By The Court:
This is an appeal from the judgment of Potts J., [1995] O.J. No. 960, dismissing the appellant’s appeal from reassessments of capital tax under Part III of the Corporations Tax Act R.S.O. 1980, c.97, as amended (“the Act”), for the taxation years ending in 1980 to 1983. The sole issue before Potts J. and on this appeal is whether government grants received by the appellant should have been included in the corporation’s paid-up capital in the year of receipt as “earned, capital and any other surplus” within the meaning of s.53(l)(b) of the Act for the purposes of determining the capital tax payable by the appellant in the relevant years. The appeal court judge held that they should be so included.
The relevant definition of “paid-up capital” reads as follows:
53.-(1) The paid-up capital of a corporation for a taxation year includes,
(a) the paid-up capital stock of the corporation;
(b) its earned, capital and any other surplus;
(c) all its reserves, whether created from income or otherwise, except any reserve the creation of which is allowed as a deduction under the provisions of Part II, except that the reserves the creation of which is allowed as a deduction under the following provisions of Part II shall be included in paid-up capital,
(i) paragraph 20(1 )(n) of the Income Tax Act (Canada) as that paragraph applies by virtue of subsections 12(1) and (8) of this Act,
(ii) subparagraph 40( 1 )(a)(iii) of the Income Tax Act (Canada) as that subparagraph applies by virtue of subsection 13(1) of this Act, and
(iii) subsection 16(1);
(d) all sums or credits advanced or loaned to the corporation by its shareholders directly or indirectly or by any person related to any of its shareholders or by any other corporation; and
(e) all its indebtedness, whether assumed or undertaken by it, represented by bonds, bond mortgages, debentures, income bonds, income debentures, mortgages, lien notes and any other securities to which the property of the corporation or any of it is subject. 1972, c. 143, s. 126; 1977, c. 58, ss. 9(2), 26; 1979, c. 28, s. 13(1).
According to generally accepted accounting principles (“GAAP”), any government grant related to a capital asset will only be included in the retained earnings or “earned surplus” as the asset is used in the operation of the business. It is not included in “surplus” on receipt. It is common ground between the parties that GAAP are not determinative of the issue and that the question is one of statutory interpretation. However, the appellant contends that, in the context of this statute, “earned, capital and any other surplus” are commercial words which can only make sense in an accounting context and that they therefore should be interpreted according to GAAP. The respondent argues in favour of a broader interpretation in accordance with the ordinary meaning of the phrase. The appeal court judge adopted the respondent’s approach.
With deference to the appeal court judge, we disagree with his conclu- sion. There is no doubt that GAAP do not govern the result. It is also clear that the “paid-up capital of a corporation” as defined in s.53 of the Act constitutes an extension of the meaning of “paid-up capital” from its ordinary commercial meaning: Investors Syndicate Ltd. v. Ontario (Minister of Revenue) (February 11, 1994), Doc. Toronto 75826/91Q/B106/93, 75827/91Q/B106/93A, 75828/91Q/B106/93B, 75829/91Q/B106/93C, 75830/91Q/B106/93D (Ont. Gen. Div.), aff’d (February 5, 1996), Doc. CA Cl 7951 (Ont. C.A.); City Parking Canada Ltd. v. Ontario (Minister of Revenue) (1973), 1 O.R. (2d) 425 (Ont. C.A.). This does not detract from the fact that, in the absence of a statutory definition for “earned, capital and any other surplus”, resort must be had to ordinary commercial principles to attribute any meaning to the phrase.
In this context, the plain and ordinary meaning of these words should be taken from the language accountants speak, not that of persons who are not involved with corporate balance sheets. The tax assessors know accounting language, as do the accountants who certify the corporation’s financial statements. The accountants, applying GAAP, do not include a government grant as an item of capital surplus in the year of surplus. Rather, the grant is treated as an item of retained earnings or “earned surplus” over time as the asset is used in the operations of the business. In our view, the statute should be interpreted in accordance with this approach.
We are further convinced that this is the correct approach by reason of the fact that the respondent’s handling of the matter results in double taxation which requires an administrative adjustment to correct. Under the respondent’s treatment, the amount of the grant is brought into surplus on receipt. In accordance with GAAP, which are accepted by the Ministry, another amount equal to the value of the grant is brought into earned surplus in annual increments over the life of the related assets. In. order to prevent the obvious duplication, a third amount is deducted in annual increments, not by reason of any provision in the Act, but by administrative adjustment. In our view, this is artificial and can be interpreted as a concession that the earlier imposition of tax is contrary to the provisions of the Act.
Consequently, the appeal is allowed, the appeal court judgment is set aside, the reassessments are referred back to the respondent for reconsideration and further reassessment in accordance with these reasons. The appellant is entitled to its costs of the appeal.
Appeal allowed.