Kaufman
Shares.
...
25. The inherent gain in the Kaufman Shares immediately before
they were purchased for cancellation cannot reasonably be
attributed to anything other than the following:
(a) the Western Insurance Income, which amount the Minister
accepts for the purpose of subsection 55(2) of the
Act as being part of Canpac's Safe Income to which the
inherent gain is attributable; and
(b) the Westcorp income.
26. The Appellant reported the entire amount received on the
purchase for cancellation of the Kaufman Shares as a taxable
dividend.
...
28. By Notice of Reassessment dated October 17, 1996, the
Minister reassessed the Appellant for its 1993 taxation year with
respect to the purchase for cancellation of the Kaufman
Shares.
29. In so reassessing the Appellant, the Minister refused to
include the Westcorp income in the Appellant's Safe Income
calculation, and instead, applied subsection 55(2) of the
Act to the portion of the purchase price of the Kaufman
Shares in excess of the Western Insurance Income. The Minister
treated the excess of $1,707,737 as a capital gain rather than as
a taxable dividend that would otherwise be included in income
under subsection 84(3) and paragraph 12(1)(j) of
the Act and deducted under subsection 112(1) of the
Act in computing taxable income. As a result, the
Appellant's income was increased by $1,280,803.
[4] The admitted facts that are relevant for the issue of this
appeal are: (a) there was a portion of the capital gain (that,
but for the dividend, would have been realized on a disposition
at fair market value of the shares that were redeemed for
cancellation), that could be attributable to income earned or
realized by Western Thrift Financial Corporation
("Westcorp"); and (b) Westcorp was not a private
corporation, a public corporation or a foreign affiliate within
the meaning of the Act.
[5] The Appellant's position is that the computation of
safe income that was earned by the non-resident corporation
Westcorp during a period when it was not a foreign affiliate,
could be included in the general wording of
subsection 55(2): "income earned or realized by
any corporation after 1971". (My underlining)
[6] The Respondent's position is that the only income that
can be considered "income earned and realized by any
corporation after 1971" for the purpose of subsection 55(2)
of the Act is the income earned or realized only by the
corporations specified in paragraphs 55(5)(b),
(c) and (d) of the Act.
[7] The "income earned and realized by any corporation
after 1971" will be hereinafter sometimes referred to as
"safe income" as it is colloquially known.
[8] The Appellant argues that the words "any
corporation", in subsection 55(2) of the Act,
are all encompassing words which are clear and unambiguous and do
not limit or restrict a particular corporation from consolidating
the safe income of another corporation in which the particular
corporation is a shareholder.
[9] The Appellant referred to a decision of the Supreme Court
of Canada in Ville de Montréal v. I.L.G.W.U. Centre et
al., [1974] S.C.R. 59, at page 66, where
Chief Justice Fauteux said: "The legislator is
presumed to mean what he says; and there is no need to resort to
interpretation when the wording is clear, ..."
[10] Counsel for the Appellant provided the Court with written
notes at the hearing and I draw the following excerpts from
these:
B. Plain Meaning of the Word "Any":
24. The phrase "income earned or realized by any
corporation" in subsection 55(2) means that all types
of corporations are included within its ambit, as the word
"any" is an all encompassing word. This is best
illustrated in Linder (M.) v. Rutland Moving & Storage
Ltd. [1991] 1 C.T.C. 517 at 521 (B.C.C.A.) (Tab 12)
where the Court referred to the case of Epp School District v.
Rural Municipality of Park [1936] 2 W.W.R. 331 at 335
(Sask. C.A.) where Gordon J.A. said the following:
A reference to legal dictionaries shows that the word
"any" is all-embracing. It is a word which, in
its natural meaning, excludes limitation or qualification.
25. In an article entitled, "The Taxation of Corporate
Reorganizations", which appeared in Volume 4 of the 1997
edition of the Canadian Tax Journal (Tab 13), author
Mark Brender of the law firm of Goodman, Phillips &
Vineberg in Montréal, Quebec, specifically addressed the
meaning of the word "any" as it appears in
subsection 55(2) of the Act as follows at
page 807 of the article:
... there is no statutory basis for limiting the
consolidation of safe income to controlled or significantly
controlled corporations and that the safe income of any
corporation should be included in the computation of safe income
of the parent, regardless of how small the interest of the parent
may be.
26. When referring to the meaning of the word "any"
in subsection 55(2), Brender stated at page 816:
The words "by any corporation" are expansive, and
there is no authority for limiting the consolidation of safe
income to corporations that are controlled or significantly
influenced direct or indirect subsidiaries of the parent
corporation. Rather, these expansive words suggest that the
computation of safe income is more of an "aggregation"
than it is a "consolidation" of safe income and this
should include the income earned or realized of any
corporation, not merely of those corporations that are controlled
or significantly influenced. Since there is no statutory basis
for limiting the aggregation of safe income to controlled or
significantly influenced corporations, the safe income of any
corporation should be included in the aggregation of the safe
income of the shareholder corporation, regardless of how nominal
the interest of the shareholder may be.
27. It is further submitted that the Appellant's argument
respecting the plain meaning of the word "any" in
subsection 55(2) of the Act is consistent with
Revenue Canada's publicly stated policies, which policies
include those expressed by Michael Hiltz. In fact, in the
Brelco case, Supra, (Tab 4) the Crown relied
heavily upon the writings of Michael Hiltz as an authority
for Revenue Canada's policy regarding the application of
subsection 55(2).
28. In 1984, Michael Hiltz, in a paper presented at the
Corporate Management Tax Conference entitled,
"Section 55: An Update", (Tab 14) expanded
upon Revenue Canada's policy and stated that the
consolidation of safe income pursuant to subsection 55(2) of
the Act should not, in certain circumstances, be limited
to a corporate group. In explaining Revenue Canada's
position, Hiltz stated the following:
The Department is prepared to make an exception in cases where
a corporation does not exercise significant influence, if it can
be clearly demonstrated that the income of the other corporation
contributed to the unrealized gain on the shares.
29. In Revenue Canada Correspondence
no. RCT 5-7012 dated April 15, 1985
(Tab 15), Revenue Canada stated the following:
The Department's approach to subsection 55(2) of the
Act is expressed in Mr. J.R. Robertson's
address to the 1981 Canadian Tax Foundation, subject to the
update presented by Mr. A. Hiltz at the 1984 Corporate
Management Tax Conference.
30. Revenue Canada further referred to Mr. Hiltz's
authority regarding subsection 55(2) in Revenue Canada
Correspondence no. 267 dated August 1990 (Tab 16) by stating the
following:
The Department's views on the application of
subsection 55(2) of the Act were expressed in
Mr. J. Robertson's address to the 1981 Canadian Tax
Foundation. These views were subsequently updated by Mr. M.A.
Hiltz at the 1984 Corporate Management Tax Conference, as well as
by Mr. R.J.L. Read and Mr. Hiltz at the 1988 and 1989 conference
of the Canadian Tax Foundation, respectively.
31. Finally, Revenue Canada referred to Mr. Hiltz's
quotation with authority in Technical Interpretation 9802105
dated June 29, 1998 (Tab 17).
32. Revenue Canada's policy regarding
subsection 55(2) of the Act, as expressed above,
clearly demonstrates that the meaning of the words "any
corporation" in subsection 55(2) of the Act does
not restrict the consolidation of safe income to a corporate
group provided that it can be clearly demonstrated that the
income of the other corporation contributed to the unrealized
gain on the shares. ...
33. Accordingly, it is submitted that the plain meaning of the
word "any" is not only clear and unambiguous, but also
consistent with Revenue Canada's policies. Therefore, the
Appellant submits that its proportionate share of the Westcorp
safe income is to be included with its own safe income
calculation.
...
C. Potential Application of the Word "Any" in
Light of Subsection 55(5):
36. The Crown's position is that since Westcorp was not a
foreign affiliate of Canpac, that none of its income can be
included in the Appellant's safe income calculation.
Paragraph 55(5)(d) provides how income of a foreign
affiliate is to be calculated for the purpose of section 55
of the Act. It is submitted that this paragraph merely
distinguishes the method of calculating income of foreign
affiliates for the purpose of section 55 from the method of
calculating income of foreign affiliates for the purposes of
subsection 95(2) of the Act, which section provides
general rules for the computation of income of foreign
affiliates. Accordingly, it is submitted that while
paragraph 55(5)(d) of the Act provides the
Appellant with assistance with respect to the safe income of
Western Insurance, it has no applicability whatsoever with
respect to the treatment of the same income of Westcorp, as
Westcorp, unlike Western Insurance, was not a foreign affiliate
of Canpac at any material time.
37. Paragraph 55(5)(b), (c) and (d)
of the Act contain rules for determining, for the purpose
of subsection 55(2), the income earned or realized by
certain types of corporations. These rules modify the general
rules in the Act for determining the income of a
corporation. None of these rules applies to Westcorp as it was
not at any time during the Holding Period a corporation referred
to in any of those paragraphs. Therefore, and because there is no
exhaustive definition of "income earned or realized by any
corporation" for the purpose of subsection 55(2), its
income for the purpose of that subsection should be its income
under Part 1 of the Act. It is therefore submitted that if
Parliament meant for there to be specific rules providing the
method of calculating income of such corporations, such rules
would be clearly expressed within the section.
D. Object and Spirit
38. As explained before, the Supreme Court of Canada has
stated that the object and spirit of the legislation ought not be
looked to when the wording of the statute is clear and
unambiguous. The Appellant submits that the meaning of the word
"any" is clear and unambiguous. However, should the
Court not accept the Appellant's argument and feels it
necessary to consider the object and spirit of the Act, it
is submitted that the object and spirit supports the
Appellant's position that the Westcorp safe income ought to
be consolidated with that of the Appellant.
39. Paragraphs 2 through 5 hereof summarize the object
and spirit of subsection 55(2) by explaining that the
subsection does not apply where the gain that has been reduced
can be attributed to income earned or realized by any corporation
after 1971 and before the transactions or events that results in
a disposition of property. The rationale is that safe income is
protected from the application of subsection 55(2) because
this income has already been subject to corporate tax and,
therefore, is permitted to be paid to other corporations on a
tax-free basis.
[11] Counsel for the Respondent referred to a decision of this
Court, Trico Industries Limited v. M.N.R., 94 DTC
1740, and more particularly to the following excerpt at
page 1744:
Robert J.L. Read, C.A., the Director General, Specialty Ruling
Directorate, Revenue Canada, in 1988 at the Annual Conference of
the Canadian Tax Foundation, in his lecture entitled
"Section 55 A Review of Current Issues", said
under the heading of "The Historical Background of
Subsections 55(2) and (3)":
...
Paragraphs 55(5)(b), (c), and (d) define
"income earned or realized by a corporation" for
purposes of subsection 55(2). "Income earned or
realized" or "safe income" with respect to a share
of a corporation refers to the income earned by any corporation
during the holding period of a particular share of a corporation
that can reasonably be considered to be allocable to that share
in the particular circumstances. "Safe income on hand"
at a particular time with respect to a share of a corporation
held by a particular shareholder is the portion of the income
earned or realized by any corporation (safe income) during the
relevant period of time that could reasonably be considered to
attribute to the capital gain that would be realized on a
disposition at fair market value of the share at that time. A
"safe dividend" is a dividend paid on a share that does
not exceed the safe income on hand in respect of that share.
In our view the phrase "income earned or realized by any
corporation" contemplates the consolidation of safe income.
...
[12] Counsel for the Respondent, in referring to
Mr. Read's comments, stated that it could be seen that
paragraphs 55(5)(b), (c) and (d) define
income earned or realized by a corporation for purposes of
subsection 55(2).
[13] Counsel for the Respondent emphasized the fact that
subsection 55(5) begins by the words "For the purposes
of this section". This provision determines the calculation
of the income earned or realized by a corporation for a period
throughout which it was a resident in Canada and not a private
corporation; the income earned or realized by a corporation
during a period throughout which it was a private corporation;
and the income earned or realized by a corporation for a period
ending at a time when it was a foreign affiliate. The Respondent
submits that the income earned or realized by Westcorp, at a time
when it was not a foreign affiliate of the Appellant, cannot be
considered in the Appellant's safe income calculation.
Subsection 55(5) cannot be interpreted as not contemplating
the computation of income of a non-resident corporation
that is not a foreign affiliate of a corporation resident in
Canada. If such a corporation is not mentioned, Parliament's
intent is that its income should not be included.
[14] The Respondent submits that it is not reasonable to
conclude that Parliament, having given careful attention by
prescribing in paragraphs 55(5)(b), (c) and
(d) the detailed computation required to determine income
earned or realized for non-private, private and foreign
affiliate corporations for the purposes of subsection 55(2),
intended that income earned or realized from a non-resident
corporation, which is not a foreign affiliate, be included in the
computation of safe income on hand for the purpose of
subsection 55(2) in a manner not specified by the
Act.
[15] The Respondent submits that the interpretation urged by
the Appellant would result in preferential treatment being given
to the income of a non-resident corporation that was not a
foreign affiliate over that of a foreign affiliate as to the
amount of income earned or realized, as well as for the period of
time that may be considered.
Conclusion
[16] I do not believe that it could be disputed that the word
"any" is all-embracing and that in its natural meaning
it excludes limitations. I believe however that there is need to
determine the corporations that are embraced by the word
"any" in view of the existence of subsection 55(5) of
the Act. This is a provision, as can clearly be seen from
its introductory words, that has been enacted to interpret the
entire section 55. It shall then be used to interpret the
meaning of the terms "income earned and realized by any
corporation" found in subsection 55(2) of the
Act.
[17] The Appellant's argument, as expressed in its above
written argument, is that since it is admitted by the parties
that a portion of the capital gain on the redemption of shares is
attributable to the income earned by Westcorp, and that since it
is the object of subsection 55(2) of the Act to
consider this portion of the capital gain to be an
inter-corporate dividend, its position is therefore in
accordance with that subsection. This position would appear
sensible if it were not, as I have mentioned in the preceding
paragraph of these Reasons, for the existence of
paragraphs 55(5)(b), (c) and (d) of the
Act. These paragraphs determine the income that may be
taken into account as income earned or realized by a corporation.
There was no argument as to the reasoning applied by Parliament
in enacting the various modes of calculation set out in these
paragraphs and there is no need for me to determine it but to
take cognizance of these interpretative provisions. I will
however venture to say that these paragraphs seem to relate to
the manner and the extent to which these various corporations are
subject directly or indirectly to tax under the Act.
[18] It is my view that the only conclusion that I may draw
from paragraphs 55(5)(b), (c) and (d)
of the Act is that if a corporation is not a corporation
that is specified in these paragraphs, its income is not included
in the calculation of the safe income. I am comforted in this
interpretation, as a different interpretation would lead to an
absurd result. It would mean that the income of a non-resident
corporation that is also a non-foreign affiliate would be
included in any mode of calculation, where a specific mode of
calculation has been determined for a foreign affiliate, for a
resident but not a private corporation and for a private
corporation. Between an interpretation that leads to an absurd
result and another that leads to a sensible result, it is evident
that the one leading to the sensible result should be preferred.
It is also of interest to note that the French version of
subsection 55(2) of the Act, by its use of the words
"une société" appears to support this
interpretation.
[19] The authors to which Counsel for the Appellant referred
to do not seem to suggest otherwise. In the article written by
Mark D. Brender, "The Taxation of Corporate
Reorganizations", (cited in the above paragraph 25
of the Appellant's written argument), I find at page 808
the following excerpt: "The calculation of safe income is
determined by statutory rules. ..." There is a footnote
that refers to paragraphs 55(5)(a), (b),
(c) and (d). The same thing is said at
page 810. There is no suggestion by these authors that
income from corporations other than the ones described in
paragraphs 55(5)(b), (c) and (d)
of the Act should be taken into account in the calculation
of the income earned or realized after 1971. It is in the context
of the degree of control of the corporation over other
corporations that these authors discuss the meaning of the word
"any" and it is in that context that the word
"any" makes sense. It is where it can be demonstrated
that the income of other corporations contributed to the gain on
the shares. But the income itself has to be calculated pursuant
to the rules prescribed by subsection 55(5) of the
Act.
[20] The appeal is dismissed, with costs.
Signed at Ottawa, Canada, this, 24th day of June, 1999.
"Louise Lamarre Proulx"
J.T.C.C.
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