THE CHIEF JUSTICE :—This is an appeal by the Minister of National Revenue from a judgment of the Exchequer Court affirming a decision of the Income Tax Appeal Board. Section 95A(1) of The 1948 Income Tax Act, ce. 52, enacted by Section 32 of the Statutes of 1950, c. 40, provides:
“95A. (1) A private company may elect, in prescribed manner and in prescribed form, to be assessed and to pay a tax of 15% on an amount equal to its undistributed income on hand at the end of the 1949 taxation year minus its tax-paid undistributed income as of that time.’’
The respondent prepared a form, P.C. 2-1949, which together with the schedules thereto has been accepted by the appellant as an election by the respondent ‘‘in prescribed form’’ under this provision. This document was prepared in accordance with a resolution of the directors of the respondent at a meeting held on June 6, 1950 (before the amendment to the statute was assented to on June 30, 1950), and was received by the appellant on July 31, 1950. In Schedule 2 under the heading ‘‘ Capital Losses Sustained”, appears the following item—“1948 loss on Canadian Libbey-Owens Sheet Glass Company Limited shares, $114,510.25” and the net undistributed income was stated to be $79,439.07 on which the respondent paid 15% or $11,915.86.
Subsection (8) of Section 95A provides:
“ (8) The Minister shall, with all due dispatch, examine each election made under this section, assess the tax payable and send a notice of assessment to the company.’’
In accordance therewith the appellant examined the election, disallowed the deduction of $114,510.25 and added that amount to the total of the respondent’s undistributed income on hand at the end of the 1949 taxation year and sent a notice of assessment accordingly. The disallowance of the sum of $114,510.25 was made on the appellant’s construction of the definition of “undistributed income on hand’’ as it appears in Section 73A enacted by Section 28 of the Statutes of 1950, c. 40, reading, so far as applicable, as follows :
“73A. (1) In this Act
(a) ‘undistributed income on hand’ of a corporation at the end of, or at any time in, a specified taxation year means the aggregate of the incomes of the corporation for the taxation year that ended in 1917 and ending with the specified taxation year minus the aggregate of the following amounts for each of those years :
(i) each loss sustained by the corporation for a taxation year,
(ii) each expense incurred or disbursement made by the corporation during one of those years that was not allowed as a deduction in computing income for the year under this Part other than an expense incurred or disbursement made in respect of the acquisition of property (including goodwill) or the repayment of loans or capital,
(iii) the amount by which all capital losses sustained by the corporation in those years before the 1950 taxation year exceeds all capital profits or gains made by the corporation in those years before the 1950 taxation year,
(iv) the amount by which all capital losses sustained by the corporation in those taxation years after the 1949 taxation year exceeds all capital profits or sains made by the corporation in those years after the 1949 taxation year,”
The argument has proceeded mainly upon the meaning to be attached to the words ‘‘all capital losses sustained’’ in (iii).
The history of the investments by the respondent in Canadian Libbey-Owens Sheet Glass Company Limited shares has been detailed in the reasons for judgment in the Exchequer Court. It is unnecessary to repeat it because undoubtedly the shares were not disposed of before the election was made and it is for that reason that the appellant argues that no capital losses with respect thereto were sustained. Reliance is placed upon the decisions in the United States where a tax is imposed on the net balance of capital gains and losses and particularly upon the judgment in De Loss v. Commissioner of Internal Revenue (1928), 28 F (2d) 803, where Judge Learned Hand, at p. 807, states the established rule:
‘“ However, while the security remains in esse and its value may fluctuate, it is well settled that only by a sale can gain or loss be established, Eisner v. Macomber, 252 U.S. 189 (1 USTC) (32) ; Miles v. Safe Deposit Co., 259 U.S. 247, 253 (1 USTC) (66); N.Y. Life Ins. Co. v. Edwards, 271 U.S. 109, 116 (1 USTC) (172), U.S. v.White Dental Mfg. Co., supra, 401. Moreover, we understand this is to be not merely a rule of convenience, but to inhere in the essence of income arising from capital gains or losses. Nevertheless, we think it inapplicable when the security can no longer fluctuate in value because its value has become finally extinct. In such eases a sale is necessarily factitious; it establishes nothing and cannot be intended to do so, for there is no variable to determine.”
It will be noticed that even in the United States an exception is made where the value of a security has entirely disappeared, but, in any event, we are concerned with the proper construction of an entirely different enactment.
In my opinion the Exchequer Court and the Income Tax Appeal Board came to the right conclusion that an actual sale of assets is not necessary in order that it might be said that a capital loss was sustained. The evidence is clear that the value of the shares had depreciated to a sum less than the $40,000 at which the respondent valued them. I am unable to gain any assistance in coming to this conclusion from the decisions relied upon by the late Mr. Justice Potter in connection with applications under various Companies Acts where the enquiries were as to “capital which is lost’’, but I am of opinion that, upon a fair reading of all the relevant provisions, the capital losses to the extent mentioned were sustained by the respondent in the years before the 1950 taxation year.
The appellant has an alternative claim as to which nothing was said until he filed an amended notice of appeal to the Exchequer Court from the decision of the Income Tax Appeal Board. This is based upon the circumstance that within the meaning of Section 73A(1) (a) (iii) capital profits or gains had been made by the respondent in the years before the 1950 taxation year in the value of its share ownership in Bennett Glass Company Limited and in the value of certain fixed assets. The latter appears in the respondent’s books after a re-appraisal of certain real estate and buildings. The Exchequer Court decided that it was too late for the appellant to take this position but with deference I am unable to agree. There is no suggestion that any available evidence was not produced and therefore this Court is in a position to dispose of the matter finally. Capital losses and gains must, I think, be treated on the same basis and the former being more than offset by the latter the notice of assessment by the appellant stands although for a different reason from that advanced by him at the time of assessment or before the Income Tax Appeal Board.
The appeal should be allowed and the assessment restored. The appellant is entitled to his costs in this Court but under the circumstances there should be no costs in the Exchequer Court.
Rand, J.:—The narrow issue in this appeal is whether in the determination of “Undistributed Income”? as defined by Section 73A of the Income Tax Act the amount by which the value of a capital investment has depreciated can be deducted under subsection (1) (a) (iii) which reads:
‘‘the amount by which all capital losses sustained by the corporation in those years before the 1950 taxation year exceeds
(sic) all capital profits or gains made by the corporation in those years before the 1950 taxation year,”
The deduction is one of a number to be made from the aggregate of incomes for the tax years from 1917 to 1949, including, among others, under paragraph (i) income losses and paragraph
(vi) all dividends paid. The phrase “capital losses sustained” or its equivalent appears in several provisions of the statute in a context from which it is apparent that, within the conceptions of accountancy underlying the Act, it means actually realized. For example, in Section 26(d) ‘‘Business losses sustained’’; Section 39(1) (a) “Loss sustained’’; Section 75, subsections (6) and (7) “Losses sustained”.
These instances, however, afford only a limited assistance to the question raised. What is much more significant, if not decisive, is that the capital losses sustained under paragraph (iii) are the net capital losses, those that exceed the ‘‘capital profits or gains made” during the same period. “Losses sustained’’ and “profits and gains made” are clearly correlatives and of the same character; but how can profits and gains be considered to have been made in any proper sense of the words otherwise than by actual realization? This is no inventory valuation feature in relation to capital assets. That the words do not include mere appreciation in capital values is, in my opinion, beyond controversy. It is difficult if not impossible to say that where only value is being considered in which a variable inheres you can have any other than a fluctuating estimate. The word ‘‘loss’’ in the context means absolute and irrevocable, finality. That state of things is realized upon a sale; it can also be said to be realized in the ease of stock in a company which is hopelessly insolvent and has ceased business. When, on the other hand, the business is maintained and all that can be said is that in the most likely prospect the value of the shares cannot exceed a maximum, there is still no more than an estimate: the actual loss cannot in fact be so determined and unless there is that determination the statute is not satisfied. The element of appreciation illustrates the quality of fluctuation more clearly perhaps than that of depreciation, but they are essentially of the same nature. If, then, appreciation must be ruled out as I think it must be, similarly mere loss of some value while a company remains in business must be treated in the same manner.
A number of authorities were cited from the courts of the United States where capital losses are deductible from taxable capital gains. So far as these decisions are helpful, they seem to support the contention of the Crown. For example, in Royal Packing Company v. Commissioners (1927), 22 Fed. (2nd) 536, the case was one of a company having closed its doors in a state of insolvency. The immediate question was when the shares had become worthless. In the course of the reasons of the Circuit: Court of Appeals it was said :
“Nor can the deduction be claimed for a mere shrinkage in value. A loss may be said to be actually sustained in a given year if, within that year, it reasonably appears that such stock has in fact become worthless.”
Conway Company v. Lynch (1932), 258 N.Y. Rep., 245, was another case of insolvency and worthlessness of the stock. In the course of his reasons Lehman, J., speaking for the court which included Cardozo, C.J., used this language:
“True, even with that variable factor’’ (the price obtainable on a sale) ‘‘taken into consideration, the taxing authority may be able to determine that some loss is inevitable, yet when the variable factor affects the amount of the inevitable loss, it may be difficult or even impossible to devise a practical test to determine that any definite part of that loss has been sustained till by complete liquidation or sale the loss is definitely established . . . No variable factor enters into the determination of loss which is inevitable.”
DeLoss v. Commissioner (1928), 28 Fed. (2nd) 808, likewise was an instance of worthless stock. Learned Hand, J., giving the reasons of the Circuit Court of Appeals, says:
“It might have been possible to regard fluctuations in the value of securities as present losses or gains, regardless of any sale. The power immediately to realize their value in money might have been considered as equivalent to possession of the money itself, though this would, it is true, have resulted in much difficulty in administration. However, while the security remains in esse and its value may fluctuate, it is well settled that only by a sale can gain or loss be established. .. . Moreover, we understand this to be not merely a rule of convenience, but to inhere in the essence of income arising from capital gains or losses. Nevertheless, we think it inapplicable when the security can no longer fluctuate in value, because its value has become finally extinct. In such cases a sale is necessarily fictitious; it establishes nothing, and cannot be intended to do so, for there is no variable to determine.”
Several other cases from similar courts were cited but they also involved insolvency and worthlessness.
These decisions, of course, are on different statutory language directed to a different purpose, i.e., the ascertainment of capital income. As is frequently the case, the language of the provisions has, in the course of the years, been modified in the light of experience, and as it appears in Montgomery’s Federal Taxes on Corporations, Vol. 1 at pp. 361 and 383, federal corporate income taxation law in the United States by 1945 had reached the point of crystallizing the rulings of the courts in a precise specification of losses resulting from sale or exchange of capital assets and from shares of stock having become worthless, as being deductible items.
Partial but indeterminate loss in the value of stock cannot, then, under the language of paragraph (iii) be treated as absolute and irrecoverable. Any other view would, apart from all other considerations, introduce administrative difficulties of the greatest magnitude. The amount of undistributed income must be determined not only for the purpose of election for distribution but also in eases of liquidation, reorganization, stock dividends and redemptions as appears in Sections 81 and 82: and the conceptions underlying losses and gains in their application to these cases are incompatible with any other interpretation.
But whatever may be said of the loss here, it is quite impossible, in my opinion, to treat the appreciated value of the fixed assets as ‘‘profiits or gains made’’ by the company. Beyond any doubt, the value written up by the company is a fluctuating value, in its essence it is variable, and being so, no part of it comes within the area of ‘‘profit or gain made’’.
I would, therefore, allow the appeal, set aside the judgments below, and restore the assessment of the Minister with costs in this and the Exchequer Court.
Locke, J.:—The sole question to be decided by Mr. Fordham, Q.C., by whom the appeal to the Income Tax Appeal Board was heard, was as to whether the present respondent, in computing the amount of its ‘‘undistributed income” at the end of the taxation year 1949 (within the meaning of that expression in Section 73A(1) (a) of The 1948 Income Tax Act, was entitled to deduct the amount by which its investment in the preference and common shares of Canadian Libbey-Owens Sheet Glass Co. Ltd. had decreased in value by that date.
The respondent, a private company, claimed to deduct the sum of $114,510.25 from the total amount paid by it for these shares as a capital loss. By the notice of assessment dated May 22, 1951, the respondent was informed that this deduction had been disallowed. Some other changes were made in the figures submitted by the company in computing the amount of its undistributed income but no question arose as to these in the proceedings before the Income Tax Appeal Board. The respondent filed its notice of objection on July 12, 1951, complaining only of the disallowance of the amount of the loss claimed in respect of these shares and, in the notice of appeal to the Board dated February 1, 1952, the objection to the assessment was limited to this ground alone.
It was the contention of the Minister that there could be no allowance for capital losses under the provisions of paragraph
(a) (iii) of Section 73A(1), unless the loss had theretofore been ascertained by the sale or realization upon the assets. In my opinion, this position is untenable and the matter was rightly decided by Mr. Fordham, Q.C., when the appeal of the taxpayer was allowed.
The amendment to the Income War Tax Act, which first permitted private companies to pay a tax on their ‘‘undistributed income’’ as defined and to distribute it in the form of dividends free of tax to the shareholders, was enacted as Sections 94 and 96 of the Statutes of 1945, c. 23. If there were ambiguity in the language of paragraph (a) (iii) of Section 73A (1) of the Income Tax Act or doubt as to the meaning to be assigned to the expressions ‘‘all capital losses sustained’’ or “capital profits or gains made’’, and I think that, read in the context, there is none, the history of the external circumstances which led to the enactment of the legislation might be considered to assist in ascertaining the evil or defect which the amendment was intended to remedy as an aid to interpretation {Eastman v. Comptroller General, [1898] A.C. 571 at 575; River Wear Commissioners v. Adamson (1877), 2 App. Cas. 743, 764).
The 1945 legislation was enacted following the report of the Royal Commission on the Taxation of Earned Surpluses of Private or Closely Held Corporations, presided over by Mr. Justice Ives and commonly known as the Ives Report. The nature of the problem which the Commissioner was directed to consider was described in the report in the following terms:
4 The problem with which w e have to deal relates to the combined effect of income taxes and succession duties arising on the death of any of the principal shareholders of closely-held corporations with accumulated surpluses. In many instances the principal asset of the deceased is represented by his equity in the company and, in order to pay succession duties, it is found necessary to distribute a substantial part, if not all, of the accumulated surplus as a dividend. The impact of the income taxes at the prevailing rates on such a distribution is extremely serious and when combined with Federal and Provincial Succession Duties may result in the confiscation of almost the entire estate.”
The "undistributed income” of the 1945 amendment might have been more appropriately called ‘‘undistributed gains” since it included not only accumulations of income, as that expression was defined by Section 3 of the Income War Tax Act, but capital profits which did not fall within the definition and, in making the computation, capital losses, not otherwise deductible in computing income, might be deducted. Clearly, a loss has been sustained when a capital asset has permanently lost all or part of its value. In my opinion, what was contemplated by the section as enacted in 1945 and as re-enacted in substantially the same language as paragraph (a) (iii) of Section 73A(1) of the Income Tax Act of 1948, was that the capital losses or gains, the amount of which had not already been ascertained by realization upon the asset, should be determined by making a valuation. Indeed, if this were not so, I think one of the main purposes of the legislation would be defeated since, in order to take advantage of the privilege afforded by the section, it might well be necessary to sell capital assets actively used in carrying on the company’s business which might have either lost their value in part or appreciated in value. This would, no doubt, mean that, in the case of many private companies where the estate of a deceased majority shareholder wished to obtain the moneys necessary to pay succession duties from the undistributed income, this could be done only by having the company realize upon a material part of its capital assets and cease operations. In the case of the present respondent, where it is contended for the Crown that its capital assets consisting of real estate and buildings had increased very largely in value and that this increase must be taken into account in computing its "undistributed income’’, it would be necessary to sell them to determine the amount of the appreciation. This, presumably, would mean a cessation of operations. I cannot think that any such construction of the legislation was intended by Parliament. The fact that the shareholder here concerned is a corporation is, of course, an irrelevant circumstance in determining the meaning to be assigned to the language of the Act.
It was proven on the appeal before the Income Tax Appeal Board that the value of the Canadian Libbey-Owen shares was not more than $40,000 at the end of the fiscal year of the company in 1949. That the investment in the shares of this company was a capital investment on the part of the taxpayer was not ques- tioned. I respectfully agree with Mr. Fordham, Q.C., that since this capital investment had depreciated in value to at least the amount claimed by the taxpayer and there being clearly no hope of any appreciation in value thereafter, the loss had been sustained within the meaning of the section.
This, however, does not dispose of the present appeal. Had the appeal before Potter, J., been limited to the question considered before the Income Tax Appeal Board, it should properly have failed. However, other matters were put in issue on the appeal from that decision. Following the judgment of the Board, the Minister gave a notice of appeal to the Exchequer Court on July 27, 1953. The ground of appeal, as stated by that notice, was that no loss had been sustained on the investment in the Canadian Libbey-Owen shares prior to December 31, 1949. Thereafter, however, the respondent consented to an order being made under subsection (3) of Section 91 of the Income Tax Act:
‘‘directing that the appellant be permitted to plead further facts and refer to a further statutory provision in the terms of the document attached hereto and entitled ‘Further Facts and Statutory Provisions upon which the Appellant Relies’ and permitting the appellant to amend its Notice of Appeal accordingly and on condition that the respondent be permitted to make a reply to the amended Notice of Appeal.”
In the attached document further grounds of appeal were set out which raised, in the alternative, the ground that, if the respondent had suffered the capital loss referred to, it had made capital profits in those years exceeding the amount claimed :
“and particularly made capital profits or gains in the value of its share ownership of Bennett Glass Company Limited and in the value of its fixed assets as shown by an appraisal in 1948 and in its books and accounts for that year.’’
A further ground raised was that, in consequence of the foregoing, there was no amount which could be deducted from the undistributed income on hand under Section 73A(1) (a) (iii) of the Income Tax Act.
While the respondent had consented to this amendment being made, by its reply it contended that the matters referred to were irrelevant. The case for the Minister was put in first at the hearing before Potter, J. As part of that case, the income tax return of the respondent for the year 1948 was put in, together with the report of the company’s auditors. That report dated April 30, 1949, said in part:
‘“The real estate and buildings were appraised during the year by the Dominion Appraisal Company, Limited, at depreciated replacement value of $414,199.75. The book value of these assets has been increased by $216,309.22 to give effect to this appraisal. Of this sum $114,510.25 has been applied to the book value of the investment in Canadian Libbey-Owens Sheet Glass Co. Limited reducing this account to $40,000.00.
The investment in Bennett Glass Company Limited is shown at cost $32,177.39 plus $84,688.14 for profits earned since acquisition of the capital stock and $26,286.38 surplus resulting from appraisal of Real Estate and Buildings in 1948.”
The balance sheet of the company for that year showed the Canadian Libbey-Owens shares at the reduced valuation and the real estate and buildings at the appreciated value assigned to them by the Dominion Appraisal Company.
The respondent called as a witness Mr. A. G. Hayes and, during the course of his examination-in-chief, produced a copy of the minutes of a directors’ meeting of the respondent held on October 9, 1948, approving what was called the ‘‘writing up” of the book value of its Montreal property by an amount in excess of $119,000, the increase to be carried to the depreciation and property reserve account and the charging against that account of the amount of the loss in value of the Canadian Libbey-Owens shares. This resolution was passed subject to the approval of the auditors, who later approved the entry in the company’s books as the value of its real estate and buildings of the figure fixed by the appraisal company, which represented an increase of $217,309.22 in the book value of these assets. The financial statements giving effect to these changes were thereafter approved at a shareholders’ meeting held on June 16, 1949.
While I think the reference to the investment in Bennett Glass Co. Ltd. is not clear, there can be no doubt that the directors, the auditors and the shareholders were all of the opinion that the value of the real estate and buildings of the company had by the end of 1948 increased by an amount considerably in excess of the loss claimed upon the Canadian Libbey-Owen shares. Just as, in my view, the investment in the shares of Canadian Libbey- Owen was capital investment, I think the investment in the real estate and buildings acquired, it may properly be assumed, for the purpose of carrying on the company’s business activities, was a capital investment and, its appreciation in value thus recognized, a capital profit or gain within the meaning of the subsection.
Mr. Justice Potter, pointing out that the question as to whether there had been capital profits or gains in the value of the shares of the Bennett Glass Company and of its fixed assets had not been considered in making the assessment and, consequently, not dealt with by the Income Tax Appeal Board, considered that he should not deal with the matter, saying that, while he expressed no opinion on the merits of the claim, he did not think that the assessment could be varied or a new assessment made by such procedure.
Had it been proposed on behalf of the Minister that a new assessment be made, or one varying that of which notice had been given on May 22, 1951, I would be in agreement with this, but that is not what was proposed. It was with the consent of the respondent that the order was made permitting the Minister to raise the issue on the appeal as to the appreciation in value of the real estate and buildings and, as shown, evidence was tendered both by the Minister and the respondent on the point. The issues were tried by the learned judge, not on the facts disclosed on the appeal to the Income Tax Appeal Board but on the evidence adduced before him, which appears to me to demonstrate that the loss in value of the Canadian Libbey-Owen shares had been more than made up by the appreciation in value of the other capital assets. The objection that the evidence was irrelevant cannot be supported, in view of the course of the proceedings.
In the result, I would allow the appeal and restore the assessment of May 22, 1951. I would allow the appellant his costs in this Court and, in my opinion, there should be no costs allowed of the appeal to the Exchequer Court.
CARTWRIGHT, J. (concurred in by Taschereau, J.) :—Two questions arise in this appeal. The first is whether the decrease in value of certain shares of Canadian Libbey-Owens Sheet Glass Co. Ltd. acquired by the respondent in the years 1920, 1921 and 1922 at a cost of $154,510.25 and written down in its books to $40,000 in 1948 was a capital loss sustained by the respondent within the meaning of Section 73(1) (a) (iii) of the Income Tax Act. The second is whether the appreciation in value of certain shares of Bennett Glass Co. Ltd. and certain fixed assets owned by the respondent and written up in its books during the same period was a capital profit or gain made by the respondent within the meaning of the same subsection.
The relevant facts and statutory provisions are set out in the reasons of other members of the Court.
The main submissions of the appellant are (i) that a decrease or an increase in the value of a capital asset still retained in specie by a taxpayer does not constitute a capital loss sustained or a capital gain made until the amount of such loss or gain is established by the sale of the asset, and (ii) alternatively, that if a decrease in value of one unrealized capital asset is to be treated as a loss then an increase in value of another unrealized capital asset must be treated as a gain; that is to say, the taxpayer cannot blow hot and cold.
For the reasons given by my brother Rand I agree with his conclusion that a loss or gain to come within the meaning of the subsection must be final in the sense of putting an end to doubt; but in my opinion a loss in value of a retained asset may be shown to be final although it is not total. On the evidence, it appears to me that the respondent established not only that the shares of Canadian Libbey-Owens Sheet Glass Co. Ltd. had decreased in value to $40,000 but also that there was no possibility of any increase in their value beyond that figure. To make such proof in regard to the shares of a company still carrying on business will usually be difficult and may often be impossible but in the case at bar it is shown that the company had parted with all its fixed assets, that its liabilities substantially exceeded its assets and that its only source of income was a commission contract expiring in 1961 yielding a revenue such that an increase in value of the stock above the figure mentioned was beyond the bounds of practical possibility. Proof that, at the critical date, the shares had decreased in value to $40,000 would not have been sufficient to establish a loss within the meaning of the subsection; but, in my opinion, the respondent has satisfied the further onus of negativing the possibility of an increase beyond that figure. I conclude that the first question should be answered in favour of the respondent.
As to the second question, I think that, by parity of reasoning, it follows that to establish a capital gain in regard to an asset still held in specie by the taxpayer it must appear not only that there has been an increase in its value but that there is no possibility of a corresponding decrease while it continues to be so held. Whether this could in any case be established I do not stop to inquire, as, in the case at bar, there is no evidence to negative such a possibility. I conclude therefore that the second question should also be answered in favour of the respondent.
For the above reasons I would dismiss the appeal with costs.
Appeal allowed.