Distillers Corporation—seagrams Limited v. Minister of National Revenue, [1980] CTC 2737

Guy Tremblay:—The case at bar was heard at Montreal, Quebec, on July 12, 1978.

The last written submissions were received by the Board in June 1979 after which the case was taken under advisement.

1. The Point at Issue

The crux of the matter is whether during the years 1968, 1969, 1970 and 1971, a non-resident corporation was a subsidiary controlled corporation of the appellant company. The latter owns directly 12.3% of the ordinary shares, and indirectly the other 87.7% of the ordinary shares of the nonresident company. An amount of more than $3,000,000 in taxes is involved in that question. Penalties of nearly $600,000 were also levied by the respondent for fraud or gross negligence.

2. Burden of Proof

Concerning the amount of tax levied, the burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182. Concerning the amount of penalty levied, the respondent has the burden of proof, as provided in subsection 163(3) of the Income Tax Act.

3. Facts

A substantial portion of the facts is not in dispute and is contained in the “Agreed Statement of Facts” presented by the parties at the hearing. It reads as follows:

3.01 Agreed Statement of Facts:

1. Prior to June 22nd, 1962, Distillers Corporation—Seagrams Limited, a Canadian company, owned all of the issued and outstanding shares of Seagram Distillers Limited (a non-resident United Kingdom company at all times material to these appeals) consisting of five thousand (5,000) ordinary shares of the par value of £1.

2. On June 22nd, 1962, Seagram Distillers Limited issued 4 million convertible preference shares of the par value of £1, and 375,000 ordinary shares of the par value of £1 additionally to Distillers Corporation—Seagrams Limited, and 1,550,000 ordinary shares of £1 to Joseph E Seagram & Sons, Inc (a USA Corporation).

3. During the period material to these appeals no additional ordinary shares were issued to the Appellant by Seagram Distillers Limited while additional ordinary shares were issued to J E Seagrams & Sons, Inc.

4. At all relevant times the Appellant owned all of the issued and outstanding shares of Centenary Distillers Limited (a Canadian company, exempt from tax under section 71 of the Income Tax Act.)

5. At all relevant times, Centenary Distillers Limited owned all of the issued and outstanding shares of Joseph E Seagram & Sons, Inc.

6. Various loans were made by the appellant to Seagram Distillers Limited (formerly Robert Brown Limited) as outlined in the attached schedules A, B and C.

7. The computation of the loans that have remained outstanding for one year or longer without interest at a reasonable rate having been included in computing the income of the appellant, has properly been set out in sub-paragraphs 15(c) and

(d) of the Amended Rules to the Notices of Appeal for each of the years 1968,1969, 1970 and 1971.

3.02 In the evidence before the Board, it was admitted by the respondent in its written submission that the loaned money was used in the subsidiary corporation’s business for the purpose of gaining or producing income within the meaning of subsection 19(3) of the old Act.

3.03 It was also admitted by both counsel that no tax has been paid on the amount of the loan under Part III of the old Act (sections 106 to 110A).

3.04 Concerning the 4 million convertible preference shares (mentioned in above subparagraph 2 of paragraph 3.01) issued by Seagram Distillers Limited to the appellant corporation, they did not have full voting rights under all circumstances. The holder of those shares, the appellant company, indeed was at all relevant times from date of issue entitled to convert the shares at any time after July 31, 1977 into ordinary shares at a one-to- one rate plus one ordinary share for every Pound Sterling of dividends in arrears. As the evidence of Mr Alan Sharp showed, no dividends were ever paid on preference shares.

3.05 On July 28, 1965, Seagram Distillers Limited, the British corporation issued options for the acquisition of additional ordinary shares to the extent of 1,550,000 to Joseph E Seagram & Sons, Inc (the USA corporation) and 380,000 to Distillers Corporation—Seagrams Limited (the appellant corporation). During the 1965-66 period, Joseph E Seagram & Sons, Inc (the USA corporation) exercised its options to acquire these additional ordinary shares.

3.06 Concerning the loans made by the appellant to the British corporation, subparagraphs 15(c) and (d) of the amended reply to the notice of appeal for each of the years 1968, 1969, 1970 and 1971 gave the non-contradicted facts:

For the year 1968

(c) From 1966 till the end of its 1968 taxation year, the appellant loaned to Seagram Distillers Ltd an amount of $25,802,999.51, computed as follows:

—balance outstanding at July 31st, 1967	$19,983,419.51
— loan of August 23, 1967	4,785,480.00
— loan of July 22nd, 1968	1,034,100.00
TOTAL	$25,802,999.51

(d) The amount of $25,802,999.51 has remained outstanding for more than one year without interest at reasonable rate having been included in computing the appellant’s income;

For the year 1969

(c) From 1966 till the end of its 1969 taxation year the appellant loanded to Seagram Distillers Ltd an amount of $35,526,909.82, computed as follows:

— Balance outstanding at July 31/68	$25,802,999.51
— Loan of Nov 19/68	2,845,067.11
— Loan of Nov 20/68	1,296,000.00
— Loan of Nov 26/68	1,262,843.20
— Loan of Nov 28/68	1,296,000.00
— Loan of Dec 3/68	1,296,000.00
— Loan of Dec 9/68	1,728,000.00
TOTAL	$35,526,909.82

(d) The amount of $35,526,909.82 has remained outstanding for more than one year without interest at reasonable rate having been included in computing the appellant’s income;

For the year 1970

(c) From 1966 till the end of its 1970 taxation year, the appellant loaned to Seagram Distillers Ltd an amount of $27,750,909.82, computed as follows:

—balance outstanding July 31, 1969	$35,526,909.82
— less repayment of Feb 26, 1970	7,776,000.00
	$27,750,909.82

(d) The amount of $27,750,909.82 has remained oustanding for more than one year without interest at reasonable rate having been included in computing the appellant’s income;

For the year 1971

(c) From 1966 till the end of its 1971 taxation year, the appellant loaned to Seagram Distillers Ltd an amount of $27,750,909.82;

(d) The amount of $27,750,909.82 has remained outstanding for more than one year without interest at reasonable rate having been included in computing the appellant’s income;

3.07 The respondent reassessed the appellant for the taxation years after adding to its declared income as deemed interest (5%) by virtue of subsection 19(1) of the old Act:

3.08 The increases of taxes due to the added interest are as follows:

3.09 In the notices of reassessment, the respondent levied a 25% penalty for each year concerned by virtue of subsection 56(2) of the old Act for gross negligence or fraud. The penalties are as follows:

3.10 The respondent issued the notices of reassessment for the four years in question on June 18,1973.

3.11 Following the production of the notices of objection on August 23, 1973, the respondent submitted his answer on November 28,1973, confirming the notices of reassessment issued on June 18, 1973.

3.12 On January 29, 1974, notices of appeal for the concerned taxation years were filed before the Tax Review Board.

4. Law—Precedents—Comments

4.1 Law

The main sections of the old Act implied in the case at bar are the following ones: 6(1)(b), 19(1), (2) and (3), 56(2), 139(1)(aq), 139(5) and 139(5a) and 139(5d). They will be quoted if necessary.

4.2 Precedents

The following precedents were cited by the parties:

A. Interpretation of Law must be large:

1. Charles David Moore v MNR, 33 Tax ABC 160; 63 DTC 734;

2. Alain G L Gaudet v HMQ, [1978] CTC 138; 78 DTC 6073;

3. HMQ v Alain G L Gaudet, CAF No A-595-77, Sept 6/78;

B. Interpretation of the Law must be strict and restrictive:

4. Wylie v City of Montreal (1885), (12) SCR 384;

5. W A Sheaffer Pen Company of Canada Ltd v MNR, [1953] CTC 345; 53 DTC 1223;

6. HMQ v Continental Air Photo Ltd, [1962] CTC 495; 62 DTC 1306;

C. Interpretation of “Control of a Corporation”: Paragraph 139(5d):

7. Hudson’s Investment Company (London) Limited v MNR, [1967] Tax ABC 1157; 68 DTC 83;

8. Massey-Ferguson Ltd v HMQ, [1977] CTC 6; 74 DTC 6529; 77 DTC 5013;

D. An option over all shares is equal to an interest in all shares: Paragraph 139(5d)(b):

9. CIR v Tring Investments Ltd, 22 Tax Cases 677;

E. Controlling interest embraces indirect and direct controlling interest:

10. British American Tobacco Co Ltd v CIR, 29 Tax Cases 50;

11. Vineland Quarries and Crushed Stone Limited v MNR, [1966] CTC 69; 66 DTC 5092;

12. A Bibby v CIR, 29 Tax Cases 167;

13. MNR v Consolidated Holding Company Limited, [1972] CTC 18; 72 DTC 6007;

14. Vancouver Towing Co Ltd v MNR, [1947] CTC 18; 2 DTC 706;

15. Army & Navy Department Store (Western) Ltd v MNR, [1953] CTC 293; 53 DTC 1185;

16. Poppy Beale Glaspie v MNR, 33 Tax ABC 274; 63 DTC 828;

F. A notice sent to a parent company for the subsidiary is valid:

17. Air-Care Ltd v Blais and Les Immeubles Pro-can Limitée, [1964] QSC 241;

G. Penalty:

18. Alex Pashovitz v MNR, [1961] CTC 288; 61 DTC 1167;

19. Arthur Thibault v MNR, 27 Tax ABC 76; 61 DTC 446;

20. Alfred Paquette v MNR, 27 Tax ABC 395; 61 DTC 597;

21. Allied Farm Equipment Limited v MNR, [1972] CTC 619; 72 DTC 6086;

H. The meaning of the term “belong”:

22. Woodworth v Lantz, [1910] NSR 221;

23. Sheriff of the County of Waterloo v Mutual Life of Canada, 59 DLR (2d) 660;

24. Lusk v City of Calgary, 28 DLR 392;

25. Reconfirmation of Local Improvement Tax Return (1909), 12 WLR 573;

26. Vancouver v Attorney General of Canada, [1944] 1 DLR 497;

27. Myerson v Collard and the Commonwealth High Court of Australia (1918), 25 CLR 154;

28. The Governors of St Thomas, St Bartholomew’s and Bridewell Hospitals v Hudgell, [1901] QB 364;

29. Kurima Son of Kanue v The Queen, [1955] AC 197;

30. Heritable Reversionary Company Ltd and (M’Kay’s trustee), [1892] AC 598.

4.3 Comments

4.3.1 The requirements of taxation and the crux of the matter

First it is necessary to quote section 19 of the old Act, on which the respondent’s assessments are based:

19.(1) Where a corporation resident in Canada has loaned money to a nonresident person and the loan has remained outstanding for one year or longer without interest at a reasonable rate having been included in computing the lender’s income, interest thereon, computed at 5% per annum for the taxation year or part of the year during which the loan was outstanding, shall, for the pur- pose of computing the lender’s income, be deemed to have been received by the lender on the last day of each taxation year during all or part of which the loan has been outstanding.

(2) Subsection (1)does not apply if a tax has been paid on the amount of the loan under Part III.

(3) Subsection (1) does not apply if the loan was made to a subsidiary controlled corporation and it is established that the money that was loaned was used in the subsidiary corporation’s business for the purpose of gaining or producing income.

First, from the wording of this section, it is clear that the appellant is not exempt from tax by the application of only one exception. It could be exempted only by the fulfillment of the three requirements described in the subsections 19(2) and 19(3). Two are admitted: the loans were used in the subsidiary corporation’s business for the purpose of gaining or producing income (see paragraph 3.02) and the tax has not been paid under Part III (see paragraph 3.03).

There remains the other condition (first part of subsection 19(3)) which is the crux of the matter: Is the British corporation a subsidiary controlled corporation of the appellant corporation? According to the appellant, there are two series of arguments in this matter. One involves: A—the interpretation of paragraph 139(1)(aq) (see paragraphs 4.3.2 to 4.3.5), and the second involves B—the interpretation of subsections 139(5), 139(5a), 139(5b) and 39(4a) (see paragraphs 4.3.6 to 4.3.11.4).

A. Interpretation of 139(1)(aq)

4.3.2 Subsidiary Controlled Corporation

Paragraph 139(1)(aq) of the old Act gives the definition of “subsidiary controlled corporation”:

“subsidiary controlled corporation” means a corporation more than 50% of the issued share capital of which (having full voting rights under all circumstances) belongs to the corporation to which it is subsidiary;

In French the definition is:

“corporation filiale contrôlée” signifie une corporation dont plus de cinquante pour cent du capital-actions émis (admis en toute circonstance aux pleins droits de vote) appartient à la corporation dont elle est la filiale;

4.3.3 Wide or strict in interpretation

In reading the former definitions, the first point the Board notes is that the expression “subsidiary controlled corporation” “means” (in French “signifie”) and not “includes” (in French “inclut”) the given definition. According to the ordinary interpretation of such words, when the word “includes” is used, it means that besides the ordinary meaning of the expression, there is another meaning, the one which is given in the definition. However, when the word “means” is used, it means that the definition of the expression is limited to the exact words of the given definition and does not mean the ordinary meaning of the expression, or word.

The well-known teacher of the Faculty of Law at Laval University, Jean- Charles Bonenfant, recently deceased, wrote in his rewritten course “Elaboration et interprétation des lois” at 37:

Lorsque l’article de définitions utilise “signifie” (means), il faut alors lire le texte d’une manière totalement différente. Cette expression implique une définition restrictive, cad une définition qui limite le sens de ce mot à celui qu’on lui donne dans le texte législatif. Ainsi l’on ne tient pas compte du sens ordinaire dans le texte législatif; on doit également exclure tous les autres sens.

and the learned teacher quotes Denisson, J in Black v Chaw (1913), 33 NZLR, p 194 at 196:

Where a statute says that a word or phrase shall “mean” not merely that it shall “include” certain acts or things, the definition and no other meaning can be assigned to the expression that is put down in the definition.

Means . . . must be taken to rigidly define and limit the meaning of the word, in that part of the section in which the interpretation is made applicable, to the actions enumerated, to the exclusion of any others.

Consequently, the expression “subsidiary controlled corporation” is restricted to the exact words of the given definition and does not signify the ordinary meaning of the expression “subsidiary controlled corporation”. The control of a subsidiary in its ordinary meaning, among other things, includes the indirect control of the common shares of the subsidiary. This is explained in a list of precedent cases among which some are cited above (paragraph 4.2, section E, 10 to 16).

Although the ordinary meaning of “subsidiary controlled corporation” cannot be considered, it is important to add that the words of the given definition of the expression themselves must be construed in their ordinary meaning. Consequently, it is not impossible also to arrive at the conclusion, among other things, that the given definition of “subsidiary controlled corporation” includes indirect control of the common shares.

Another aspect must be underlined: subsection 19(3) and its complement, paragraph 139(1)(aq), are exemption provisions. consequently, the following principle of interpretation must be applied: taxation is the rule and exemption the exception. Consequently again, if there is a reasonable doubt of the non-application of the legal exemption because it is ambiguous, there is no exemption at all. On this aspect, very often the courts have quoted Sir W J Ritchie, CJ of the Supreme Court of Canada in Wylie v City of Montreal (1885), 12 Can SCR 384 at 386 where he said:

I am quite willing to admit that the intention to exempt must be expressed in clear unambiguous language: that taxation is the rule and exemption the exception, and therefore, to be strictly construed;

The learned Thorson, J, in W A Sheaffer Pen Company of Canada Ltd v MNR, [1953] CTC 345 at 349; 53 DTC 1223 at 1225, after quoting the learned Judge Ritchie above, added:

Then I put the rule of construction of an exempting provision of the Income War Tax Act as follows:

Just as receipts of money in the hands of a taxpayer are not taxable income unless the Income War Tax Act has clearly made them such, so also, in respect of what would otherwise be taxable income in his hands a taxpayer cannot succeed in claiming an exemption from income tax unless his claim comes clearly within the provisions of some exempting section of the Income War Tax Act: he must show that every constituent element necessary to the exemption is present in his case and that every condition required by the exempting section has been complied with.

A similar rule of construction should be applied in the case of a statutory right of deduction such as that conferred by section 5(p) from which it follows that if a taxpayer cannot clearly bring his claim for deduction within the express terms of the provisions conferring the right of deduction he is not entitled to it.

The learned Noël, J said in an excise tax case, HMQ v Continental Air Photo Ltd, [1962] CTC 495 at 505; 62 DTC 1306, at 1312:

We are not dealing here with a tax charging section but with an exemption provision, and therefore, if there is any doubt as to which of the two possible conclusions should be preferred, the narrowest and strictest should be adopted in order to give the benefit of exemption to the narrowest group, consistent with the meaning to be given to the words “portrait photography”.

The principles of interpretation can be summarized as follows:

1. As a tax law is public law, it must be strictly interpreted in the sense that there is no room for intention, equity nor presumption, there is only room for interpretation of the wording, for what is said and clearly said.

2. A taxing section shall be strictly interpreted in the sense that if it is ambiguous it shall be interpreted in the taxpayer’s favour: there is no taxation. It is restrictive for the legislator.

3. Once the object of the taxation is clearly established, the following principle applies “Taxation is the rule, and exemption, the exception”. This principle gives rise to the following one.

4. An exemption provision must be strictly interpreted in the sense that if it is ambiguous, it shall be interpreted in favour of the taxation authoritis, in order to grant the minimum exemption possible or none at all. It is restrictive for the taxpayer.

4.3.4 Meaning of “belong” and “appartenir”

In studying the ordinary meaning of the words of the given definition of “Subsidiary Controlled Corporation” the Board states the most important word is the word “belong” (in French “appartenir”). The dictionary defines them (4.3.4.1). The Courts decided about that (4.3.4.2). The Income Tax Act also uses the same words in the same section (4.3.4.3).

4.3.4.1 The dictionary defines them as follows:

1.a. The Shorter Oxford English Dictionary on Historical principles Vol I A-M, 3rd Edition, Oxford, “belong”:

1. “to go along with, as an adjunct, function, or duty;

2. to pertain, concern or relate;

3. to be the rightful possession of:

4. to be connected with”.

1.6. Webster’s Third New International Dictionary Unabridged—A Merriam-Webster G & C Merriam Co, Mass USA “belong”:

“to be the property of a person or thing”.

1.c. Littré, Dictionnaire de la Langue française, p 168, “appartenir”:

1. “être la propriété de;

2. être le droit ou le privilège de”.

1.d. Robert, Dictionnaire Alphabétique et Analogique de la Langue Française, Vol 1, p 186, ABC, Paris 1972 “appartenir”:

1. “être à quelqu’un en vertu d’un droit, d’un titre; v Propriété

2. être le droit, l’apanage, la privilege, la prérogative ou le propre, le caractère particulier de quelqu’un”.

4.3.4.2 The court decisions:

Many times the courts decided the ordinary meaning of “belong”:

2.a. “belong”: connotes ownership

2.a.1 In Myerson and Collard (1918), 25 CLR 154, the words “belonging to” connote beneficial ownership; “they are not a term of art”;

2.a.2 In Heritable Reversionary Company Ltd and Millar (M’Kay’s trustee) at 606, Lord Herschel I said:

the words “belonging to” are not technical; and I do not think that a heritable estate of which the bankrupt is a bare trustee and in which he has no beneficial interest can with any propriety be said to “belong” to him.

and at 621, Lord Macnaghten said:

The words “property” and “belonging to” are not technical words in the law of Scotland. They are to be understood, I think, in their ordinary signification. They are in fact convertible terms; you can hardly explain the one except by using the other. A man’s property is that which is his own, that which belongs to him. What belongs to him is his property.

2.a.3 In Massey-Ferguson Ltd v HMQ, this case was first heard by the Tax Review Board [1973] CTC 2088; (73 DTC 66). The facts are well summarized as follows in 73 DTC 66:

Company v, which was a wholly-owned subsidiary of the appellant company, had no office of its own, no employees and no bank account. Its directors were full-time employees of the appellant. Another firm, company P, was in turn a wholly-owned American subsidiary of company V and was engaged in the sale and servicing of diesel engines. In 1967 company P was in need of operating capital and approached the appellant for a loan in the amount of $1,000,000. The appellant agreed and sent the money to company P through its own subsidiary company V, presumably to ensure that the loan would be interest-free. When the Minister added a sum in excess of $30,000 to the appellant’s income as deemed interest, the appellant objected, claiming that there was no loan from the appellant to company P and, alternatively, that company P was a subsidiary controlled corporation.

HELD: The appeal was dismissed. The Minister has acted correctly in assessing the appellant company for deemed interest received on the loan to company P. Evidence in the form of letters between the appellant and company P never suggested there was to be a loan to company V at all. The appellant spoke only of a loan to company P via company V. The true fact was that this alleged transaction between the appellant and company V was a fiction designed to avoid taxation of the interest on the loan. The Board also rejected the contention that company P was a subsidiary controlled corporation of the appellant.

The Federal Court, Trial Division (the learned Heald, J) ([1974] CTC 671; 74 DTC 6529) confirmed the conclusion of the Tax Review Board. Heald, J said at 677 [6534]:

Plaintiff’s counsel relied on the decision in Vineland Quarries v MNR. However, the word there being considered was the word “controlled” as used in section 39(4)(b) of the Act. I would have no hesitation, on the facts in this case, in concluding that the plaintiff controlled Perkins. However, the word used in section 139(1)(aq) is “belongs” and in my view, the primary natural meaning of that word connotes ownership. There can be no doubt on the facts here, that all of the Perkins shares were owned by Verity, and thus belonged to Verity and not to t-he plaintiff. There is no doubt, that because of its control of Verity, the plaintiff Was in a position to acquire the shares of Perkins. However, it did not choose to do so and on the basis of the plain and unambiguous meaning of the words used in section 139(1)(aq) of the Act, I have concluded that, at all relevant times, Perkins was not a subsidiary controlled corporation of the plaintiff and has thus not brought itself within the exception provisions of section 19(3) of the Act.

It is true that the Federal Court of Appeal ([1977] CTC 6; 77 DTC 5013) has reversed the decision of the learned Judge Heald but it is not on the point cited above. Indeed the Federal Court of Appeal declared that there was no sham in the transaction and consequently it was perfectly legitimate for company V to get the loan from the appellant and then, in turn, make a loan to the foreign corporation, its wholly owned corporation. At 16 [5020], Urie, J of the Federal Court of Appeal said:

There were two ways at least in which it could be done, in one of which there was an inherent risk of attracting tax, ie by making the interest free loan directly from the Appellant to Perkins, where, if the latter were found not to be a “subsidiary wholly-owned corporation” of the Appellant within the meaning of section 139(1)(aq) of the Act, that risk could be transposed into an actual tax liability under section 19(1). The other method eliminated that risk by having Verity lend the money since Perkins was its “subsidiary wholly-owned corporation” and, the latter being a non-resident corporation, section 19(3) became applicable to the loan. That was the method chosen after the business decision to loan the money to Perkins had been made, following which, in due course, the debtor rights and obligations came into existence.

2.b. “Belong”: connotes “in the possession”, “control of”:

2.6.1 In Sheriff of the County of Waterloo v Mutual Life Assurance Co of Canada, 59 DLR (2d) 660 at 662, this case illustrates the point that the term “belong” should be given an elastic meaning depending on the circumstances in which it is used. It is not necessarily definable once and for all as meaning “absolute ownership” but depends upon the context in which it is used. In this case the court dealt with the Ontario Education Act and interpreted “belonging to” as “in the possession or control of”:

Section 16 of the Execution Act provides that the Sheriff shall seize any money or bank notes, cheques, bills of exchange, promissory notes, bonds, mortgages, specialities or other securities for money belonging to the judgment debtor and shall, subject to the Creditor’s Relief Act, RSO 1960, c 78, pay any money or bank notes so seized to the execution creditor. In the absence of authority to the contrary. I interpret “belonging to” as “in the possession or control of” for the section makes no provision to determine claims or ownership of money or bank notes adverse to that of the judgment debtor. Section 17 on the other hand sets out the manner in which “property” allegedly that of the execution debtor but claimed by a third party may be seized and it provides for determination of adverse ownership.

The reference in the above-mentioned case to “in the possession or control of” a party, may be linked with respondent’s admission that Distillers Corporation—Seagrams Limited controlled Seagrams Distillers Ltd as it controlled the other company, Joseph E Seagram & Sons Ltd, which had shares in Seagram Distillers Ltd.

2.6.2 Another illustration of the wide interpretation which may be given to the term “belongs” is found in the case of Lusk v City of Calgary, 28 DLR 392 which dealt with the question of the liability of the City of Calgary for damages caused by reason of the failure to keep the approaches to a bridge, “belonging to the city” in good repair. The issue was whether the bridge and its approaches “belonged” to the city. At 395 and 396 the court stated the following:—

The appellant, however, contended that, by the true construction of the statute or ordinance incorporating the city, there was no liability imposed upon the city in any case to keep the approach in repair.

Sec 158 of the Ordinance, says:

“Every public street, road, square, or other highway within the city, shall be vested in the city and shall be kept in repair by the corporation.”

Sub-sec 2, subsequently passed, enacts that:

“Every public road, street, bridge, highway, alley, or other public place, “belonging to the city” including all crossings, sewers, culverts and approaches, grades, sidewalks, and other works made or done thereon by the city or by any person with the permission of the council, shall be kept in repair by the city,”

and the sub-section goes on to impose civil liability for damages caused by reason of default. The argument of the appellant is this: the sub-section imposes the duty to repair only with respect to roads and highways “belonging to the city.” It is contended that this phrase means vested in the city, as provided by the preceding clause, that the preceding clause does not contain the word “bridge”, that the bridge over the canal was therefore not vested in the city and so did not “belong to the city”, that the term “bridge” includes under the law all approaches to a bridge, that therefore the approach not being “vested in the city” did not “belong to the city” and therefore the sub-section does not impose any obligation to repair with respect to it.

It seems to me that this argument is a very strained one. In the first place, I am not sure that the expression “belonging to the city” might not very properly be interpreted in a wide general sense as “forming part of or being within the city”. But even if that suggestion is not acceptable and if we must interpret the phrase in the light of the words of the previous clause and take it to mean “vested in the city” in the sense of ownership, I am unable to see how this helps the appellant.

2.6.3 In the case of Re Confirmation of Local Improvement Tax Return (1909), 12 WLR 573, the Alberta Local Improvement Act provided that “the council may cause to be levied in each year ... a tax . .. upon every owner or occupant in the district for all land owned or occupied by him.” The term “owner” was defined to include “any person who has any right, title or estate whatsoever or any interest other than that of a mere occupant in any land.” The issue to be decided was whether a company entitled to a grant of land from the Crown but which had not yet received the Crown patent was liable to assessment under the Act as owners of the land. The right of the company to receive the grant was not dependent upon the exercise of any discretion by the Crown but rather upon the fulfillment of certain stated factual conditions and upon payment of the survey costs and incidental expenses. The situation described is somewhat like an option or conversion right to acquire common shares of a company upon payment of the exercise price or the fulfillment of any formal conditions prior to conversion. The company argued that it was not an owner of the land since the land was vested in the Crown and by virtue of section 125 of the BNA Act land “belonging to the Crown” could not be subject to taxation. The court held that land in respect of which a company is entitled to a grant from the Crown although the patent is unissued, such land is vested in the Crown for a bare legal estate and the whole beneficial interest in the land is vested in the company and thus it is not land “belonging to” the Crown within the meaning of section 125 of the BNA Act. The Alberta Court of Appeal stated as follows:

What is the meaning of the words “belonging to”? Prima facie it is their ordinary meaning.

In the case between the individual vendor and purchaser, under an agreement, where the whole purchase money has been paid, and the purchaser is entitled to a transfer on request, in my opinion the purchaser could, and the vendor could not, swear that he was the owner of the land—that the land belonged to him—simpliciter. So here, in my opinion, an officer of the company could, long prior to patent, with an absolutely clear conscience and without hesitation, have sworn simpliciter that the land in question was land belonging to the company, and a representative of the Crown could not simpliciter swear that it was land belonging to the Crown.

The only conceivable reason for the exemption clause in question seems to be to protect the interest of the Crown. In the case under consideration, as soon as the whole consideration entitling the company to a free grant had passed to the Crown, the Crown had no interest.

Authority for the interpretation I have given to the words “belonging to” seems to me unnecessary, but reference may be made to Doe v Terry, 5 L JMC 27; and other cases discussed in St Nicholas Deptford v Sketch ley, 17 LJ (MC).

2.0.4 In the case of Vancouver v Attorney General of Canada, [1944] 1 DLR 497, Hudson, J dealt with the issue of whether certain property “belonged to’’ the Crown. In this case, the Vancouver Incorporation Act, 1921, made the registered owner of land liable for taxes assessed upon the land and calculated according to a separate valuation of the land the improvements thereon. The Crown had leased land and had erected a building thereon but was obliged, at the end of the lease, to remove the building. At 515, Hudson, J stated:

The result is that the Crown had the sole beneficial use and ownership of the building. The real situation is that the building never became the property of the landlord and, for that reason, no conveyance from it was called for. The exemption from taxation under s 125 is of “Lands and Property be longing to the Crown.” There is no limitation on the kind of property. It may be real or personal, tangible or intangible, with a title legal or equitable. The words “belonging to” are more comprehensive than the words “owned by’’. That the equitable title of the building is in the Crown could hardly be open to doubt and, for the purposes of exemption, beneficial ownership does not differ from legal ownership, (6 Hals, (2nd ed), pp 736 et seq) and was recognized by this Court in the case of Quirt v The Queen (1891), 19 SCR 510.

Hudson, J wrote the dissenting judgment in this case but he was the only judge who dealt with the meaning of the term “belonging to’’.

4.3.4.2.3 Conclusion of the paragraph 4.3.4.2.2

In the judgments summarized above in paragraph 4.3.4.2.2.b, the word “belong’’ is interpreted in a wide general sense, depending on the special circumstances in which it was used in each case.

According to the appellant, there are special circumstances in the present case one of which is the 4 million convertible preference shares issued on June 22, 1962 by the foreign company to the appellant (paragraph 3.01“2”) which was entitled to convert them at any time after July 31, 1977, into a one-to-one rate plus one ordinary share for every Pound Sterling of dividends in arrears. No dividends were ever paid on preference shares (paragraph 3.04). From an arithmetic point of view, the conversion of the preference shares in 1977 would have vested control in the appellant company of the foreign company, despite any arrears in dividends.

It is the Board’s opinion that the wide meaning of the word “belong’’ resulting from the possible control of the foreign company in 1977 cannot be applied for the years prior to August 1977 unless there is a specific section in the Act which provides the contrary. Indeed, the definition in paragraph 139(1)(aq) is applicable to the present case for the years 1968 to 1971. The circumstances do not clearly express that the meaning of the future control, ie the future and possible property of the majority of the shares in 1977 must be preferred to the meaning of the actual property in 1968 to 1971 (which was the property of the minority of the shares). In such a case, the Board refers to the principle of strict interpretation explained in paragraph 4.3.3.

Consequently the meaning of “belong” which connotes present and actual property must be preferred to the meaning which connotes future property unless there are specific sections in the Act which provide the contrary.

4.3.4.3 The Income Tax Act uses the term “belong”

It is a basic principle of interpretation of law that the meaning of a term used in a section of a law has the same meaning as the meaning of the same word used in another section of the same law. In the case of Archibald v Royer, [1924] 1 DLR 897 Ritch, J, held at 900 that:

It would, I think, be a departure from the ordinary rules of construction to give the word “district” in that subsection a meaning different from its meaning when used in other parts of the same section, the more especially so, as one is not driven to that end in order to give the word a reasonable meaning. I think the word must have the same meaning throughout.

The Board did not read all the sections of the Income Tax Act to find where the legislator uses the word “belong”(subsection 28(3)has the same wording as paragraph 139(1)(aq)). However, as the word “belong” is used twice in the same section of the Act (paragraph 139(1)(aq)), it is important to see if the meaning of the other word “belong” can help the Board to arrive at a conclusion in the present case. The whole paragraph 139(1)(aq) reads as follows:

139.(1) In this Act,

(aq) “subsidiary wholly-owned corporation” means a corporation all the issued share capital of which (except directors’ qualifying shares) belongs to the corporation to which it is subsidiary and “subsidiary controlled corporation” means a corporation more than 50% of the issued share capital of which (having full voting rights under all circumstances) belongs to the corporation to which it is subsidiary;

At first glance it seems to the Board that in the definition of “wholly- owned corporation” the word “belong” can realistically connote property. Indeed, the exception of the general rule expressed in the definition: “except directors’ qualifying shares”, can be applied only to a patent corporation which directly owns the shares of the subsidiary corporation.

The exception cannot apply to a grand parent corporation which does not directly own the shares. Let us suppose for instance, Company C issued 100 shares: 89 shares to Company B (100% of its shares are owned by Company A), 10 shares to Company A and 1 qualifying share to a director. How can it be said that all the shares of Company “C”, “except directors’ qualifying shares”, belong to Company “A” when a percentage of the said shares belongs to Company “B”. Company “B” with its 89 shares could not be considered within the exception. The definition can apply only if 99 shares of the company belong to, (or are directly owned by,) Company B and 1 qualifying share to a director. Hence, in this definition of “subsidiary wholly-owned corporation”, the word “belong” connotes “property”.

It is the Board’s opinion that the word “belong” used in the definition of “subsidiary controlled corporation” must have the same meaning as the word “belong” used in the definition of “subsidiary wholly-owned corporation”. Consequently, the word “belong” means that the shares must belong directly to the parent company.

4.3.5 Conclusion of part 4.3.4

After studying the meaning of “belong” in the dictionaries (para 4.3.4.1), and the meaning given by the courts (para 4.3.4.2), the Board concludes that the ordinary meaning of the word “belong” in the definition of “subsidiary controlled corporation” in paragraph 139(1)(aq) connotes “property”. Hence, the control of the subsidiary must be direct.

Even if one arrives at the conclusion that the meaning of “in possession” or ‘‘control of” (see para 4.3.4.2.b.) must be accepted as the ordinary meaning of the word “belong”, this meaning could not be accepted in the present case. The meaning of “belong” indeed in the definition of “subsidiary controlled corporation” must have the same meaning as the same word given in the same paragraph 139(1 )(aq) of the Act and must have priority over the ordinary meaning of the word. Consequently, in the definition of “subsidiary controlled corporation”, (paragraph 139(1)(aq)) the word “belong” must be interpreted as connoting “property” and consequently the control must be direct (para 4.3.4.3).

B. Interpretation of subsections 139(5), 139(5a), 139(5d) and 39(4a)

4.3.6 The appellant also invoked the presumption of paragraph 139(5d)(b) which provides that ‘‘a person who had a right under a contract, in equity or otherwise, either immediately or in the future (. . .) to acquire shares in a corporation or to control the voting rights of shares in a corporation shall (. . .) be deemed to have had the same position in relation to the control of the corporation as if he owned the shares”.

As the appellant’s corporation had the right to convert in ordinary voting shares after July 31, 1977, at least 4 million privilege shares, it argues that it is legally deemed to control the British company as if he owns the ordinary voting shares.

4.3.7 The respondent says that this presumption applies only to the notion of arm’s length and related corporation which are not implied in the present case.

4.3.8 As subsection 39(4a) refers to said subsection 139(5d) and the latter refers to subsection 139(5a) and that latter refers to 139(5), those four provisions must be quoted:

39.(4a) For the purpose of this section,

(a) one person is related to another person if they are “related persons” or persons related to each other within the meaning of subsection (5a) of section 139;

(b) “related group” has the meaning given that expression in subsection (50) of section 139; and

(c) subsection (5d) of section 139 is applicable mutatis mutandis,

139.(5) For the purposes of this Act,

(a) related persons shall be deemed not to deal with each other at arm’s length;

and

(b) it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm’s length.

139.(5a) For the purpose of subsection (5), (Sc) and this subsection, “related persons”, or persons related to each other, are

(a) individuals connected by blood relationship, marriage or adoption;

(b) a corporation and

(i) a person who controls the corporation, if it is controlled by one person,

(ii) a person who is a member of a related group that controls the corporation, or

(iii) any person related to a person described by subparagraph (i) or (ii); (c) any two corporations

(i) if they are controlled by the same person or group of persons,

(ii) if each of the corporations is controlled by one person and the person who controls one of the corporations is related to the person who controls the other corporation,

(iii) if one of the corporations is controlled by one person and that person is related to any member of a related group that controls the other corporation,

(iv) if one of the corporations is controlled by one person and that person is related to each member of an unrelated group that controls the other corporation,

(v) if any member of a related group that controls one of the corporations is related to each member of an unrelated group that controls the other corporation, or

(vi) if each member of an unrelated group that controls one of the corporations is related to at least one member of an unrelated group that controls the other corporation.”

139.(5d) For the purposes of subsection (5a)

(a) where a related group is in a position to control a corporation, it shall be deemed to be a related group that controls the corporation whether or not it is part of a larger group by whom the corporation is in fact controlled;

(b) a person who had a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently, to or to acquire, shares in a corporation, or to control the voting rights of shares in a corporation, shall, except where the contract provided that the right is not exercisable until the death of an individual designated therein, be deemed to have had the same position in relation to the control of the corporation as if he owned the shares;

and

(c) where a person owns shares in two or more corporations, he shall as shareholder of one of the corporations be deemed to be related to himself as shareholder of each of the other corporations.

4.3.9 First, to make sure that the legal aspect contended by the appellant has the real basis of the possible future possession of the majority of the ordinary shares, it is necessary to summarize the property of the shares of the British company.

After July 31, 1977, it was possible at least to convert the 4 million preference shares into ordinary shares. It is not necessary to take into account the 380,000 ordinary shares of which it was possible since July 1965, to exercise the option nor the ordinary shares due for the dividends in arrears (para 3.05). In fact, the appellant company owned during the years 1968, 1969, 1970 and 1971, 380,000 ordinary shares and the future possibility to convert the 4 million preference shares, and that is the majority of the voting shares if the provision paragraph 139(5d)(b) applies, The USA com- pany owned only 3,100,000 ordinary shares and no convertible preference shares.

4.3.10 Because of the importance of the present case regarding the amount of tax involved, and the fact that it is the first time that a tribunal must decide whether paragraph 139(5d)(b) may apply to paragraph 139(1 )(aq), and also because of the seriousness of the written submissions of the lawyers representing the parties, the Board largely cited their arguments in law.

4.3.10.1 Appellant’s original arguments

While the Department itself has been the first to assert the widest possible application of Section 139(5d)(b) when it suits its purpose so to do, the position may be taken in the present case, because the alternative would be to confess judgment in favour of the Appellant, that this section has a more limited application and does not apply. The observations which follow are made in relationship to any possible submission on this score by Respondent. All of the definition provisions which we have invoked, Sections 139(1)(aq), 139(5), 139(5a) and 139(5d) are part of the very same section of the Income Tax Act—139—which constitute the major segment of Part VII —Interpretation of the Act. Included amongst these rules is a series of provisions dealing with relationships both personal and corporate. The personal rules which define relationship in terms of consanguinity or alliance through marriage or adoption do not concern us in the present instance except for comparative purposes. The corporate relationships do. All of the corporate relationships, including that of a subsidiary controlled corporation, concentrate on relationships arising through control.

Section 139(5d) is qualified by the opening words “for the purpose of subsection (5a)”. If one stopped at this point and did not look at subsection (5a), this might lend credence to the notion that Section 139(5d)(b) has a limited application in itself. However, Section 139(5a) in turn explains that it applies “for the purpose of subsection (5), (50) and this subsection”. Subparagraph (a) of subsection (5a) deals with individual relationships, and (b) and (c) with intercorporate relationships through control. In turn, Section 139(5) thereby incorporated by crossreference provides application of these rules “for the purpose of this Act’’. Hence, Section 139(5d) in making reference to subsection (5a) which in turn makes reference to subsection (5) which in turn applies for the purposes of this Act has the effect of making (5d) equally applicable for the purposes of this Act.

It might be noted that in the current post-1971 Income Tax Act, the equivalent of Sections 139(5), 139(5a) and 139(5d), while textually unchanged, are now embodied in Section 251 and are no longer part of the definition section which has become Section 248 and which includes the definition of a subsidiary controlled corporation. What was Section 139(5d)(b) for our case is now 251(5d)(b). Nonetheless, the DeBoo’s Canada Tax Service at page 251-105 points out, even without this additional argument which would have been applicable under the old Act for the years 1968 to 1971 inclusive and which no longer apply from 1972 onward, that the provisions of Section 251(5)(b) both in its exact phraseology and in the various relevant cross-references of the governing Act “have application for all purposes of the Act”. Putting in the old numbers applicable in our case: the provisions of Section 139(5a), (5b), (So), (5d) and (6) “have application for all purposes of this Act” and particularly, so far as we are concerned, to 139(1)(aq). More simply stated, Section 139(5d)(b) applies to Section 139(1)(aq) which applies to Section 19. For ready reference, page 251-105 of this Canada Tax Service is herewith reproduced in full. The important point for purposes of the present submission is all set forth succinctly in the opening paragraph:—

“It should be noted that the meanings attributed by subsections 251(2) to (6) to “related persons” are not only for the purpose of establishing whether or not the persons are to be considered as dealing at arm’s length for the various purposes already indicated but have applicationn for all purposes of the Act.”

Section 139(5d) of the applicable Income Tax Act as well as the other portions of Section 139 deal with definitions and rules of interpretation. Section 139(5d)(b) applies certain consequences in relationship to persons who are “deemed to have had the same position in relation to the control of the corporation as if he owned the shares”. The general application of this section to the definition of the sub- sidiary controlled corporation is supported by Section 14 of the Federal Interpretation Act reading as follows:

“14.(1) Definitions or rules of interpretation contained in an enactment apply to the construction of the provisions of the enactment that contain those definitions or rules of interpretation, as well as to the other provisions of the enactment.

(2) Where an enactment contains an interpretation section or provision, it shall be read and construed

(a) as being applicable only if the contrary intention does not appear, and

(b) as being applicable to all other enactments relating to the same subjectmatter

unless the contrary intention appears. 1967-68, c 7, s 14.’’

As Seagram Distillers Limited was at all relevant times a subsidiary controlled corporation of Distillers Corporation-Seagrams Limited, there is no occasion or right on the part of the Department to claim that interest which was not paid should be deemed to have been paid. In effect, this is a situation where, through the interposition of Section 19(3), the deeming provisions of Section 139(5d)(b) offset the otherwise deeming provisions of Section 19(1).

Appellant respectfully submits that Section 139(5d)(b) is applicable and suffices without further ado to motivate a judgment to vacate the assessments.

4.3.10.2 Respondent’s arguments

The paragraphs 20, 21, 22 and 23 of the “Représentations écrites de l’intimé” are quoted at length:

20. Comme troisième proposition, (’Appelante invoque le bénéfice du concept fictif édicté par l’article 139(5d)(b) et prétend, en raison de son droit éventuel de conversion, occuper la même position à l’égard du contrôle de Seagrams Distillers Ltd que si elle était propriétaire de ces actions ordinaires. Or, l’article 139(5d)(b) représente un extention satutaire de la notion de “contrôle” dans un cadre bien précis, soit celui de la détermination de personnes liées. Le préambule du paragraphe 5d de l’article 139 précise limitativement l’application de l’extension statutaire réclamée par (’Appelante en faisant référence au seul paragraphe 5a de l’article 139. Cette dernière disposition ayant pour objet de définir exhaustivement le concept de “personnes liées”, nous soumettons donc que l’article 139(5d)(b) s’applique uniquement dans la détermination des personnes liées sous l’article 139(5a) et n’offre aucune pertinence en regard du concept de corporation filiale contrôlée tel que défini à l’article 139(1)(aq), puisque cette dernière définition ne s’appuie aucunement sur la notion de “personnes liées”.

22. L’article 139(5d)(b) présentera certes un intérêt en regard de toutes les dispositions qui font référence et s’appuient sur le concept de “personnes liées” défini à l’article 139(5a), tel l’article 139(5) relativement aux personnes ne transigeant pas à distance, l’article 139(5c) relativement aux “groupes liés”. Le préambule du paragraphe 5a de l’article 139 fait d’ailleurs expressément référence à ces dernières dispositions. De plus, l’article 139(5d)(b) présentera aussi un intérêt certain en matière de companies associées puisque l’article 39(4a)(c) prévoit expressément l’application de l’article 139(5d) à l’article 39. Comment soutenir que le législateur voulait donner une application aussi générale à l’article 139(5d) alors qu’il prévoit expressément son application dans le cadre de l’article 39? Il faudrait en inférer que le législateur s’est exprimé pour ne rien dire à l’article 39(4a)(c) ce qui serait contraire aux règles d’interprétation les plus élémentaires.

22. Nous soumettons respectueusement que l’article 139(5d) ne saurait trouver largement application en regard de dispositions qui d’une part ne font aucunement référence au concept de personnes liées, ou ne prévoient pas expressément l’application de l’article 139(5d). Ce sont la à notre avis des limites posées à la généralisation de l’application de l’article 139(5d) telle qu’elle fut suggérée par (’Appelante. L’Opinion exprimée dans DeBoo’s Canada Tax Service sur laquelle s’appuie (’Appelante, ne semble aucunement aller à l’encontre d’une telle interprétation puisqu’elle s’attache davantage à la généralisation de la notion de personnes liées définie par l’article 251(2) à (6) qu’à la généralisation autonome de chacun des paragraphes de ces dispositions. Cette inter- prétation résulte aussi des termes plus larges du préambule de l’article 251(2) qui est formulé de la façon suivante: ‘‘aux fins de la présente Loi’.

23. L’Article 139(1)(aq) et l’article 19 ne référant aucunement à la notion de personnes liées et ne prévoyant pas expressément l’application de l’article 139(5d) en vue de déterminer le statut d’une corporation filiale contrôlée, nous soumettons qu’il n’existe donc aucune relation entre l’article 139(5d)(b) et l’article 139(1)(aq). Nous soumettons que cette dernière disposition représente une définition autonome et indépendante d’une corporation filiale contrôlée. Ceci s’infère aussi du fait que le Législateur s’est expressément attaché à la répartition du capital-actions “émis” à l’article 139(1)(aq) et ne pouvait donc pas s’intéresser aux droits éventuels relativement au capital-actions non encore émis. Le Ministre pouvait certes avoir intérêt à s’appuyer sur le droit de conversion pour prétendre que (’Appelante était liée à Seagrams Distillers Ltd au sens de l’article 139(5a), ne transigeait pas à distance avec elle sous l’article 139(5) pour les fins de l’application de la présente Loi et lui étant même associé au sens de l’article 39. Ces conclusions s’avèrent toutefois impertinentes pour déterminer si Seagram Distillers Ltd était une corporation filiale contrôlée de (’Appelante au sens de l’article 139(1)(aq).

En conséquence, nous soumettons respectueusement que la troisième proposition de (’Appelante s’avère aussi dénuée tout mérite.

4.3.10.3 Appellant’s Reply

Respondent seeks to ignore the rights of conversion of the 4 million preference shares owned by Distillers Corporation—Seagrams Limited in Seagrams Distillers Ltd on the grounds that this right of conversion into 5,200,000 ordinary shares (4,000,000 plus 1,200,000 additional by reason of the arrears accumulatively unpaid) is only exercisable in the future beginning after July 31, 1977. Respondent suggests that because Section 139(1)(aq) defining a subsidiary controlled corporation refers to the issued share capital, one must pay attention to the actually issued share capital only and not to the share capital which is clearly, categorically, specifically and precisely deemed to be issued under Section 139(5d)(b) in relation to the control of the corporation. The precise question we are dealing with is control of the corporation. For ready reference, Section 139(5d) is herewith repeated with some of the words in italics:

“139.(5d) Control by related group, options, etc. For the purpose of subsection (5a) . ..

(b) a person who had a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently, to, or to acquire, shares in a corporation, or to control the voting rights of shares in a corporation, shall, except where the contract provided that the right is not exercisable until the death of an individual designated therein, be deemed to have had the same position in relation to the control of the corporation as if he owned the shares;”

In relationship to the control of Seagram Distillers Ltd, one cannot set aside the right to acquire 5,200,000 additional ordinary shares because the right is not available immediately and only is exercisable “in the future” after July 31, 1977. This specific future right is expressly embodied in Section 139(5d)(b) by sweeping within its ambit the right to acquire shares “either immediately or in the future". To make matters even more certain, this section does not have the effect of saying that the existence of this right will some day in the future make Seagram Distillers Ltd a subsidiary controlled corporation of Distillers Corporation—Seagrams Limited. It deems Distillers Corporation—Seagrams Limited to “have had" the same position in relation to the control of Seagram Distillers Ltd as if it owned the shares. Respondent may argue in its written representations that Appellant could not own any shares which had not yet been issued. This argument is about as logical as if the Appellant argued that it could not be subject to tax on interest which was neither received nor receivable. The answer to the Appellant would be quite correctly the deeming provisions of Section 19(1) and the answer to the Respondent is equally the deeming provisions of Section 139(5d)(b). Section 6(1)(b) normally only taxes interest “received in the year or receivable in the year”. Section 19(1) expands that by taxing under certain circumstances interest not received or receivable. Argument by the Appellant that Section 6(1)(b) does not refer to a deemed receivable would be given a short shrift. So should Respondent’s present argument that Section 139(1)(aq) only deals with shares that have been issued and makes no cross-reference to shares not yet issued which are deemed to be owned by the party having the right to acquire them. Distillers Corporation—Seagrams Limited is deemed to have had the same position in relation to the control of Seagram Distillers Ltd as if it owned the 5,200,000 ordinary shares. This is both the beginning and the end of the whole matter.

Respondent seeks to argue (p 14, par 23) that Sections 19 and 139(1 )(aq) do not expressly refer to the application of Section 139(5d) the latter should be ignored and Section 139(1)(aq) should be regarded as ‘‘une définition autonome”. All the sections of the Act are interpreted one by the other. Sections 139(1)(aq) and 139(5d)(b) are both subsections of the same interpretation section. It is more appropriate to observe that Section 139(1)(aq) does not exclude Section 139(5d)(b).

Resting Respondent’s case on “une définition autonome” flies in the face of all the established rules of interpretation. The very expression ‘‘définition autonome” is a contradiction in terms because definitions are only meaningful in their application to other sections. This notion of “définition autonome” is not founded upon any principles or precedents. The authorities are all to the contrary. Just by way of a couple of examples:

Maxwell on “Interpretation of Statutes”, Twelfth Edition, p 58;

“Passing from the external aspects of the statute to its contents, it is an elemantary rule that construction is to be made of all the parts together, and not of one part only by itself.”

Parenthetically, it may be observed that Sections 139(1)(aq) and 139(5d)(b) are not only in the same part but even in the same section so that even if one were allowed to read “one part only by itself” it would still have the same result in this Situation.

A similar statement can be found in E A Driedger “The Construction of Statutes” at pp 69 and 70:

“The general principles, as we have seen, are that if the words are clear and unambiguous they must be followed; but if they are not, then a meaning must be chosen or found. But the Act must be read as a whole first, for only then can it be said that the words are or are not clear and unambiguous.” . . .

“To say that a statute must be read as a whole means not merely that the meaning of the words contained in a particular provision is to be gathered from reading them in their verbal and grammatical context; it means that the substance of the particular provision must be seen in the context of the ideas expressed in the whole Act, “because” as Lord Reid said in Inland Commissioners v Hinchy “one assumes that in drafting one clause of a Bill the draftsman had in mind the language and substance of other clauses, and attributes to Parliament a comprehension of the whole Act.”

The original premise of the Department’s assertion of a claim is itself based on linking two sections together. Under Section 6(1)(b) interest is only to be taxed when it is received or receivable. However, under Section 19(1) there are circumstances where it may be taxed even when it is not received or receivable. The two sections do not contradict each other. They supplement each other. Appellant could not possibly claim that Section 6(1)(b) is an autonomous independent section and all other sections should be ignored in relationship to interest received or receivable. Respondent has even a lesser right to argue that Section 139(1)(aq) is an autonomous or independent section which must be read without reference to any other section.

Respondent fails to cite any authority to contest the DeBoo Service affirmation that Section 139(5d) (which in the current law has become Section 251(5)(b)) not only applies “for the purpose of establishing whether or not the persons are to be considered as dealing at arm’s length for the various purposes already indicated but have application for all purposes of the Act” (Cited on p 12 of our initial argument). On the contrary, Respondent even appears to go so far as to admit its correct interpretation that it applies “aux fins de la présente Loi” (for the purposes of this Act) (pp 13 and 14, par 22 of Respondent’s argument). Again, this admission should end the matter.

Notwithstanding this telling admission, Respondent seeks to argue the contrary position in the immediately preceding paragraph of its written submissions.

There it is suggested that, because Section 39(4a) which deals with associated companies specifically refers to Section 139(5D), this latter section should only apply to Section 39(4a) and to nothing else. As expressed in par 21 p 13 of Respondent’s submissions:

“Comment soutenir que le législateur voulait donner une application aussi générale à l’article 139(5d) alors qu’il prévoit expressément son application dans le cadre de l’article 39?”

If this is the case and it was intended that Section 139(5d) could only apply to Section 39(4a), it would have been simply embodied therein. There would have been no need for a cross-reference to, and incorporation of, Section 139(5d) in the general interpretation provisions. Section 139(5d) would not be made applicable “mutatis mutandis” if it had been so expressed as to be only applicable to Section

39. To apply it “mutatis mutandis” to Section 39 is not to deny its application generally but rather to reflect an affirmation and confirmation of such general application.

Once it was admitted by Respondent that Section 139(5d) applies “for the purposes of this Act”,—or to use the DeBoo Service exact language for all purposes of the Act—this is flatly supportive of Appellant’s position and completely inconsistent with Respondent’s reiteration that Section 139(1)(aq) is an autonomous independent section to which Section 139(5d) can have no application.

It is respectfully submitted that by virtue of the foregoing and without reference to any additional arugmentation on other points the deeming provisions of Section 139(5d) have effectively countered the deeming provisions of Section 19(1) and, through the application of Section 19(3), the assessment is unfounded in law and should be vacated.

4.3.11 From all the arguments of the parties and the different concepts and principles involved, the Board thinks that it must start by the points which seem more certain to try to arrive at the most reasonable conclusion.

4.3.11.1 It seems, at first glance, that because subsection 139(5) begins with the words: “For the purposes of this Act’’, the content of this subsection and it alone applies to the whole Act. This subsection concerns only related persons which are deemed not to deal at arm’s length. So only this legal presumption must apply in the whole Act.

Because subsection 139(5a) starts with “For the purpose of subsections (5), (50)” (which stipulates related person and related group) it seems that the subsection 139(5a) must apply only to those subsections to which it refers.

Because subsection 139(5d) (which stipulates the control of corporation by related group of by related person) starts with “For the purpose of subsection 5a”, it seems that the subsection 139(5d) must apply only to subsection (5a) and to subsections 5 and 50 to which it refers and obviously only to the matter therein stipulated.

In sum the key paragraph 139(5d)(b) which concerns the control of corporation seems at first glance to finally apply only to concepts of dealing at arm’s length. However, subsection 139(5d) is also involved by the reference made to it by subsection 39(4a) quoted above (para 4.3.8). Subsection 39(4a) says subsection 139(5d) is applicable “mutatis mutandis” for the purpose of section 39. The expression “mutatis mutandis” literally means “in changing what must be changed”. In fact, what is applicable in section 139(5d) to section 39 is only the concept of control of a corporation by another corporation, implying that the two corporations are associated in the sense of subsections 39(2) and (4).

4.3.11.2 In the present case, the crux of the matter is in fact, the control of the British company by the appellant. To allow the appeal the Board must be convinced that this control must be applied within the meaning of the definition of paragraph 139(1)(aq). The appellant cited subsections 14(1) and (2) of Interpretation Act (para 4.3.10.1 in fine).

It seems to the Board that in the present case in restricting the application of control in paragraph 139(5d)(b) to the concept of associated company and at arm’s length transaction, the legislator shows his intention not to apply it to other sections.

4.3.11.3 As stated in paragraph 4.3.3 above, because of the presence of the word “means” in the definition, “subsidiary controlled corporation”, this definition cannot be construed in its ordinary meaning, but is restricted to the exact words given in the said definition.

The respondent argues that the said definition used the words “issued shares” which cannot include future right or future control of paragraph 139(5d)(b).

This latter legal provision, however, says that the person who has future right or future control “shall be deemed to have had the same position in relation to the control of the corporation as if he owned the shares”. In sum, the said shares are deemed to have been issued. In the Board’s opinion, the words “issued shares” in paragraph 139(1)(aq) do not exclude “deemed issued shares”. Deeming sections are numerous in the Income Tax Act. Subsection 19(1) itself, on which the assessments involved in the present case are based, is a deeming section. Ordinarily, deeming sections are charging sections.

Subsections 139(5), (5a), and (5d) are all in fact deeming sections which are part of charging sections. The concepts of dealing at arm’s length and associated company indeed arose to impose some obligations on the taxpayers. It is well known for instance that the concept cf associated company is to the effect to share between the associated companies the exemption of the first $35,000 of taxable income at the rate of 18% (paragraph 39(1 )(a)). The balance of the taxable income of the associated is taxed at 47% (paragraph 39(1)(b)). Without those concepts each associated company could have used the total exemption of the first taxable $35,000 at 18%.

In the present case, however, the appellants company uses paragraph 139(5d)(b) to base not a charging section, but an exempting section: ie Subsection 19(3). It is not illegal in itself, but this means that if there is a doubt, it must be against the taxpayer and in favour of the taxing authorities: “Taxation is the rule, and exemption, the exception” (para 4.3.3 in fine). After all the above comments, the Board cannot say it is clear that paragraph 139(5d)(b) is relevant, ie can be used to construe paragraph 139(1)(aq).

4.3.11.4 Because of the comments and findings in the three former paragraphs and because of the restrictive interpretation by which the Board is bound to construe the sections of the Act involved in the case, the Board must conclude that the paragraph 139(5d)(b) cannot be used to construe paragraph 139(1)(aq).

Consequently the taxation of the deemed interest according to subsection 19(1) must be maintained.

The Board states that the concept of control in the Income Tax Act is very complicated to apply and to construe and may not be equitable. The paragraph 139(5d)(b) indeed is applicable to impose a larger burden of tax, but not to base an exemption provision. The Board, however, even if it does not agree with the philosophy of the legislator has no choice but to construe the Act as it is written. It follows therefore that the reassessments must be maintained.

C. Penalties

4.4 Facts concerning penalties

4.4.1 The respondent filed as Exhibit R-4 an inter-office memo dated January 24, 1967 written by a L P Babich to Mr A AA Sharp. The subject of this memo is “Notes on New York Visit”.

The latter summarized six items discussed in New York. One of them entitled “Canadian Borrowings” reads as follows:

Canadian Borrowings

We must review in detail as soon as possible the following factors with respect to Canadian borrowings:

1. How is the money going to be repaid and when?

2. How long will the Canadian Government permit us to expense interest costs while we make interest free advances to the UK or any other area of our operations?

The latter must be discussed by both of us with Mr Vineberg.

4.4.2 The respondent filed also as Exhibit R-2, five documents:

(a) the comments made by Price Waterhouse & Co dated February 5, 1969 concerning the 1968 income tax return;

(b) the memo dated February 10, 1069 written by a Mr F A Bennett to Mr Alan A Sharp;

(c) a letter dated February 11, 1969 by Mr L P Babich to Mr P E Vineberg;

(d) a letter dated February 14, 1969 by the legal firm Phillips, Vineberg, Goodman, et al to Mr Harold Fieldsteel of Joseph E Seagram & Sons, Inc;

and

(e) a copy of an article published in the Montreal Star on July 17, 1970, concerning a judgment rendered in the Bain Wagon Co Ltd case by Mr Fordham of the former Tax Appeal Board, this article is entitled “Six days means $279,000 tax”. The case turns on what interpretation should be put on “one year” to establish if a loan of $8,250,125 (an interest free short term advance to a foreign company, a wholly owned subsidiary) was taxable. A memo of transfer dated July 23, 1970 from Mr Bennett to Mr Vineberg, and a letter dated July 31,1970 from Mr Vineberg to Mr Bennett concerning the Bain Wagon case were also filed with the said article.

4.4.3 The comments of Price Waterhouse & Co concerning the non-interest bearing loans to non-residents are as follows:

Distillers Corporation—Seagrams Limited has advanced funds aggregating $32,604,065 at July 31, 1968 to Seagram Distillers Limited, a UK company. No interest is being charged on this loan. As Seagram Distillers Limited is not a direct subsidiary of Distillers Corporation—Seagrams Limited, section 19 of the Income Tax Act might be applied whereby deemed interest at the rate of 5% would be included in computing the taxable income of DCSL.

The above points were discussed with Mr F A Bennett who stated that it was company policy not to charge interest on these loans. He further stated that the federal tax authorities have not, to date, raised any objection to this procedure. We suggested to Mr Bennett, however, that due to the significance of the potential tax involved the company should consider alternate methods of financing the UK company.

4.4.4 In the memo from Mr Bennett to Mr Alan A Sharp concerning the noninterest bearing loans, it is said:

This as you know, has been discussed with Phil Vineberg on many occasions and he has never appeared to be apprehensive and has always considered that we can prove that the money loaned was used in the business of a subsidiary to gain income.

4.4.5 Concerning his letter to Mr Fieldsteel, Mr Vineberg made an objection invoking the theory of the privilege.

This privilege is defined in paragraph 126A(1)(e) of the former Act:

126A.(1)(e) “solicitor-client privilege” means the right, if any, that a person has in a superior court in the province where the matter arises to refuse to disclose an oral or documentary communication on the ground that the communication is one passing between him and his lawyer in professional confidence, except that for the purposes of this section an accounting record of a lawyer, including any supporting voucher or cheque, shall be deemed not be such a communication.

This privilege, however, as it was many times decided by the courts is the privilege of the client not of the attorney.

In the present case, it was admitted that the appellant’s administrator, in fact Mr Vineberg’s client, remitted the document to the inspector of the Department of Revenue. A client has a right to renounce the said privilege. In fact, it is what he did in remitting the document. Hence, Mr Vineberg’s objection is rejected.

4.4.6 In that letter to Mr Fieldsteel, Mr Vineberg concerning the final paragraph of the memorandum (para 4.4.4 above) and the main problem wrote:

The final paragraph of the memorandum unfortunately greatly oversimplifies the position I have taken and is not a position which I could really endorse.

There is an old history to this Section and its application and many years ago we did have a problem within the DC-SL organisation which we were able to solve satisfactorily on this very point.

When this loan was advanced, it was in fact made to a Company which at that time was “subsidiary control corporation” and it was at that time used by the subsidiary in its business to gain income. Hence we have a technical argument in defence if the matter should be invoked. It is obvious, however, that this would not necessarily dispose of the matter.

The main problem seems to be that the cure is either worse than the ailment or else is impossible. I would be quite happy to see the loan repaid but this is out of the question unless we could augment our financing in the United Kingdom. We might at least bear this in mind as a factor in terms of considering the possible reduction of the indebtedness to the Canadian Company.

Payment of interest might also be considered but there are obvious limitations even related to deductibility of interest in the United Kingdom.

4.4.6 The respondent also filed as Exhibit R-1 the front page of the corporation income tax return (T-2 form) of the appellant for the years 1961 to 1967 with financial statements for each year including the statement entitled: “Advances to subsidiary companies” and the list of the main subsidiary companies of the appellant.

4.4.7 Neither in those documents (Exhibit R-1) nor in the T-2 Form and Financial statements for the years involved (1968 to 1971) is there information to the effect that since June 22, 1962, the appellant company had no direct control of the British company, Distillers Seagram Limited.

4.5 Law and Burden of Proof

The provisions of the Income Tax Act which are involved in the present case are subsection 56(2) of the former Act concerning the penalty and subsection 163(3) of the new Act and subsection 62(3) of Income Tax Application Rules (ITAR) for the burden of proof:

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

163.(3) Where, in any appeal under this Act, any penalty assessed by the Minister under this section is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.

62.(3) Subsection 163(1) of the amended Act is applicable in respect of any return of income required to be filed after 1971 and subsection 163(3) thereof is applicable in respect of any appeal instituted after the coming into force of this Act.

Because of the above cited legal provisions, the respondent has the burden to prove that the penalties are correct.

4.6 Precedent Cases and Jurisprudence

The precedent cases and jurisprudence referred by the parties concerning penalty and solicitor-client privilege are:

A. Penalty

1. Donald Eugene Morgan et al v MNR, [1973] CTC 2192; 73 DTC 146;

2. CIR v Fisher’s Executors, [1926] AC 392; 42 TLR 340;

3. Danalan Investments Ltd v MNR, [1973] CTC 251; 73 DTC 5209;

4. Arthur William Wallace v MNR, 42 Tax ABC 1; 66 DTC 593;

5. Orest Sadownick v MNR, 40 Tax ABC 411; 66 DTC 280;

6. Barry Beech v HMQ, [1977] CTC 361; 77 DTC 5249;

7. Spence Building Limited v MNR, [1977] CTC 2104; 77 DTC 71;

8. John Victor Decore v HMQ, [1974] CTC 791; 74 DTC 6695;

9. Michael Pupko v MNR, [1967] Tax ABC 614; 67 DTC 438;

10. Alex Pashovitz v MNR, [1961] CTC 288; 61 DTC 1167;

11. Grain Belt Farm Equipment Limited, Allied Farm Equipment Limited et al v MNR, [1970] Tax ABC 1265; 71 DTC 1; [1972] CTC 619; 73 DTC 5036;

12. Georges Lafrance v MNR, [1971] Tax ABC 221; 71 DTC 172;

13. G F Gibsone Estate v MNR, 26 Tax ABC 387; 61 DTC 297;

14. Arthur Thibault v MNR, 27 Tax ABC 76; 61 DTC 446;

15. Alfred Paquette v MNR, 27 Tax ABC 395; 61 DTC 597;

B. Solicitor-Client Privilege

16. Richard C W Rolka v MNR, [1962] CTC 637; 62 DTC 39;

17. Calcraft v Guest, [1898] 1 QB 759 (CA);

18. Susan Hosiery Ltd v MNR, [1969] CTC 533; 69 DTC 5278;

19. Kuruma v The Queen, [1955] AC 197 (House of Lords);

20. Phipson on Evidence, 10th Ed, p 252, no 586;

21. Wigmore on Evidence, 1961, Vol VIII, p 629, no 2321.

4.7 Comments

4.7.1 It is obvious that the officers of the appellant company (“Comapny can only act through their officers, directors or servants or agents”, Mr Justice Collier said in Danalan Investments Ltd referred above) have been aware since 1967 that there is a general problem concerning the “interest free advances to the UK” (para 4.4.1). More particularly in 1969, they were aware that the UK company was not a direct subsidiary controlled company of the appellant, and that section 19 of the former Act “might be applied” (para 4.4.3).

Moreover, it seems that the solution was not easy to find because “the cure is either worse than the ailment” according to Mr Vineberg (para 4.4.5). It is a fact that after 1968 the appellant company did not lend anymore to the UK company (para 3.06).

4.7.2 Even if the accountants and the officers of the company were aware of the possibility of taxation, they did not give to the respondent the T-2 returns, the facts therein permitting it to see that possibility (para 4.4.6 and 4.4.7), and giving it the opportunity to act accordingly.

4.7.3 After studying all the documents which are referred to above, the Board arrives at the conclusion that the officers and the solicitor of the appellant company were not sure that it was taxable. They had a serious doubt. The Board itself, after studying all the arguments of both parties can say it is not obvious that paragraph 139(5d)(b) (the future right) is not relevant ie cannot be used to construe the definition of “subsidiary controlled corporation” paragraph 139(1)(aq), hence there is taxable deemed interest. “The straw that broke the camel’s back” (in French “La goutte d’eau qui a fait renverser le verre”) in favour of the respondent, is concerned because the said definition paragraph 139(1)(aq) is part of the exemption section 19(3) and in such circumstance if there is a doubt, it must be interpreted in favour of the taxing authorities as explained above. If a doubt of the same nature had existed concerning the application of the future rights (paragraph 139(5d)(b)) to construe a taxing provision the doubt would have been interpreted in favour of the appellant. In that respect, it must be added that in a sense a penalty section is a charging section.

4.7.4 Moreover, it is the first time that a tribunal has to decide the principle, of the application of the future rights (paragraph 139(5d)(b)) to construe the definition of ‘‘subsidiary controlled corporation” in section 139(1)(aq). In the Georges Lafrance case referred to above:

The issue between the parties was a question of law which has not yet been settled. In Estate of G F Gibsone v MNR, 26 Tax ABC 387; 61 DTC 297, it was decided that ‘‘a legal error does not constitute a penalizable offence”.

4.7.5 Another point is that according to the evidence, the appellant company has filed with the T-2 returns since 1961 a statement of loans to some of its subsidiaries and a list of more than 50 of the subsidiaries. Why did the respondent not ask for details concerning the property and control of those subsidiaries? The document concerning the list is not entitled “controlled subsidiary corporations”, but only “subsidiary companies”.

4./.6 Because of the reasons given above, the Board cannot arrive at the conclusion that the appellant company was grossly negligent.

5. Conclusion

The appeals are allowed in part and the matter is referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed in part.