454538 Ontario Ltd. v. MNR, 93 DTC 427, [1993] 1 CTC 2746 (TCC)

Sarchuk, T.C.C.J.:—This is an appeal by 454538 Ontario Ltd. (538) from an assessment of tax with respect to its 1981 taxation year. An appeal by 454539 Ontario Ltd. (539) from an assessment of tax for the same year is also before the Court. The issues are identical and counsel agreed that the testimony and submissions presented herein will, without exception, apply to 539 as well.

The issue arose as follows. Tri-M Rock Drilling Accessories Ltd. (Tri-M) was a company incorporated on March 26,1969 under the laws of the Province of Ontario. At all material times up to and including November 3, 1980 its shareholders were Mauro Mazzocca (Mauro), Romantino Mazzocca (Roman- tino) and Terrence Manley (Manley), each of whom was issued a total of 4,000 common shares.

On August 21, 1980, 538 and 539 were incorporated by Romantino and Mauro respectively.

On November 3, 1980 Ronald J. Farano, Q.C. (Farano), as trustee on behalf of 461047 Ontario Ltd. (461), made an offer to purchase Manley's shares for an aggregate purchase price of $500,000, conditional upon the sale of all of the outstanding shares of Tri-M to an undisclosed third party on December 10, 1980.1 [1]

On November 14, 1980 an agreement was reached between Romantino, Mauro, 538 and 539 to sell 12,000 common shares of Tri-M, which would include Manley's shares, to 461 for an aggregate price of $3,202,900.

On December 10, 1980 the following transactions took place:

1. Romantino sold his 4,000 common shares of Tri-M to 538 on a tax-deferred basis under the provisions of subsection 85(1) of the Income Tax Act, R.S.C. 1982, c. 148 (am. 1970-71-72, c. 63) (the Act) for a purchase price of $1,227,100. The consideration paid by 538 for Romantino's shares was 1,000 fully paid Class B preference shares with a par value of $1 each and a redemption price of $12,271 each or $1,227,100 in the aggregate. The amount elected for purposes of subsection 85(1) was fixed at $561,000 and the adjusted cost base of Romantino's shares was $148,500;

2. Mauro sold his 4,000 common shares of Tri-M to 539 in precisely the same terms.

3. Manley's shares were sold to 538 and 539 in equal portions of 2,000 shares each for a total amount of $582,900, such amount provided by 461 to allow 538 and 539 to acquire Manley's shares;

4. The main transaction took place when 461 advanced to Tri-M two cheques each in the amount of $666,000 to assist in the funding of dividends by Tri-M in the amount of $111 per share. These dividends were declared and respectively paid to 538 and 539 immediately prior to the closing of the main transaction. As a result of the main transaction 461 acquired 6,000 common shares of Tri-M for $811,100 from each of 538 and 539;

5. On December Tith, 1980 Tri-M issued a promissory note payable on demand in the amount of $1,332,000 in favour of 461 in respect of the money advanced for the dividends. [2]

In their respective 1981 tax returns 538 and 539 referred to the dividend paid by Tri-M as“ taxable dividends deductible per T-2S3, $660,000” and thus exempt from income tax by virtue of subsection 112(1) of the Act. There was no specific designation in either return of this dividend as a separate dividend for purposes of section 55 of the Act.

On December 16, 1986, the Minister of National Revenue (the Minister) reassessed 538 to treat the payment of the dividend of $666,000 as proceeds of disposition of the shares of Tri-M. [3] In so doing the Minister acted on the basis that the provisions of paragraph 55(2)(b) of the Act are applicable. [4]

The appellant raises four grounds of appeal: (a) the transactions in issue were part of a series of transactions that commenced prior to April 22, 1980; (b) subsection 55(2) of the Act is ambiguous; (c) the Minister of National Revenue failed to convey to the appellant the legal assumptions upon which the assessments are based; and (d) the provisions of subsection 55(2) of the Act are void for vagueness.

In support of the grounds raised by the appellant, testimony was adduced from Romantino, and from Dario D’Angela (D'Angela) and Anthony Canale (Canale), chartered accountants who acted for the Mazzoccas and their corporations during the relevant periods of time. Canale was in charge of the firm's tax practice and was involved in the preparation of Tri-M’s financial statements and income tax returns. Their testimony related to the events and circumstances which led to the disposition of the shares as well as to the basis upon which the appellant chose to treat the dividend as exempt from income tax in its return for the relevant year. The main points raised in their testimony follow.

Tri-M carried on the business of manufacturing drill bits used in the mining industry. Romantino was its president. He and Mauro were machinists with primary responsibility for the plant while Manley was responsible for administration, management and all financial aspects of the business. Following incorporation the Mazzoccas' relationship with Manley was described as "okay for a while”, however in 1971 a dispute flared up and there was talk of buying each other out. Matters settled down and from 1972 to 1975 business progressed reasonably well. Manley was considered to be a capable manager although Romantino felt that on occasion he spent too much time away from the office. In 1975 tensions between Mauro and Manley resurfaced. Shortly thereafter Manley offered to buy the Mazzoccas' shares but was rejected. They then offered to buy out Manley which offer was also rejected. The relationship grew even more strained and the Mazzoccas sought advice from D’Angela. Discussions took place and ultimately the parties agreed to the establishment of a joint audit for the accounts of Tri-M. The firm of D'Angela and Sorrenti represented the Mazzoccas while Moore and Powell was appointed to perform the audit on behalf of Manley. This joint audit mechanism remained in place until the completion of Tri-M's 1979 fiscal year.

Notwithstanding these arrangements the relationship did not improve, although, as Romantino put it, "We went on again for three or four years until 1979.” when further disagreements between Manley and Mauro led to physical confrontation. As well, towards the end of 1979 Tri-M's difficulties were exacerbated by the fact that it had exhausted its line of credit at the bank. The Mazzoccas asked D'Angela to obtain financing to enable them to buy Manley out or to find an individual prepared to purchase Manley's share. D'Angela recalls that on March 11, 1980 he contacted one possible source. Financial statements were provided and meetings were held in May 1980. Two other sources were contacted, one in May 1980 and the other in July 1980. All were unproductive.

On May 12, 1980, Manley resigned as manager. Romantino described the period after his departure in the following words:

We are now operating the company. The bank was unhappy — we met with the bank — they wanted more money in the company. The bank manager came over several times.

At this point of time Tri-M's line of credit was“ pretty well at the limit". The bank which had looked almost exclusively to Manley for the management of Tri-M became quite concerned and appointed Peat, Marwick to perform an analysis of the situation. In result the bank insisted that Tri-M make arrangements for proper management and additional financing.

On or about May 30, 1980 Manley offered to purchase all of the shares of Tri- M from Mauro and Romantino for $1,000,000. The offer was rejected. On June 13, 1980 the Mazzoccas advised Manley that they were prepared to sell their shares for $2,000,000 in the aggregate. Their offer was not accepted. It is apparent from the testimony of Romantino and D'Angela that the primary reason for the failure of the Mazzoccas and Manley to come to terms was their inability to arrange financing.

In July 1980 Romantino contacted Fred Brunner (Brunner) an individual involved in a similar business albeit on a much larger scale than Tri-M. They met in August 1980 at which time Romantino outlined Tri-M's financial problems, its shareholders’ disputes, the aborted buy out efforts and their desire to find a buyer for Manley's interest. Brunner indicated that he was unwilling to take a minority interest. Romantino then referred the matter to D'Angela. He contacted Brunner on September 17, 1980 again proposing the sale of a partial interest in Tri-M. When it was flatly rejected D'Angela reported back to the Mazzoccas who instructed him to pursue a sale of their interests as well. Negotiations continued and at some point of time in October 1980 Brunner decided to purchase all of the outstanding shares of Tri-M. An agreement was concluded which in turn led to the series of transactions between Tri-M, 538, 539 and 461 previously described.

As to the calculation of the dividends in issue Canale stated that he reviewed the tax provisions in Tri-M's financial statements to ensure that the income tax provision reflected in the financial statements was reasonable from an accounting perspective". According to Canale the dividend which was paid by Tri-M to the appellant was ” based on the retained earnings of the company computed under generally accepted accounting principles”. He explained that the capital cost allowance available for the machinery was significantly more than the depreciation taken on the financial statements because of the accelerated capital cost allowance rate available for such manufacturing machinery. Thus for income tax purposes Tri-M took capital cost allowance at a rate which exceeded the depreciation allowance which was reflected in the financial statements. However for the purpose of calculating the dividends he used the "accounting retained earnings taken from the financial statement”. He assumed this was the correct procedure because:

. . .we were relying on pronouncements or budgets that came out from the Department of Finance during this time and prior to this time where the expression was being used "post 1971 tax retained earnings” in the budget of December 1979, and we interpreted that to be retained earnings of a corporation.

The issue before the Court is whether the amount of $666,000 received by 538 constitutes a tax-free intercorporate dividend or is deemed to be proceeds of disposition of the shares under the application of paragraph 55(2)(b).

Submissions and conclusion

I propose to consider each of the four grounds raised on behalf of the appellant and, for the sake of convenience, to deal with them seriatim.

A. Part of a series of transactions or events

The appellant's primary argument is that the transactions were part of a series of transactions or events which commenced prior to April 22, 1980 and that accordingly subsection 55(2) of the Act is not applicable. If I conclude that the evidence supports this ground of appeal, that would be the end of the matter.

The appellant's position is that certain events which occurred prior to April 22, 1980, such as the long-standing disagreements between the Mazzoccas and Manley; the numerous Mazzocca-Manley buy-out offers and counter offers, [5] and the management impasse this situation produced were so inextricably connected with the events that occurred after that date as to constitute a series within the meaning of the relevant provision. Brunner's purchase of the Tri-M shares was merely the ultimate resolution.

Counsel for the appellant referred to a discussion paper by John Robertson [6] as supportive of the position adopted by the appellant. In particular he cited the following comment:

To come within the meaning of this phrase [a series of transactions or events] it would be necessary to have some connecting link between the transaction such as several successive steps to achieve a single objective. If there are a number of transactions or events that operate sequentially and have as a result the reduction of a capital gain, these transactions or events would constitute a series.

Counsel submitted:

. . .the series of transactions in the present case commenced prior to April 22, 1980 and more particularly when the offers to purchase began circulating back and forth between Mr. Manley and the Mazzoccas. The fact that Mr. Brunner's corporation was the ultimate purchaser of the shares in December of 1980 is, I submit, irrelevant. Mr. Brunner simply provided the financing for a transaction that the shareholders of Tri-M had contemplated and considered for many months, if not years, prior to the infusion of funds by Mr. Brunner. Mr. Brunner supplied the means by which the Mazzoccas and Manley were able to rid themselves of one another. Without that funding, I dare say the offers and counter-offers would have gone on indefinitely.

And later:

Stated in another manner, one could describe the subject situation by asking two meaningful questions:

1. When did the series of offers and counter-offers between the Mazzoccas and Manley start? and

2. When did this series end?

I submit the series started in earnest with Manley’s physical assault on Mauro in late 1979, and ended with the sale of shares of Tri-M to Brunner’s company.

Counsel for the appellant also submits that a paper presented by Carole Gouin-Toussaint [7] is clear proof that the Department of National Revenue (the Department) considers that a series of transactions includes any preliminary transactions of a taxpayer if, at the time it was carried out, the taxpayer had the intention of proceeding with the subsequent transactions and eventually did so. He argued that the interpretation proposed on behalf of the appellant was consistent with that expressed on behalf of the Department and was also consistent with the modern rule of statutory interpretation adopted in Stubart Investments Ltd. v. The Queen, [1984] 1 1S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305 and subsequent decisions which were predicated on the interpretative approach established in that case. [8]

The Minister’s position is that the phrase "a series of transactions or events" is to be defined according to the essential purpose of the transaction that is ultimately completed. That transaction was a sale of Tri-M shares by the Mazzoccas to 461. Counsel for the Minister submitted that nothing which occurred prior to April 22, 1980 could reasonably be related to an attempt by the Mazzoccas to sell their interest in Tri-M to 461.

Conclusion

The evidence adduced on behalf of the appellant fails to establish a reasonable nexus between the impugned transaction and any event or transaction which took place prior to April 22, 1980. There was no serious intention on the part of the Mazzoccas to dispose of their interests in Tri-M prior to late summer and fall of 1980. Romantino's testimony made it clear that he and his brother were bent on retaining their interest and this is confirmed by D'Angela's understanding of what Romantino and Mauro were endeavouring to obtain from Brunner. He described his instructions in September 1980 as:

I think the first was to see whether — the Mazzoccas did not really want to sell their interest. They would have preferred to find someone that would have just taken over Manley's interest and eliminate the problem, the animosity and the mistrust that had existed. They just wanted to change partners.

Counsel for the appellant contended that Robertson's comments, and thus the Department's position, were premised on the assumption that, where the transactions giving rise to the reduction in capital gains were contemplated then the transactions or events occurring at that preliminary stage would form part of the series of transactions or events. He argued that the appellant met this test. I do not agree. The transaction contemplated by subsection 55(2) is the disposition at fair market value of a share of capital stock as a result of which the corporation received a taxable dividend in respect of which it was entitled to a deduction under subsection 112(1) or subsection 138(6) of the Act. It is difficult if not impossible to point to one single item of evidence which supports the existence in the minds of the Mazzoccas or their corporations of such “contemplation” prior to April 22, 1980. A generalized desire to rid oneself of a problem is an insufficient base upon which one can make the quantum leap to the conclusion sought.

The phrase "series of transactions or events" must be read in its grammatical and ordinary sense reflecting the context in which it is found, the scheme and object of the Act and the intention of Parliament. [9] Bearing this stricture in mind it seems reasonable to conclude that in order for the events to form part of a series they must follow each other in time and must somehow be logically or reasonably connected to one another. Furthermore the appellant and 539 themselves must intend that the series of transactions be linked together to achieve the specific result in this case being the disposition of the shares of Tri- M to 461 in the circumstances and in the manner previously described. This approach is consistent with the dictionary definitions of the words, "series", "transaction" and "event". [10]

The interpretation placed upon the provisions of subsection 55(2) of the Act by counsel for the appellant is strained and artificial. The connection that counsel is attempting to establish between the shareholder disputes which took place at various times from 1975 to 1980 is too tenuous and nebulous to be reasonably described as a link between those events and the disposition of the Tri-M shares.

The transaction in issue did not form part of a series of transactions or events that commenced before April 22, 1980 and accordingly subsection 55(2) is applicable. It therefore becomes necessary to consider the other arguments submitted by counsel for the appellant.

B. Is subsection 55(2) of the Act ambiguous?

Counsel for the appellant submitted that subsection 55(2) of the Act is ambiguous and that “reasonable uncertainty or factual ambiguity resulting from lack of explicitness in a statute should be resolved in favour of the taxpayer". [11] The primary area of ambiguity claimed to exist relates to the words "income earned or realized by the corporation" and thus to the method of calculating the amount of "safe income". [12] Counsel for the appellant submitted that it was not possible to determine the intent of Parliament from such language.

It was contended that the assessment was in error in that it was made on the basis that income in subsection 55(2) refers to income determined under Division B of Part I of the Act. He argued that there is nothing in the legislation to require a taxpayer to make the relevant calculation on that basis and submitted that the appellant's utilization of generally accepted accounting principles to determine" income earned or realized” for the purpose of calculating the amount of the dividend was a reasonable approach. He submitted that since there is no definition of that phrase in the Act the only issue which

less regular intervals; a number of things of one kind (chiefly immaterial following one another in temporal succession, or in the order of discourse or reasoning; a number of persons in succession holding the same office or having some characteristic in common; a succession, sequence, or continued course (of action or conduct, of time, life, etc.); the connected sequence; order of succession; a number of magnitudes, degrees of some attribute, or the like, viewed as capable of being enumerated in a progressive order. Also, a set of objects of one kind, differing progressively in size, composition, etc., or having a recognized order of enumeration.

needs to be determined in these circumstances is whether this appellant's interpretation of subsection 55(2) is reasonable and consistent with the intent of Parliament.

Counsel for the appellant also urged the Court to find that the Minister was in error in maintaining that "dividends, income taxes and other nondeductible cash outlays should be deducted to determine income” for the purposes of subsection 55(2). He argued that this is in conflict with the accepted meaning of the word income" for the purposes of the Act. He cited a number of decisions which he maintained "support the reasonableness of the appellant's adoption of GAAP for the purposes of calculating income". [13]

Counsel for the Minister submitted that the phrase "income earned or realized by any corporation after 1971” is income as calculated under the Income Tax Act. He referred to paragraph 55(5)(c) which provides:

(5) For the purposes of this section. . .

(c) the income earned or realized by a corporation for a period throughout which it was a private corporation shall be deemed to be its income for the period otherwise determined on the assumption that no amounts were deductible by the corporation by virtue of paragraph 20(1)(gg) or section 37.1;

[Emphasis added.]

Counsel argued that the issue is the appropriate interpretation of the words "its income for the period otherwise determined". He noted that section 3 of the Act provides:

3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules

[Emphasis added.]

and argues that the reference to “for the purposes of this Part” is to Part 1 in which section 55 is found. In both sections the word "determined" is used and therefore it is logical to conclude that the word "income" in paragraph 55(5)(c) of the Act "gets its meaning from the wording in section 3”. He submitted that the decision of the Supreme Court of Canada in Mattabi Mines Ltd. v. Minister of Revenue (Ont.), [1988] 2 S.C.R. 175, [1988] 2 C.T.C. 294 supports this interpretation.

Conclusion

Although the facts in Mattabi Mines Ltd. are different than those before me, the decision has substantial application. To determine the issues raised it became necessary for the Supreme Court to interpret the meaning of the phrase "for the purpose of earning income” in subsection 106(1) and the word "incomes" in paragraph 106(5)(b) of the Corporations Tax Act, R.S.O. 1980,

c. 97. Wilson, J., after a review of other jurisprudence and Interpretation Bulletin IT-487, concluded that Mattabi met the qualifying provision in subsection 106(1) of that Act. She then continued (S.C.R. 190-93, C.T.C. 302-03):

My conclusion to this point only assists Mattabi to qualify for the tax credit in the year in which the expenditures were made, i.e. 1971. But the company was exempt from tax in that year and thus for the credit to be of any practical use the company must be able to carry it forward. The conditions under which that may be done are set out in subsections 106(2)-(4):

(4) Notwithstanding subsection 3, where a corporation has a net loss, any amount which may be deducted under subsection 1 may be deducted in subsequent fiscal years to the extent that the deduction allowed under subsection 1 exceeds the tax otherwise payable by the corporation in the previous fiscal years and, except as herein provided, no deduction shall be allowed in any fiscal year of the corporation ending after the 31st day of March, 1974. . . .

The crucial phrase here is "net loss", which is defined in paragraph 106(5)(b):

(5) In this section,

(b) "net loss” means the amount, if any, by which the non-capital losses exceed the incomes of a corporation for the fiscal years ending between the 26th day of April, 1971, and the 1st day of April, 1973. . . .

This is a definition peculiar to section 106. It requires Mattabi to establish that its non-capital losses" exceeded its "incomes" in the relevant years, i.e. 1971 and 1972. What do these terms mean? The Court of Appeal thought the word "incomes" should be construed as referring to more than one income in any given year. In its view, it would cover both taxable and exempt income in a particular year. I would attribute a different significance to the use of “incomes” in the plural. It seems to me that the plural was used because the necessary calculation includes more than one fiscal year. This view is supported by the fact that neither "income" nor "non-capital loss” is defined in section 106. One must turn therefore to the Act in general for their meaning.

Income is dealt with in Part Il of the Act which covers sections 8-122 and therefore includes section 106. Division B of Part II entitled “Computation of Income” begins with the formula for determining the income of a corporation in any fiscal year (section 12). The section begins:

The income of a corporation for a fiscal year for purposes of this part is its income for the year determined by the following rules. . . .

[Emphasis added.]

"This Part" is, as noted above, Part II and includes section 106. The rules laid out in section 12 are followed by a large number of sections dealing with what must be included, what may be deducted, and so on. Subdivision F of Division B headed "Amounts Not Included in Computing Income” contains paragraph 75(2)(a):

Subject to the prescribed conditions, there shall not be included in computing the income of a corporation income derived from the operation of a mine during the period of 36 months commencing with the day on which the mine came into production.

Two possible ways of interpreting the relationship between paragraph 75(2)(a) and section 106 were advanced by the parties. The company's argument was simply that the plain meaning of the Act resulted in Mattabi having no income for the purposes of Part II (including section 106) during this period. The Minister implicitly accepted that this correctly represented the plain meaning but urged this Court to hold that the carry forward provisions "could not have been intended to apply to corporations which earned large incomes but which were exempted under other provisions of the Act from paying taxes on those incomes during the qualifying period”. To qualify, he submitted, a taxpayer must have incurred a“ true net loss". The Minister supported this interpretation by noting that the credit was designed to provide an incentive to purchase equipment and that such incentive would only be effective in the case of a company that actually paid tax. Therefore, it could not in his submission have been intended to apply in the present case.

The Minister, in effect, asks the court to find, in the absence of a separate definition for the section, that "income" has a different meaning in section 106 from its meaning "for the purposes of" Part Il of the Act in which the section appears. Robins, J.A. in the Court of Appeal seems to have accepted this submission. He concludes that "income" in section 106 is, in effect, a synonym for profit. Accordingly, it does not matter whether the profit is tax exempt or not. The difficulty with this position, as I see it, is that a taxing statute is a highly technical piece of legislation which requires an interpretation that will ensure certainty for the taxpayer. Many of the words used carry a very specific and technical meaning because they identify the fundamental concepts underpinning the legislation. “Income” is one of those fundamental concepts.

[Emphasis added.]

Finally, with respect to the Minister's reliance on Stubart Investments Ltd. v. The Queen, [1984] 1S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305, Wilson, J. said at page 304 (C.T.C.) :

The submission of the Minister is that a reading of the whole statute according to its plain meaning can defeat a narrow, technical interpretation of a particular provision. However, in the present case consideration of the whole statute reveals, if anything, support for the company's position. "Income" is a defined term in Part Il of the Act and the failure to define income differently for purposes of section 106 which is contained in Part II has to be treated as significant. Interpretation according to the "object and spirit” of the legislation cannot, in my view, overcome a clear statutory definition. This is not a case in which the Court has a choice of the interpretations it may put upon the language used by the legislature. The legislature has specifically addressed the subject. I would therefore conclude that in assessing whether Mattabi had a“ net loss" one must start with the finding that for purposes of paragraph 106(5)(b) its "incomes" were" nil”.

[Emphasis added.]

The language of section 12 of the Corporations Tax Act is virtually identical to that found in section 3 of the Income Tax Act. Thus the ratio in Mattabi is applicable to this appeal.

With respect to this issue reference can also be made to the article Capital Gains Strips: A Critical Review of the New Provisions" [14] cited by counsel for the appellant. The following comment is found at page 73:

It is also necessary to consider what is meant by the reference to "income earned by any corporation after 1971”. It would seem quite clear that in the context of the Income Tax Act, income used herein means the corporation's income as determined under Part I of the Income Tax Act, and in accordance with all the rules and provisions of the Act. In other words, it is quite clear that this is not an accounting definition of income, but a tax definition. The new amendments go on in this area to define the income of a corporation which is not a private corporation as being expanded to include the untaxed half of capital gains and certain net goodwill proceeds. There is no similar rule relating to any expanded definition of the income of a private corporation; presumably, it is expected that a private corporation will use its capital dividend account in order to distribute the untaxed half of capital gains on a tax-free basis.

It should be specifically noted that in no case is any particular adjustment to be made to the income of a corporation, as determined for tax purposes, to reflect accelerated deductions for tax purposes, such as the excess of capital cost allowance over depreciation booked. It is only income that has been taxed that is to be recognized for this purpose and not income in any other sense. Further, no adjustment is to be made for a variety of other deductions which could be regarded as "artificially" reducing income in an accounting sense: inventory allowance; resource allowance and earned depletion; additional deductions for research and development.

I am satisfied that subsection 55(2) of the Act is to be read in conjunction with paragraph 55(5)(c) and section 3 of the Act. It is therefore appropriate for the Minister to consider the application of subsection 55(2) on the basis that "income earned or realized” is income determined pursuant to the provisions found in Division B of Part I of the Act.

C. Legal Assumptions

This ground of appeal is premised on the proposition that the Minister failed to convey to the appellants the “legal assumptions" upon which the reassessments were made as required by law and in the alternative, if the "legal assumptions" were conveyed, they are wrong in law because there is no legal foundation for them. Counsel for the appellant referred to the amended notice of appeal which purports to summarize these “legal assumptions". As his argument unfolded it became apparent that his submission related not to the validity of the assumptions of fact made by the Minister but rather raised a question as to the manner in which the Minister “interpreted” or "applied" the statutory provisions, i.e. subsections 55(2) and 55(5) of the Act in making his assessment.

Conclusion

Counsel's submission that the appellant did not have conveyed to it the basis upon which the reassessment was made is in general without foundation. Mr. Farano tendered in evidence three letters which passed between himself and officers of Revenue Canada with respect to the proposed assessment (Exhibits A-10, A-11 and A-12). A fourth letter from an officer of Revenue Canada to Mr. Farano was tendered by counsel for the Minister (Exhibit R-7). It is difficult to view these letters as inadequate in setting forth the Minister's position. I make particular reference to Exhibit R-7 which provides specific responses to queries made by Mr. Farano on behalf of the taxpayer. These responses reasonably set forth the facts and statutory provisions which formed the basis for the proposed assessment.

D. Subsection 55(2) — Void for Vagueness?

The last ground of appeal raised by the appellant is that subsection 55(2) of the Act is void for vagueness. The proposition that counsel put forward is that a declaration that a statute is void for vagueness as a matter of statutory construction is not really a declaration that the statute is void in a technical sense of having no legislative force. Rather it is a declaration that the Court cannot as opposed to will not apply that statute. A statute is vague when no meaning can be derived from it. He contended that the vagueness of the subsection in issue can be demonstrated by the word "significant" used to describe the standard of reduced gain that could trigger tax; the lack of clarity with respect to the method of calculation of income for dividend purposes and the timing of that calculation bearing in mind the phrase “ before the transaction or the event or the commencement of the series of transactions or events"; and the phrase "income earned or realized”. He argues that the language of subsection 55(2) has reached such a level of vagueness that it must be considered unenforceable or void.

^Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182.

in support of his position counsel made particular reference to an article“ Is GAAR Void for Vagueness"? [16]

Conclusion

I propose first to deal with the specific language in subsection 55(2) complained of by counsel for the appellant. As to the use of the word "significant" in subsection 55(2) counsel for the appellant argued that when legislation sets standards of conduct it should do so in such a manner that a reasonably intelligent person can understand them and conduct his or her affairs accordingly. I do not disagree.

However such general language is not novel or unusual. Many words and phrases similar in nature have been interpreted by the Courts, albeit not always without difficulty. A reasonable approach was postulated by Joyal, J. in First Fund Genesis Corp. v. Canada, [1991] 2 C.T.C. 14, 91 D.T.C. 5361 (F.C.T.D.) where, in considering the meaning of the phrase “ substantially advanced" he said at page 24 (D.T.C. 5369):

. . .I believe that the term “substantially advanced" cannot be interpreted in a vacuum. Rather its interpretation must reflect the nature and the scope of the subject matter with which subsection 194(4.2) is dealing, i.e, the issue of shares and debt obligations to finance scientific research. [17]

It seems logical to conclude that statutory provisions written in general rather than precise language reflect the legislator's desire not to set rigid and arbitrary limits but rather to leave the matter to the Courts to decide in accordance with the circumstances of each case. Difficulty in application is not an excuse for shirking that task.

I add only that in this instance the argument is somewhat hypothetical since the appellant did not specifically challenge the Minister's assumption that one of the purposes of the transactions leading to the disposition of the shares of Tri-M was to carry out a significant reduction of a capital gain that would otherwise have been realized by the taxpayer. Even if he had, on the facts before me I would have concluded that his argument has little substance to it.

I have already considered the phrases "income earned or realized” and "series of transactions or events" and need not repeat my comments.

With respect to the general proposition advanced by counsel it must be conceded that taxing statutes are notorious for the use of elusive, puzzling and at times almost incomprehensible language. As Collier, J. said with respect to section 133 of the Act in Great Atlantic and Pacific Tea Co. v. The Queen, [1975] C.T.C. 432, 75 D.T.C. 5283 (F.C.T.D.) at page 434 (D.T.C. 5285):

To understand the intricacies of the problem it is necessary to set out the applicable provisions of the statute. To attempt a solution to the problem, I am faced with the scary task of trying, for my first time, to penetrate a portion of the jungle of unpruned verbiage found in the new Act:

It is a canon of construction that if it is possible, effect must be given to the language of an Act of Parliament. It is instructive to note what the Supreme Court of Canada said in this context in Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213. Dickson, J., as he then was, described subsection 13(1) of the Income Tax Act, R.S.C. 1952, c. 148 as "an awkwardly worded and intractable section and source of much debate". He later added at pages 482-83 (C.T.C. 311, D.T.C. 5214):

In an alternative argument, the taxpayer submits that subsection 13(1) is meaningless and incomprehensible; therefore, it should not be applied to his detriment. In effect, he would have us write the section out of the Act. I do not think we can accede to that submission. We must endeavour to construe the language of Parliament. It is not an impossible task.

The concept of vagueness was considered by Lord Denning in Fawcett Properties Ltd. v. Buckingham County Council, [1961] A.C. 636, [1960] 3 All E.R. 503 (H.L.) at page 676 (All E.R. 524):

My Lords, it is a bold suggestion to make that these words, taken as they are from a statute, are void for uncertainty. Mr. Megarry was unable to point to any case where a statute has ever been held void for uncertainty. There are a few cases where a statute has been held void because it is meaningless but none because it is uncertain But when a statute has some meaning, even though it is obscure, or several meanings, even though there is little to choose between them, the courts have to say what meaning the statute is to bear, rather than reject it as a nullity. As Farwell, J. put it when speaking of a statute: “ Unless the words were so absolutely senseless that I could do nothing at all with them, I should be bound to find some meaning, and not declare them void for uncertainty.”

The doctrine of “vagueness” was recently discussed by the Supreme Court of Canada in Osborne v. Canada (Treasury Board), [1991] 2 S.C.R. 69, 82 D.L.R.

(4th) 321. In issue was federal legislation prohibiting public servants from engaging in work for or against a political party or candidate. The question was whether the legislation was too vague to constitute a limit prescribed by law and violated certain provisions of the Canadian Charter of Rights and Freedoms (the Charter).

In his reasons Sopinka, J. made the following comments at pages 94-96 (D.L.R. 339-40):

Vagueness can have constitutional significance in at least two ways in a section 1 analysis. A law may be so uncertain as to be incapable of being interpreted so as to constitute any restraint on governmental power. The uncertainty may arise either from the generality of the discretion conferred on the donee of the power or from the use of language that is so obscure as to be incapable of interpretation with any degree of precision using the ordinary tools. In these circumstances, there is no “limit prescribed by law" and no section 1 analysis is necessary as the threshold requirement for its application is not met. The second way in which vagueness can play a constitutional role is in the analysis of section 1. A law which passes the threshold test may, nevertheless, by reason of its imprecision, not qualify as a reasonable limit. Generality and imprecision of language may fail to confine the invasion of a Charter right within reasonable limits. In this sense vagueness is an aspect of overbreadth.

This Court has shown a reluctance to disentitle a law to section 1 scrutiny on the basis of vagueness which results in the granting of wide discretionary powers. Much of the activity of government is carried on under the aegis of laws which of necessity leave a broad discretion to government officials. See R. v. Jones, [1986] 2 S.C.R. 284, 69 N.R. 241, 31 D.L.R. (4th) 569, United States of America v. Cotroni, [1989] 1 S.C.R. 1469, 23 Q.A.C. 182, 48 C.C.C. (3d) 193, and R. v. Beare, [1988] 2 S.C.R. 387, 88 N.R. 205, 55 D.L.R. (4th) 481. Since it may very well be reasonable in the circumstances to confer a wide discretion, it is preferable in the vast majority of cases to deal with vagueness in the context of a section 1 analysis rather than disqualifying the law in limine. In this regard, I adopt the language of McLachlin, J. in Canada (Human Rights Commission) v. Taylor, [1990] 3 S.C.R. 892, 117 N.R. 191, 75 D.L.R. (4th) 577, at page 956 (N.R. 259, D.L.R. 621-22):

That is not to say that the alleged vagueness of the standard set by the provision is irrelevant to the section 1 analysis. For reasons discussed below, I am of the opinion that the difficulty in ascribing a constant and universal meaning to the terms used is a factor to be taken into account in assessing whether the law is "demonstrably justified in a free and democratic society”. But I would be reluctant to circumvent the entire balancing analysis of the section 1 test by finding that the words used were so vague as not to constitute a "limit prescribed by law", unless the provision could truly be described as failing to offer an intelligible standard. That is not the case here.

Irwin Toy Ltd. v. Quebec (Attorney General), [1989] 1 S.C.R. 927, 94 N.R. 167, 58 D.L.R. (4th) 577, is an apt illustration of this approach which is particularly apposite [sic] to this case. At issue in this case were sections 248 and 249 of the Consumer Protection Act which prohibited commercial advertising directed at persons under the age of 13. It was argued that the sections could not be saved pursuant to section 1 because the provisions were "confusing and contradictory”, because they provided insufficient guidance to the courts in determining whether advertising was directed towards children, and because the legislation provided too much scope for discretion to promulgate regulations. The majority opinion written conjointly by Dickson, C.J., Lamer and Wilson, JJ. rejected out of hand the "regulations" argument. In dealing with the“ insufficient guidance” argument, the Court remarked at page 983 (N.R. 229, D.L.R. 617):

Absolute precision in the law exists rarely, if at all. The question is whether the legislature has provided an intelligible standard according to which the judiciary must do its work. The task of interpreting how that standard applies in particular instances might always be characterized as having a discretionary element, because the standard can never specify all the instances in which it applies. On the other hand, where there is no intelligible standard and where the legislature has given a plenary discretion to do whatever seems best in a wide set of circumstances, there is no "limit prescribed by law”.

Although these comments were made in the context of the provisions of section 1 of the Charter I am of the view that they are applicable in the appeal before me even though the Charter was not invoked.

Without question the language of subsection 55(2) creates problems in application but that is not surprising given the complexity of the subject matter. If any vagueness exists which will at most produce difficulties in interpretation that is not sufficient to declare the provision void. (See Beetz, J. in City of Montreal v. Arcade Investments Inc., [1985] 1 S.C.R. 368, 14 D.L.R. (4th) 161.) Applying the principles in Fawcett Properties and Osborne I cannot conclude that subsection 55(2) is couched in such vague or general language that it does not contain an intelligible standard. Contrary to the submissions made by counsel for the appellant I believe that a reasonably intelligent and, since the law is technical in nature, sufficiently well informed taxpayer, is able to determine its meaning and is capable of governing his actions in a manner which will comply with the statute. I am not prepared to declare that subsection 55(2) of the Act is void for vagueness.

The appeal is dismissed.

Appeal dismissed.