Trans World Oil & Gas Ltd. v. The Queen, 95 DTC 260, [1995] 1 CTC 2087 (TCC), briefly aff'd 98 DTC 6060 (FCA)

Bowman J.T.C.C.:-This appeal is from an assessment for the appellant’s 1985 taxation year.

The basic issue is this: can the appellant, who, in 1985, owned a U.S. resident-controlled foreign affiliate that earned foreign accrual property income (’’FAPI") offset that income with active business losses incurred by the affiliate in the U.S. in 1980 at a time when the affiliate was not a controlled foreign affiliate of the appellant but rather of the appellant’s controlling shareholder, an individual?

The facts are not disputed and are set out in an agreed statement, as follows:

The appellant and respondent by their respective counsel do hereby agree and admit that the facts recited below are the facts upon which this Court can rely and base its decision.

A. Statement of facts

1. The appellant is a corporation resident in Canada for the purposes of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") having a fiscal year-end of December 31 in each year.

2. Mr. Joe Phillips ("Phillips"), an individual resident in Canada for the purposes of the Act, was the controlling shareholder of the appellant in its 1980 to 1985 taxation years, inclusive.

3. Trans World Oil & Gas Ltd. ("Trans World U.S.") was a corporation incorporated under the laws of the state of Montana and resident in the U.S. for the purposes of the Act. The fiscal year-end of Trans World U.S. is April 30 in each year.

4. Phillips owned all of the issued and outstanding voting shares of Trans World U.S. prior to its 1980 taxation year and subsequently until January 2, 1985.

5. Prior to and during its 1980 taxation year, Trans World U.S. carried on an active business of exploring for oil and natural gas in the U.S.

6. During its 1980 taxation year, Trans World U.S. incurred a net loss of U.S. $795,086 (Cdn. $1,068,436.57) from the said active business of exploring for oil and natural gas carried on by it in the U.S.

7, On or about May 1, 1984, Phillips subscribed for 90,000 shares of the common stock of Trans World U.S. for a total consideration of U.S. $7,560,900 (or Cdn. $9,711,990).

8. The proceeds of the said share subscription were deposited by Trans World U.S. in term deposits with banks in the U.S.

9. On or about January 2, 1985, Phillips sold all of his shares in Trans World U.S. to the appellant for Cdn. $9,811,899, Trans World U.S. thereby became a wholly-owned subsidiary of the appellant and was a wholly-owned subsidiary and a ‘controlled foreign affiliate" of the appellant within the meaning of paragraph 95(1 )(a) of the Act on April 30, 1985.

10. During its 1985 taxation year ending on April 30, 1985, the sole income of Trans World U.S. was interest in the amount of Cdn. $998,810 (U.S. $743,289) earned on the aforesaid term deposits with banks in the U.S. Apart from earning that interest it carried no other activities that were calculated to produce income.

11. In computing its income for the purposes of the U.S. Internal Revenue Code for its fiscal period ending April 30, 1985, Trans World U.S. applied U.S. $733,241 of its total of U.S. $820,178 of its prior years’ net losses, including part of its 1980 net loss, to reduce to nil its taxable income and taxes payable for U.S. federal income tax purposes.

12. By notice of reassessment dated November 9, 1990, the Minister of National Revenue reassessed the appellant in respect of its 1985 taxation year by including the amount of $998,810 in the calculation of the appellant’s income in reliance on subsection 91(1) and subparagraph 95(l)(b)(i) of the Act on the basis that the interest income of Trans World U.S. for its fiscal period ended April 30, 1985 was foreign accrual property income ("FAPI”) of Trans World U.S. The Minister of National Revenue did not apply the prior years’ net losses of Trans World U.S. to reduce the interest income otherwise included in the calculation of FAPI of Trans World U.S. on the basis that subparagraph 95(l)(b)(v) and Regulation 5903 did not apply to the prior years’ net losses of Trans World U.S. By the aforesaid notice of reassessment, the Minister of National Revenue also allowed as a deduction the amount of $217,132 on account of withholding taxes paid to the U.S. Government on dividends paid by Trans World U.S. to the appellant in its 1985 taxation year resulting in a net increase in taxable income of $781,678 to the appellant.

13. The parties are in agreement that for the purposes of this appeal the said interest income earned by Trans World U.S. in its 1985 taxation year was FAPI of the appellant in the 1985 taxation year, within the meaning of subsection 91(1), subparagraph 95(l)(b)(i) and paragraph 95(1 )(d) of the Act, and that the sole issue to be decided by this Honourable Court is whether the losses incurred by Trans World U.S. in its 1980 taxation year are deductible in computing the said FAPI.

From this the following points are of particular pertinence:

A. When Trans World U.S. incurred active business losses of $795,086 U.S. in 1980 it was not a controlled foreign affiliate of the appellant but rather of Mr. Joe Phillips, the appellant’s controlling shareholder.

B. When Trans World U.S. earned the FAPI of U.S. $743,289 (Cdn. $998,810) it was a controlled foreign affiliate of the appellant.

These are the only two facts that are of significance to this issue. In the 1985 taxation year of Trans World U.S. it paid a dividend of U.S. $731,140 (Cdn. $998,810) to the appellant but that fact is relevant only to the second issue which I shall discuss later.

I do not propose to review in detail the somewhat complex regime relating to non-resident corporations and their Canadian shareholders, foreign affiliates, controlled foreign affiliates and FAPI. These provisions are no doubt familiar to anyone who is interested in reading these reasons. It is sufficient to say that Trans World U.S. was until January 2, 1985, a foreign affiliate and a controlled foreign affiliate of Mr. Phillips within the meaning of paragraphs 95(1 )(d) and (a) of the Income Tax Act and a foreign affiliate and a controlled foreign affiliate of the appellant thereafter.

The FAPI earned by Trans World U.S. was to be included in 1985 in computing the appellant’s income under subsection 91(1). The question is how much was it—$998,810 or zero? This depends upon whether the active business losses incurred by Trans World U.S. in 1980, when it was a controlled foreign affiliate of Mr. Phillips, can be used to reduce the FAPI earned in 1985.

"Foreign accrual property income" is defined in paragraph 95(1 )(b). Insofar as that definition is relevant to this appeal, it reads as follows:

"foreign accrual property income" of a foreign affiliate of a taxpayer, for any taxation year of the affiliate, means the amount, if any, by which the aggregate of

(i) the affiliate’s incomes for the year from property and businesses other than active businesses...

exceeds the aggregate of

(v) the amount prescribed to be the deductible loss of the affiliate for the year and the five immediately preceding taxation years.

The amount prescribed to be the deductible loss of a foreign affiliate of a taxpayer is defined in subsection 5903(1) of the Income Tax Regulations. Although only a small portion of that definition is applicable, I shall set it out in full because it is from that provision, among others, that one must draw an inference as to the intention of the drafter of the regulations.

5903.(1) Deductible loss.—For the purpose of subparagraph 95(l)(b)(v) of the Act, the amount prescribed to be the deductible loss of a foreign affiliate of a taxpayer for a taxation year and the five immediately preceding taxation years is the amount, if any, by which the aggregate of

(a) the aggregate of all amounts each of which is the amount, if any, for each of the five immediately preceding taxation years of the affiliate during which it was a foreign affiliate of the taxpayer or of a person described in any of subparagraphs 95(2)(f)(iv) to (vii) of the Act, by which

(i) the aggregate of the amounts determined under subparagraphs 95( 1 )(b)(iii) and (iv) of the Act in respect of the affiliate for that preceding year

exceeds

(ii) the aggregate of the amounts determined under subparagraphs 95( 1 )(b)(i) and (ii) of the Act in respect of the affiliate for that preceding year, and

(b) the amount, if any, by which the aggregate of

(i) each amount determined under clause 5907(l)(c)(ii)(A) and subparagraphs 5907(1 )(c)(iii) and (iv) in respect of an exempt loss of the affiliate for those years, and

(ii) each amount determined under clause 5907(1 )(j)(ii)(A) in respect of taxable loss of the affiliate for those years but not including any amount included in the affiliate’s exempt loss for those years

exceeds the aggregate of

(iii) each amount determined under subparagraphs 5907(1 )(b)(ii), (iii), (iv) and (v) in respect of the exempt earnings of the affiliate for those years less such portion of the income or profits tax payable to the government of a country for any of those years by the affiliate as may reasonably be regarded as payable in respect of an amount referred to in subparagraph 5907(1 )(b)(iii) or clause (l)(b)(iv)(B), and

(iv) each amount determined under clauses 5907( 1 )(i)(ii)(A) and (C) in respect of the taxable earnings of the affiliate for those years but not including any amount included in the affiliate’s exempt earnings for those years

exceeds the aggregate of

(c) the aggregate of all amounts each of which is an amount deducted by virtue of subparagraph 95(l)(b)(v) of the Act by the taxpayer or a person described in any of subparagraphs 95(2)(f)(iv) to (vii) of the Act in respect of any of the five immediately preceding taxation years of the affiliate to the extent that such amount relates to a loss for any of those years and assuming that no amount is deductible under that subparagraph for any year until the maximum amount for preceding years has been deducted; and

(d) where a payment has been received by the foreign affiliate that may reasonably be considered to relate to a payment described in subsection 5907(1.3) made by another foreign affiliate of the taxpayer in respect of a loss, or any portion thereof, included in computing the amount referred to in paragraph (a) or (b) in respect of the affiliate, the amount of such loss or portion thereof.

For the purposes of this appeal the only applicable portion is subparagraph 5903(1 )(b)(i), that is to say, the amount determined under subparagraph 5907(1 )(c)(iii) in respect of an exempt loss of the affiliate for those years.

"Exempt loss" is defined in paragraph 5907(1 )(c) of the regulations as follows:

(1) For the purposes of this Part and sections 95 and 113 of the Act,

(c) "exempt loss” of a foreign affiliate of a corporation for a taxation year of the affiliate is the aggregate of all amounts each of which is

(i) the amount by which the capital losses of the affiliate for the year exceed the aggregate of

(A) the amount of the allowable capital losses for the year referred to in subparagraph 95( 1 )(b)(iv) of the Act,

(B) the amount of the allowable capital losses for the year referred to in clauses (g)(iii)(A) and (g)(iv)(C), and

(C) such portion of any income or profits tax refunded by the government of a country for the year to the affiliate as may reasonably be regarded as tax refunded in respect of the amount by which the capital losses of the affiliate for the year exceed the aggregate of the amounts referred to in clauses (A) and (B),

(ii) for its 1975 or any preceding taxation year, the aggregate of all amounts each of which is

(A) the affiliate’s net loss for the year from an active business carried on by it in a country, or

(B) the amount, if any, for the year by which

(I) the amount determined under subparagraph 95( 1 )(b)(iii) of the Act for that year

exceeds

(II) the amount determined under subparagraph 95( 1 )(b)(i) of the Act for that year,

(iii) for the 1976 or any subsequent taxation year where the affiliate is resident in a country listed in subsection (11), each amount that is the affiliate’s net loss for the year from an active business carried on by it in Canada or in a country listed in subsection (11), or

(iv) for the 1976 or any subsequent taxation year, each amount that is included in the exempt loss of the affiliate by virtue of subsection (10).

Again, the only provision that has any application in this case is subparagraph 5907(1 )(c)(iii). Trans World U.S. was resident in and carried on business in the U.S., which was listed in subsection 5907(11), and its loss in 1980 was from an active business carried on there.

’’Net loss” is defined in part as follows in subparagraph 5907(1 )(g)(i):

(g) "net loss" of a foreign affiliate of a corporation for a taxation year of the affiliate

(i) from an active business carried on by it in a country is the amount of its loss for the year from that active business carried on in that country minus such portion of any income or profits tax refunded by the government of a country for the year to the affiliate as may reasonably be regarded as tax refunded in respect of such loss.

’’Loss” is defined in paragraph 5907(1)(e):

(e) "loss" of a foreign affiliate of a taxpayer resident in Canada for a taxation year of the affiliate from an active business carried on by it in a country is the amount of its loss for the year from that active business carried on in that country computed by applying the provisions of subparagraph (a)(i) respecting the computation of earnings from that active business carried on in that country, mutatis mutandis.

In construing these rather complex provisions it is well to bear in mind that the right to carry losses forward or back from one taxation year to another does not exist independently of the statute and regulations. There is no room for any assumption of an inherent right based on general principles or on the overall scheme of the Income Tax Act. Moreover, subdivision (i) of Division B of the Income Tax Act and Part LIX of the Regulations form a self-contained code relating to non-resident corporations and trusts and their resident shareholders or beneficiaries. Accordingly, the extrapolation of rules relating to the treatment of losses of domestic corporations is not a reliable guide to the interpretation of the FAPI provisions.

The appellant’s contention, briefly, is that the 1980 active business loss of Trans World U.S. is a loss referred to in subparagraph 5907(1 )(c)(iii). This contention is based first upon certain inferences that he invites me to draw concerning the scheme of the Act as it relates to domestic corporations. As stated above I do not find such comparisons helpful. Second, he points out that there are to be included in the computation of the "deductible loss of a foreign affiliate of a taxpayer" for a year or the five preceding years under paragraph 5903(1 )(a) essentially the affiliates’ property and non-active business losses and allowable capital losses accrued after 1975, net of property and non-active business income and taxable capital gains accrued after 1975. The significance of this item is that the calculation of the amounts for the purposes of paragraph 5903(1 )(a) is for years "during which it was a foreign affiliate of the taxpayer or of a person described in any of subparagraphs 95(2)(f)(iv) to (vii)" (essentially non-arm’s length persons and predecessor corporations).

Each counsel seeks to draw an inference favourable to his case from the presence of the emphasized words in paragraph 5903(1 )(a) and their absence from paragraph 5903(1 )(b). For the appellant it is said that those words in paragraph 5903(1 )(a) are words of limitation and their absence from paragraph 5903(1 )(b) indicates that no such restriction applies to a calculation under the latter paragraph. For the respondent it is said that had the drafter intended to extend the calculation under paragraph 5903(1 )(b) to years in which the affiliate was not a foreign affiliate of the Canadian taxpayer but of a related person it would have said so as it did in paragraph 5903(l)(a).

The appellant’s contention therefore boils down to two propositions:

1. Property losses, non-active business income losses and capital losses for the preceding five years can be used to reduce FAPI only if those losses were incurred while the affiliate was a foreign affiliate of the taxpayer or, effectively, a person related to the taxpayer or a predecessor corporation.

2. All active business losses of a foreign affiliate of a Canadian resident incurred in the preceding five years can be used to reduce FAPI of that affiliate even if the non-resident company was not a foreign affiliate of the taxpayer when the active business losses were incurred. The appellant contends that nothing in paragraph 95(1 )(b) of the Income Tax Act, or paragraphs 5903(1 )(b) and 5907(1 )(c) of the Regulations requires that the active business losses have been incurred when the affiliate was a foreign affiliate of the corporate taxpayer in respect of which the FAPI is being calculated.

The respondent takes no exception to the first proposition but in response to the second says that the net loss referred to in subparagraph 5907(1 )(c)(iii) must be the net loss incurred. while the affiliate was a foreign affiliate of the corporate taxpayer in respect of which the computation of FAPI is being made and not of an unrelated third party or even of a person related to the Canadian taxpayer.

The respondent’s position is essentially that in the calculation of the prescribed "deductible loss" of a foreign affiliate under subsection 5903(1) one of the elements to be taken into account is an amount determined under a portion of the definition of exempt loss of the affiliate, specifically an amount determined under subparagraph 5907(1 )(c)(iii) "in respect of an exempt loss of the affiliate for those years". That determination must, according to the respondent, be made in the context of a definition of the "exempt loss" of a foreign affiliate of a corporation. From this the respondent concludes not only that the only type of foreign affiliate of a taxpayer that can have an exempt loss is a foreign affiliate of a corporation but also that it must have been, in each year during which the component of exempt loss that is relevant to the determination of a deductible loss is to be calculated, a foreign affiliate of the corporation in respect of which the FAPI is being calculated.

This contention is based upon a number of provisions of the regulations. First, counsel points out that subparagraph 5907(1 )(c)(iii) appears as an ingredient of a definition of "exempt loss" of a foreign affiliate of a corporation. Accordingly, he reasons, there can be no exempt loss of a foreign affiliate for a taxation year of the affiliate unless it is an affiliate of a corporation in the taxation year or years referred to in subparagraph 5907(1 )(c)(iii).

Second, he observes that subparagraph 5907(1 )(c)(iii) requires a determination of the affiliate’s "net loss" for the year from an active business carried on in Canada or a listed country. "Net loss" is defined in subparagraph 5907(1 )(g)(i), so far as is relevant to this appeal, only as the net loss of a foreign affiliate of a corporation.

Third, he refers to the fact that in the definition of deductible loss in subparagraph 5903(1 )(b)(i) the amounts to be calculated under subparagraph 5907(1 )(c)(iii) must be determined "in respect of an exempt loss".

To these contentions the appellant responds that in 1985 Trans World U.S. was a foreign affiliate of a corporation, the appellant, and the words "of a corporation" in the definition of exempt loss and of net loss do not imply that when the active business loss was incurred the affiliate had to be a foreign affiliate of the corporation of which it was an affiliate in 1985, or indeed of any corporation.

Moreover, he contends that in applying the definition of "net loss" one must determine the affiliate’s loss and the definition of "loss" is a definition of the loss of a foreign affiliate "of a taxpayer", that is to say, of an individual or a corporation. Further, he asserts that the respondent’s position would lead to an absurdity in that it would mean that if an individual taxpayer owned a foreign affiliate both when it was resident in a listed country and incurred losses from an active business carried on in that country and also when it earned passive income in a subsequent taxation year, he or she could not, in determining the FAPI taxable under subsection 91(1), offset the. passive income with the prior years active business losses. Counsel for the respondent acknowledges that this is the result, but counters with the observation that the appellant’s position leads to the anomalous conclusion that a person who acquired a foreign affiliate with accumulated active business losses could use them to offset passive income earned in a subsequent year even though the foreign affiliate incurred those losses at a time when it was nobody’s foreign affiliate or the foreign affiliate of a complete stranger. This, he warns, could give rise to an active trade in the shares of foreign companies with accumulated active business losses.

There is much technical merit in the contentions of both counsel, who advanced their respective positions with skill and thoroughness. There is room, I believe, even in construing a provision of such complexity as Part LIX of the Regulations, for applying general principles of statutory interpretation. These are, generally, that the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act and the intention of Parliament and that in case of doubt, where that doubt cannot be resolved by recourse to the scheme of the legislation, it should be resolved in favour of the taxpayer. I see no reason for not applying these principles to the construction of a regulation. We have, as well, two recent decisions of the Federal Court of Appeal, Tennant v. Canada, [1994] 2 C.T.C. 113, and Canada v. Swantje, [1994] 1 C.T.C. 2559. The former admonishes against a "results oriented" approach to statutory interpretation, and the latter disapproves of a "purely mechanical one, focused on the method, the means devised to achieve the goal" and recommends that the approach be "a functional one" and that "the scheme must be considered as a whole, taking into account the intent of the legislation, its object and spirit and what it actually accomplishes".

In summary then, if the words of the legislation are clear and unambiguous and admit of but one interpretation one need look no further. If they are not and are susceptible of more than one interpretation one must look to the scheme of the Act and its object and spirit. It is only when recourse to all of the other tools of statutory interpretation fails to yield a clear answer that one is entitled to invoke the principle that in case of ambiguity the benefit of the doubt must go to the taxpayer. As Fauteux C.J. said in Ville de Montréal v. ILGWU Center et al., [1974] S.C.R. 59, 24 D.L.R. (3d) 694, at page 66 (D.L.R. 699):

The legislator is presumed to mean what he says; and there is no need to resort to interpretation when the wording is clear....

Two separate questions are involved in the analysis required here:

A. Must the foreign affiliate that sustains the active business losses in the prior years have been a foreign affiliate of a corporation in the years when it sustained the losses?

B. If so, must it be a foreign affiliate of the same corporation in respect of which the FAPI is to be determined in a subsequent year?

An affirmative answer to either question will sustain the respondent’s position.

While I accept the appellant’s contention that anomalies may result from the respondent’s interpretation I believe that that interpretation is more consonant with the overall scheme of the Act and regulations as they relate to FAPI.

As to the first question, there are many indications in Part LIX of the Regulations that it was intended to restrict the application of prior years’ active business losses to those incurred while the foreign affiliate was a foreign affiliate of a corporate taxpayer. I have in mind, for example, the words "in respect of an exempt loss of the affiliate for those years" in subparagraph 5903(1 )(b)(i). Since an "exempt loss" appears to be a computation that is relevant only to an affiliate of a corporate taxpayer it is I think a fair inference that there can be no exempt loss of a foreign affiliate of an individual. A further indication is found in paragraph 5903(1 )(b), where calculations under subparagraph 5907(1 )(c)(iv) and clause 5907(l)(j)(A) are required. Neither of these provisions is directly applicable here, but both of them require calculations that can be made only in the case of a foreign affiliate of a corporation.

The inference that one is disposed to draw from this somewhat labyrinthine legislation is that, in the various calculations that must be made for different purposes, certain of them can be made in respect of all taxpayers who own shares of foreign affiliates and some can be made only in respect of the corporate shareholders of foreign affiliates. In construing provisions of such specificity as Part LIX of the Regulations it must be assumed that the authors meant what they said and that the differentiations made had a purpose and were intentional. Inherent in the scheme of subdivision (i) of Part B of the Act and Part LIX of the Regulations is that many provisions apply only to corporate shareholders of foreign affiliates of corporations resident in Canada whereas some apply also to individual shareholders. To ignore these distinctions would be to drive a coach and four through the entire regime. Even if there are lacunae or anomalies —and there may well be-it is not the function of this Court, by reading words into or out of the regulations, to attempt to fill the former or correct the latter. As Chief Justice Isaac said in Hawboldt Hydraulics Inc. (Trustee of) v. Canada, [1994] 2 C.T.C. 336. "These [established principles of statutory interpretation] are not invitations to Courts to ignore other well-established rules of construction, such as that which requires courts to construe statutes so as ‘to ascribe some meaning to each word used by the legislature’ Atco v. Calgary Power, [1982] 2 S.C.R. 557, 140 D.L.R. (3d) 193, at page 569 (S.C.R.)".

As to the second question, I regard the presence in paragraphs 5903(1 )(a) and (c) of the words "or a person described in any of subparagraphs 95(2)(f)(iv) to (vii)" and their absence from paragraph 5903(1 )(b) as an indication that makers of the regulation did not intend to extend the treatment of prior years’ active business losses of an affiliate to losses incurred when it was a foreign affiliate of persons described in subparagraphs 95(2)(f)(iv) to (vii) of the Act (or of anyone else, for that matter). Had it been intended to do so the regulation would have said so. [1]

The alternative construction is not, I acknowledge, without merit. It is, in summary, that where one provision (paragraph 5903(1 )(a)) specifically refers to a broader group of possible owners of a foreign affiliate, 1.e., persons mentioned in subparagraphs 95(2)(f)(iv) to (vii) (which could of course include individuals such as Mr. Phillips) it should be inferred that it was not intended similarly to limit the group where no such group is mentioned. One must be wary of the indiscriminate use of Latin maxims such as expressio unius est exclusio alterius. I doubt that it is really an appropriate guide in this case to the interpretation of this provision. It would apply if all that I had to construe were paragraph 5903(1 )(a). The unius would be the persons mentioned in subparagraphs 95(2)(f)(iv) to (vii), and the alterius would be everyone else. I question the correctness of applying it to a different provision, paragraph 5903(1 )(b), where no mention is made of any owner of the foreign affiliate, even the very taxpayer in respect of which the FAPI is being computed. Yet I do not believe it is reasonable to conclude from the absence from paragraph 5903(1 )(b) of the words "or of a person described in subparagraphs 95(2)(f)(iv) to (vii)" that it was intended to broaden the group of potential owners to everyone in the world. In a provision whose purpose is the computation of the amount of passive income (FAPI) that is to be taxed in a Canadian resident’s hands it would be surprising if a taxpayer, although limited to offsetting "passive" income earned in the year with passive losses sustained in prior years only where those passive losses were incurred while the foreign affiliate was owned by the taxpayer, a non-arm’s length person or a predecessor corporation, yet would nonetheless have an unlimited right to deduct prior years’ active business losses incurred when a wholly unrelated third party owned the foreign affiliate. [2] That appears to me to be inconsistent with the very object that the FAPI rules were designed to accomplish. The object behind the FAPI rules was to discourage Canadians from parking investments in offshore companies (usually tax havens), or, if they did, at least to require them to pay taxes currently on the income so generated. That object would be defeated if a Canadian resident were permitted to acquire from a third party a company, resident in a listed country, with accumulated active business losses and use those losses to offset both the income taxable in that country [3] and the passive income taxed under subsection 91(1). While this result may seem a little harsh in the case of Mr. Phillips or the appellant considering that ultimate control never changed throughout the entire period it is a result that is in my opinion the only one that is consistent with the regime that the Act and regulations are seeking to govern.

Accordingly, I would answer in the affirmative the two questions which I posed earlier in this analysis.

It is unfortunate that the relatively simple concept involved in this case had not been expressed with a degree of clarity that would have obviated the necessity of bringing the matter to court.

If my interpretation is wrong, and the deductible loss of Trans World U.S. includes the losses incurred in 1980, it makes no difference in any event to the appellant’s taxable income. To the notice of assessment of the appellant for 1985 was attached a schedule outlining the basis of the increase to taxable income. It read as follows:

The assessment was premised on the assumption that the FAPI of the controlled foreign affiliate was $998,810 under subsection 91(1). A dividend of the same amount was paid in the year and was included in income under section 90. Since the dividend was paid out of taxable surplus [4] an amount equal to the amount required by subsection 91 ( 1 ) to be included in respect of the share was deducted in computing the appellant’s income under subsection 91(5). [5] The result of this calculation is that the FAPI is taxed only once, under subsection 91(1), and not a second time when it is paid to the Canadian resident shareholder as a dividend.

In addition the Minister, in assessing, allowed a further deduction under section 113 of $217,132, being the amount of the withholding tax paid of $99,881 multiplied by the relevant tax factor as defined in subsection 95(1). For 1985 this factor was 1/.46.

If the appellant were correct in its contention that the 1980 losses reduced the FAPI in 1985 to nil, so that no amount was to be included in its income under subsection 91(1), the dividend paid in 1985 would still have been included in its income under section 90, but no amount would have been deductible under subsection 91(5). Accordingly, the appellant’s taxable income and the amount of tax assessed for 1985 would have been the same.

This alternative contention was raised in a most peculiar way by the respondent. After agreeing that the sole issue before the Court was:

...whether the losses incurred by Trans World U.S. in its 1980 taxation year are deductible in computing the said FAPI

counsel for the respondent brought a motion on the eve of trial, supported by a lengthy affidavit, to dismiss the appeal on the grounds that:

...the Court has no jurisdiction over the subject matter of the appeal...

or alternatively to amend its reply to the notice of appeal to raise the same jurisdictional question. The appellant consented to the amendment and the motion to dismiss for want of jurisdiction proceeded at trial.

As I understand the rationale behind the motion, it is that since the respondent has come up with an alternative ground for upholding the correctness of the amount assessed, this Court, in some way that I have been unable to fathom, loses jurisdiction over the subject matter of the appeal. The kindest thing to do with this forlorn and ill-conceived notion is to cast it adrift and let it founder on its own. This Court obviously has jurisdiction to hear the appeal, and to entertain arguments as to alternative bases for supporting the assessment, just as it has the obligation to redefine badly defined issues and to determine the correctness in law of the assessment, irrespective of the manner in which the issues are raised.

The appeal is dismissed with costs, except for the costs relating to the motion to dismiss for want of jurisdiction.

Appeal dismissed.