A J Frost (orally):—This is an income tax appeal in respect of the appellant’s 1965 taxation year. Upon notice of objection duly signed and filed, the Minister of National Revenue confirmed the assessment on June 10, 1971. The appeal came on for hearing in Toronto, Ontario on September 19, 1972.
The appellant is a corporation incorporated under the laws of the Province of Ontario. It operated a bowling alley and had accumulated operating losses of $107,000 over a period of years. On June 10, 1964 Amcan Holdings Limited (hereinafter referred to as “Amcan”) acquired 50% of the outstanding shares of the appellant and on the same date gave an option to the appellant to acquire a property known as Part of Lot 13, Concession 6, Toronto Township, in the County of Peel, for $245,575, which property had a market value of $343,770. The appellant exercised the option and sold the property at its fair market value of $343,770 to Slough Estates (Canada) Limited. Originally the property cost Amcan $96,275. The effect of the transaction was to artificially split the gain realized between the appellant and its sister company, Amcan.
The Minister of National Revenue taxed the entire gain as income in the hands of Amcan under subsection 17(2) of the Income Tax Act on the ground that the taxpayer was not dealing at arm’s length with the appellant and that the amount of $343,770 was deemed to have been received or receivable. The Minister of National Revenue also assessed the appellant on its net reported profit which included the profit realized on the sale of the land in the amount of $83,014.83, and under subsection 27(5) of the Income Tax Act disallowed deductions from income in respect of losses sustained prior to 1965, thereby levying tax the second time on the same income dollars.
In the first instance, the appellant and Amcan were obviously trying to artificially feed profits of $83,014.83 from Amcan to the appellant on account of the accumulated loss on its books. It did not work out very well because Amcan was caught by subsection 17(2) of the Income Tax Act and the Minister of National Revenue accordingly transferred back the amount of $83,014.83 to the income of Amcan but did not adjust the reported income figure shown in the appellant’s tax return. The Minister taxed the said amount once in the hands of Amcan and again in the hands of the appellant.
The question in issue in this appeal is whether or not the Minister of National Revenue is entitled to notionally take away income dollars as reported in one taxpayer’s return, add it to another taxpayer’s return and then tax both recognizing the receipt of income but not its source.
There is a general presumption in law against taxing the same income dollars twice. Double taxation can only be considered to exist where it is equitable and/or the language of the taxing Act is clear and unequivocable. In this case we are dealing with a “deemed” transaction under subsection 17(2) of the Income Tax Act. The Minister of National Revenue “deemed” that the profit of $83,014.83 was income in the hands of Amcan and when Amcan did not contest this deemed allocation, that amount of income for tax purposes was proven to be income of Amcan and not that of the appellant and was no longer merely “deemed”. Further the substance of the transaction as opposed to the form leaves no doubt whatsoever in my mind that the dollars in question were the income dollars of Amcan and not those of the appellant. The Minister of National Revenue cannot in my opinion tax the $83,014.83 earned by Amcan as income dollars of the appellant.
To permit the Minister to impose such a “tax” would be tantamount to allowing the masquerading of a penalty as a tax not permitted under the Income Tax Act. The Board has no alternative but to allow the appeal.
Appeal allowed.