Minister of National Revenue v. Norman Lefevre Grieve and Toronto General, [1959] CTC 320, 59 DTC 1186

THURLOW, J.:—This is an appeal by the Minister of National Revenue from a judgment of the Income Tax Appeal Board dated November 22, 1957 (18 Tax A.B.C. 208), allowing an appeal by William Robert Grieve against income tax re-assessments for the years 1953 and 1954. Mr. Grieve died on August 8, 1958, and at the opening of the trial by consent Norman LeFevre Grieve and the Toronto General Trusts Corporation, the executors named in his will, were made parties respondent, and the proceedings were continued against them. The matter in issue is whether Mr. Grieve was entitled, in computing his income for income tax purposes for the years in question, to deduct the whole of his farming losses for those years or was limited to a deduction of half of them by Section 13 of the Income Tax Act. For 1953 there is a further issue of whether or not he was entitled to average his income pursuant to Section 42 of the Act.

Section 13 of the Income Tax Act, R.S.C. 1952, c. 148, as applicable to the years 1953 and 1954, was as follows :

“13. (1) Where a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, his income for the year shall be deemed to be not less than his income from all sources other than farming minus the lesser of

(a) one-half his farming loss for the year, or

(b) $5,000.

(2) For the purpose of this section, the Minister may determine that a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income.

(3) For the purpose of this section, a ‘farming loss’ is a loss from farming computed by applying the provisions of this Act respecting computation of income from a business mitt at is mutandis except that no deduction may be made under paragraph (a) of subsection (1) of section 11.”

Section 42 provides a right for a taxpayer to elect to average his income ‘‘where a taxpayer’s chief source of income has been farming or fishing during a taxation year (in this section referred to as the ‘year of averaging’) and the four immediately preceding years (in this section referred to as the ‘preceding years’).”

William Robert Grieve was a farmer who had carried on farming operations for many years prior to 1953 and 1954. Farming was his sole occupation. In some years these operations had yielded a profit. In others, notably in 1953 and 1954, they resulted in a loss. The following figures relating to his income were put in evidence:

In computing his income for 1953 and 1954 for the purposes of the Income Tax Act, Mr. Grieve deducted his farming losses for these years from his other income, the bulk of which was income which he received as life beneficiary of an estate. For 1953 he also claimed, pursuant to Section 42, to elect to average his income in accordance with the provisions of that section. His returns for the years 1953 and 1954 were dated April 8, 1954 and April 12, 1955, respectively. In the return for 1953, gross farming revenue was reported at $2,255.93 and farming expenses at $8,795.12, including $424.19 for capital cost allowances, and a tax refund of $509.23 was claimed as a result of the averaging under Section 42. In the return for 1954, the farming revenue was reported at $2,542.42, the expenses claimed amounted to $7,394.19, including $411.69 for capital cost allowances, and tax was computed at $487.50. By notices of assessment dated May 91, 1954 and May 18, 1955 respectively, the Minister advised Mr. Grieve that tax levied for 1953 resulted in a credit of $509.23 and that the tax levied for 1954 was $487.50, these amounts being exactly as computed in Mr. Grieve’s returns.

On or about January 7, 1955, by a letter directed on behalf of the Chief Assessor for the Vancouver Taxation District to a firm of chartered accountants who acted for Mr. Grieve, the latter was informed that his income tax returns for 1953 and earlier years were under review and information was requested on a number of details pertaining to his farming operations. He was also informed that, as the farming losses incurred in the averaging period amounted to $16,074.31 and were offset only by the 1950 profit of $260.60, while during the same period investment and other income totalled $17,851.42 (sic), his chief source of income did not appear to be from farming and therefore the averaging “privilege” could not be “extended” to him. The accountants answered the questions and on March 8, 1955 a further letter was addressed on behalf of the Chief Assessor to Mr. Grieve. In this letter he was again informed that his returns for 1952 and 1953 were under review and, after setting out Section 13 verbatim, the letter went on to state that it was proposed to recommend to the Deputy Minister that he make a determination under Section 13(2) that Mr. Grieve’s chief source of income for 1952 and 1953 was neither farming. nor a combination of farming and some other source of income. In the final paragraph, Mr. Grieve was informed that any representations he might wish to make should be made, preferably in writing, within two weeks, after which time the matter would be referred to head office. Some further correspondence, in which the accountants offered representations on his behalf, followed, and later, on December 16, 1955, a notice of re-assessment was sent to him in which his tax for the year was computed at $835.74. Some two months later, a letter was sent to him referring to the letter of March 8, 1955, and stating that the Deputy Minister had determined that Mr. Grieve’s chief source of income for 1953 was neither farming nor a combination of farming and some other source of income. The re-assessment had been made on that basis, and in it one-half only of the farm loss for the year (after deducting therefrom the capital cost allowances claimed) was allowed as a deduction. The election to average income pursuant to Section 42 was also rejected, because ‘‘the chief source of income during the averaging period does not appear to have been derived from ‘farming’ as required by s. 42(1) of the Income Tax Act.’’ A notice of objection was given by Mr. Grieve, and subsequently, on July 26, 1956, the Minister, per the Deputy Minister (as to which see Section 116(1)), confirmed the re-assessment as having been made ‘‘in accordance with the provisions of the Act and in particular on the ground that under the provision of s-s. (2) of s. 13 of the Act the Minister has determined that the taxpayer’s chief source of income is not farming or a combination of farming and some other source of income; that the taxpayer’s chief source of income was not farming within s-s. (2) of s. 41 of the Act.”

It appears from the notice of objection to the re-assessment for 1954 that on January 5, 1956 a letter, setting out Section 13 and ‘‘advising of intended reduction of farm loss claimed” was sent by the District Taxation Office to Mr. Grieve in respect of his 1954 income. To this letter Mr. Grieve made no reply ‘‘as the same point was being dealt with at that time in respect of a 1953 assessment.’’ This, I assume, refers to a proposed reference to the Deputy Minister to obtain his determination under Section 13(2) with respect to the 1954 taxation year. In any case, on January 26, 1956, notice of re-assessment for 1954 was sent to Mr. Grieve, accompanied by a letter stating that the Deputy Minister had determined that Mr. Grieve’s chief source of income for 1954 was neither farming nor a combination of farming and some other source of income. By this re-assessment, as well, only half of the farm loss claimed (after deducting capital cost allowance) was allowed as a deduction from other income.

Following a notice of objection given by Mr. Grieve, this re-assessment was also confirmed by the Minister, per the Deputy Minister, as having been ‘‘made in accordance with the provisions of the Act and in particular on the ground that under the provisions of subsection (2) of Section 13 of the Act the Minister has determined that the taxpayer’s chief source of income is not farming or a combination of farming and some other source of income. ’ ’

Notice of appeal to the Income Tax Appeal Board from both re-assessments was then given, and on the matter coming before the Board the appeal was allowed by a judgment the effect of which was to vacate the re-assessments for both years. The Minister thereupon appealed to this Court and, in his notice of appeal, set out as allegations the deduction by Mr. Grieve of amounts representing farm losses in calculating his income for the 1953 and 1954 taxation years, the original assessments, and the re-assessments, and went on to state in paragraph 4 as follows :

“4. Before the making of the re-assessments referred to in paragraph 3 hereof, determinations were made under subsection 2 of Section 13 of the Income Tax Act, that the Respondent’s chief source of income for the 1953 and 1954 taxation years was neither farming nor a combination of farming and some other source of income.”

All of these allegations, as well as allegations relating to the ‘notices of objection, confirmation of the re-assessments by the Minister, and the appeal to the Income Tax Appeal Board were admitted in the reply filed on behalf of Mr. Grieve. In subsequent paragraphs of the reply, however, reasons (the truth of which on the evidence there is no reason to doubt) were given accounting for the 1953 and 1954 farming losses as being the result of marketing conditions and severe frosts which killed many of the taxpayer’s apple trees, and it was objected that the determinations made by the Minister under Section 13(2) -were subject to review by this Court, that the taxpayer’s chief -source of income for 1953 and 1954 was either farming or a combination of farming and some other source of income, and alternatively, that, in view of the original assessments, the Minister was functus officio and had no power to make the re-assessments.

Under the last-mentioned plea, it was submitted that it must be presumed that the Minister exercised his power to make a determination as provided by Section 13(2) prior to or at the time of the making of the first assessment for each of the years in question and that thereafter he was functus officio and without power to make the later determinations which were referred to in the notice of appeal in the paragraph above quoted. If this contention is sound, it goes to the root of both re-assessments.

As there was no direct or other evidence that the Minister had made a determination for either year under Section 13(2) prior to giving the first notice of assessment for that year, the substantial question raised by the submission is that of what is to be inferred as to the exercise by the Minister of his power from the giving of the first notices of assessment.

In approaching the problem, it is, I think, important to note that, while both the function of assessing the tax under the authority of Section 46 and that of making a determination under Section 13(2) are by the Act committed to the Minister, they are separate and different functions and their effects are not the same. The first, that of assessing the tax, is strictly an administrative function. It involves simply the application by the Minister of the substantive law to the facts as they appear. Liability for the tax imposed by the statute is not affected by the assessment so made being incorrect or incomplete or by the fact that no. assessment has been made, and, within the times limited by Section 46(4), the assessing function may be reexercised to realize the full amount of the tax imposed by the statute. If there is any dispute between the taxpayer and the Minister, both the facts and the law, as well as the application of the law to the facts, are left to be determined by the Court on an appeal as provided by the statute. The second function, that of making a determination under Section 13(2), is a judicial function. The subsection constitutes the Minister the judge, for the purpose of Section 13, of the material fact on which the application of Section 13(1) depends and, subject to his decision being not contrary to “ sound and fundamental principles”, empowers him to bind the taxpayer by such determination.

I do not think, however, that it follows that a determination pursuant to Section 13(2) is necessary in every case to which the rule of Section 13(1) may apply. For example, if a taxpayer files a return and, in doing so, correctly computes his income by applying the rule of Section 13(1), I can see no occasion for the Minister to make a determination of the fact under Section 13(2) before making an assessment of tax for, in such a case. there is no issue to be determined. Nor do I think it would follow from the fact of an assessment having been made that the Minister must necessarily have made a determination under Section 13(2) and become functus officio and, therefore, powerless to vary the assessment if it subsequently appeared that Section 13(1) was in fact inapplicable and that the computation was thus wrong, for until the matter was raised by someone there would have been no issue to be determined. As I see it, this power is provided for and is to be exercised by the Minister in situations where an issue, whether raised by the taxpayer or the Minister, exists as to the material fact on which the application of Section 13(1) depends.

The power conferred by Section 13(2) is substantially different from that which the Minister had under Section 13(2) as it was prior to the repeal and substitution of Section 13 by

S. of C, 1952, c. 29, s. 4. For a review of the history of this legislation, see M.N.R. v. Robertson, [1954] Ex. C.R. 321 at 328; [1954], C.T.C. 110 at 117. Formerly, the power was to determine what the chief Source of income was. That power and the rule for-computing income contained in subsection (1), as it then was, applied to the right of taxpayers to deduct losses not related to the taxpayer’s chief source of income, while the present section is concerned only with the right to deduct farming losses. The power contained in the applicable Section 13(2) is not a power to determine what the chief source of income was, nor is it a power to determine, in any general sense, what it was not. It is limited to determining that the chief source of income was neither of two things, namely farming or a combination of farming and some other source of income. The making of such a determination results only in a negative conclusion of fact, and the absence of such a conclusion cannot imply a positive determination that the chief source of income was one thing or another. At most, the absence of such a conclusion can imply only one of two things, either that the Minister has not exercised the power, or that he has considered the matter judicially, pursuant to Section 13(2), and has come to the conclusion that the facts do not warrant such a determination. Only in the latter case could there be any possible application of the principle that, having exercised the power, the Minister had become functus officio.

Now it is, I think, also important to observe that, in the present ease, the first assessments for 1953 and 1954 were predicated not on the basis of the rule of Section 13(1) being applicable, but on the basis of the rule of Section 13(1) being inapplicable. This suggests that the Minister had not made a determination that the taxpayer’s chief source of income was neither farming nor a combination as set out in Section 13(2), for the assessments do not reflect the application of the rule of Section 13(1). It 1s, accordingly, consistent with the assessments to infer that the applicability of Section 13(1) was not considered at all—in which case it would, in my opinion, remain the duty of the Minister to consider it and to re-assess acordingly, if necessary— or that the Minister, acting through his subordinates engaged in carrying out the administrative duty of assessing, considered the matter but came to the conclusion that the facts did not warrant raising an issue between himself and the taxpayer on the point. In the latter event as well, I think that it would be the duty of the Minister, in view of Section 46(3) and (4), and that it would remain open to him, to review the assessment and, if necessary, raise the issue at a later time within the periods limited by Section 46(4).

Since these explanations are not inconsistent with the assessments, it cannot, in my opinion, be said that the raising of an issue and the exercise of the power to determine it under Section 13(2) are necessarily to be inferred where all that has happened is that a taxpayer in his return has proceeded to calculate his income and his tax on the basis of Section 13(1) being inapplicable and an assessment of tax has been made which apparently proceeds on the same basis, and I think this is so even though both the taxpayer’s and the Minister’s computations may be quite wrong and even though it was the Minister’s duty in his administrative capacity before making the assessment to examine the taxpayer’s return and to consider and apply all relevant provisions of the statute. I doubt that any inference can ever be drawn from a mere assessment of tax as to the making of a determination pursuant to Section 13(2), but whether it can in some instances or not, unless an issue for determination under that provision has been raised prior to the making of the assessment, I am of the opinion that the mere making of the assessment implies nothing as to whether or not the power to determine such an issue has been exercised.

In M.N.R. v. Robertson, [1954] Ex. C. R. 321; [1954] C.T.C., 110, Potter, J., on the evidence before him, drew an inference; that the power conferred on the Minister by Section 13 had in fact been exercised. There, however, both the provisions of Section 13 and the power of determination given by subsection (2) were widely different from those applicable to the years 1953‘ and 1954, the computation on which the assessment in question was based was at variance with the taxpayer’s computation, and Potter, J., appears to have drawn his conclusion that the determination had been made not merely from the notice of assessment and a a letter referring to subsections (3) and (4) of Section 13, though not to subsection (2), which had accompanied the notice of assessment, but as well from the Minister’s decision (following the appellant’s notice of objection), in which it was stated that the appellant’s chief source of income was neither farming nor a combination of farming and some other source of income within the meaning of subsection (3) of Section 13 of the Act.

In the present case, the original assessments being in conformity with the taxpayer’s computations, there was, in my opinion, no issue for determination by the Minister under Section 13(2) until such an issue was opened in the respective letters whereby the taxpayer was informed that it was proposed to refer the matter to the Deputy Minister for his determination, and the taxpayer was invited to submit representations thereon. In this situation, there is, in my opinion, no foundation for an inference that the Minister had made determinations or had exhausted his power prior to or when making the first assessments, and I am therefore of the opinion that the Minister was not functus officio at the time of making the determinations which were admitted in the taxpayer’s reply.

It was also submitted that the Minister’s determinations were open to review on this appeal and that they were not justified by the facts. In my opinion, a determination by the Minister under Section 13(1) is reviewable on appeal to this Court, but only within the limits indicated in the M.N.R. v. Wright’s Canadian Ropes, [1947] C.T.C. 1. There Lord Greene, M.R., said at p. 13:

“This right of appeal must, in their lordships’ opinion, have been intended by the legislature to be an effective right. This involves the consequence that the Court is entitled to examine the determination of the Minister and is not necessarily to be bound to accept his decision. Nevertheless the limits within which the Court is entitled to interfere are in their lordships’ opinion strictly circumscribed. It is for the taxpayer to show that there is ground for interference and if he fails to do so the decision of the Minister must stand. Moreover, unless it be shown that the Minister has acted in contravention of some principle of law the Court, in their lordships’ opinion, cannot interfere : the section makes the Minister the sole judge of the fact of reasonableness or normalcy and the Court is not at liberty to substitute its own opinion for his. But the power given to the Minister is not an arbitrary one to be exercised according to his fancy. To quote the language of Lord Hals- bury in Sharp v. Wakefield, [1891] A.C. 173 at p. 179, he must act ‘according to the rules of reason and justice, not according to private opinion; according to law and not humour. It is to be not arbitrary, vague and fanciful, but legal and regular’. Again in a case under another provision of this very sec. 6 [sec. 5(1) (a)—Ed.] where a discretion to fix the amount to be allowed for depreciation is given to the Minister, Lord Thankerton in delivering the judgment of the Board said ‘ The Minister has a duty to fix a reasonable amount in respect of that allowance and, so far from the decision of the Minister being purely administrative and final, a right of appeal is conferred on a dissatisfied taxpayer; but it is equally clear that the Court would not interfere with the decision unless— as Davis, J. states—‘‘it was manifestly against sound and fundamental principles’ ’’. (Pioneer Laundry and Dry Cleaners Ltd. v. Minister of National Revenue, [1938-39] C.T.C. 411 at pp. 416-417.) ”

In the present case, there was no agreement between the parties nor was there any oral evidence as to what was in fact before the Minister or his Deputy when the two determinations were made, though a number of documents were offered on behalf of the Minister and admitted in evidence by. consent. These included copies of the taxpayer’s returns for the years in question, the notices of the re-assessments and accompanying documents, the taxpayer’s notices of objection, which included copies of the correspondence and representation made on the taxpayer’s behalf, and a statement showing the taxpayer’s investment income and farm profits and losses as previously set out for the years 1942 to 1954 inclusive.

I think it may fairly be assumed that the taxpayer’s income tax returns for the years in question and copies of the notices of re-assessment and accompanying documents, as well as the taxpayer’s notices of objection with accompanying documents, were before the Deputy Minister when he decided to confirm the re-assessments. Indeed, it is stated in the decisions that he -has reconsidered the re-assessments and considered the facts and reasons set forth in the notices of objection. But whether or not the figures relating to the taxpayer’s investment income and his farming profits and losses for earlier years were before the Deputy Minister was not established. Nor was any evidence offered as to what was before him when the determinations, as admitted, were made. In this situation, since ‘‘it is for the taxpayer to show that there is ground for interference and if he fails to do so the decision of the Minister must stand’’, no ground has been shown for interfering with the Minister’s determinations. But even assuming that the Deputy Minister had before him the material set out in the taxpayer’s returns and the correspondence which preceded the re-assessments and reviewing the matter on the basis of that having been the material which was before the Deputy Minister, I am of the opinion that there was in it ample material to support the determinations and that no good ground has been shown for disturbing either of them. I am also of the opinion that, if the figures for earlier years were before him, the determinations are equally unassailable, for if the figures have any effect, it is simply to confirm the determinations. Nor was anything further shown in the notices of objection which would, in my opinion, afford ground for disturbing the determinations. It was conceded in the course of argument, and I think quite properly so, that the taxpayer’s chief source of income was not farming, and the case was thus narrowed down to a submission that the taxpayer’s chief source of income was in fact a combination of farming and investments. However, on the whole of the material, including that put forward on behalf of Mr. Grieve, there does not appear to have been any connection or relation whatever between his farming as a source of income in any year and the estate or investments from which the bulk of his income was derived upon which one could say that his chief source of income was a combination of the two, beyond the mere fact that he w as the recipient or owner of the estate or investment income and was also the recipient or owner of the farming profits or the sufferer of the farming losses. That fact alone does not, in my opinion, inevitably lead to the conclusion that Mr. Grieve’s chief source of income was a combination of such sources of income within the meaning of Section 13(1), and I can, therefore, see no reason for disagreeing with the Deputy Minister’s determinations for either 1953 or 1954 that Mr. Grieve’s chief source of income was neither farming nor a combination of farming and some other source of income.

There remains the issue under Section 42(1); a matter which is not affected by the Minister’s determination under Section 13(2) since that determination is merely for the purpose of Section 13. On this issue, it was accordingly open to the respondents on the trial of this appeal to prove, if they could, that Mr. Grieve’s chief source of income for the five averaging years was GLENORA SECURITIES INC., Appellant,

and

MINISTER OF NATIONAL REVENUE, Respondent.

Exchequer Court of Canada (Dumoulin, J.), September 17, 1959, on appeal from assessment by Minister of National Revenue.

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148—Sections 4 and 41(1) (a)—Calculation of foreign tax credit.

Appellant company had dividends from U.S. sources totalling $53,946.50 in the 1957 taxation year. It incurred expense in earning the dividends in the amount of $10,081.48, leaving a net dividend income of $43,865.02. U.S. withholding tax was paid to the U.S. government in the amount of $8,092.01, being 15% of the gross dividends of $53,946.50. The appellant claimed foreign tax credit for the full $8,092.01 U.S. tax paid, but the Minister allowed only $6,579.75, which was 15% of the net income figure of $43,865.02. On appeal to the Exchequer Court,

HELD:

(i) That the amount of $6,579.75 allowed by the Minister was the correct allowance for foreign tax credit under Section 41(1) (a) of the Income Tax Act;

(ii) That the appeal be dismissed.

EDITORIAL NOTE: Section 41(1) (a) provides for deduction from tax otherwise payable of an amount equal to the “tax paid by (the taxpayer) to the government of a country other than Canada on that part of his income from sources therein for the year upon which he is subject to tax” in Canada. The learned Judge finds that the appellant’s income (in the sense of profit, as provided by Section 4) from U.S. sources was the net figure of $43,865.02. All of that income of $43,865.02 was taxable in Canada, so appellant claimed the full amount of foreign tax paid, on the basis that if 100% of its income ($43,865.02) was taxable in Canada, then there was no limitation on the deduction of the full amount of the tax actually paid to the U.S. government.

In rejecting this contention, the judgment amounts to a finding that where foreign tax was charged on gross receipts, but only net income is taxed in Canada, the tax credit allowed by Section 41(1) (a) is only an amount equal to the gross tax rate applied to the amount of net income taxable in Canada.

The appellant’s contention that it paid out the greater amount of U.S. tax in order to obtain the income subject to tax in Canada was rejected.

This decision would appear to have been overruled by the judgment of the Supreme Court of Canada in Interprovincial Pipe Line Company v. M.N.R., [1959] C.T.C. 339.

P. N. Thorsteinsson, for the Appellant.

Guy Fauvreau, Q.C., and Paul Boivin, Q.C., for the Respondent.

DUMOULIN, J.:—This is an appeal from the income tax assessment, dated July 22, 1958, for the taxation year 1957, of Glenora Securities Inc., of Montreal, Province of Quebec, levying for the above fiscal year, a tax in the sum of $10,382.18.

Glenora Securities Inc., a limited company, with an office in the City of Montreal, was resident in Canada throughout the whole of its taxation year 1997.

The instant appeal was argued in law, both parties having submitted an Agreed Statement of Facts and filed elaborate factums.

The factual components of the controversy are quite simple :

(a) In 1957, appellant received dividends from

sources in the United States totalling	$53,946.50
(b) Expenses incurred, or carrying charges, were
in the amount of $9,324.59 ((all monetary
figures computed in Canadian currency) with,
also, a depletion claim for $756.89, a total of .	10,081.48
(c) Therefore appellant’s profit or income accru
ing from American sources, during 1957, con
sisted in	43,865.02
(d) Appellant paid to the Government of the
United States, for 1957, a withholding tax of	8,092.01
Such are the basic, uncontroverted, facts.

The legal issue can also be stated briefly: the appellant claims a deduction under Section 41(1) (a) of the Income Tax Act (R.S.C. 1952, e. 148) of the full amount of the tax paid to United States fiscal authorities: $8,092.01, whereas the assessment objected to allows only a 15% deduction computed on an income of $43,865.02, namely an amount of $6,579.75.

Both litigants mention, as the relevant provisions of our Income Tax Act, Sections 2, 3, 4 and 41.

Section 4 identifies ‘‘income’’ with “profit”, that is net profit; any different meaning would seem practically unsound.

The United States withholding tax, at a rate of 15%, was levied upon the gross receipts of $53,946.50, permitting of no deductions on the score of earning expenses or depletion of capital sources, whilst, Canadian legislation contemplates taxing merely the net profit of $48,865.02, calculated, might I say, conformably to Earl Loreburn’s speech in Usher’s Wiltshire Brewery Ltd. v. Bruce, [1915] A.C. 483 at 444, “. . . on ordinary principles of commercial trading, by setting against the income earned the cost of earning it’’.

A first point worthy of note is the difference between the taxing instruments concerned: the foreign one levies tax on gross receipts or total dividends, the Canadian law deducting earning expenditure and depletion, thereby exempting a portion, $10,081.48, of the revenue from sources in the United States.

Admittedly the moot text under review is none other than Section 41 of the Act, more particularly subsection (1), paragraphs (a) and (if applicable) (b) hereunder recited.

“41. (1) A taxpayer who was resident in Canada at any time in a taxation year may deduct from the tax for the year otherwise payable under this Part an amount equal to the lesser of

(a) the tax paid by him to the government of a country other than Canada on that part of his income from sources therein for the year upon which he is subject to tax under this Part for the year, or

(b) that proportion of the tax for the year otherwise payable under this Part that

(i) that part of the taxpayer’s income

(A) for the year, if section 29 is not applicable, or

(B) if section 29 is applicable, for the period or periods in the year referred to in paragraph

(a) thereof,

from sources in that country that was not exempt from income tax in that country minus amounts that are deductible for the year or such period or periods, as the case may be, under paragraph (d) of subsection (1) of section 28,

is of

(11) the taxpayer’s income

(A) for the year, if section 29 is not applicable, or

(B) if section 29 is applicable, for the period or periods in the year referred to in paragraph

(a) thereof,

minus amounts that are deductible for the year or such period or periods, as the case may be, under section 28.’’

I may dispose, as irrelevant, of this long and somewhat confusing subsection (b), since none of the conjectures, provided for—or against, by Sections 29 and 28, arise in this case. More- over, I have no recollection that either party contended it was of any account. Section 41(1) (a) remained throughout the subject-matter of the argument, or as paragraph 8 of appellant’s notes and authorities puts it: ‘The whole issue in this appeal turns upon the meaning of the word ‘income’ in Section 41(l)(a).”

The nature of this difficulty makes it advisable to summarize in their own words litigants’ respective view-points.

Reverting to the ‘‘Notes of Argument and Authorities cited on behalf of Appellant”, the second paragraph, on page 3, goes thus:

‘‘Section 41 thus provides for deduction of foreign tax paid on foreign income, subject to two limitations: (1) if any part of the income (in the proper sense of ‘profit’) from the foreign source is not subject to tax in Canada, there is no credit in respect of tax paid to the foreign government on that part, and (2) the credit cannot in any case exceed the proportionate Canadian tax on the foreign income. Neither of those limitations has application in this case.”

With the exception of its last and negative sentence: ‘‘ Neither of those limitations, etc.”, this presentation of the issue would seem quite correct; my opinion is that no other one could be reasonably entertained. Let us look more closely at those “two limitations”, which may very likely paint a true picture of this affair.

One part ‘‘of the income from the foreign source is not subject to tax in Canada . . .” namely carrying expenses and depletion totalling, as seen above: $10,081.48. Then, if the following proposition No. (2) is true, and it does appear to be the clear purport of the law, ‘‘. . . credit (ï.e., tax relief or deduction sought) cannot in any case exceed the proportionate Canadian tax on the foreign income’’. And such was respondent’s decision in respect of the tax levied at the proportionate rate of 15% on the foreign ‘‘income’’, which in the United States, no more and no less than in Canada, can mean nothing but net profit, actually: $43,865.02, entitling to tax credit of $6,579.75.

It would appear that appellant confuses exemption with taxing ratios, the former refused in the foreign country, but granted pro tanto in Canada ; the latter, operating at similar percentages of 15%, here and in the United States, but as against different ingredients of the total yield.

Appellant next proceeds with its analysis of the law as follows (cf. Notes of Argument and Authorities, paragraph 10) :

“10. Section 41(1) (a) entitles the Appellant to deduct the tax paid [all italics are found in the text] to the Government of the United States ($8,092.01), subject to the limitation that the tax must have been paid on that part of its income from sources in the United States on which it was subject to tax under Part I of the Income Tax Act. The Section provides for the deduction of the tax actually paid, on that part of the income from the United States which was taxable in Canada

N

This first portion of paragraph 10 is, if I apprehend it correctly, a repetition of the tentative interpretation previously commented upon, and a similar remark applies to the remainder. I need do no more than refer parties to my notes above.

Paragraph 13 of the ‘‘Notes of Argument and Authorities cited on behalf of Appellant”, summarizes the legal construction it would attach to Section 41(1) (a) of our Act. I quote:

“13. It is to be noted that the Section allows a deduction of the tax paid, which in this case was $8,092.01. It does not provide for a deduction of the amount arrived at by applying the rate of foreign tax to the income subject to tax in Canada, which is what the Respondent has done in this case by allowing only 15% (the United States withholding tax rate) of the income amount of $48,865.02. The Appellant had income from sources in the United States of $43,865.02, and on that income it paid a tax of $8,092.01. The rate or method of computation used by the United States Government in imposing a tax of $8,092.01 is immaterial : the only thing of any significance for Canadian tax purposes that the Appellant received from the United States in 1957 was an income of $43,865.02—on that income it paid a tax of $8,092.01.”

A careful reading of the law is irreconcilable with the meaning that appellant seeks to convey.

The Court could agree, since Section 41(1) (b) is out of question, only if Section 41(1) (a), instead of its present context, read :

“A taxpayer who was resident in Canada at any time in a taxation year may deduct from the tax for the year otherwise payable under this Part . . .

(a) the tax paid by him to the government of a country other than Canada . . .”’

Thus amputated of its actual and operative purview, an amount equal to that paid to a foreign authority, would become automatically deductible from foreign dividends by a resident of this country.

Quite in line with this reasoning is the respondent’s reply appearing at page 3, second paragraph, of its Factum.

“As under section 41(1) the tax credit may be claimed only for the tax paid to the United States on income from sources therein and subject to tax in Canada, i.e. on income computed by applying the provisions of our own income tax legislation regarding the computation of income, it follows that where income tax is required to be paid to the United States under the income tax legislation of that country on an amount of money or income which is not subject to tax in Canada under our own income tax legislation (as for instance where the difference between gross income and net income is taxed in the United States), such amount of money cannot be taken into consideration for the determination of the tax credit that may be claimed under either paragraph (a) or paragraph

(b) of section 41(1).”’

Such is, I believe, the intent of Section 41(1) (a). It provides the basic elements for any fixation of tax credit which, in the instant case, was properly allowed in a sum of $6,579.75, or 15% on a net profit (“income” as outlined in Section 4) of $43,865.02.

For the reasons above, appellant’s income tax assessment for 1957, to an amount of $10,382.18, was levied in accordance with the provisions of the pertinent law.

Therefore this appeal is dismissed, with taxable costs going in favour of the respondent.