THE HARMONIZATION OF TAX LEGSLATION - CASE OF COMPLEMENTARITY PART II (continued)

COMPLEMENTARITY IS THE RULE

M.N.R. v. Faure Estate (1975)

In M.N.R. v. Faure Estate,[20] Justice Pratte of the Federal Court of Appeal tempered the comments of Justice Taschereau in Sura and established that under the civil law the ownership of the property governed by the matrimonial regime of community of property remained suspended throughout the duration of the matrimonial regime. In this case, the issue to be determined was whether there had been a transmission of property for the purposes of the former Estate Tax Act[21] on the death of a spouse married under the community of property regime where the spouses had signed a marriage contract providing, inter alia, that the surviving spouse would be entitled to all of the common property. Justice Pratte decided in favour of the declaratory effect of the partition of the community at the death of one of the spouses and, thus, the absence of a transfer for the purposes of the Estate Tax Act.

On appeal from the decision of the Federal Court of Appeal, the Supreme Court[22] refused to rule again on the issue of whether spouses married under the regime of community of property were co-owners of the common property or not. The Supreme Court ruled, however, that the husband could not be considered the sole owner of the community property and reaffirmed the principle it had stated in Sura that the partition of the community property, following the dissolution of the regime, was declaratory and did not involve a transmission of property. In this case, the Supreme Court admitted the retroactive effect of the partition not only with respect to half of the community property, but for the totality of the community since the marriage contract provided that the entire community would belong to the surviving spouse.

Olympia & York Developments Ltd. v. The Queen (1980)

In Olympia & York Developments Ltd. v. The Queen,[23] the taxpayer had sold a commercial building, reserving the rights of ownership until the purchase price had been paid in full. The question at issue was whether there had been a “disposition of property” within the meaning of section 54 of the ITA, as it read at that time, despite the reservation respecting the transfer of the rights of ownership.

Justice Addy found that there had been no sale within the meaning of the civil law. However, he concluded that, although there had been no sale under the civil law, there was nonetheless a “disposition of property” within the meaning of the ITA, since there had been a transfer of the three main incidents of ownership: risk, possession and use.

The following excerpt from the decision of Justice Addy should be highlighted:

It is evident that the rights of the parties to the contract and all matters governing various agreements and legal relations arising from the actions of the parties to those agreements must be determined in accordance with the law of the Province of Quebec.

The rights of the parties arise out of the agreement filed as Exhibit 1 and full consideration must be given to its terms.  Since there is no special definition of the word "sale" or any special meaning to be attached to it in the Income Tax Act, one must consider that word in the light of the law of the Province of Quebec as applied to the relationship created by the agreement Exhibit 1.[24]

After this statement by Justice Addy, is it not surprising to see his conclusion, based on common law concepts, that there was, in that case, a “disposition of property”?

The main incidents of ownership in civil law are the right to use the property (usus), the right to enjoy its fruits (fructus) and the right to dispose of it (abusus). The transfer of risk, possession and use referred to by Justice Addy may be sufficient under the common law for an effective transfer of ownership (beneficial ownership), but is not in itself sufficient to transfer the ownership of the property in civil law. It should be remembered that ownership in civil law is absolute and that, unlike the common law, ownership cannot be divided into beneficial ownership and legal ownership. Thus, it would appear that Justice Addy referred to common law precedents to settle a case from Quebec. Now that new section 8.1 of the Interpretation Act has been enacted, there is reason to speculate whether a court might not reach a different conclusion by applying civil law rules to transactions conducted in Quebec.

The trilogy of cases: Continental Bank Leasing Corporation (1998), Backman (2000) and Spire Freezers (2000)

In what is know as the trilogy of Continental Bank Leasing Corporation,[25] Spire Freezer[26] and Backman,[27] the Supreme Court issued a reminder in no uncertain terms that reference must be made to the private law in determining whether an arrangement constituted a partnership for the purposes of the application of the ITA.

In Continental Bank Leasing Corporation, the taxpayer had planned the sale of its assets used in its leasing operations so as to avoid recapture of the capital cost allowance. The planning that was used consisted, for the taxpayer, in transferring the assets to a partnership on a rollover basis in exchange for an interest in the partnership. Subsequently, the taxpayer, in the context of its liquidation, disposed of its interest in the partnership to its parent company. Then, the parent company disposed of this interest to third party purchasers.

Revenue Canada disallowed the rollover of the assets under subsection 97(2) of the ITA, inter alia, on the basis that the partnership had been invalidly constituted.

In a split decision, the Supreme Court found in favour of the taxpayer. The minority justices were of the opinion that the taxpayer should not have been entitled to the rollover under subsection 97(2) of the ITA, not because the partnership had been invalidly constituted, but rather because it would be contrary to public policy to allow the parties to the transaction to benefit from their deliberate breach of the legal prohibitions (in the case, the prohibition against a bank's participation in a partnership under paragraph 174(2)(i) of the Bank Act).[28]

The Court's reasons regarding the applicable criteria for determining whether a partnership had been validly constituted were delivered by Justice Bastarache. Although the latter was speaking for the minority, the entire Court adopted his analysis of the applicable criteria. These criteria were stated in answer to the first question that the Court had to answer: “Was Leasing a member of a valid partnership with the subsidiaries of Central in December 1986 within the meaning of s. 2 of the Partnerships Act?” Justice Bastarache wrote at paragraph 22 of his decision:

Section 2 of the Partnerships Act defines partnership as "the relation that subsists between persons carrying on a business in common with a view to profit".  This wording, which is common to the majority of partnership statutes in the common law world, discloses three essential ingredients:  (1) a business, (2) carried on in common, (3) with a view to profit.  I will examine each of the ingredients in turn.[29]

The Supreme Court accordingly applied the private law of Ontario in order to determine whether, in that case, the alleged partnership had been validly constituted.

In Backman and Spire Freezers, both issued by the Supreme Court on the same day, the Court again had to rule on whether a partnership existed. The two cases involved taxpayers who had claimed business losses, against their other income, from American partnerships, according to the taxpayers. The following excerpt from the decision of Justices Iacobucci and Bastarache in Backman again refers to the principle of complementarity:

The term "partnership" is not defined in the Act. Partnership is a legal term derived from common law and equity as codified in various provincial and territorial partnership statutes.  As a matter of statutory interpretation, it is presumed that Parliament intended that the term be given its legal meaning for the purposes of the Act: N. C. Tobias, Taxation of Corporations, Partnerships and Trusts (1999), at p. 21. We are of the view that, where a taxpayer seeks to deduct Canadian partnership losses through s. 96 of the Act, the taxpayer must satisfy the definition of partnership that exists under the relevant provincial or territorial law.  This is consistent with Interpretation Bulletin IT-90, "What is a Partnership?" dated February 9, 1973.   It is also consistent with the approach taken to the interpretation of the Act by a majority of this Court in Will-Kare Paving & Contracting Ltd. v. Canada, [2000] 1 S.C.R. 915, 2000 SCC 36, para. 31.  It follows that even in respect of foreign partnerships, for the purposes of s. 96 of the Act, the essential elements of a partnership that exist under Canadian law must be present: for a similar approach, see Economics Laboratory (Canada) Ltd. v. M.N.R., 70 D.T.C. 1208 (T.A.B.).

Each of the common law provinces has enacted its own partnership legislation based on the Partnership Act, 1890 (U.K.), 53 & 54 Vict., c. 39. However, partnership as a concept was recognized by the courts of law and equity long before the enactment of that statute.  It is perhaps not surprising that common law jurisdictions generally, and the common law provinces of Canada in particular, define partnership as a relationship comprised of the same three essential ingredients.  The three essential ingredients of partnership were recently described by this Court in Continental Bank, supra, at para. 22: [...][30]

In Witkin v. The Queen[31] and in Water's Edge Village Estates (Phase II) Ltd. v. The Queen,[32] the Federal Court of Appeal recently followed the decisions of the Supreme Court in Continental Bank Leasing Corporation, Backman and Spire Freezers.

Will-Kare Paving & Contracting Limited v. The Queen (2000)

In Will-Kare Paving & Contracting Limited, [33] the taxpayer had constructed its own asphalt plant. Approximately 75 per cent of the asphalt output was used by the taxpayer to fulfill its paving contracts and the remainder was sold to third parties. The taxpayer claimed an accelerated capital cost allowance under class 39 of Schedule II of the Income Tax Regulations[34] and the investment tax credit for the plant on the basis that the plant had been acquired primarily in the “manufacturing or processing of goods for sale. Revenue Canada denied the investment tax credit and only allowed the capital cost allowance applicable to property in class 8 of Schedule II of the Income Tax Regulations.

In that case, the issue was thus to determine the meaning to be given to the term “sale”. Should it be given its legal meaning or its plain meaning? The Supreme Court, in a 4 - 3 decision, opted for the legal meaning of the term “sale”. The following excerpt is taken from the decision of Justice Major (for the majority):

Notwithstanding this absence of direction, the concepts of a sale or a lease have settled legal definitions. As noted in Crown Tire and Hawboldt Hydraulics, Parliament was cognizant of these meanings and the implication of using such language.  It follows that the availability of the manufacturing and processing incentives at issue must be restricted to property utilized in the supply of goods for sale and not extended to property primarily utilized in the supply of goods through contracts for work and materials.

It is perhaps true, as Will-Kare submitted and as noted in Halliburton, supra, at p. 5338, that the use of sale of goods law distinctions sometimes yields the anomalous result that the provision of services in connection with manufactured and processed goods will disqualify property that would, but for the services, qualify for the incentives. Nevertheless, it remains that in drafting the manufacturing processing incentives to include reference to sale or lease, Parliament has chosen to use language that imports relatively fine private law distinctions.  Indeed, the Act is replete with such distinctions.  Absent express direction that an interpretation other than that ascribed by settled commercial law be applied, it would be inappropriate to do so.

To apply a "plain meaning" interpretation of the concept of a sale in the case at bar would assume that the Act operates in a vacuum, oblivious to the legal characterization of the broader commercial relationships it affects. It is not a commercial code in addition to a taxation statute. Previous jurisprudence of this Court has assumed that reference must be given to the broader commercial law to give meaning to words that, outside of the Act, are well-defined. See Continental Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298. See also P. W. Hogg, J. E. Magee and T. Cook, Principles of Canadian Income Tax Law (3rd ed. 1999), at p. 2, where the authors note:

The Income Tax Act relies implicitly on the general law, especially the law of contract and property. ... Whether a person is an employee, independent contractor, partner, agent, beneficiary of a trust or shareholder of a corporation will usually have an effect on tax liability and will turn on concepts contained in the general law, usually provincial law.

[...]

The technical nature of the Act does not lend itself to broadening the principle of plain meaning to embrace popular meaning.  The word sale has an established and accepted legal meaning.

Will-Kare's submissions essentially advocate the application of an economic realities test to the interpretation of what constitutes a sale for the purpose of the manufacturing and processing incentives.  However, as noted above, in the absence of express legislative direction to the contrary, I view the incentives' reference to the concepts of sale and lease as importing private law distinctions.  As such, the provisions at issue are clear and unambiguous and reference to economic realities is not warranted.  See Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622, at para. 40.

It would be open to Parliament to provide for a broadened definition of sale for the purpose of applying the incentives with clear language to that effect.  Given, however, the provisions merely refer to sale, it cannot be concluded that a definition other than that which follows from common law and sale of goods legislation was envisioned.[35](emphasis added)

In contrast, the three minority justices concluded that the meaning that should be chosen is the plain meaning of the term "sale". According to the minority justices, taxpayers should not be required to make the distinction between a disposition of property by "sale" or by "accession". Justice Binnie (for the minority) wrote:

The primary rule of statutory interpretation is to ascertain the intention of Parliament.  Where the meaning of the words used is plain and no ambiguity arises from context, then the words offer the best indicator of Parliament's intent:  R. v. McIntosh, [1995] 1 S.C.R. 686, at p. 697, per Lamer C.J., and at p. 712, per McLachlin J., dissenting.  No doubt the statement that words have a "plain meaning" is itself a conclusion based on a contextual analysis.  However, once the tools of interpretation have been deployed and the issue considered from the different perspectives identified by Professor Driedger, if the result of that exercise is the conclusion that the meaning of the words used by Parliament is plain, then effect must be given to them.  The Stubart Investments gloss on "plain meaning" was thus reaffirmed by Major J. in Friesen, supra, at para. 10.  He said that, if, after examining the context and purpose of the tax provision, the Court nevertheless concludes that "a provision is couched in specific language that admits of no doubt or ambiguity in its application to the facts, then the provision must be applied regardless of its object and purpose": Friesen, supra, at para. 11, quoting P. W. Hogg and J. E. Magee, Principles of Canadian Income Tax Law (1995), at p. 454.

The strength of the "plain meaning" rule is its recognition that it is the words of the provision themselves that constitute the vehicle used by Parliament to convey its intent to the people who are trying to assess their rights and tax liabilities under the Act.  As the Court said in Antosko, supra, at pp. 326-27:

While it is true that the courts must view discrete sections of the Income Tax Act in light of the other provisions of the Act and of the purpose of the legislation, and that they must analyze a given transaction in the context of economic and commercial reality, such techniques cannot alter the result where the words of the statute are clear and plain and where the legal and practical effect of the transaction is undisputed...

Even less attractive, I think, is the attempt in the present case to narrow the words "sale or lease" by reference to technical legal distinctions among various types of disposal contracts which are totally extraneous to the Act and are not easily accessible to the self-assessing taxpayer. Apart from everything else, such imported technical distinctions may frustrate not only the plain meaning, but the legislative purpose of the tax provision.  Where (as here) Parliament has spoken in language that continues to speak plainly despite "successive circles of context", I think the taxpayer is entitled to the benefit voted by Parliament.  It is the Minister (or the Minister's colleague, the Minister of Finance) who recommended the particular wording to Parliament, and it is the Minister or his colleague who may recommend amendments to the Act if it is thought desirable to narrow the tax benefit.[36]

It is interesting to note that the minority and majority justices reached opposite conclusions while citing the same sources: Stubart Investments, Friesen, Antosko and P.W. Hogg and J.E. Magee, Principles of Canadian Income Tax Law (1995).

It should further be noted that this decision was rendered before the enactment of new section 8.1 of the Interpretation Act. Is there not good reason to believe that section 8.1 of the Interpretation Act now explicitly requires that, where there is a reference to the private law of the provinces, an undefined term should be given its legal meaning, if any, in accordance with the appropriate provincial law? The writer is inclined to think that the answer to this question is yes.

CONCLUSION

The decisions analysed in this column belong to the prevailing line of authority that recognizes the complementarity of the provincial private law in the application of federal tax statutes. This line of authority is the basis of new section 8.1 of the Interpretation Act.

Footnotes

  • [20] 75 DTC 5076. See also Laporte v. M.N.R. (84 DTC 1208), Garant v. The Queen (85 DTC 5408), Dumais v. M.N.R. (88 DTC 1229) and M.N.R. v. Dumais (89 DTC 5543).

  • [21] S.C. 1958, c. 29.

  • [22] 77 DTC 5228.

  • [23] [1981] 1 F.C. 691.

  • [24] Olympia & York Developments Ltd., supra, note 23, 697.

  • [25] Continental Bank Leasing Corporation v. Canada, [1998] 2 S.C.R. 298 (the “Continental Bank Leasing Corporation”).

  • [26] Spire Freezers Ltd. v. Canada, [2001] S.C.R. 391 (“Spire Freezer”).

  • [27] Backman v. Canada, [2001] 1 S.C.R. 367 (“Backman”).

  • [28] R.S.C., 1985, c. B-1, as am.

  • [29] Continental Bank Leasing Corporation, supra, note 25, 316-317.

  • [30] Backman, supra note 27, 377-378.

  • [31] 2002 DTC 7044.

  • [32] 2002 DTC 7172.

  • [33] Will-Kare Paving & Contracting Limited, supra, note 7.

  • [34] Consolidated Regulations of Canada, 1978, c. 945, as am.

  • [35] Will-Kare Paving & Contracting Limited, supra, note 7, 933-935.

  • [36] Will-Kare Paving & Contracting Limited, supra, note 7, 942-943.

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