Minister of National Revenue v. Brucewood Court Limited, [1962] CTC 187, 62 DTC 1124

KEARNEY, J.:—This is an appeal taken by the Minister from a decision of the Income Tax Appeal Board, 25 Tax A.B.C. 97, whereby the respondent’s appeal against a re-assessment made by the Minister under the Income Tax Act, R.S.C. 1952, c. 148, in respect of its income tax for the year 1957 was allowed and the matter referred back to the Minister for adjustment.

The facts are not in dispute.

In filing its income tax return for 1957 the respondent estimated its net tax for the year to be $5,024.56, but this was later amended to read $7,073.06. The appellant notified the respondent that its tax assessment for the year in question amounted to $9,771.68; whereupon the respondent filed a notice of objection thereto, but on review the appellant confirmed the assessment.

The respondent’s basic or operating taxable income for 1957 amounted to $16,379.74 and but for two events which occurred in the said year the respondent’s income tax payable would have been computed under Section 39(1) (a) of the Act and would have amounted to $3,275.95 and the present dispute would not have. arisen.

i The above-mentioned section reads as follows:

39. (1) The tax payable by a corporation under this Part upon its taxable income or taxable income earned in Canada, as the case may be, (in this section referred to as the ‘amount taxable’) for a taxation year is, except where otherwise provided,

. (a) 18% of the amount taxable, if the amount taxable does

not exceed $20,000, and

r: (b) $8,600 plus 45% of the amount by which the amount

taxable exceeds $20,000, if the amount taxable exceeds $20,000.’’

Firstly, during the course of the year in question the respondent sold a number of apartment building properties of which it had been the owner for more than five years and during which it had claimed and been allowed for tax purposes certain depreciation allowances referred to in No. 1100 of the Regulations. The amount realized on the above-mentioned sale exceeded the book value or undepreciated cost to the respondent of the properties in question to the extent of $39,068.13 and this excess depreciation became taxable income for 1957, the year of its recapture, by reason of Section 20(1) of the Act which states:

“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 I befo 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 thereot to the taxpayer,

shall be included in computing his income for the year.”

Thus the respondent’s total taxable income for 1957 amounted to $55,447.87.

The other event consisted of the fact that, by reason of Section 40 of the Income Tax Act, R.S.C. 1952, e. 148, and Nos. 400 and 402(1) of the Regulations promulgated thereunder, Ontario, as of January 1, 1957, became known as a prescribed province”, and the respondent being a taxpayer of a prescribed class, all of its taxable income was deemed to have been earned in the said province.

The above-mentioned section and regulations provide:

“40. (1) There may be deducted from the tax otherwise payable by a corporation under this Part for a taxation year an amount equal to 9% of the corporation’s taxable income earned in the year in a province prescribed by a regulation made on the recommendation of the Minister of Finance.

(2) In this section, * taxable income earned in the year in a province’ means the amount determined under rules prescribed for the purpose by regulations made on the recommendation of the Minister of Finance. 1952, c. 29, s. 13.”

Regulation 400. “For the purpose of subsection (1) of section 40 of the Act, a province prescribed is a province that has not entered into an agreement with Canada as contemplated by section 6 of the Federal-Provincial Tax-Sharing Arrangements Act, by virtue of which agreement the province would be entitled, if such an agreement were entered into, to payment of compensation for refraining from levying corporation income taxes and corporation taxes.

402. (1) Where, in a taxation year, a corporation had no permanent establishment outside the province, the whole of its taxable income for the year shall be determined to have been earned in the province.”

With a view to ease the incidence of its tax burden resulting from the effect of Section 20 of the Act, the respondent availed itself of subsection (1) of Section 43 of the Act and the relevant provisions of subsection (2) thereof which read as follows:

“43. (1) Where an amount is included in computing a taxpayer’s income for a taxation year by virtue of section 20, the taxpayer may elect to pay, as tax for the year under this Part, in lieu of the amount that would otherwise be payable, an amount equal to the aggregate of

(a) the tax that would be payable by the taxpayer for the year under this Part if no amount were included in computing the taxpayer’s income for the year by virtue of section 20, and

(b) the aggregate of the amounts by which the taxpayer’s taxes under this Part would have been increased if the portion of the amount so included by virtue of section 20 determined under subsection (2) had been included in computing the taxpayer’s income for each of the taxation years in the period determined under subsection (2).

(2) Where the period during which the taxpayer was not exempt from tax under this Part and

(a) if a corporation, carried on business in Canada, and . . .

immediately before the taxation year for which an amount is included in computing his income by virtue of section 20 is only one taxation year or less, subsection (1) does not apply; and where that period . . .

(iv) is more than 4 taxation years, the portion referred to in paragraph (b) of subsection (1) is /5 and the period referred to therein is the 5 immediately preceding taxation years.”

The appellant, in paragraph 6 of its notice of appeal, furnished the following details showing in graphic form the manner in which the Minister’s re-assessment of $9,771.68 was computed:

The computation above referred to as set out in paragraph 7 of the notice of appeal is as follows:

“7. Particulars of the computation of the aggregate of the amounts by which the respondent’s taxes under Part I of the Income Tax Act would have been increased in the years 1952 to 1956 both inclusive, if one-fifth of $39,068.13 (i.e. $7,813.62) had been included in computing respondent’s income for each of the said years.

1952
Taxable income declared		nil
Add: 14 of $39,068.13	$ 7,813.63
Revised taxable income		7,813.63
Tax thereon at 22% (1952 rate)		$ 1,719.00
Less: Tax paid in 1952			nil
Increase in tax for year ..- $ 1,719.00
1953
Taxable income declared (loss)	$	22.90
Add: 14 of $39,068.13		7,813.63
Revised taxable income	$ 7,790.73
Tax thereon at 20% (1953 rate)		-..$ 1,558.15
Less: Tax paid in 1953			nil
Increase in tax for year			$ 1,558.15
1954
Taxable income declared (loss)	$ 4,394.87
Add: 14 of $39,068.13		7,813.63
Revised taxable income	$ 3,418.76
Tax thereon at 20% (1954 rate)		$	683.75
Less: Tax paid in 1954			nil
Increase in tax for year$				683.75
1955
Taxable income declared	$ 6,808.42
Add: 14 of $39,068.13		7,813.63
Revised taxable income	$14,622.04
Tax thereon at 20% (1955 rate)		$ 2,924.41
Less: Tax paid in 1955			478.13
Increase in tax for year			$ 2,446.28
1956
Taxable income declared	$ 1.696.91
Add: 14 of $89,068.13		7,813.63
Revised taxable income	$ 9,510.53
Tax thereon at 20% (1956 rate)		$ 1,902.11
Less: Tax paid in 1956			339.38
Increase in tax for year			$ 1,562.73
Aggregate of the total increase for the five years			$ 7,969.91”

The respondent does not contest the accuracy of the figures set out in the above particulars but takes exception to the method of computation used by the appellant. According to the respondent, its net tax owing, instead of being $9,778.68 as claimed by the appellant, amounts to $6,255.55, computed as follows:

It will be seen from the foregoing that the amount in dispute is the sum of $3,516.13, which is the difference between the respondent’s tax payable for the year, as assessed by the Minister and amounting to $9,771.68, and the respondent’s estimate thereof amounting to $6,255.55. As hereinafter more fully set out, the disputed amount arises because the appellant has only allowed a deduction of 9% under Section 40 in respect of the respondent’s basic income amounting to $16,379.74, and not in respect of its recaptured depreciation of $39,068.13, while the respondent maintains that it is entitled to both of the said deductions. The parties agree that the issue turns on the manner in which Sections 40 and 43 are interpreted.

As appears by the notice of appeal the appellant’s submissions are as follows:

“1. That w hen a taxpayer elects to pay as tax for the year the amount computed under the provisions of sec. 43 of the Income Tax Act in lieu of the amount that would otherwise be payable under the provisions of Part I of the Income Tax Act, he is not entitled to any deduction pursuant to the provisions of sec. 40 of the Income Tax Act except to the extent that the provisions of see. 43 permit such a deduction.

2. That a taxpayer, in making the computation required by the provisions of para. (a) of s.s. (1) of section 43, is, by virtue of sec. 40, entitled to a deduction in respect of its taxable income for the year (computed as if no amount were included in computing the taxpayer’s income for the year by virtue of sec. 20) earned in a prescribed province.

3. That Respondent, in making the computation required by the provisions of para. (a) of s.s. (1) of sec. 43, was, by virtue of sec. 40, entitled to (and was allowed by the Appellant) a deduction of 9% of $16,379.74 (the said $16,379.74 being Respondent’s taxable income for the year computed as if no amount were included in computing its income for the year by virtue of sec. 20) since its taxable income was earned in Ontario which was a prescribed province in the 1957 taxation year.

4. That a taxpayer, in making the computation required by para. (b) of s.s. (1) of sec. 43 for each of the years included in the period referred to therein, is, by virtue of sec. 40 (or its predecessor section), entitled to a deduction in respect of the portion of the amount referred to in para, (b) of s.s. (1) of sec. 43 in each of those years of the said period during which the province where the deemed income was earned was a prescribed province and is not entitled to such a deduction in those years of the said period during which the province where the deemed income was earned was not a prescribed province.

5. That, in making the computation required by para. (b) of s.s. (1) of sec. 43 for each of the years 1952 to 1956, both inclusive, of the amounts by which the Respondent’s taxes would have been increased in those years if 4% of $39,068.13 (i.e. $7,813.62) had been included in computing the Respondent’s income for each of the said years, Respondent was not entitled to (and has not been allowed by Appellant) a deduction by virtue of sec. 40 (or its predecessor section) because Ontario was not a prescribed province within the meaning of sec. 37 of The 1948 Income Tax Act as applicable to the 1952 taxation year or within the meaning of sec. 40 of the Income Tax Act as applicable to the 1953 to 1956 taxation years.’’

As is usual in a trial de novo where the Crown is the appellant, it is counsel for respondent who first addresses the Court, and the following is a summary of his main submissions.

In absence of a specific declaration in the Act to that effect, Section 43 cannot be interpreted in such a way as to negative the application of Section 40 to the whole of its taxable income for the year 1957, amounting to $55,447.89, since it is an undeniable fact that, as appears by Regulation No. 402 which the appellant caused to be promulgated, the $39,068.13 item is deemed to be taxable income earned by the respondent in 1957 and is as much a basie or operating type of taxable income as the item of $16,379.74 and should be treated similarly. As the above-mentioned amount is only notionally spread back into the five previous years, it still remains income for the year 1957, during which the respondent was admittedly a taxpayer of a prescribed class.

Individuals who are taxpayers of a prescribed class are, under Section 33(1), entitled to a deduction from tax otherwise payable, and unlike Section 40, Section 33(2) (a) contains a definition of tax otherwise payable which clearly disentitles the taxpayer to a deduction in respect of recaptured depreciation; it reads thus:

“33. (2) In this section,

(a) ‘tax otherwise payable under this Part means the tax otherwise payable for the taxation year in respect of which the expression is being applied (determined, in the case of a taxpayer by whom an election under section 43 applicable to that year has been made, as though no amount were included in computing his income for that year by virtue of section 20), after making any deduction under section 38 and after deducting the Old Age Security tax imposed by subsection (3) of section 10 of the Old Age Security Act but before making any deduction in respect of taxes payable to the government of a country other than Canada; and”?

In the absence of a similar provision in Section 40 the latter must be read so as to make its provisions applicable to Section 43(1) (b) and thus entitle the respondent to the 9% deduction. Section 43 is couched in precise and unambiguous terms which admit of no interpretation other than that given it by the respondent.

Counsel for the respondent concluded by denying that the taxpayer was seeking to obtain a deduction during 1952-56, inclusive, when Ontario was not a prescribed province and by affirming that it is claiming a deduction of 9% on $55,447.89 for the taxable year 1957 when it was a prescribed province.

According to the appellant, the wording of Sections 40 and 43 is such as to permit the deduction of the 9% mentioned in Section 40 insofar as Section 43(1) (a) is concerned and to exclude its applicability in respect of Section 43(1) (b). Furthermore, that in any event, unless it can be said that Section 43 specifies that Section 40 is applicable, the respondent is not entitled to the deduction in question in respect of its recaptured depreciation.

Although the respondent’s submission is not without merit, for the under mentioned reasons I think that the meaning given to Sections 43(1) (a), (b) and 40 by the appellant should prevail.

As pointed out by counsel for the appellant, in interpreting a taxation statute due weight must be given to every word con- tained in it, as Anglin, J., observed in Williams v. Box (1911), 44 S.C.R. 1, 24:

. To treat any part of a statute as ineffectual, or as mere surplusage, is never justifiable if any other construction be possible. The rejection or excision of a word or phrase is permissible only where it is impossible otherwise to reconcile or give effect to the provisions of the Act. . . .”

The attention of the Court was drawn to the importance of what might be termed the key-words otherwise payable as contained in Section 40, and, similarly, the importance of the words in Section 43(1) in lieu of the amount that would be otherwise payable and, in paragraph (b) the lines if the portion of the amount (in this case, $7,813.62) . . . had been included in computing the taxpayer’s income for each of the taxation years in the period determined under subsection (2).

The use of the word otherwise in conjunction with the phrase otherwise payable, as contained in Section 40, signifies, I think, that the 9% deduction therein referred to is one which is made in arriving at a tax payable and not a deduction which is made after the tax payable has been computed or ascertained. In other words, Section 40 has reference to a deduction that is permitted after having applied Section 39. If Section 40 provided for a deduction from the tax payable, instead of otherwise payable, it would lend more weight to the respondent’s submission that the deduction was applicable to the tax payable as determined by the Minister under Section 43(1) (b).

As already noted, in support of its submission that it is entitled by virtue of Section 40(1) to deduct from the total additional tax 1952-6, amounting to $7,969.91, 9% of the capital cost allowance recapture ($39,068.13) the respondent stresses the fact that what is being computed is the tax payable for 1957 while Ontario was a prescribed province and submits that as to this part of the computation the sum of $7,961.91 is ‘‘the tax otherwise payable’’ within the meaning of that phrase, as used in Section 40(1). I am unable to agree with this submission, because, in effect, it means that the Court is asked to construe the provisions of Section 43(1) as though there were added after paragraph (b) thereof the phrase ‘‘minus any amount deductible for the year under Section 40’’. Indeed, such an addition (including, however, also Sections 33, 38 and 41) was made to Section 43(1) by Section 20(1) of Chapter 49, Statutes of Canada 1960-61, and made applicable to the 1962 and subsequent taxation years. It was not made retroactive.

I wish to add that although the spreading back of 1% of the $39,068.13 in question over five years was notional in the sense that it did not necessitate the rewriting or reauditing of the respondent’s books, so as to reflect the actual inclusion thereof in each of the said years, the effect to be given to such notional spreading in this particular case, in my opinion, should be the same in either event.

Furthermore, I think all the relevant provisions of the Income Tax Act, including more particularly tax rate applicable (Section 39) and entitlement to exemption (Section 40), as they read in each of the above five years, are to be applied. In other words, I consider that the sum of $39,068.13 which was recaptured on a single sale in 1957 should be treated as if such recapture had been effected by five separate sales of $7,813.62 each and as if they occurred in each of the years 1952 to 1956 inclusive. It is to be noted that neither the tax rate under Section 39 nor the exemptive percentage rate allowed under Section 40 and its predecessor Section 37 remained uniform.

Under Section 36, which was the predecessor equivalent of Section 39, the rate of tax applicable in 1952 was 22%. It so happens that with respect to the year 1953-54 the rate under Section 39 was the same in 1957 as it was then, namely, 20 %— but this is purely accidental and occurred because the amount of the appellant’s taxable income did not exceed $20,000. If the reverse were true, the rate of taxation would have been $3,500 plus 47%, instead of the 45% rate which prevailed in 1957. The same thing can be said in regard to the year 1954—and it was only in 1955 that the 45% came into effect. In 1952 the section applicable to a deduction by a corporation of a prescribed class was contained in Section 37(1) and amounted to 5%. During 1953, 1954 and 1955 a 5% deduction was in effect, but in 1956 Section 40(1) was amended to provide for a 9% deduction, and so it remained in 1957.

Both parties, in their computation, applied the then prevailing rate of taxation, but the respondent seeks to invoke the benefit of a deduction under Section 40 in the 5-year period, on the ground that it was entitled to do so in 1957. The appellant, in testing the applicability of Section 40 as it then existed, considered—rightly, I think—that since the respondent was not a taxpayer of a prescribed class during the 5-year period in question it is precluded from invoking the benefit of the said section. Even if the respondent were thus qualified during the years 1952 to 1954 inclusive, I consider it would have only been entitled to deduct 5% of $7,813.62 in each of the said years, instead of 9% as claimed.

It is conceded that but for the respondent’s election it would have been required to pay under Section 39(1) (b) a net tax of $15,670, instead of $9,771.68 as assessed by the Minister under Section 48(1), (2), and its complaint is that although it has profited by its election it did not receive all the benefits which Section 43(1) affords. One obvious advantage it obtained is that, by reason of the separation of basic income of $16,379.74, as effected in the Minister’s computation, the respondent, instead of having to pay tax on the former at a rate of 45% under Section 39(1) (b), does so at a rate of 20% under Section 39(1) (a). An equally obvious disadvantage is that under the Minister’s computation the respondent was denied the right which under Section 39(1) it would have been entitled to deduct from the item of its recaptured depreciation. I think this is a case where, having made a free choice, the respondent must accept the ensuing disadvantages as well as the advantages, and I believe one consequence of its election was the forfeiture of its right to deduct from $7,969.91, as computed by the Minister under Section 43(1) (b) 9% on $39,068.13, being $3,516.13, which is the sole amount in issue.

I might add that it was only following a period of indecision that I arrived at the above-mentioned conclusion, and it may be that this is a case wherein it can be stated, as Addison once observed, ‘‘Much can be said on both sides.’’ Under the circumstances, I think it should be emphasized that we are here concerned with the interpretation of Sections 40 and 48, both of which confer a privilege or benefit on the taxpayer and which should be interpreted in a manner which is succinctly set out in the following observations at page 488 of the Canadian Encyclopaedic Digest, Vol. 10:

“While a taxing Act is to be construed strictly in favour of the taxpayer, a statute under which an exemption is claimed from a burden imposed upon the community at large is also to be narrowly construed against the person to be exempted. As taxation is the rule and exemption the exception the intention to make an exemption ought to be expressed in clear and unambiguous terms, and it cannot be taken to have been intended when the language of the statute on which it depends is doubtful and uncertain.”

As the President of this Court observed in Lumbers v. M.N.R.,

[1943] Ex. C.R. 202; [1943] C.T.C. 281, the taxpayer must show that ‘‘every constituent element necessary to the exemption is present in his case and every condition required by the exempting section has been complied with’’.

Counsel for the respondent states that he ‘‘does not dispute for a moment” that in the instant case the onus is on the tax- payer to clearly establish its entitlement to the exemption, but submitted that we are here dealing with language in a statute which is precise and unambiguous and which only admits of one interpretation, namely, that which the respondent seeks to put upon it.

Counsel for the appellant, for the reasons above described, is equally convinced that Sections 40 and 48 are susceptible of no other interpretation than that given them by the Minister.

As not infrequently happens when two able counsel declare that the same thing is perfectly clear in opposite senses, it is some indication that the language is ambiguous and may be capable of rival constructions.

I will conclude by saying that in my opinion the respondent has not discharged the onus of proving to my satisfaction that the assessment made by the Minister is erroneous.

For the above reasons I confirm the assessment made by the Minister and maintain the present appeal, with costs.

Judgment accordingly.