Nuclear Enterprises Ltd. v. Minister of National Revenue, [1971] CTC 449, 71 DTC 5243

Kerr, J.:—This is an appeal by way of Special Case stated for the opinion of the Exchequer Court of Canada pursuant to its General Rules 150 and 151, and continued in the Federal Court of Canada, in respect of the appellant’s appeal from the income tax assessments made by the respondent for the company’s 1962, 1964 and 1965 taxation years. In its 1962 to 1965 taxation years the company received certain grants from the National Research Council and the Department of Defence Production for scientific research and to sustain technological capability in Canadian industry, as more fully set forth in the Special Case, and the appeal relates to the treatment of the said grants for income tax purposes.

The Special Case reads as follows, the facts stated therein being admitted by the parties for the purpose of such Case :

1. The Appellant is a body corporate, incorporated on the 17th day of April, 1951 by Letters Patent pursuant to the laws of the Province of Manitoba.

2. The Appellant carried on business in Canada at the City of Winnipeg in each of the years 1961 to 1965 inclusive, and duly filed an income tax return, including financial statements, for each of the said years as required by the Income Tax Act.

3. The profit of the Appellant in each of the said years was calculated on the basis of its taxation year coinciding with the calendar year.

4(a). The Appellant, during its 1961 to 1965 taxation years, made in Canada the following expenditures in respect of scientific research, which expenditures were in connection with an agreement and application undertaken by it and referred to in paragraph 9 hereof, all of which expenditures were of a current nature except for the amounts of $1,218.15 in 1961, $3,211.68 in 1964 and $10,462.00 in 1965, which amounts were capital expenditures, as follows:

4(b). The Appellant, during its 1962 to 1965 taxation years, received from the National Research Council and the Department of Defence Production the following amounts:

4(c). The Appellant, in computing its income, did not, and in its books of account did not, include as a receipt, or part of its. gross sales, the amounts referred to in paragraph 4(b).

5. However, the Appellant, in each year, in computing the amount deductible under Section 72 of the Income Tax Act, offset the amounts referred to in paragraph 4(b) against the expenses referred to in paragraph 4(a), so that in computing its income, it deducted the net amount. Particulars are as follows:

(a) For 1962 it reduced its research costs by an amount of $10,103.58, identified as labour and material recoveries ; reduced its overhead costs by an amount of $13,977.98, identified as research refund or overhead, and increased its net profit in the amount of $138,120.67, identified as 1961 research costs recovered.

Exhibit 1 of Exhibit Book

(b) For 1963 it reduced its research and development costs by $12,265.67, identified as government subsidies, and reduced its administrative expenses by an amount of $1,206.85, identified as government research subsidies.

Exhibit 2 of Exhibit Book

(c) For 1964 it reduced its research and development expenses by an amount of $17,643.07, identified as government subsidies.

Exhibit 3 of Exhibit Book

(d) For 1965 it reduced its research and development expenses by an amount of $16,157.52, identified as government subsidies.

Exhibit 4 of Exhibit Book

6. With respect to the adjustments referred to in paragraph 5 hereof, the Respondent assessed tax to the Appellant on the basis that the adjustments made by the Appellant were proper adjustments to arrive at its taxable income.

7. The Appellant now contends that the adjustments outlined in paragraph 5 hereof were incorrectly made and should not have been made in arriving at its taxable income for each year; rather, its taxable income for each year should be reduced from that reported and assessed by the following amounts :

THE AMOUNTS REFERRED TO IN PARAGRAPHS 4(b), 5 AND 7 HEREOF WERE PAID TO THE APPELLANT IN THE CIRCUMSTANCES OUTLINED IN THE PARAGRAPHS TO FOLLOW.

8. The business of the Appellant is that of manufacture and research, the research being of such a character as to bring the expenses in connection therewith within the provisions of section 72 of the Income Tax Act.

9. The amounts referred to in paragraphs 4(b), 5 and 7 hereof were amounts received by the Appellant from the Government of Canada as a result in part of an agreement entered into by the Appellant with Her Majesty the Queen in right of Canada and in part as a result of applications by the Appellant to the National Research Council.

10. The Appellant, in the calendar year 1962, was aware that through the National Research Council there might be available to it assistance pursuant to the Industrial Research Assistant Program and to this end communicated with officers of the National Research Council and received replies therefrom.

Exhibits 5, 6, '7' and 8 of Exhibit Book

11. The communiciations resulted in the Appellant, by letter dated the 29th day of October, 1962, sending to the National Research Council a formal application for financial assistance, pursuant to the Industrial Research Assistance Program, in the amount of $5,000 for a research project for the fiscal year ending the 3lst day of March, 1963, which application bears the date the 29th day of October, 1962.

Exhibits 9 and 10 of Exhibit Book

12. By letter dated the 21st day of November, 1962, the National Research Council advised the Appellant that its application dated the 29th day of October, 1962 had been approved, with which was enclosed a copy of ‘ General Conditions of Grant’’, which letter asked for acceptance by the company.

Exhibits 11 and 12 of Exhibit Book

13. The Appellant indicated its acceptance of the assistance by returning to the National Research Council a copy of the letter to it of the 21st day of November, 1962, with its acceptance noted thereon.

Exhibit 11 of Exhibit Book

14. In December 1962 and January 1963 correspondence passed between the Appellant and the National Research Council as to the manner of invoicing pursuant to the General Conditions of Grant.

Exhibits 13, 14, 15 and 16 of Exhibit Book

15. The Appellant applied for approval of its application for a grant for the 1963-64 fiscal year in the amount of $14,500, which approval was confirmed by letter of the 5th day of April, 1963.

Exhibits 17, 18 and 19 of Exhibit Book

16. By letter of the 30th day of December, 1963, to which was attached Summary of Financial Details, the Appellant applied for approval of its application for a grant for the 1964-65 fiscal year in the amount of $17,000, which approval, after receipt of further information, was given by letter of the 5th day of March, 1964 and acknowledged by letter of the 9th day of March, 1964.

Exhibits 20, 21, 22, 23 and 24 of Exhibit Book

17. A supplemental grant for the fiscal year 1964-65 was required to pay an increased amount which would be required in that year; it was applied for and granted in the amount of $1,300.

Exhibits 25, 26, 27, 28, 29 and 30 of Exhibit Book

18. By letter of the 30th day of December, 1964, to which was attached Summary of Financial Details, the Appellant applied for approval of its application for a grant for the 1965- 66 fiscal year in the amount of $18,000 which, after further information was provided, was granted, with the company being duly advised and acknowledging the advice.

Exhibits 31, 32, 33, 34 and 35 of Exhibit Book

19. Pursuant to its applications, the approvals and as required by the General Conditions of Grant, the Appellant sent invoices to the National Research Council in the period from January 1963 to December 1965 at the rate of about one for each month, which invoices relected the amounts paid by the Appellant to the person or persons named therein.

Exhibit 36 (being 13 of such invoices) of Exhibit Book

20. Consequent to the approval of the said applications and the said invoices, the Appellant received or became entitled to receive amounts totalling $42,647.29 which amount, together with the amounts received or entitled to be received, as indicated by paragraph 26 hereof, reduced its research costs in the manner described in paragraph 5.

21. The funds to pay the amount of the grants made by the National Research Council were authorized by the following Votes under the estimates of the National Research Council:

(a) Vote 10 of the Special Appropriations Act 1963 for the year ending the 31st day of March, 1963, being chapter 2 of the Statutes of Canada 1963;

(b) Vote 10 of the Appropriations Act No. 5, 1963 for the year ending the 31st day of March, 1964, being chapter 42 of the Statutes of Canada 1963 ;

(ce) Vote 15 of the Appropriations Act No. 10, 1964 for the year ending the 31st day of March, 1965, being chapter 34 of the Statutes of Canada 1964-65;

(d) Vote 15 of the Appropriations Act No. 1, 1966 for the year ending the 31st day of March, 1966, being chapter 3 of the Statutes of Canada 1966-67,

the first three of which Votes read ‘‘assistance towards research in industry’’ and the last Vote reading ‘‘assistance towards research in industry under terms and conditions approved by the Governor-in-Council including authority, notwithstanding section 30 of the Financial Administration Act, to make commitments for the current year not to exceed a total of $4,500,000.”

22. The Appellant by a proposal dated the 17th day of May, 1961, proposed to the Department of Defence Production that it had a program to develop certain marketable instruments which would be of use to that Department.

Exhibit 37 of Exhibit Book

23. The Department of Defence Production advised the Appellant by letter dated the 12th day of October, 1961, that approval in principle for the contract had been given and the Appellant replied thereto by letter bearing date the 30th day of October, 1961.

Exhibits 38 and 39 of Exhibit Book

24, An Agreement made in duplicate as of the 11th day of April, 1962 was entered into between ‘‘Her Majesty the Queen in right of Canada (hereinafter called Her Majesty) herein represented by and acting through the Minister of Defence Production (hereinafter called the Minister of the First Part) and Nuclear Enterprises Ltd., of the City of Winnipeg, Province of Manitoba, (hereinafter called the Contractor of the Second Part).”

Exhibit 40 of Exhibit Book

25. Pursuant to the terms of the Agreement, the Appellant filed with the Department of Defence Production on Form DDP 392 fifteen claims for progress payments in the period from June 1st, 1962 to December 31st, 1965, each of which reflected amounts paid by the Appellant for the period shown and as described in the claim

Exhibit 41 of Exhibit Book

96. Pursuant to the said contract and the said claims, the Appellant received, or became entitled to receive, amounts totalling $41,828.05, being the total adjusted amounts of the said claims which, together with t‘ïre amount received or en- titled to be received, as indica*ed by paragraph 20 hereof, reduced its research costs in the manner described in paragraph 5.

27. The funds to pay the amount for the fiscal years 1963 and 1964 due pursuant to the Agreement between the Appellant and Her Majesty the Queen were provided for by the following Votes of the Department of Defence Production:

(a), Vote 25 of the Special Appropriations Act 1963 for

the year ending the 31st day of March, 1963, being chapter 2 of the Statutes of Canada 1963 ;

and

(b) Vote 25 of the Appropriations Act No. 5, 1963 for the year ending the 31st day of March, 1964, being chapter 42 of the Statutes of Canada 1963,

both of which Votes, except as to amounts, read as follows:

“To sustain technological capability in Canadian Industry by supporting selected defence development programs, on terms and conditions approved by Treasury Board, and to authorize, notwithstanding section 30 of the Financial Administration Act, total commitments of $16,500,000 for the foregoing purposes during the past and subsequent fiscal years. ’ ’

28. The funds to pay the amounts for the fiscal year 1965 due pursuant to the Agreement between the Appellant and Her Majesty the Queen were provided for by the Vote of the Department of Industry as follows :

Vote 5 of the Appropriations Act No. 10, 1964 for the year ending the 81st day of March, 1965, being chapter 34 of the Statutes of Canada 1964,

which reads as follows:

“To sustain technological capability in Canadian Industry by supporting selected defence development programs, on terms and conditions approved by Treasury Board, and to authorize, notwithstanding section 30 of the Financial Administration Act, total commitments of $16,500,000 for the foregoing purposes during the past and subsequent fiscal years. ’ ’

29. To date none of the amounts received by the Appellant pursuant to the Industrial Research Assistance Program have been repaid by it to the National Research Council.

30. To date no amount pursuant to paragraph 7 of the said Agreement has Jeen paid! by the Appellant to Her Majesty the Queen in right of Canada. . \.

31. While the contract (Exhibit 40) was not executed until April llth, 1962, the amount to be paid pursuant to the contract related to work done on and after February Ist, 1961.

32. Services in accordance with the contract (Exhibit 40) in the amount of $18,728.28 were performed in the calendar year 1961 but were not paid for until sometime in the 1962 calendar year. .

33. For the purposes of section 72A the Appellant ’s\“ basic scientific expenditure’’ in 1961 was in the amount of $95 200.66 and consequently, in each of the years 1962 to 1964 inclusive, since the expenditures by the Appellant after having been reduced by the amounts received from the Government of Canada through the National Research Council and the Department of Defence Production did not exceed the amount of $25,200.66, the Appellant was not entitled in any of those years to the special deduction permitted by section 72A. However, since the Appellant’s expenditures in the year 1965 after having been reduced by the amounts received from the Government of Canada through the National Research Council and the Department of Defence Production did exceed its “basic scientific expenditure’’ as established in 1961, it was entitled to deduct and was allowed a deduction pursuant to section 72A for the year 1965 in the amount of $2,819.50.

34. Had the Appellant been paid the $18,728.28 in its 1961 taxation year for the services performed in that year pursuant to the contract (Exhibit 40), its ‘‘ basic scientific expenditure” for that year would have been $6,472.38. Had the Appellant’s “basic scientific expenditure’’ for its 1961 taxation year been $6,472.38, the Appellant would have been entitled pursuant to section 72A to the special deduction thereby provided in each of the years 1962 to 1965 inclusive.

B. QUESTIONS FOR THE COURT

35. The questions for the opinion of the court are as follows :

A. Whether the Appellant

(i) in computing its income for the 1962 to 1965 taxation years inclusive is required to include in its income the amounts received by it from the National Research Council;

or

(ii) the portion of the outlays for scientific research in respect of which the Appellant received a grant from the National Research Council were not expenditures in respect of scientific research within the meaning of section 72 of the Income Tax Act.

B. Whether the Appellant

(i) in computing its income for its 1962 to 1965 taxation years inclusive is required to include in its income the amounts received by it from the Department of Defence Production ;

or

(ii) the portion of the outlays for scientific research in respect of which the Appellant received a grant from the Department of Defence Production were not expenditures for scientific research within the meaning of section 72 of the Income Tax Act.

C. DISPOSITION

36. The parties agree that

(a) if the court shall be of the opinion in the affirmative on both questions the judgment shall be entered for the Respondent dismissing the appeal with ‘costs;

(b) if the court shall be of the opinion in the negative on either question A or B, or both, the judgment shall be entered for the Appellant allowing the appeal with costs and referring the assessments back to the Respondent for the purpose of reassessing in accordance with the opinion of the court.

37. Nothing herein shall be deemed to restrict any right which the parties may have with respect to an appeal to the Supreme Court of Canada from the judgment of the Exchequer Court in respect of this Special Case.

Section 72 of the Income Tax Act allows deductions from income of certain expenditures in respect of scientific research. Section 72A allows additional deductions for such research.

Section 72(1), as applicable to the 1962-65 taxation years concerned, reads as follows :

72. (1) There may be deducted in computing the income for a taxation year of a taxpayer who carried on business in Canada and made expenditures in respect of scientific research in the year

(a) all expenditures of a current nature made in Canada in the year

(i) on scientific research related to the business and directly undertaken by or on behalf of the taxpayer,

(ii) by payments to an approved association that undertakes scientific research related to the class of business of the taxpayer,

(iii) by payments to an approved university, college, research institute or other similar institution to be used for scientific research related to the class of business of the taxpayer,

(iv) by payments to a corporation resident in Canada and exempt from tax under this Part by paragraph (gc) of subsection (1) of section 62,

(v) by payments to a corporation resident in Canada for scientific research related to the business of the taxpayer; and

(b) such amount as may be claimed by the taxpayer not exceed- ding the lesser of

(i) the expenditures of a capital nature made in Canada (by acquiring property other than land) in the year and any previous year ending after 1958 on scientific research relating to the business and directly undertaken by or on behalf of the taxpayer, or

(ii) the undepreciated capital cost to the taxpayer of the property so acquired as of the end of the taxation year (before making any deduction under this paragraph in computing the income of the taxpayer for the taxation year).

Section 72(1) was amended by Statutes of Canada 1966-67, c. 91, Section 12,* [1] by revising the opening wording of subsection (1) preceding paragraph (a) and by adding a new paragraph (c), to read as follows:

72. (1) There may be deducted in computing the income for a taxation year of a taxpayer who carried on business in Canada and made expenditures in respect of scientific research in the year the amount by which the aggregate of

(a) all expenditures of a current nature made in Canada in the year

(i) on scientific research related to the business and directly undertaken by or on behalf of the taxpayer,

(ii) by payments to an approved association that undertakes scientific research related to the class of business

(iii) by payments to an approved university, college, research institute or other similar institution to be used for scientific research related to the class of business of the taxpayer,

(iv) by payments to a corporation resident in Canada and exempt from tax under this Part by paragraph (gc) of subsection (1) of section 62,

(v) by payments to a corporation resident in Canada for scientific research related to the business of the taxpayer;

(b) such amount as may be claimed by the taxpayer not exceeding the lesser of

(i) the expenditures of a capital nature made in Canada (by acquiring property other than land) in the year and any previous year ending after 1958 on scientific research relating to the business and directly undertaken by or on behalf of the taxpayer, or

(ii) the undepreciated capital cost to the taxpayer of the property so acquired as of the end of the taxation year (before making any deduction under this paragraph in computing the income of the taxpayer for the taxation year), and

(c) all expenditures in the year by way of repayment of amounts paid to the taxpayer under an Appropriation Act and on terms and conditions approved by the Treasury Board for the purpose of advancing or sustaining the technological capability of Canadian manufacturing or other industry,

exceeds the aggregate of amounts paid to him in the year under an Appropriation Act and on terms and conditions described in paragraph (c).

Subsections (1) and (3) of Section 72A, which were applicable to the 1962-66 taxation years, read as follows :

72A. (1) In addition to the deductions allowed for the year by section 72, a corporation, other than a corporation referred to in subsection (2), that carried on business in Canada and made expenditures in respect of scientific research in a taxation year, may deduct in computing its income for the year 50% of the amount by which

(a) the aggregate of

(i) all expenditures of a current nature made in Canada in the year, as described in subpagraphs (i) to (v) of paragraph (a) of subsection (1) of section 72, on scientific research, and

(ii) all expenditures of a capital nature made in Canada (by acquiring property other than land) in the year on scientific research,

exceeds

(b) the aggregate of

(i) the base scientific expenditure of the corporation, and (ii) any amount paid to the corporation in the year in respect of scientific research undertaken by the corporation

(A) by Her Majesty in right of Canada or a province,

(B) by a person resident in Canada, or

(C) by a person not resident in Canada if such person is entitled, in respect of the payment, to a deduction in computing his income by virtue of subparagraph (v) of paragraph (a) of subsection (1) of section 72.

(3) For the purposes of subsections (1) and (2), the base scientific expenditure of a corporation is an amount equal to

(a) the aggregate of all expenditures of a current or capital nature (by acquiring property other than land) made in Canada by the corporation in the last taxation year of the corporation that ended before April 11, 1962, on scientific research related to the business of the corporation,

minus

(b) any amount paid to the corporation in the year referred to in paragraph (a) as described in subparagraph (ii) of paragraph (b) of subsection (1),

but where the corporation had no taxation year that ended before April 11, 1962, its base scientific expenditure is nil.

The appellant claims that Section 72 authorizes the deduction of all capital expenditures for scientific research and that there is no requirement in the Act that grants made by the Government of Canada for such research be applied directly in reduction of such deductions or be used indirectly to reduce the deductions by taking the grants into taxable income.

The respondent says that the grants were income of the appellant from its business; that the profit from its business is determined after the grants were reflected in its business accounts; that the appellant did not have expenses within the meaning of Section 12(1)(a) of the Act to the extent that those expenses were reimbursed by the Government of Canada and that the company only made expenditures in respect of scientific research within the meaning Section 72 to the extent that those expenditures exceeded the grants received by the company.

The purpose of the research assistance program of the National Research Council is set forth in the Exhibit Book at page 61 as ‘intended to stimulate interest of Canadian industry in research and development and promote the establishment of new industrial research facilities and the expansion of existing facilities across Canada”.

The cost of a project is shared on the basis of approximately equal contributions by N.R.C. and industry, and the division in costs in general provides for the salaries and wages of scientific and technical staff to be paid by N.R.C. and payment for equipment and overhead by industry, with upper and lower limits (p. 63).

An application for a grant must show, inter alia, the proposal and supporting information to enable N.R.C. to assess company suitability and qualifications, the feasibility of the project, prospects of success and its value in promoting expansion of industrial research in Canada, a brief summary of the costs to be borne by the company, the duration of the program and successive annual costs (pp. 65-68).

After an exchange of letters the company made an application in October 1962 to N.R.C. for financial assistance for a project subsequently called ‘ Scintillation 751’’, involving scientific research (pp. 73-82). It gave estimates of scientific and technical staff costs and requested financial aid equivalent to 80% or better of such costs, and proposed to absorb the half of the cost of capital equipment, assistant service costs and overhead, which costs it estimated would be double the scientific and technical staff costs. The application was approved by N.R.C., subject to General Conditions (pp. 93-95) and the company accepted the assistance granted. The General Conditions include paragraph 1, which repeats the purpose previously referred to herein of N.R.C. assistance, and paragraphs 2, 7 and 16, as follows:

2. Financial assistance will be given primarily to assist industry in establishing and maintaining relatively longterm applied research projects in science and engineering which offer a reasonable potential for achieving a major advance in performance or technique. Such projects will not include those currently under way in the company or which would normally be undertaken by the company, unless industrial research assistance will make possible a substantial increase in such projects.

7. Financial assistance normally will be limited to salaries and wages of scientific and technical personnel directly and continuously employed on the research project and will exclude the cost of supporting services such as drafting rooms, machine shops, photographic and X-ray departments, etc. Consultants’ fees also are excluded, except under special circumstances. Such excluded amounts may be considered as part of the company’s matching share. Salaries may include pension and health insurance contributions and other fringe benefits normally paid by the company.

16. Payment is to be made monthly in arrears on receipt of invoices from the company dated as of the end of the calendar month and submitted to reach the Secretary of CIRA by the tenth day of the following month. It is essential that all invoices be received by the tenth of April following the end of the fiscal year in order to receive payment under Government financial procedures. Otherwise the payments may become the responsibility of the company.

N.R.C. continued to support the program under the same General Conditions in the later taxation years concerned. A renewal application dated December 24, 1964 (p. 131 in Exhibit Book) shows total estimates of expenditures and, apparently, an intention on the part of the company that the company would bear half of the total and N.R.C. would provide the other half.

Turning now to the grants paid by the Department of Defence Production, they were in respect of what was subsequently called a ‘‘Pulse Shape Discrimination Programme’’. In its proposal to the Department referred to in pargraph 22 of the Special Case the appellant requested a grant of funds “to allow the development of phase 1 and phase 2 of this proposal and further approval by the Department in advance for the repayment of the granted funds by way of company invested funds in the research programme outlined as phase 3 of this proposal, and representing a 50:50 contribution by the company toward financing of the project’’. The company supplied proposed cost figures to the Department showing a 50:50 distribution of costs as follows:

The contract between the company and Her Majesty, referred to in paragraph 24 of the Special Case, contained a covenant that the company would carry out the work described therein, and, inter alia, the following paragraphs in respect of price, payment and repayment:

4, PRICE

Her Majesty shall pay the Contractor 50% of the costs reasonably and properly incurred by the Contractor in the performance of the work commencing the 1st day of February, 1961, without profit or fee, such costs to be determined in accordance with the Costing Memorandum and verified by Audit Services Division, Office of the Comptroller of the Treasury, Department of Finance; provided, however, that the costs payable by Her Majesty to the Contractor hereunder shall not exceed the sum of $50,000.00. Notwithstanding the said limitation on the amount of Her Majesty’s contribution, the Contractor shall remain obligated to perform the work hereunder. It is understood by the parties hereto that sales tax shall not be exigible on the design and development work covered by this agreement

6. PAYMENT

As promptly as possible after the first day of each calendar month, the Contractor shall furnish to Audit Services Division, Office of the Comptroller of the Treasury, Department of Finance, a certified statement and progress claim showing the costs reasonably and properly incurred hereunder in the preceding month. The first of such statements shall include the costs incurred from the 1st day of February, 1961, up to and including the month for which the statement is submitted. Such statement and progress claim shall be prepared in such manner and accompanied by copies of such vouchers, invoices, payrolls and other documents or information as the Minister of the Audit Services Division may require. If such statement and progress claim is satisfactory to Her Majesty, Her Majesty shall promptly pay the Contractor 50% of the amount thereof, such payments being subject to the limitation set out in Section 4 hereof.

7. REPAYMENT, REINVESTMENT AND PROFIT LIMITATION

(1) The Contractor shall pay to Her Majesty all profits in excess of amounts which the Minister shall determine to be fair and reasonable derived from the work and from future contracts resulting from the work (other than contracts to which reference is made in subsection (2) of this Section 7) until the total contribution of Her Majesty hereunder shall have been repaid.

(2) In the event Her Majesty shall enter into any contract with the Contractor covering the purchase by Her Majesty for her own account of development or production arising from the work to be performed hereunder, all profit in excess of 10% derived from such contracts shall be refunded to Her Majesty, but such refuds shall not be applied in repayment of the contribution made by Her Majesty hereunder; provided that upon repayment of the said contribution as provided in this Section, the obligations of the Contrator under this subsection

(2) shall, subject to the provisions of the Defence Production Act and any provisions contained in such future production contracts, cease and determine.

(4) In lieu of the payments to be made by the Contractor under this Section the Contractor may, upon terms approved by the Minister expend on future development projects, an amount related to Her Majesty’s contribution hereunder, provided such projects and the amount of expenditure thereon are specifically authorized by the Minister.

(7) Without limiting the repayment provisions of this Section, the Contractor may repay to Her Majesty at any time any outstanding balance of the contribution made by Her Majesty hereunder.

13. TERMINATION

The Minister may, by giving written notice to the Contractor, terminate this agreement as regards Her Majesty’s share of any costs incurred by the Contractor in the performance of the work after receipt of such notice by the Contractor. In the event of such termination by the Minister, the Contractor shall have no further obligation to Her Majesty to perform the work covered by this agreement.

The company submitted claims for progress payments which showed total amounts of listed costs, ‘‘Less 50% share’’, and the company claimed for the other 50%.

Two cases were cited by counsel in their arguments, Okalta Oils Limited v. M.N.R., [1955] C.T.C. 39, and St. John Dry Dock & Shipbuilding Company Limited v. M.N.R., [1944] C.T.C. 106.

In the Okalta case (supra), a Crown corporation financed the company’s costs of drilling an oil well. The well proved unproductive. The company claimed that the expenses of the drilling were deductible from its income. Cameron, J. rejected the claim. He said that he found it impossible to put upon Section 8(6) of the Income War Tax Act a construction that would enable a company that had all its expenses paid for by the Crown to be repaid for such expenses out of taxes that would otherwise accrue to the Crown.

In the St. John Dry Dock case (supra), the company received a subsidy from the Dominion Government as an aid in the construction of a dry dock. The Minister assessed the subsidy as income received by the company. The company took the position that the subsidy was not taxable income but was a capital payment. After reviewing a number of English and American decisions dealing with subsidies, Thorson, P. held in favour of the company, saying, inter alia (page 126) :

In the present case, the purpose of the Act and the agreements and Orders in Council made under its. authority was to secure the construction of a dry. dock of the first class on the Atlantic Coast and the subsidy payments were made as an aid to such construc- : tion in order to accomplish the purpose of the Act. That purpose

was a special one, in the public interest, quite apart from the trade and business operations of the appellant and had nothing whatever to do with its trade or business profits or gains. Since the subsidy was paid and received for such special purpose, in the national interest, it cannot be said to be a trade or business receipt or revenue in the hands of the appellant or an item of trade or business. profit or gain ‘to it. It was paid and received for the purpose which the Act was designed to, achieve and, in my opinion, _. that statutory purpose stamps the subsidy as an amount that should not be regarded as an item of annual net profit or gain or gratuity to the appellant or taken into computation for income tax Purposes.

J do not think that it was ever intended by Parliament that, after payment of the subsidy had been authorized by the Government in aid of the construction of the dry dock by the appellant, and after the dock had been completed by the appellant and the purpose of the Act accomplished, a substantial and increasingly large portion of the aid to construction should come back to the Government in the form of income tax.

The subsidy payments, even if it be assumed that they were received by the appellant, were not trade or business receipts of the appellant or part of its operating revenue, or items of its trade or business profits or gains, nor were they paid or received as interest or a return on share or debenture capital, but rather for the purpose of advancing or re-imbursing a capital expenditure by the appellant and as a capital contribution or grant in respect of such expenditure, and, furthermore, they were paid and received for the accomplishment of a special purpose in the national interest quite apart from the trade or business operations of the appellant and not connected with them. For these several reasons I conclude that the subsidy payments in this case were not subject to income tax under the Income War Tax Act.

Counsel for the appellant in this case said that the two projects were not far apart in what they involved and he submitted that the purpose of the grants was not for the benefit of the company but was rather for the good of Canada and that such purpose is the criterion for taxability; the grants were not to maintain or promote profits nor concerned with the profit structure of the company, and although profits to the company might come eventually profit was not contemplated in the course of the projects; they were not trading ventures for profit; the grants were not trade receipts or expenditures; the undertakings were not the ordinary commercial contracts; and this is a deserving case because there was no payment of grant in the year 1961 for work done in that year and consequently the company’s base scientific expenditure in that year was higher than if a grant had been paid, and the result was as set forth in paragraph 33 of the Special Case to the disadvantage of the company.

Counsel for the respondent argued that the grants were paid to the appellant because of, and in the course of, its business operations and its contract and undertaking, and was income to the company therefrom; whether or not profits were contemplated is irrevelant; the company at all times knew that it would bear only half the costs of the projects, and in the result it did not have the costs that were paid for by the grants; Secion 72 is in the Act to permit a deduction that Section 12(1) (a) otherwise would prohibit ; the 1966-67 amendment corrected a deficiency in Section 72 by allowing repayments of grants to be deducted and the section as amended is consistent with the Crown’s position that the grants are income or reduce the costs that the company may deduct, and that they are not deductible until repaid.

In the present case, I am unable to give the applicable provisions of the Income Tax Act a construction that the appellant should not only not be required to include the grants as income but should also be allowed to deduct from its other income the expenditures that in reality were paid for, not by the appellant, but by N.R.C. and Department of Defence Production.

Therefore, my opinion on both questions in the Special Case is in the affirmative, and the appeal will be dismissed, with costs. MINISTER OF NATIONAL REVENUE, Appellant,

WILLIAM PANKO, Respondent.

Supreme Court of Canada (Abbott, Judson, Ritchie, Pigeon and Laskin, JJ.), June 28, 1971, on appeal from a judgment of the Exchequer Court, reported [19701 C.T.C. 397.

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148—Sections

The taxpayer had. pleaded guilty to offences under Section 132(1) (a), (d) for attempted evasion of tax and had been fined amounts aggregating $25,000 in respect of the 1960 to 1965 taxation years. Later, the Minister re-assessed those years and added penalties under Section 56(2) of the Act. It was common ground that if the penalties had. been contemplated under Section 56(1) they would have been proscribed by Section 132(3), which specifically referred to penalties under Section 56(1) but not those under Section 56(2). On appeal, both the Tax Appeal Board and the Exchequer Court found in favour of the taxpayer, holding that relief from all penalties under Section 56 could reasonably be inferred from the language of Section 132(3).

HELD:

Per Judson, J. (concurred in by Abbott and Ritchie, JJ.) : There was no ambiguity in the relevant legislation. The penalties in issue were assessed under Section 56(2) and were not subject to the condition provided for in Section 132(3), the plain terms of which did not create “an absurdity in the law” or make necessary an inference that the section must be applied not only to an assessment under Section 56(1) but also to one under Section 56(2).

Per Laskin, J., dissenting (concurred in by Pigeon, J.) : The offence was caught by Section 56(1), under which the proscribed conduct was brought by conviction under Section 132(1) (d), and the taxpayer was not liable to a penalty under Section 56(2). There was therefore no right, by reason of Section 132(3), to impose a penalty in addition to the fines.

The Minister’s appeal was allowed.

G. W. Ainshe, Q.C. and J. R. Powers for the Appellant.

J.J. Mahony for the Respondent

Jupson, J. (concurred in by Abbott and Ritchie, JJ.) :— During each of the years 1960 to 1965 inclusive, the respondent, William Panko, suppressed income in the total amount of $165,801.70. For this offence he was prosecuted under Section 132 of the Income Tax Act. Two informations were laid, one information containing a charge for each of the years 1960 to 1965 inclusive for having violated Section 132(1) (a), and the other information contained one charge for having violated Section 132(1) (d) for the period March 23, 1961 to June 30, 1966. Panko pleaded guilty and was fined a total of $20,000 for the violations of Section 132(1) (a) and $5,000 under Section 132(1) (d). Sec-

tion 132(1) (a) deals with: false or deceptive statements in a return; Section 132(1) (d) deals with wilful evasion.

After this, the Minister gave notices of re-assessment, one for each of the years 1960 to 1965, and at the same time assessed penalties totalling $16,134.25. The sole question in this appeal is whether the Minister had authority to assess a penalty pursuant to Section 56(2) of the Income Tax Act at a time subsequent to the laying of the informations. Both the Tax Appeal Board and the Exchequer Court have found against the Minister on this point.

It. is necessary to begin with an examination of the interrelation of Section 56 of the Act and Section 132 as they stood before the, 1960 amendments made by 1960, c. 43. Before. the 1960 amendment there could be no doubt about the law. Section 56 then had no subsections. It read as follows :

56. Every person who has wilfully, in any manner, evaded or attempted to evade payment of the tax payable by him under this Part for a taxation year or any part thereof is liable to a penalty, to be fixed by the Minister, of not less than 25 per cent and not more than 50 per cent of the amount of the tax evaded or sought to be evaded.

A taxpayer who had wilfully evaded payment of tax was liable to two types of penalty :

(1) If found guilty following a prosecution under Section 132(1) (d) to a fine, fixed by the court, of not less than $25 and not exceeding $10,000, plus, in an appropriate case, an amount not exceeding double the amount of the tax evaded.

(2) A penalty assessed. by the Minister, under Section 56, of not less than 25 per cent and not more than 50 per cent of the tax evaded.

There was a limitation on the Minister” S power to assess a penalty.

Subsection (3) of Section 132 provided that, if found guilty and fined under that section, the taxpayer was not liable to pay a penalty under Section 56 for the same evasion unless such penalty had been assessed prior to the laying of the information under Section 132.

The 1960 amendments added two new subsections to Section 56. The original section was renumbered subsection: (1). Subsection (2) provided , for a penalty based upon less stringent grounds. It gave the Minister no discretion as to the amount of the penalty which was fixed at a flat 25 per cent.:The new subsection (3) ‘provided that where a taxpayer. is liable to any penalty under Section 56(2), he is not liable to a penalty under Section 56(1) in respect of the same statement or omission.

In full, the new subsections (2) and (3) read:

56. (2) Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made, or has participated in, assented to or acquiesced in the making of, a statement or omission in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation, as a result of which the tax that would have been payable by him for a taxation year if the tax had been assessed on the basis of the information provided in the return, certificate, statement or answer is less than the tax payable by him for the year, is liable to a penalty of 25% of the amount by which the tax that would so have been payable is less than the tax payable by him for the year.

(3) Where a person is liable to a penalty under subsection (2) - in respect of any statement or omission in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation, he is not liable to any penalty under subsection

(1) in respect of the same statement or omission.

Thé amending Act also expressly provided that the new subsections (2) and (3) of Section 56 apply only in respect of any statement or omission made after the coming into force of the amending. Act, namely August 1, 1960.

The amending Act also replaced subsection (3) of Section 132, but the only change was to substitute the words ‘‘subsection (1) of section 56” for the words ‘‘section 56’’ in the original Act.

‘Section 132(3) then read:

132. (3) Where a person has been convicted under this section of wilfully, in any manner, evading or attempting to evade payment of taxes imposed by Part I, he is not liable to pay a penalty imposed under subsection (1) of section 56 for the same evasion or attempt unless he was assessed for that penalty before the information or complaint giving rise to the conviction was laid or made.

I can find no ambiguity in the law as amended and I think that the Minister’s submissions are right. The new subsection (2) of Section 56 provided for a new and independent penalty to that provided under subsection (1) which continued to apply with respect to statements made prior to August 1, 1960. The other amendments were consequential.

The penalties in issue here were assessed under Section 56(2) and are not subject to the condition provided for in Section 132(3). The error in the Tax Appeal Board and in the Exchequer Court is to be found in the common conclusion that penalties must be assessed before the information or complaint under both Section 56(1) and Section 56(2) . This pays no heed to the plain terms of Section 132(3), above quoted, which limits the need for prior assessment to Section 56(1). For the above reasons, the plain terms of Section 132(3) do not create ‘‘an absurdity in the law’’ or make necessary an inference that the section must be applied not only to an assessment under Section 56(1) but also to one under Section 56(2).

I would allow the appeal with costs both here and in the Exchequer Court, set aside the judgment of the Exchequer Court and the decision of the Tax Appeal Board and restore the assessments.

LASKIN, J. (concurred in by Pigeon, J.) :—The respondent taxpayer failed to report certain income in six successive taxation years, 1960 to 1965 inclusive. In January 1967 two informations were laid against him, one including six charges under Section 132(1) (a) of the Income Tax Act and the other consisting of a single charge under Section 132(1) (d) comprehending the six taxation years. He pleaded quilty to all charges, and fines, as varied on an appeal, totalling $25,000 were levied against him. Thereafter, he was re-assessed for tax; and the Minister included in the re-assessment notices dated May 2, 1967 penalties for each of the six taxation years, pursuant to Section 56(2) of the Income Tax Act, and amounting in all to $16,134.25.

The taxpayer objected to the inclusion of the penalties, relying on Section 132(3) of the Income Tax Act, and his objection was sustained by the Tax Appeal Board and, on appeal, by Kerr, J. of the Exchequer Court. The question in this court is simply whether the Minister, on the facts herein, was authorized to impose the penalties.

Section 132(1) (a) and (d) of the Income Tax Act, so far as material, reads as follows:

132. (1) Every person who has

(a) made, or participated in, assented to or acquiesced in the making of, false or deceptive statements in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation,

(d) wilfully, in any manner, evaded or attempted to evade, compliance with this Act or payment of taxes imposed by this Act, . . .

is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary conviction [to a fine or to the fine and imprisonment].

Having been convicted under Section 132(1) (d), the taxpayer was, ex facie, entitled, on the facts herein, to the benefit of Section 132(3) which is in these words:

132. (3) Where a person has been convicted under this section of wilfully, in any manner, evading or attempting to evade payment of taxes imposed by Part I, he is not liable to pay a penalty imposed under subsection (1) of section 56 for the same evasion or attempt unless he was assessed for that penalty before the information or complaint giving rise to the conviction was laid or made.

The contention of the Minister that the penalties were imposed under Section 56(2) and not under Section 56(1) would be, of course, a complete answer if there was power to exact them in this case. In order to appreciate the competing contentions of the parties, I reproduce the text of Section 56 and shall relate its history. The section now reads :

56. (1) Every person who has wilfully, in any manner, evaded or attempted to evade payment of the tax payable by him under this Part for a taxation year or any part thereof is liable to a penalty, to be fixed by the Minister, of not less than 25% and not more than 50% of the amount of the tax evaded or sought to be evaded. 1950, c. 40, s. 19.

(2) Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made, or has participated in, assented to or acquiesced in the making of, a statement or omission in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation, as a result of which the tax that would have been payable by him for a taxation year if the tax had been assessed on the basis of the information provided in the return, certificate, statement or answer is less than the tax payable by him for the year, is liable to a penalty of 25% of the amount by which the tax that would so have been payable is less than the tax payable by him for the year.

(3) Where a person is liable to a penalty under subsection (2) in respect of any statement or omission in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation, he is not liable to any penalty under subsection

(1) in respect of the same statement or omission.

Prior to 1960, Section 56 consisted of the single provision now shown as Section 56(1), and Section 132(3) similarly referred then to Section 56 simpliciter. In 1960, by Section 16 of c. 43, what are now subsections (2) and (3) of Section 56 were enacted and expressly given a prospective operation; and at the same time, by Section 31 of c. 43, Section 132(3) was amended to limit its application to Section 56(1), thus maintaining it in its previous state when it was simply Section 56.

There is no necessary connection between Section 56 and Section 132, since the Minister may exact penalties under Section 56 (extrajudicially so to speak, although subject to taxpayer challenge) without summary conviction proceedings being taken under Section’132. A connection arises however between Section 56 and Section 132(3) when there has been a conviction under Section 132(1) (d). If both are to be pursued, the penalty assess a penalty for the same conduct as expressed in Section 56(1). Wilful evasion or attempted wilful evasion of tax is redressible by a penalty under Section 56(1) and by prosecution under Section 132(1) (d). If both are to be pursued, the penalty must be assessed before the information is laid under Section 132(1) (d); otherwise the penalty cannot be exacted. although there be a conviction for which a fine or a fine and imprisonment are imposed. Section 56(3) also excludes a penalty under Section 56(1) in the situation therein set out. Since the taxpayer was convicted under Section 132(1) (d), the question arises whether the Minister can ignore Section 132(3) and impose a penalty under Section 56(2), in respect of the very conduct which offended Section 132(1) (d), by relying on Section 56(3) as well as on Section 56(2).

Proper perspective on this issue, in the light of the facts which gave rise to it, is realized by reading Section 56 and Section 132(3) together. I should say at this point that counsel for the Minister does not rely in any way on the fact that convictions were entered under Section 132(1) (a) in addition to the conviction under Section 132(1) (d). He does however contend, on the one hand, for a limited reading of Section 56(1) (despite the words ‘‘in any manner’’) so as to exclude therefrom the statements or omissions described in Section 56(2), and he seeks, on the other hand, to bring the conduct in this case, which is caught by Section 56(1) (being in the terms set out in Section 132(1) (d) ), within Section 56(2) by reason of the word “knowingly”. Thus, he would justify the imposition of the penalty under Section 56(2) by a segmented interpretation and application of Section 56(1) ; and on this basis he would invoke Section 56(3) to support the exaction of that penalty to the exclusion of a penalty under Section 56(1). In short, the Minister would exclude statements or omissions from Section 56(1) (despite the words therein ‘‘in any manner’’) but at the same time would not find “wilfully” and ‘‘knowingly’’ mutually exclusive. In my opinion, this is not only tortured construction, but it suggests also expedient shifting of position by the Minister on facts which do not warrant it and, indeed, it suggests afterthought. No problem would have arisen if the Minister (as it was open to him to do and as he had ample time to do) had assessed penalties before proceeding to prosecute under Section 132(1) (d), or if he had been content to limit prosecution to offences under Section 132(1)(a).

Counsel for the Minister conceded a possible overlap in the conduct that is referred to in Section 56(1) and in Section 56 (2) but he contended that nonetheless the liability to penalties was mutually exclusive. This, indeed, was the point taken by counsel for the taxpayer who contended that mutual exclusiveness meant a two-way street; if liability to a penalty under Section 56(2) excluded liability under Section 56(1), so would liability to a penalty under Section 56(1) exclude liability under Section 56(2); and he submitted further that the conduct comprehended by Section 56(1) was different from that under Section 56(2).

What counsel for the Minister argues, however, in amplification of his contentions already noted, is that when the Minister is faced with a factual situation which would justify a penalty either under Section 56(1) or under Section 56(2) he is obliged by reason of Section 56(3) to act under Section 56(2) in imposing a penalty, with the result that none can be imposed under Section 56(1). It is in this sense that his submission must be taken that the penalties under Section 56 are mutually exclusive; and it depends, of course, on accepting as valid the contention that the same conduct may be caught by Section 56(1) and by Section 56(2), not in the segmented sense already commented upon, but in the fuller sense that the Minister may choose to treat the conduct, although cognizable under Section 56(1), as coming under Section 56(2) which imposes a lesser maximum penalty.

The positions of the parties may be tested in a number of ways. First, if Section 56(1) and Section 56(2) are themselves mutually exclusive (in that to do something wilfully is different from doing it knowingly or through gross negligence), then Section 56(3) must be regarded as simply emphasizing that there is no overlapping. There is some support for this in the legislative scheme, since subsections (2) and (38) of Section 56 were enacted at the same time in supplement of Section 56(1). However, it may be thought strange that Section 56(3) is needed to reinforce an exclusiveness that already is evident from the formulations of Section 56(1) and Section 56(2). Hence, although I see no reason to doubt that such a reinforcement may have been provided ex abundanti cautela, I shall assume that Section 56(3), far from fortifying mutual exclusiveness, evidences an overlapping. If so, it poses the question whether the Minister is given a choice of treating the delinquency of the taxpayer under the less onerous penalty provision or whether he must always so treat it for penalty purposes.

Second, therefore, and assuming that the Minister has an election whether to treat the delinquency as falling under Section 06(1) or under Section 56(2), he has on the facts herein treated it as falling under Section 56(1) by prosecuting to a conviction under Section 132(1) (d). On this view, there can be no assessment of a penalty under Section 56(2). It would be unthinkable for the Minister to urge that although he has prosecuted under Section 132(1) (d) without previously assessing a penalty under Section 56(1), he may recede from his election and also treat the conduct as falling within Section 56(2) for penalty purposes.

Third, assuming that, for penalty purposes, there being an overlapping application of the respective provisions to the facts herein, the Minister must act under Section 56(2), then several situations may be envisaged :

(1) The Minister lays no charges but assesses a penalty under Section 56(2). He is then precluded from assessing one under Section 56(1) but he is not precluded from prosecuting under Section 132(1) (a); and assuming he also prosecutes under Section 132(1) (d), no penalty could then be assessed under Section 56(1), whether or not there was a conviction under Section 132(1) (d); this would result from the effect of Section 56(3) or Section 132(3).

(2) If the Minister lays charges under Section 132(1) (a) and there is a conviction he may still assess a penalty under Section 56(2) and if there is liability to such a penalty (it is not precluded by laying the charges under Section 132(1) (a)), then none can be assessed under Section 56(1).

(3) The Minister lays charges under Section 132(1) (d) alone or under both Section 132(1) (d) and Section 132(1) (a) without previously assessing a penalty. That is the present case; and the argument that a penalty may still be imposed under Section 56(2) must rest on the premise of overlapping and that the Minister is obliged to act in such ease under Section 56(2). The fact that no penalty may be exacted under Section 56(1) is the result then not of Section 132(3) but of Section 56(3). The difficulty with this construction is that a taxpayer whose delinquency falls within both Section 56(1) and Section 56(2) would never be liable to a penalty under Section 56 (1) (and note that Section 56(3) speaks of a person being liable to a penalty), although it is claar under Section 132(3) that a Section 56(1) penalty is envisaged as open to assessment.

Of the three possible constructions of the relevant provisions, namely, mutual exclusiveness, election by the Minister, and mandatory duty on the Minister, the first two support the conclusion that on the facts herein the taxpayer is not liable to the penalty under Section 56(2); and the third supports the assessment of the penalty on a strained reading of the statutory Provisions.

It is certainly rational construction to view separate subsections, which define conditions upon which different penalties are assessable, as dealing with different situations unless it can clearly be seen that the same conduct may be within both. Penalty provisions are normally considered as appendant and not governing. Even if there be an overlap in Section 56(1) and Section 56(2) so that the same misconduct is embraced by both, the penalty appropriate thereto may be held to have been determined according to the provision under which enforcement proceedings are first taken. Indeed, to say that a person is liable to a penalty is merely to expose him to the risk thereof; only when the necessary action or step is taken to exact it does it become effective. Assuming, therefore, that there may be cases where the Minister has a choice in assessing under Section 56(1) or under Section 56(2), he has, in my opinion, lost that choice here (and Section 56(3) is in consequence spent) when a charge has been successfully prosecuted under Section 132(1) (d) without any penalty having been assessed before the charge was laid. The proscribed conduct having thus been brought under Section 56(1), there was no right, by reason of Section 132(3), to impose a penalty in addition to the fines.

Finally, a broader consideration moves me to the conclusion to which I would come. There is no presumption, certainly not in this case, in favour of Ministerial statutory power. If there is difficulty, as on the view most favourable to the Minister there is in this case, in reconciling connecting provisions of an enactment, that construction that permits their most compatible application in any fact situation is to be preferred.

In concluding these reasons, I feel that I should advert to an issue which emerged during the course of the argument by counsel for the Minister, namely, whether the effect of the 1960 amendments was to deprive Section 56(1) of any prospective application and whether Section 132(3) was likewise limited to past occurrences. In short, the contention appeared to be that an implied repeal was effected of these provisions, because the 1960 amendments involved a departure from the previous policy of forbidding an assessed penalty in addition to a judicially im- posed penalty after a charge and conviction under Section 132(1)(d).

Any such contention is without merit. There is no language in the legislation to support it and Section 10 of the Interpretation Act, R.S.C. 1952, c. 158, as amended (now Section 10 of the Interpretation Act, 1967-68 (Can.), c. 7) is against it. Not only is there a strong presumption against the implied repeal of legislation, but the suggested change of policy is inconsistent with the retention of the same policy under Section 131(3) of the Income Tax Act.

For all the foregoing reasons, which differ somewhat from those below, I would dismiss the appeal with costs.