Minister of National Revenue v. Midwest Hotel Company Limited, [1970] CTC 482, 70 DTC 6316

WALSH, J.:—This is an appeal from a decision of the Tax Appeal Board dated April 8, 1970, whereby it allowed an appeal from an assessment made under the Income Tax Act for the respondent’s 1963 taxation year. There is no dispute as to the facts on which the assessment was made and the action was submitted for judgment on the basis of an Agreed Statement of Facts and Issues which was filed and the written arguments made before the Tax Appeal Board, no witnesses being called. Oral argument was made by counsel for both parties. To summarize the Agreed Statement of Facts and Issues, it appears that respondent, a duly incorporated company carrying on business, owned at the commencement of its 1963 taxation year certain property described in Classes 3 and 4 of Schedule B to the Regulations made pursuant to the Income Tax Act, which property was acquired for the purpose of gaining or producing income from a hotel business and when it was disposed of during respondent’s 1963 taxation year, the proceeds of distribution exceeded the undepreciated capital cost thereof immediately prior to such disposition. During the same 1963 taxation year, however, following the said disposition, respondent acquired further property described in the said Classes 3 and 8 for the purpose of gaining or producing income from a business different from the hotel business. It computed its income for its 1963 taxation year on the basis that, for the purpose of Section 11(1) (a) and Section 20 of the Income Tax Act and Part XI of the Regulations made thereunder, the property acquired fell into the same Classes 3 and 8 of Schedule B as the property disposed of and that Section 20(2) of the Act applied to the determination of its income for 1963 and Section 1101(1) of the Income Tax Regulations had no application.

Appellant, on the other hand, in assessing respondent’s 1963 taxation year, proceeded on the basis that, since the property acquired was for the purpose of gaining or producing income from a business different from that which was sold during the year, by virtue of Section 1101(1) of the Regulations the property fell into separate classes from Class 3 and Class 8 of Schedule B to the Regulations and that, therefore, Section 20 (2) of the Act does not apply so as to reduce the amount that is to be included in computing respondent’s income for 1963 pursuant to Section 20(1) and, as a result, there was included in computing respondent’ s income the sum of $306,237.80 by virtue of Section 20(1) in addition to the amount declared by respondent in filing its income. return.

The decision of the Tax Appeal Board held that Section 1101(1) of the Income Tax Regulations was ultra vires the Governor in Council and, hence, maintained respondent’s appeal from the assessment. It is further agreed that if the decision of this Court should be that the said section is intra vires, respondent’s assessment should nevertheless be referred back to the Minister of National Revenue for reconsideration and, if necessary, re-assessment for the purpose only of allowing such further capital cost allowance under Section 11(1) (a) of the Act as the respondent may claim and the Minister of National Revenue may permit in accordance with the Act on the basis that Section 1101(1) of the Regulations is intra vires.

It will be convenient to set out here the sections of the Act and Regulations which affect the issue.

INCOME TAX ACT

11. (1) Notwithstanding paragraphs (a), (b), and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year:

(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation ;

12. (1) In computing income, no deduction shall be made in respect of

(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part, •

20. (1) Where depreciable property of a taxpayer of a prescribed class has, in a taxation year, been disposed of and the proceeds of disposition exceed the undepreciated capital cost to him of depreciable property of that class immediately before the disposition, the lesser of

(a) the amount of the excess, or

(b) the amount that the excess would be if the property had been disposed of for the capital cost thereof to the tax- payer,

shall be included in computing his income for the year.

(2) Where one or more amounts are by subsection (1) required to be included in computing a taxpayer’s income for a taxation year in respect of the disposition of depreciable property of a prescribed class and the taxpayer has, during the year but following the, dispositions, acquired further depreciable property of that class, notwithstanding subsection (1) and paragraph (e) of subsection (5), the following rules are applicable:

(a) if the. aggregate of the amounts that would, according to the terms of subsection (1), be included thereunder in computing his income is equal to or exceeds the amount that would, according to the terms of paragraph (e) of subsection (5), be the undepreciated capital cost to him of depreciable property of that class at the end of the year before any deduction is made under paragraph (a) of subsection (1) of section 11 for that year,

(i) the amount to be included in computing his income for the year under subsection (1) in respect of dispositions of depreciable property of that class is that aggregate minus the amount: that would be that undepreciated capital cost, and

(ii) the undepreciated capital cost to him of depreciable property of that class at the end of. the year is nothing;

and

(b) if the aggregate of the amounts that would, according to the terms of subsection (1), be included thereunder in computing his income is less than the amount that would, according to the terms of paragraph (e) of subsection (5), be the undepreciated capital cost to him of depreciable property of that class at the end of the year before any deduction is made under paragraph (a) of subsection (1) of section 11 for that year,

(i) no amounts shall be included in computing his income for the. year in respect of depreciable property of that class under subsection (1), and

(ii) the undepreciated capital cost to him of depreciable property of that class at the end of the year before any deduction is made under paragraph (a) of subsection (1) of section 11 for the year is the amount that it would be according to the terms of paragraph (e) of subsection (5) minus that aggregate.

117. (1) The Governor in Council may make regulations

(a) prescribing anything that, by this Act, is to be prescribed or is to be determined or regulated by regulation,

(j) generally to carry out the purposes and the provisions of this Act.

139. (1) In this Act,

(af) "prescribed", in the case of a form or the information to be given on a form, means prescribed by order of the Minister, and, in any other case, means prescribed by regulation;

(ai) "regulation" means a regulation made by the Governor in Council under this Act;

REGULATIONS

1101. (1) Where more than one property of a taxpayer is described in the same class in Schedule B and where

(a) one of the properties was acquired for the purpose of gaining or producing income from a business, and

(b) one of the properties was acquired for the purpose of gaining or producing income from another business or from the property,

a separate class is hereby prescribed for the properties that

(i) were acquired for the purpose of gaining or producing income from each business, and

(ii) would otherwise be included in the class.

(6) A reference in this Part to classes 1 to 17 shall be deemed to include a reference to the corresponding separate classes prescribed by this section.* [1]

1105. The classes of property provided in this Part and in Schedule B are hereby prescribed for the purpose of paragraph

(a) of subsection (1) of section 11 of the Act and section 20 of the Act.

The Tax Appeal Board first considered the question in the ease of Charos v. M.N.R., 29 Tax A.B.C. 190, when a majority of the full Board as it was then constituted, although it dismissed the appeal, gave very full and complete consideration to the possibility that Section 1101(1) of the Regulations might be ultra vires although this argument had not been raised before them, and reached the conclusion that this was an issue " which might well be dealt with if either of the parties considers it advisable to proceed to the Exchequer Court by way of appeal”.! [2] This decision refers to the judgment of Dumoulin, J. in M.N.R. v. Trudeau, [1962] C.T.C. 183, where, however, the Reasons for Judgment do not indicate that the validity of Section 1101(1) of the Regulations was called into question. The question came before the Tax Appeal Board again in the case of Touzeau v. M.N.R., 30 Tax A.B.C. 301, where the appeal by the taxpayer was allowed. Referring to its observations in the Charos case, the Board reached the conclusion, again in a decision written by W. 8. Fisher, Q.C., that Section 1101(1) of the Regulations is ultra vires inasmuch as it imposes taxation in certain circum- stances where the specific provisions of the Income Tax Act grant relief from taxation. In rendering his decision, Mr. Fisher stated, at pages 306 and 307:

Subsection (2) of Section 20 of the Act (quoted above) provides for the determination of the recapture of any allowance in respect of capital cost previously granted where a disposition has been made during the year of some or all of the property of a prescribed class and additions of the same class have then been acquired subsequent to the sale but before the end of the taxation year. Where the profit on the disposition of the class is equal to or greater than the capital cost of subsequent additions made prior to the end of the year, the amount of the profit to be added to taxable income for the year is reduced by the cost of the subsequent additions, and only the net amount is then added to taxable income. This procedure would leave no balance of undepreciated capital cost in the class to be written off in subsequent years. However, where the profit on the disposition of the class is less than the capital cost of subsequent additions made to the class before the end of the taxation year, the profit on the said disposition is deducted from the cost of the additions, and only the balance of the cost of the subsequent additions remains to be written off against profits in future years.

In my opinion, it is evident from the provisions of subsection (2) of Section 20 that, when all of the assets of a prescribed class are sold in one year and new assets of the same class are subsequently obtained in that year, the new assets will be used in a different business from that previously carried on by the taxpayer. Nevertheless, the said subsection provides for relief from taxation, as indicated in the examples given above. Notwithstanding this specific relief afforded in the legislation, Section 1101 of the Income Tax Regulations proceeds to overrule the specific provisions enacted by Parliament. It therefore follows that taxation is thus being imposed by the respondent under the provisions of the said Section 1101(1) of the Regulations, which section is contrary to the provisions of the law as contained in subsection (2) of Section 20 of the Income Tax Act.

These passages were referred to in the decision of R. S. W. Fordham, @.C. in the present case. There was no appeal from the Touzeau judgment, possibly because the amounts involved were small.

The Tax Appeal Board again considered the question in the case of Pevato v. M.N.R., 35 Tax A.B.C. 159, again allowing the taxpayer’s appeal, following its earlier decision in the Charos and Touzeau cases. This judgment did go to appeal in the Exchequer Court where the Minister’s appeal was dismissed by judgment of Gibson, J., [1965] C.T.C. 300, but he found it unnecessary to deal with the question of law submitted as to whether or not Section 1101(1) of the Regulations was ultra vires since he reached the conclusion that the two properties in question were being used in the same business. An appeal against this judgment was dismissed by the Supreme Court in an unreported judgment.

As might be expected, the Tax Appeal Board has consistently followed its own jurisprudence in the absence of any decision from a higher tribunal reversing it, and has held Section 1101(1) of the Regulations to be ultra vires in the cases of Charles Martin Enterprises v. M:N.R. (not reported); H: Jones Building Supplies Limited v. M.N.R. (not reported), Flowerday v. M.N.R., 30 Tax A.B.C. 163, H. J. O Connell Limited v. M.N.R., 42 Tax A.B.C, 174, Albert Pantel v. M.N.R., 32 Tax A.B.C. 295, Jack Pantel v. M. N.R., 32 Tax A.B.C. 230, and Cole Associates Limited v. M.N.R., [1969] Tax A.B.C. 948.

In the Tax Appeal Board judgment in the present case, Mr. Fordham comments on the fact that, since the same point has arisen on sO many occasions since the Charos judgment, it is astonishing that it has not yet come to be considered by a higher tribunal but that the point has come squarely before the Board in the present appeal and counsel wish to see the matter carried through to a final determination. The admission in the Agreed Statement of Facts that the property acquired in the year was so acquired for the purpose of gaining or producing an income from a different business from that in which the property which was disposed of during the year was used makes it evident, as the parties agree, that the only issue to be considered by the Court is whether or not Section 1101(1) of the Regulations is ultra vires as conflicting with Section 20(2) of the Act.

It is indisputable, as a general priciple of law, that the Executive government cannot by Order in Council amend the law or enact regulations which may go beyond the enabling authority contained in the statute itself. Such enabling authority may, for example in times of national emergency, be very broad as was held in the case of George Edwin Gray (1918), 57 8.C.R. 156, where Sir Charles Fitzpatrick, C.J. stated at page 156 :

The practice of authorizing administrative bodies to make regulations to carry out the object of an Act, instead of setting out all the details in the Act itself, is well known and its legality is unquestioned. But it is said that the power to make such regulations could not constitutionally be granted to such an extent as to enable the express provisions of a statute to be amended or repealed; that under the constitution Parliament alone is to make laws, the Governor-in-Council to execute them, and the court to interpret them; that it follows that no one of these fundamental branches of government can constitutionally either delegate or accept the functions of any other branch.

In view of Rex v. Halliday, [1917] A.C. 260, I do not think this broad proposition can be. maintained. Parliament cannot, indeed, abdicate its functions, but within reasonable limits at any rate it can delegate its powers to the executive government. Such powers must necessarily be subject to determination at any time by Parliament, and needless to say the acts of the executive, under its delegated authority, must fall within the ambit of the legislative pronouncement by which its authority is measured.

See also the case of Booth v. The King (1915),.51 S.C. R. 20, where Anglin, J., with whom Davies, J. concurred, adopted. the language of Maclennan, J.A. in Smylie v. The Queen (1900), 27 Ont. App. R. 172 at 174, when he stated "..if the regulation is not in accordance with the statute, . . . it must give way to the statute, and can confer no right beyond what the statute authorized. ..’’. A similar finding was made in Belanger. v. The King (1917), 54 S.C.R. 265, dealing with a regulation made under the Government Railways Act. which permitted the removal at certain seasons of the year of piling near the rails at highway crossings with the result that the tracks were about six inches above the roadbed at the time of the accident which gave rise to the litigation, whereas the Act itself provided that the rail should never rise above or sink below the level of the highway by. more than one inch. Despite the fact that the Act provided that the regulations made were taken to be read as part of the Act, it was held:that the regulation in question was inconsistent with the Act and must give way. In rendering judgment, Anglin, J. stated at page 280 that: I i . ii

. no regulation, although passed by the Governor in Council under section 49, can be allowed to override the explicit requirement of section 16 of the statute. If no construction can be placed upon regulation No. 48 which will bring it into harmony ‘with that section, it cannot be regarded as having been made within the authority conferred by section 49, or, if so made, it must be treated as subordinate to the precise and definite prohibition of section 16.

These latter two judgments were discussed and referred to with approval in the judgment of Thorson, P. in the. case of G.H.C. Investments Limited v. M.N.R., [1961] C.T.C. 187. This judgment bears considerable resemblance to the present case, dealing with Sections 11(1) (a) and 20(1) of the Income Tax Act but with Regulation 1103 rather than with Regulation 1101(1) and it is the converse of the present case in that the taxpayer was attempting to avail himself to the provisions of Regulation 1103 so as to minimize taxation whereas in the present case it is the Minister who is availing himself of the provisions of Regulation 1101(1) with the effect of increasing the taxpayer’s assessment for the year in question. In that case the company in June 1958 sold property in Classes 8, 10 and 12, the proceeds of this disposition being about $64,000 more than the undepreciated capital cost of the property disposed of. The company’s fiscal year was December 31 and on June 29, 1959, one day before it was required to file its 1958 return, it elected under Section 1103 of the Regulations to include in Class 1 all of its properties of Classes 2 to 12, including the property disposed of in June 1958, with the result that its recaptured capital cost allowance was reduced to about $12,000. The regulation permitted the election to be made before the last day on which the taxpayer was obliged to file a return and referred to its being "‘effective in respect of the taxation year’’ and hence the taxpayer contended that, since the election was made in due time, it had retroactive effect to the beginning of the 1958 taxation year and the properties when sold in June of that year should be considered as Class 1 assets. The then President made a very complete analysis of the effect of this regulation. He states, at page 194:

. it is clear, in my opinion, that a regulation made by the Governor in Council under an empowering section of the Act cannot have the effect of allowing a taxpayer in computing his income for a taxation year to include an amount that it less than that which the Act clearly requires him to include and thereby enabling him to reduce the amount of income tax that the Act clearly imposes, and it is not permissible to construe a regulation made under an empowering section of the Act in such a way as to produce such a result.

He concludes, at page 197:

Similarly, Section 1103 of the Regulations must not be so construed as to give the appellant’s election under it the effect for which counsel contended for such a construction would bring it into conflict with the clear requirement of Section 20(1) of the Act. The regulation cannot be allowed to override the Act. If the two are in conflict or inconsistent with one another the regulation must give away. That being so, one of two consequences follow. If Section 1103 of the Regulations is to be read as having been made within the authority of, and consistent with, the Act its construction should be limited so that the election made by the appellant under it on June 29, 1959, to include its depreciable property otherwise in classes 2 to 12 in class 1 should be confined to the depreciable properties in such classes that it had at the date of the election and should not be applicable to the depreciable properties in classes 8, 10 and 12 which it disposed of on June 27, 1968, for otherwise, as already stated, if the election were given the effect that was contended for it the regulation which gave it such an effect would be in conflict with Section 20(1) of the Act. Alternatively, if it is not reasonably possible, in view of the language used, to escape from the construction of Section 1103 of the Regulations which counsel for the appellant placed upon it and the effect of the election made under it then Section 1103 of the Regulations is so inconsistent with Section 20(1) of the Act that it cannot be regarded as having been made within the authority of the Act and effect should not be given to it.

This Judgment interpreted the regulation in such a way as to avoid conflict with the statute, while holding that it would be ultra vires if this could not be done.

We must now consider whether Section 1101(1) of the Regulations is, in fact, inconsistent with Section 20(2) of the Act and hence ultra vires, which is the issue in the present case.

Section 11(1) (a) of the Act allows the deduction of such amount in respect of the capital cost to the taxpayer for the property "‘as is allowed by regulation’’. No reference is made here or elsewhere in the Act to the describing of classes of property by regulation but Section 20 clearly contemplates the existence of prescribed classes.

Section 20(5) (e) defines " ‘ undepreciated capital cost’’ to a taxpayer of depreciable property of a prescribed class for the purposes of Section 20 " ‘ and regulations made under paragraph (a) of subsection (1) of section 11”.

The apparent purpose, therefore, of the classes of property ^prescribed” by the regulations is as part of the scheme for determining what capital cost allowance deductions may be taken.

It might have been more appropriate if there had been a complete and tidy description of the classes in Schedule B to the Regulations. The draftsman, however, chose to put certain parts of the description of classes in the Regulations. Section 1102(1)* [3] of the Regulations is a very important part of any such description. Even more important is Section 1102(2) of the Regulations. It is of the essence of the scheme that land is not property of a class in respect of which à capital cost deduction may be taken.

Section 1101(1) of the Regulations, like Section 1102(1) and (2), is merely a part of the description of the classes of property for the purpose of the Section 11(1).(a) allowances.

Section 20(2), which is the section which respondent applied in preparing his tax return, refers to the disposition of depreciable property of ‘‘a prescribed class’’ and the acquisition during the year of further depreciable property ‘of that class”. Since Section 117(1) (a) of the Act permits the Governor in Council to make regulations) "‘prescribing anything that by this Act is to be prescribed or is to be determined or regulated by regulation’’ and ""prescribed” is defined in Section 139(1) (af) in this context as meaning "prescribed by regulation’’ which itself is defined in Section 139(1) (ai) as "a regulation made by the Governor in Council under this Act’’; appellant therefore argues that the Order in Council adopting Section 1101(1) of the Regulations was the proper procedure for establishing a "prescribed class’’, of property within the meaning of Section 20(2) of the Act, and that it merely establishes a separate class when the property was acquired for the purposes of gaining or producing income from a different business from that for which the other property was acquired. It is also of interest to note that Section 1105 of the Regulations indicates that the classes of property provided in that Part (i. e. Part XI in which Section 1101(1) is included) and in. Schedule B are prescribed for the purpose, of Sections 11(1) (a) and 20. of the Act. Jackett, P. stated in Gateway Lodge Limited v. M N.R. [1967], 2 Ex, C.R. 326 at 332; [1967] C.T.C. 199 at 204:

The overall scheme of capital cost allowances is to be ‘found on the one hand in the regulations made under Section 11(1) (a) of the Act, which provide for the deductions that may be made, and, on the other hand, in Section 20(1) of the Act, which provides for the "recapture" of allowances previously made when

minus the initial transportation charges and retail sales tax in respect thereof, exceeded $5,000, unless the automobile was acquired by a person before June 14, 1963, and has, by one or more transactions between persons not dealing at arm’s length, become vested in the taxpayer, or

(i) that was deemed by section 18 of the Act as enacted by subsection (1) of section 8 of Chapter 32 of the Statutes of Canada, 1958 to have been acquired by the taxpayer and that did not vest in the taxpayer before the 1963 taxation year.

(2) The classes of property described in Schedule B shall be deemed not to include the land ‘upon which a property described therein was constructed or is situated.

it turns out that the actual’ overall capital cost of property to the taxpayer was less than the total of the allowances that were made under Section 11(1) (a) in the years during which the property was held for income-earning purposes.

Appellant’s counsel argued that the right to prescribe classes of property is not. limited to physical classes referred to as

property of the same kind, such as, for example, several brick buildings owned by. the same taxpayer” as it was described in the Charos case judgment of the Tax Appeal Board (supra), but that classes prescribed in the Regulations have. also been based on the date of acquisition (Classes 3(g), 4(a), 5, 6(h) and (i)), the nature of taxpayer’s business (Class 19), the type of business in which the property is to be used (Classes 10(g), (k) and (1)), and even on the cost of the property (Classes 12(c), (e), and (h)). Furthermore, Part XVII of the Regulations provides for a different method of determining capital cost allowance for. persons engaged in farming and fishing, Classes 20 to 24 also are specific examples of classification of property according to its. use.. As appellant’s counsel points out in his written argument, Section 1101(1) of the Regulations is only one of a rather complex code dealing generally with the tax consequences of acquiring, owning or disposing of depreciable property.

It is evident, however, that if, on the interpretation of the Act, the only classification of property that could: be made by regulations was a classification based upon its physical characteristics, then the fact that the Regulations have adopted a great variety of other classifications to deal with particular situations could not in itself make Section 1101(1) of the Regulations intra vires any more than the many other similar sections of the Regulations based on such. classifications, but it. does at least establish that Section 1101 ( 1 ) is not in itself a very exceptional regulation, in making a distinction based on the use to which the property is put.

Moreover, this case differs from that of G.H.C. Investments Limited n. M.N.R. (supra) in that that ease did not permit a regulation to be so interpreted as to enable a taxpayer to apply it with retroactive effect to avoid payment of part of the recaptured capital cost allowance on which he would otherwise have been taxed, whereas in the present case Section 1101(1) of the Regulations is not being applied by the Minister with retroactive effect so as to force the taxpayer to pay recaptured capital cost allowance which he would otherwise avoid by virtue of Section 20(2) of the Act, for the regulation was in effect at the relevant times when the taxpayer disposed of one property and subsequently acquired the other property during the same taxation year and he must be deemed to have been aware of the consequences.

Furthermore, as appellant’s counsel points out, while in the cases in which the validity of Section 1101(1) of the Regulations has been attacked its application has worked out in a manner unfavourable to the taxpayer in the particular taxation year, it does not follow that the purpose of prescribing separate classes based on use is to defeat Section 20(2). In some cases its application could even work out to the advantage of the taxpayer as in the case where a taxpayer has disposed of all of the property of a prescribed class and wishes to apply Section 1100(2) of the Regulations relating to terminal loss which provides:

(2) Where, in a taxation year, otherwise than on death, all property of a prescribed class that had not previously been disposed of or transferred to another class has been disposed of or transferred to another class and the taxpayer has no property of that class at the end of the taxation year, the taxpayer is hereby allowed a deduction for the year equal to the amount remaining, if any, after deducting the amounts, determined under sections 1107 and 1110 in respect of the class, from the undepreciated capital cost to him of property of that class at the expiration of the taxation year.

He submitted three examples to show how this could work out to the advantage of a taxpayer, which we need not go into in detail here since, in any event, the validity of a regulation cannot depend on the resulting consequences of its application. As the judgments of the Tax Appeal Board, however, holding Section 1101(1) of the Regulations to be ultra vires seem to be based to some extent on the fact that this regulation deprives the taxpayer of certain rights given him by Section 20(2) of the Act, it is of interest to note that the application of this regulation need not necessarily work out to the disadvantage ‘of the taxpayer.

Appellant’s counsel further argued that the classification of depreciable property based on the separation of investment property from business property or the separation of property used in one business from property used in another business is not illogical nor inconsistent with other provisions of the Act, such as Section 139 (la) which in paragraph (a) refers to a taxpayer’s income from a business, employment, property or other source of income, and makes the assumption that during the tax year he had no income except from that source or sources, and in paragraph (b) refers to the business carried on by a taxpayer or the duties performed by him being carried on partly in one place and partly in another and makes the assumption that during the taxation year he had no income except from the part of the business that was carried on or the duties performed in the particular place, and Section 27(1) (e) (iii) which refers to no amount being deductible in respect of losses from the income of any year except to the extent of the lesser of:

(A) the taxpayer’s income for the taxation year from the business in which the loss was sustained and his income for the taxation year from any other business, or . . .

Both these sections seem to make some distinction where a taxpayer carries on more than one different business or a business in two different places, and appellant’s counsel argues that it can be inferred from this that the Act itself recognizes the principle that property can properly be classified on the basis of the business in which it is being used, or perhaps even the location of the property, rather than merely according to the nature of the property itself. Respondent’s counsel countered this by arguing that Section 27(5) of the Act permits a loss carry forward unless there has not only been a change in control of the corporation but also a change in the nature of its business, and therefore that the nature of the business in which a property is being used is not under the Act deemed in itself to be a sufficient criterion for classification of it. While these attempts to draw inferences from other sections of the Act dealing with different situations are not without interest, they are not very helpful in enabling a conclusion to be reached as to whether Section 20(2) of the Act has, in effect, been contravened by Section 1101(1) of the Regulations.

Appellant’s counsel further argued that Section 1101(1) of the Regulations is effective during the whole life of the business and does not purport to come into operation only when Section 20(2) would otherwise be applicable, and hence it does not come into conflict with that section since Section 20 only applies when property of a prescribed class’’ is disposed of. There is some force to this argument although it would not in itself justify Section 1101(1) of the Regulations if, in fact, it did come into conflict with Section 20(2) of the Act when the property was disposed of.

Respondent’s counsel draws an argument from the provisions of Section 20(11) of the Act which reads:

(11) For the purposes of this section and regulations made under paragraph (a) of subsection (1) of section 11, a vessel in respect of which any conversion cost is incurred after the coming into force of this subsection shall, to the extent of the conversion cost, be deemed to be included in a separate prescribed class.

This subsection was added by S.C. 1966-67, c. 91. Respondent’s counsel. argued that if this could have been done by regulation there would have been no need to legislate so as to create a separate prescribed class. While this argument is interesting, I do not believe it is conclusive as to the validity of Section 1101(1) of the Regulations. Even when Parliament has given the Executive government the right to make regulations for a specified purpose, it has not in any way derogated from its right to legislate for the same purpose, and I think it would perhaps be going too far to infer that, because it was decided to insert Section 20(11) in the Act by an amendment thereto, this could not have been done by Order in Council adopting a regulation to this effect, and then to deduce therefrom that the same would apply in the case of the present Section 1101(1) of the Regulations.

The Regulations have, as I have indicated, prescribed classes of depreciable property in the course of fixing the allowances under Section 11(1) (a). These are the only classes of depreciable property that have been prescribed by regulation made under the Income Tax Act. They fit the words of Section 20(1) and (2). They are certainly valid for the purpose of Section 11(1) (a) and, in my view, they are no less valid for Section 20(1) and (2).

As I appreciate the contrary. argument, it assumes that Section 20(2) was enacted in relation to the classes as prescribed by Schedule B to the Regulations. If this were so, if for example Section 20(2) had expressly referred to the classes as defined by Schedule B, it would clearly be beyond the powers of the Governor in Council to amend those classes. However, once it is realized

(a) that Section 20(2) refers to the classes as prescribed by the Regulations, and

(b) that Section 1101(1) of the Regulations is an integral part of the definition of classes contained in the Regulations,

there can be no question of any conflict between the Act and the Regulations and therefore no question of invalidity.

After a careful examination of the arguments presented, both oral and written, of the judgment of the Tax Appeal Board in the present case and its earlier judgments in the cases of Charos and. Touzeau and the reasons therefor, I have reached the conclusion that Section 1101(1) of the Regulations is a proper exer- cise of the implied power to prescribe classes by Order in Council within the scope of the enabling power of the Income Tax Act, and while it does limit the effect of Section 20(2) of the Act in the situations to which it applies, it is not in contradiction to this section and hence is not ultra vires. /

Having reached this conclusion, appellant’s appeal must succeed but the Minister has agreed, in this event, to reconsider and, if necessary, re-assess respondent’s income for 1963 in order to allow respondent such further capital cost allowance under Section 11(1) (a) of the Income Tax Act as it may; claim and the Minister may permit on the ‘basis that Section: 1101(1) of the Regulations i is intra vires. Respondent ‘s counsel contended that, in the event that the Court found Section 1101(1) of the Regulations to be intra vires, the Minister’s appeal should nevertheless be dismissed since otherwise the matter could not be referred back to the Minister for re-assessment as it would be ‘inconsistent to allow the appeal but nevertheless refer the matter back for such re-assessment. The sole issue between the parties was the validity of Section 1101(1) of the Regulations, and since I have found it to be intra vires, the Minister ha's succeeded in his appeal and is entitled to judgment i in his favour with costs. It isaclear, however, that: if respondent is assessed for the full recaptured capital cost allowance arising out of the sale of the first property during the year, and the undepreciated capital cost of the property acquired is not to be reduced by this amount, it is entitled to claim such capital cost allowance as the Act and Regulations permit on the whole amount of the capital cost of the property acquired, instead of on the reduced amount used in its return as the result of thé application by it of Section 20(2) of the Act, without taking into consideration Section 1101(1) of the Regulations: and, therefore, a re-assessment is necessary, as the Minister. concedes.

Judgment will therefore be rendered allowing appellant’s appeal and declaring Section 1101(1) of the Regulations made pursuant to the Income Tax Act infra vires the Governor in Council, but referring the assessment for the 1963 taxation year of respondent back to the Minister for re-assessment on the basis outlined. above, the Whole with cost in favour of appellant. ,, . , ,