Judgments

[2000] 3 F.C. 508

A-583-99

Lamont Management Ltd. (Appellant)

v.

Her Majesty the Queen (Respondent)

Indexed as: Lamont Management Ltd. v. Canada (C.A.)

Court of Appeal, Décary, Rothstein and Malone JJ.A. —Winnipeg, March 28; Ottawa, April 19, 2000.

Income tax — Exemptions — General principle against double taxation at corporate level — “Safe income” — Taxpayer Canadian corporation shareholder of another Canadian corporation — Latter purchasing taxpayer’s shares for certain amount — Taxpayer deemed to have received dividend in same amount under Income Tax Act, s. 84(3) — Minister treating amount as gain from disposition of capital property under Act, s. 55(2) — S. 55 anti-avoidance provision intended to limit use of tax exempt intercorporate dividends otherwise taxable — Provision not applicable where intercorporate dividend attributable to “income earned or realized by any corporation” under s. 55(2) — Whether term “any corporation” limited to types of corporations referred to in s. 55(5)(b), (c), (d) — Income earned, realized of foreign non-affiliate capable of determination, even if rules not specified in s. 55(5) — Foreign non-affiliate not excluded from types of corporations entitled to “safe income” calculation in s. 55(2) — No necessary implication in language used by Parliament — Term “any corporation” unrestricted, includes foreign non-affiliates.

This was an appeal from a Tax Court of Canada decision holding that, if a corporation is one for which there are no rules for determining “safe income”, that corporation cannot be “any corporation” referred to in subsection 55(2) of the Income Tax Act. The appellant is a private Canadian corporation that owned 250 shares of another private Canadian corporation, Canpac Entreprises Ltd. From February 12, 1986 to December 15, 1992, Canpac held an indirect equity interest in its foreign non-affiliate, Western Thrift Financial Corporation (Westcorp). On December 15, 1992, it purchased from the appellant, for cancellation, its 250 shares for the amount of $7,282,926 which the latter was deemed to have received as a dividend by reason of subsection 84(3) of the Act. The Minister treated the amount received by the appellant from Canpac not as a deemed dividend, but as a gain from the disposition of capital property under subsection 55(2) of the Act. The amount the Minister treated as a capital gain in respect of Westcorp was $1,707,737. It was agreed that the $1,707,737 gain in the fair market value of the 250 Canpac shares owned by the appellant was not attributable to anything other than income earned or realized by Westcorp. The Minister argued that “any corporation” in subsection 55(2) could only mean a Canadian non-private corporation under paragraph 55(5)(b), a Canadian private corporation under paragraph 55(5)(c) or a foreign affiliate under paragraph 55(5)(d). The issue was whether that term includes a foreign corporation which is not a foreign affiliate, that is a foreign corporation in which the Canadian taxpayer’s equity percentage was less than 10%.

Held (Malone J.A. dissenting), the appeal should be allowed.

Per Rothstein J.A.: The purpose of the income tax exemption for intercorporate dividends is to preclude double taxation at the corporate level, once by the corporation earning the income giving rise to the dividend and again by the corporation receiving the dividend income. Section 55 of the Income Tax Act is an anti-avoidance provision intended to limit use of tax exempt intercorporate dividends where they would otherwise be taxable. Where the limitation applies, the intercorporate dividend will be deemed not to be a dividend, but proceeds of disposition of property of the recipient corporation. However, where the intercorporate dividend is attributable to “income earned or realized by any corporation”, also referred to as “safe income”, the anti-avoidance provision does not apply and the intercorporate dividend will continue to be treated as a dividend. Whether the term “any corporation” in subsection 55(2) is limited to the types of corporations referred to in paragraphs 55(5)(b), (c), and (d) is a question of statutory construction. This issue cannot be avoided by a telescopic, non-contextual consideration of those two words. Subsection 55(5) does not purport, at least expressly, to limit the term “any corporation” and the necessary implication that no other corporations could be contemplated in those words must be clear. Section 55 is a complex provision which contains some rules applicable to all corporations and some applicable to specified corporations and it would not be appropriate to find an implied but unexpressed legislative intent in the face of ambiguity. The income earned or realized of a foreign non-affiliate is not incapable of determination, even if rules are not specified in subsection 55(5). Contrary to what the Tax Court Judge said, the absence of express rules for determining “safe income” of foreign non-affiliates does not lead to an absurd result. And even considering the French term “une corporation” used in subsection 55(2), a foreign non-affiliate is not excluded from the types of corporations entitled to a “safe income” calculation. The language used by Parliament does not make clear that the term “any corporation” is limited to the three types of corporations specified in subsection 55(5) and does not lead to any such necessary implication. The term “any corporation” is unrestricted and includes foreign non-affiliates such as Westcorp.

Per Malone J.A. (dissenting): The words “income earned or realized by any corporation” are restricted and cannot include foreign non-affiliates given the scheme of the Income Tax Act and the object and purpose of section 55. Subsection 55(2) is an anti-avoidance provision which operates to limit the use of tax-free dividends to reduce a potential capital gain. The words “any corporation” in subsection 55(2) cannot be divorced from the rest of section 55. To do so would be to ignore the words “For the purposes of this section” found at the beginning of subsection 55(5). In drafting subsection 55(2), Parliament intended that section 55 as a whole be governed by the applicable rules for the purposes of this section. The phrase “income earned or realized” is not a generic term as it appears only in subsections 55(2) and 55(5) of the Act and is not defined in the general definition section of the Act, namely subsection 248(1). The Act defines “safe income” only for public corporations, private corporations and foreign affiliate corporations. Parliament has not included a definition of “safe income” for a non-resident, foreign non-affiliate and it logically follows that there is no such thing as “safe income” for such a corporation. It is not within the object and purpose of section 55 of the Act that earnings of a non-resident corporation, which is not a foreign affiliate, are to receive a more beneficial treatment than earnings of a non-resident corporation which is a foreign affiliate.

STATUTES AND REGULATIONS JUDICIALLY CONSIDERED

Income Tax Act, S.C. 1970-71-72, c. 63, ss. 12(1)(j),(k), 55(2) (as am. by S.C. 1980-81-82-83, c. 48, s. 24; c. 140, s. 25; 1984, c. 45, s. 15), (5) (as am. by S.C. 1980-81-82-83, c. 48, s. 24; 1988, c. 55, s. 33), 84(3) (as am. by S.C. 1977-78, c. 1, s. 38), 85.1(3) (as enacted by S.C. 1974-75-76, c. 26, s. 49), 90, 95(1)(d) (as am. by S.C. 1974-75-76, c. 26, s. 59), (4) (as am. idem; 1976-77, c. 4, s. 35), 112(1)(a),(b) (as am. by S.C. 1980-81-82-83, c. 140, s. 71), 113(1) (as am. by S.C. 1974-75-76, c. 26, s. 73; 1980-81-82-83, c. 140, s. 72).

Income Tax Regulations, C.R.C., c. 945, R. 5907(1)(d) (as am. by SOR/80-141, s. 5; 85-176, s. 4; 89-135, s. 3), (k) (as am. by SOR/80-141, s. 5; 85-176, s. 4; 89-135, s. 3).

CASES JUDICIALLY CONSIDERED

CONSIDERED:

Friesen v. Canada, [1995] 3 S.C.R. 103; (1995), 127 D.L.R. (4th) 193; [1995] 2 C.T.C. 369; 95 DTC 5551; 186 N.R. 243.

AUTHORS CITED

Krishna, Vern. The Fundamentals of Canadian Income Tax, 5th ed. Toronto: Carswell, 1995.

New Shorter Oxford English Dictionary on Historical Principles, Oxford: Clarendon Press, 1993. “Purpose”.

APPEAL from a Tax Court of Canada decision ([1999] 3 C.T.C. 2576; (1999), 99 DTC 871) holding that, if a corporation is one for which there are no rules for determining “safe income”, that corporation cannot be “any corporation” referred to in subsection 55(2) of the Income Tax Act. Appeal allowed.

APPEARANCES:

Joel A. Weinstein, Q.C., and Robert C. Lee for appellant.

Robert M. Gosman for respondent.

SOLICITORS OF RECORD:

Aikins, MacAulay & Thorvaldson, Winnipeg, for appellant.

Deputy Attorney General of Canada for respondent.

The following are the reasons for judgment rendered in English by

Rothstein J.A.:

ISSUE

[1]        On this appeal from the Tax Court of Canada [[1999] 3 C.T.C. 2576], the issue is whether the term “any corporation” in subsection 55(2) of the Income Tax Act[1] includes a foreign corporation which is not a foreign affiliate, i.e. at the relevant time, a foreign corporation in which the Canadian taxpayer’s equity percentage was less than 10%.[2] If so, a dividend received by a Canadian corporation, which was attributable to income earned or realized by the foreign non-affiliate, will be exempt from taxation in accordance with the general principle against double taxation at the corporate level. If not, the dividend will be deemed to be a gain of the recipient corporation from the disposition of capital property which will be subject to taxation at the rate applicable to capital gains.

FACTS

[2]        For purpose of this decision, it is not necessary to recite all the complex facts and transactions placed into evidence in the Tax Court. It is only necessary to focus on the following:

(1) The appellant is a private taxable Canadian corporation.

(2) The appellant owned 250 shares of Canpac Enterprises Ltd., also a private taxable Canadian corporation.

(3) Over the relevant holding period, February 12, 1986 to December 15, 1992, Canpac held an indirect equity interest in Western Thrift Financial Corporation (Westcorp).

(4) Westcorp was a foreign non-affiliate of Canpac, i.e. less than 10% of the equity of Westcorp was indirectly owned by Canpac.

(5) As of December 15, 1992, there was an inherent gain in the value of the 250 Canpac shares owned by the appellant of $4,573,121, attributable to nothing other than income earned or realized by Westcorp.

(6) On December 15, 1992, Canpac purchased from the appellant, for cancellation, its 250 shares owned by the appellant for $7,282,926. By reason of subsection 84(3) [as am. by S.C. 1977-78, c. 1, s. 38] of the Income Tax Act, the appellant was deemed to have received a dividend in the amount of $7,282,926.[3]

(7) One of the results of Canpac purchasing its shares for cancellation from the appellant was a significant reduction in the capital gain which, but for the deemed dividend under subsection 84(3), would have been realized by the appellant on the disposition of its Canpac shares at fair market value.

(8) The appellant reported the entire $7,282,926 received from Canpac on the purchase for cancellation of its Canpac shares as a taxable dividend, which was then deducted from its income pursuant to subsection 112(1) [as am. by S.C. 1980-81-82-83, c. 140, s. 71] of the Income Tax Act.[4]

(9) The Minister reassessed the appellant and treated the amount received by the appellant from Canpac in respect of the income of Westcorp reflected in the increased value of Canpac shares, not as a deemed dividend, but rather as a gain from the disposition of capital property under subsection 55(2) of the Income Tax Act. The amount the Minister treated as a capital gain in respect of Westcorp was $1,707,737.[5]

SUBSECTION 55(2)

[3]        The Income Tax Act provides that, in accordance with specified provisions, dividends received by one corporation from another are exempt from income tax.[6] The purpose of the exemption is to preclude double taxation at the corporate level, i.e. once by the corporation earning the income giving rise to the dividend and again by the corporation receiving the dividend income.

[4]        In circumstances where the Income Tax Act provides that dividends paid from one corporation to another are exempt from taxation, there is an incentive for the shareholding corporation to receive capital gains in the form of dividends. Section 55 is an anti-avoidance provision that is intended to limit use of tax exempt intercorporate dividends where they would otherwise be taxable. Where the limitation applies, the intercorporate dividend will be deemed not to be a dividend, but rather, proceeds of disposition of property, or a gain, of the recipient corporation, subject to tax at the rate applicable to capital gains. However, where the intercorporate dividend is attributable to “income earned or realized by any corporation”, the anti-avoidance provision does not apply and the intercorporate dividend will continue to be treated as a dividend. This is sometimes referred to as “safe income”.

[5]        Subsection 55(2) provides:

55. …

(2) Where a corporation resident in Canada has after April 21, 1980 received a taxable dividend in respect of which it is entitled to a deduction under subsection 112(1) or 138(6) as part of a transaction or event or a series of transactions or events (other than as part of a series of transactions or events that commenced before April 22, 1980), one of the purposes of which (or, in the case of a dividend under subsection 84(3), one of the results of which) was to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at fair market value of any share of capital stock immediately before the dividend and that could reasonably be considered to be attributable to anything other than income earned or realized by any corporation after 1971 and before the transaction or event or the commencement of the series of transactions or events referred to in paragraph (3)(a), notwithstanding any other section of this Act, the amount of the dividend (other than the portion thereof, if any, subject to tax under Part IV that is not refunded as a consequence of the payment of a dividend to a corporation where the payment is part of the series of transactions or events)”

(a) shall be deemed not to be a dividend received by the corporation;

(b) where a corporation has disposed of the share, shall be deemed to be proceeds of disposition of the share except to the extent that it is otherwise included in computing such proceeds; and

(c) where a corporation has not disposed of the share, shall be deemed to be a gain of the corporation for the year in which the dividend was received from the disposition of a capital property. [Emphasis added.]

[6]        Prima facie, Westcorp is “any corporation”. The parties agree that the $1,707,737 gain in the fair market value of the 250 Canpac shares owned by the appellant is not attributable to anything other than income earned or realized by Westcorp. In the absence of any other provision applying, the purchase for cancellation by Canpac of its 250 shares owned by the appellant should result in a deemed dividend pursuant to subsection 84(3) which should be exempt from taxation.

SUBSECTION 55(5)

[7]        The Minister says that “any corporation” in subsection 55(2) can only mean a Canadian non-private corporation under paragraph 55(5)(b), a Canadian private corporation under paragraph 55(5)(c), or a foreign affiliate under paragraph 55(5)(d). Subsection 55(5) provides in relevant part:

55. …

(5) For the purposes of this section,

(a) the portion of any capital gain attributable to any income that is expected to be earned or realized by a corporation after the time of receipt of the dividend referred to in subsection (2) shall, for greater certainty, be deemed to be a portion of the capital gain attributable to anything other than income;

(b) the income earned or realized by a corporation for a period throughout which it was resident in Canada and not a private corporation shall be deemed to be the aggregate of

(i) its income for the period otherwise determined …

(ii) the amount … and

(iii) the aggregate of all amounts ….

(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;

(d) the income earned or realized by a corporation for a period ending at a time when it was a foreign affiliate of another corporation shall be deemed to be the aggregate of the amount,

…

(e) in determining whether 2 or more persons are dealing with each other at arm’s length, persons shall be deemed to be dealing with each other at arm’s length and not to be related to each other if one is the brother or sister of the other; and

(f) where a corporation has received a dividend any portion of which is a taxable dividend,

(i) the corporation may designate in its return of income under this Part for the taxation year during which the dividend was received any portion of the taxable dividend to be a separate taxable dividend, and

(ii) the amount, if any, by which the portion of the dividend that is a taxable dividend exceeds the portion designated under subparagraph (i) shall be deemed to be a separate taxable dividend. [Emphasis added.]

[8]        If the Minister is correct, since Westcorp is a foreign non-affiliate, it is not “any corporation” and the anti-avoidance effect of subsection 55(2) operates to deem the deemed dividend arising on the cancellation of the appellant’s 250 shares of Canpac as a capital gain subject to tax at the rate applicable to capital gains.

THE DECISION OF THE TAX COURT JUDGE[7]

[9]        The learned Tax Court Judge accepted the Minister’s argument. In her view, but for paragraphs 55(5)(b), (c) and (d), Westcorp would be “any corporation” under subsection 55(2). However, she determined that subsection 55(5) was intended to interpret the entire section 55. Paragraphs 55(5)(b), (c) and (d) determine safe income under subsection 55(2). Therefore, if a corporation is one for which there are no rules for determining safe income, that corporation cannot be “any corporation” referred to in subsection 55(2).

[10]      The learned Judge was of the opinion that any other interpretation would lead to an absurd result. Any mode of calculation of safe income would apply to a foreign non-affiliate, while specific modes of calculation are provided for foreign affiliates and for Canadian private and non-private corporations.

[11]      She was also of the view that the French text “une corporation” used in subsection 55(2) supported her interpretation.

[12]      The Judge then referred to articles by authors that were put before her. None suggested that the income of corporations other than those specified in subsection 55(5) should be taken into account in determining safe income.

[13]      Finally, she said that the word “any” only made sense in the context of control of one corporation by another.

[14]      For these reasons, she dismissed the appellant’s appeal.

ANALYSIS

[15]      The issue is whether paragraphs 55(b), (c) and (d) operate so as to provide a limitation on the term “any corporation” in subsection 55(2).

[16]      It is first necessary to dispose of the appellant’s initial argument. This argument is that the plain meaning rule should apply to the words “any corporation” in subsection 55(2). It is said that the word “any”, in its natural meaning, excludes limitations or qualifications, and that when Parliament has chosen to limit the term “any corporation” in the Income Tax Act, it does so expressly. See, for example, subsections 85.1(3) [as enacted by S.C. 1974-75-76, c. 26, s. 49] and 95(4) [as am. by S.C. 1974-75-76, c. 26, s. 59; 1976-77, c. 4, s. 35]. Thus, the income earned or realized by “any corporation” in subsection 55(2) includes income earned or realized by a foreign non-affiliate, namely Westcorp.

[17]      To accept this argument would require the Court to focus only on the words “any corporation” in subsection 55(2), to the exclusion of anything else in the entire section. I am not aware of any rule of interpretation that would support such a telescopic approach. To focus only on the words “any corporation” presumes that nothing else in section 55 modifies or limits the term. However, in order to be satisfied that nothing else in the section does or does not do so, requires that the Court consider the section as a whole. If it is determined that nothing in the entire section modifies the words “any corporation” in subsection 55(2), it is then possible to focus on the words “any corporation” to conclude that the term includes all corporations, including foreign non-affiliates.

[18]      Indeed, the issue is whether the term “any corporation” in subsection 55(2) is limited to the types of corporations referred to in paragraphs 55(5)(b), (c) and (d). This is a question of statutory construction. The issue cannot be avoided by a telescopic, non-contextual consideration of the two words “any corporation” in subsection 55(2). It is necessary to consider whether subsection 55(5) has the limiting effect found by the learned Tax Court Judge and argued for by the respondent.

[19]      Even on a cursory review of subsection 55(5), it is apparent that it is not a provision which defines the term “any corporation” in subsection 55(2). One does not see in subsection 55(5) words such as “any corporation in subsection 55(2) means a private Canadian corporation, a non-private Canadian corporation or a foreign affiliate of another corporation”. In its terms therefore, subsection 55(5) does not purport, at least expressly, to limit the term “any corporation” in subsection 55(2).

[20]      Subsection 55(5) only contains rules for determining “the income earned or realized by any corporation” for purposes of section 55 and, in particular, for subsection 55(2). Therefore, subsection 55(5) can only be considered to limit the term “any corporation” in subsection 55(2) if, because reference is made to rules for determining income earned or realized for only three types of corporations, the necessary implication is that no other corporations could be contemplated in the words “any corporation” in subsection 55(2). However, for the Court to find the necessary implication, it must be clear. Section 55 is a complex provision and it would not be appropriate to find an implied but unexpressed legislative intent in the face of ambiguity.

[21]      As I read subsection 55(5), it contains some rules applicable to all corporations and some applicable to specified corporations. For example, paragraph 55(5)(a) applies to all corporations. A capital gain that is attributable to income earned or realized after the time of receipt of the dividend referred to in subsection 55(2) will not be considered income. I can see nothing in paragraphs 55(5)(a), (e) or (f) applicable to all corporations that would suggest that they could not be applicable to corporations not referred to specifically in paragraphs 55(5)(b), (c) or (d) and, in particular, that they could not be applicable to foreign non-affiliates.

[22]      Paragraphs 55(5)(b), (c) and (d) specify rules for non-private Canadian corporations, private Canadian corporations and foreign affiliates respectively. Nothing in these paragraphs, or anything else in subsection 55(5), indicates that, in the absence of rules pertaining to a particular type of corporation, that income of a foreign non-affiliate cannot be determined. In his text, The Fundamentals of Canadian Income Tax, 5th ed., Toronto: Carswell, 1995, Professor Krishna has addressed the issue of the calculation of earnings of a foreign affiliate for purposes other than section 55. At page 1323 he states:

The affiliate’s earnings are determined according to the tax laws of the country in which the affiliate is resident if that country requires computation of income according to its laws. If the country of residence does not specify the method of determining income, it is calculated according to the tax laws of the country in which the affiliate carries on its business. If neither foreign country specifies a method of computation, earnings are calculated according to Canadian tax rules.

I see no reason why the approach put forward by Professor Krishna would not be applicable to determining the earnings of a foreign non-affiliate for purposes of subsection 55(2), in the absence of rules in subsection 55(5).

[23]      It is not necessary to go further. I am satisfied that the income earned or realized of a foreign non-affiliate is not incapable of determination, even if rules are not specified in subsection 55(5). I am therefore not able to say that the necessary implication of the rules in subsection 55(5) is that no corporation other than those specified in paragraphs 55(5)(b), (c) and (d) could be included within the term “any corporation” in subsection of 55(2).

[24]      During the course of argument, counsel was asked why subsection 55(5) contained no express rules for determining safe income of foreign non-affiliates. Counsel for the respondent suggested it might be related to the issue of control. However, it was not explained why the absence of, or reduced control, implied by a foreign non-affiliate i.e. at the relevant time, ownership of less than 10% of its equity, as compared to a foreign affiliate i.e. 10% or more, would cause Parliament to exclude foreign non-affiliates from the calculation of safe income in subsection 55(2). Section 55 being an anti-avoidance provision, it is more likely to be concerned with corporations over which greater rather than lesser control is exercised. The receipt of income from foreign non-affiliates would, generally, seem to be a situation at the more benign end of the spectrum, and with respect to which Parliament would have less concern in enacting anti-avoidance measures.

[25]      The learned Tax Court Judge found that it would be absurd if the income of foreign non-affiliates could be calculated by any mode when specified modes of calculation apply to Canadian corporations and foreign affiliates. While it is not obvious why Parliament did not specify express rules for calculating the income earned or realized by foreign non-affiliates in subsection 55(5), I cannot agree that the absence of express rules leads to an absurd result. The calculation of income of foreign non-affiliates may be more permissive than in the case of the corporations specified in paragraphs 55(5)(b), (c) and (d). However, that is not absurd.

[26]      Nor can I agree that the term “une corporation” supports the interpretation of the learned Tax Court Judge. The term “une corporation” literally translated means “one” or “a” corporation and not “any” corporation. However, the adjective “one” and the indefinite article “a” are still broad and unrestricted. Therefore, even considering the French phrase “une corporation”, a foreign non-affiliate is not excluded from the types of corporations entitled to a safe income calculation in subsection 55(2).

[27]      I have also had regard to the various articles to which the learned Judge made reference and to others placed before this Court. While much has been written about section 55, I have not been able to find anything in the articles provided by counsel that expressly addresses the issue here, that is, whether the term “any corporation” can include foreign non-affiliates.

[28]      Section 55 is a complex provision. I acknowledge that by specifying the types of corporations in subsection 55(5) and not others, it may have been Parliament’s intention that the term “any corporation” in subsection 55(2) be limited only to those three. However, the language used by Parliament does not make that clear and does not lead to any such necessary implication. On the other hand, the words “any corporation” are unrestricted.

[29]      I would hold that the term “any corporation” in subsection 55(2) is unrestricted and includes foreign non-affiliates such as Westcorp.

[30]      For these reasons, the appeal will be allowed and the decision of the Tax Court will be quashed. The matter will be remitted to the Minister of National Revenue to reassess the appellant by treating the sum of $1,707,737 as a taxable dividend that would otherwise be included in income under subsection 84(3) and paragraph 12(1)(j) and deducted under subsection 112(1) of the Income Tax Act. The appellant will be entitled to costs in this Court and in the Tax Court of Canada.

Décary J.A.: I agree.

* * *

The following are the reasons for judgment rendered in English by

[31]      Malone J.A. (dissenting): This appeal deals with the meaning of the words “income earned or realized by any corporation” used in subsection 55(2) of the Income Tax Act,[8] often referred to as “safe income”, and the interrelationship of that subsection with the income computation rules set out in paragraphs 55(5)(b) to (d).

[32]      In essence, the appellant’s position is that the dividend income of “any corporation” in which it has an interest is relevant in determining safe income pursuant to subsection 55(2). The Minister’s position is that safe income is confined by paragraphs 55(5)(b) to (d) to only those corporations specified in those paragraphs. The learned Tax Court Judge upheld the Minister’s interpretation holding that paragraphs 55(5)(b), (c) and (d) restrict the words “any corporation” to public, private and foreign affiliate corporations.

[33]      I have had the benefit of reading the majority reasons prepared by Mr. Justice Rothstein who is of the opinion that the term “any corporation” in subsection 55(2) is unrestricted and includes foreign non-affiliates. I am unable to reach a similar conclusion. In my view, the words “income earned or realized by any corporation” are restricted and cannot include foreign non-affiliates given the scheme of the Act and the object and purpose of section 55 in particular.

[34]      Dividends received by a Canadian resident corporation from a taxable Canadian corporation or a corporation resident in Canada and controlled by it are exempt from taxation under Part I of the Act by virtue of subsection 112(1). Consequently, where a Canadian resident corporation wishes to dispose of shares of such a corporation, it has an incentive to cause that corporation to pay a dividend prior to the sale, as a means of reducing the capital gain on the sale.

[35]      Subsection 55(2) is an anti-avoidance provision which operates to limit the use of tax-free dividends to reduce a potential capital gain. It reads as follows:

55. …

(2) Where a corporation resident in Canada has after April 21, 1980 received a taxable dividend in respect of which it is entitled to a deduction under subsection 112(1) or 138(6) as part of a transaction or event or a series of transactions or events (other than as part of a series of transactions or events that commenced before April 22, 1980), one of the purposes of which (or, in the case of a dividend under subsection 84(3), one of the results of which) was to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at fair market value of any share of capital stock immediately before the dividend and that could reasonably be considered to be attributable to anything other than income earned or realized by any corporation after 1971 and before the transaction or event or the commencement of the series of transactions or events referred to in paragraph (3)(a), notwithstanding any other section of this Act, the amount of the dividend (other than the portion thereof, if any, subject to tax under Part IV that is not refunded as a consequence of the payment of a dividend to a corporation where the payment is part of the series of transactions or events)

(a) shall be deemed not to be a dividend received by the corporation;

(b) where a corporation has disposed of the share, shall be deemed to be proceeds of disposition of the share except to the extent that it is otherwise included in computing such proceeds; and

(c) where a corporation has not disposed of the share, shall be deemed to be a gain of the corporation for the year in which the dividend was received from the disposition of a capital property. [My emphasis.]

[36]      The salient facts which give rise to this appeal are as follows:

(a) The appellant (Lamont) is a private taxable Canadian corporation which at all relevant times owned 250 shares of Canpac Enterprises Ltd. (Canpac) which was also a private taxable Canadian corporation.

(b) Canpac held indirect equity interests in two American corporations, Western Insurance Holdings Ltd. (Western Insurance) and Western Thrift Financial Corporation (Westcorp). During the relevant period Western Insurance was a foreign affiliate of Canpac while Westcorp was not (i.e. Canpac’s equity percentage was less than 10%).[9]

(c) At December 15, 1992, there was an inherent gain in the value of the 250 Canpac shares a portion of which was attributable to income earned or realized by Westcorp. That same date Lamont sold these shares to Canpac, for cancellation, at a price of $7,282,926. Pursuant to subsection 84(3) of the Act, Lamont was deemed to have received a dividend in the full amount of the sale price.[10]

(d) The appellant reported the entire amount received from this share purchase as a taxable dividend which was then deducted from income pursuant to subsection 112(1) of the Act.[11]

(e) The Minister reassessed Lamont on the basis that the $1,707,737 increase in the value of the Canpac shares that was directly attributable to income earned or realized by Westcorp was a gain from the disposition of capital property under subsection 55(2) of the Act and not a deemed dividend.

(f) The gain in the value of the 250 Canpac shares in the amount of $5,575,189 that was clearly attributed to income earned or realized by Western Insurance or other foreign affiliates of Canpac was not reassessed; this being accepted by the Minister as safe income of a foreign affiliate pursuant to paragraph 55(5)(d).

[37]      The appellant’s first argument is that the words “any corporation” in subsection 55(2) are clear and unambiguous and cites a number of Supreme Court of Canada decisions mandating that in such circumstances the “plain meaning” of the words has to be applied. The appellant asserts that all corporations are therefore to be included within the ambit of “any corporation” and, accordingly, subsection 55(2) should be read in isolation. I reject this argument following the reasons given by Rothstein J.A. as this is far too narrow an interpretation. The words “any corporation” in subsection 55(2) cannot be divorced from the rest of section 55. To do so would be to ignore the words “For the purposes of this section” found at the beginning of subsection 55(5).

[38]      The learned Tax Court Judge dealt with the issue in the following words:

I do not believe that it could be disputed that the word “any” [in subsection 55(2)] is all-embracing and that in its natural meaning it excludes limitations. I believe however that there is need to determine the corporations that are embraced by the word “any” in view of the existence of subsection 55(5) of the Act. This is a provision, as can clearly be seen from its introductory words, that has been enacted to interpret the entire section 55. It shall then be used to interpret the meaning of the terms “income earned or realized by any corporation” found in subsection 55(2) of the Act.[12] [Emphasis added.]

[39]      Subsection 55(5) is framed in the legislation as follows:

55. …

(5) For the purposes of this section,

…

(b) the income earned or realized by a corporation for a period throughout which it was resident in Canada and not a private corporation shall be deemed to be the aggregate of

…

(c) the income earned or realized by a corporation for a period throughout which it was a private corporation shall be deemed to be ….

(d) the income earned or realized by a corporation for a period ending at a time when it was a foreign affiliate of another corporation shall be deemed to be the aggregate of the …. [My emphasis.]

[40]      It is argued by the Minister that paragraphs 55(5)(b) to (d) create computation rules for those corporations which have safe income under subsection 55(2). The statutory scheme, as evidenced in paragraphs 55(5)(b) to (d), confirms that safe income consists of income which has been subject to tax in Canada or can be repatriated to Canada free of tax. In this respect, the statutory scheme furthers the goal of preventing double taxation at the corporate level (i.e. the payment of Canadian tax at the corporate level justifies the payment of a tax-free intercorporate dividend to another Canadian corporation). He further submitted that common sense dictates that Parliament, having turned its mind to enacting rules for calculating safe income for these types of corporations, did not intend that corporations not dealt with in paragraphs 55(5)(b) to (d) should also have safe income.

[41]      I agree with the learned Tax Court Judge’s reasoning. I am of the view that by drafting subsection 55(5) as above, Parliament intended that section 55 as a whole be governed by the applicable rules for the purposes of this section. “Purpose” means “object to be attained, thing intended”.[13] Literally stated, this means “For the objectives expressly intended by Parliament in section 55 the permitted calculations are as follows”.

[42]      I am comforted in this approach by the following quotation from Mr. Justice Major in the Supreme Court decision in Friesen v. Canada:[14]

In interpreting sections of the Income Tax Act, the correct approach, as set out by Estey J. in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, is to apply the plain meaning rule. Estey J. at p. 578 relied on the following passage from E.A. Driedger, Construction of Statutes (2nd ed. 1983), at p. 87:

Today, there is only one principle or approach, namely, 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

[43]      There is further confirmation that Parliament intended that “any corporation” in subsection 55(2) mean any of the corporations specified in paragraphs 55(5)(b), (c) and (d). The phrase “income earned or realized” is not a generic term. It appears in the Act only in subsections 55(2) and 55(5). It is not defined in the general definition section of the Act, namely, subsection 248(1).

[44]      The Act defines safe income only for public corporations—55(5)(b), private corporations—55(5)(c) and foreign affiliate corporations—55(5)(d). In the absence of a specific rule in respect of a non-resident, foreign non-affiliate, it would be difficult to determine how such an amount should be calculated. Parliament has not included a definition of safe income for a non-resident, foreign non-affiliate and it logically follows that there is, therefore, no such thing as safe income for such a corporation. This is simply an application of the maxim, expressio unius est exclusio alterius: to express in a statute that certain corporations are entitled to a safe income calculation, a Parliamentary intention to exclude all others from its operation may be inferred.

[45]      The appellant also argues that the learned Tax Court Judge erred by failing to consider the object and purpose of subsection 55(2) in purporting to determine the meaning of the words “any corporation”. The Tax Court Judge addressed this argument in these words:

The Appellant’s argument, as expressed in its … written argument, is that since it is admitted by the parties that a portion of the capital gain on the redemption of shares is attributable to the income earned by Westcorp, and that since it is the object of subsection 55(2) of the Act to consider this portion of the capital gain to be an inter-corporate dividend, its position is therefore in accordance with that subsection. This position would appear sensible if it were not … for the existence of paragraphs 55(5)(b)(c) and (d) of the Act. These paragraphs determine the income that may be taken into account as income earned or realized by a corporation.[15]

[46]      In my opinion, a consideration of object and purpose does not lead to the conclusion urged by the appellant but to the conclusion reached by the Tax Court Judge. The position advanced by the appellant would result in preferential treatment being given to the income of a non-resident corporation that is not a foreign affiliate over that of a foreign affiliate. This offends the scheme of the Act which can be gleaned from the following provisions:

(a) under paragraph 12(1)(k) and section 90, a taxpayer resident in Canada must include in the computation of income any amount received as a dividend from a corporation not resident in Canada;

(b) for such a corporation, subsection 113(1) provides that only dividends received from a foreign affiliate can be deducted in computing taxable income, subject to the rules set out in paragraphs 113(1)(a) to (d). In particular, paragraph 113(1)(b) limits this deduction to that portion of a dividend from a foreign affiliate that is prescribed to have been paid out of that affiliate’s taxable surplus, (i.e. tax paid income from an active business).

(c) paragraphs 5907(1)(d) and (k) of the Income Tax Regulations [C.R.C., c. 945 (as am. by SOR/80-141, s. 5; 85-176, s. 4; 89-135, s. 3)] provide that exempt and taxable surplus of a foreign affiliate of a corporation resident in Canada is only computed from the time that is the first day of the taxation year of the affiliate in which it last became a foreign affiliate of the corporation.

[47]      Paragraph 55(5)(d) is consistent with this scheme as it recognizes as safe income, those earnings of a foreign affiliate that could be repatriated to Canada free of tax. This would include exempt earnings, as well as taxable earnings that are subject to sufficient underlying foreign tax. Earnings of non-resident corporations that are not foreign affiliates cannot be repatriated to Canada free of tax and are not recognized as safe income anywhere in subsection 55(5). Yet the appellant’s argument in this case is that income analogous to safe income from “any corporation” is entitled to the subsection 55(2) exemption.

[48]      I agree with the Tax Court Judge’s overall conclusion that it is not within the object and purpose of section 55 of the Act that earnings of a non-resident corporation, which is not a foreign affiliate, are to receive more beneficial treatment (in the same or similar circumstances) than earnings of a non-resident corporation which is a foreign affiliate. I would dismiss the appeal with costs.

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