Benoit Mandeville, Lawyer, M. Fisc.

Department of Justice Canada


Part I of this column on the harmonization of tax legislation[2] provided an overview of the federal government's main accomplishments in the area of harmonization. It included a summary discussion of new sections 8.1 and 8.2 of the Interpretation Act[3] and ended with a discussion concerning the choice between asymmetry and uniformity when harmonizing federal legislation. The reader is reminded that complementarity means the use of provincial private law rules for the purposes of applying a federal enactment that refers to private law concepts but does not define their scope. As was previously discussed, the courts[4] have recognized the principle of complementarity, which has now been codified in section 8.1 of the Interpretation Act and reads as follows:

Both the common law and the civil law are equally authoritative and recognized sources of the law of property and civil rights in Canada and, unless otherwise provided by law, if in interpreting an enactment it is necessary to refer to a province's rules, principles or concepts forming part of the law of property and civil rights, reference must be made to the rules, principles and concepts in force in the province at the time the enactment is being applied.

Part II of this column will present the main court decisions that have applied, over the last fifty years, the principle of the complementarity of provincial private law in the application of tax legislation.

An upcoming column will present some decisions involving the dissociation of federal law from the private law of the provinces.


This column is not intended to serve as an exhaustive analysis of the case law concerning the complementarity of provincial private law in the application of federal tax statutes but rather, as noted above, its objective is to present the leading decisions in this area.[5]

Tax statutes constantly refer to private law concepts. For example, the definition of "proceeds of disposition" in section 54 of the Income Tax Act[6] (the "ITA") contains a reference to the "sale" price of the property that has been "sold". Since the ITA does not define the term "sale", the courts must, in the writer's opinion, turn to the private law (civil law or common law) of the relevant province to define this term. Where a term is not defined, the currently preferred rule of interpretation seems to be to give the term its legal meaning if the term has one; if there is no legal meaning, then to give it its commercial meaning, if there is one, and, if there is no legal or commercial meaning, then to give it its plain meaning. This is, moreover, the principle of interpretation used for terms not defined in the ITA that was preferred by the majority of the Court in Will-Kare[7] which will be analysed below. This principle was mentioned by David Ward in his presentation to the 2002 Annual Conference of the Canadian Tax Foundation:

Canadian tax jurisprudence clearly leans toward establishing the meaning of undefined terms in the Act from their legal meaning in the common law. If the terms have no particular legal meaning, but have an established commercial meaning, the commercial meaning should be adopted. This approach leaves little room for "plain meaning of every day word", which was argued for by the dissent in Will-Kare.[8]

This rule of interpretation -- that terms not defined in the Act must be given their legal meaning -- is, in the writer's opinion, a specific demonstration of the complementarity of provincial private law with federal legislation.

Mr. Ward made the following comment in his presentation:

At some future date the courts will have to deal with a case involving taxpayers resident in Quebec and others resident in a common law province. It will be interesting to see how the legal meaning of an undefined term will be established if the civil law and common law meanings are not identical.[9]

The complementarity of provincial private law in the application of tax statutes plays a role at another level as well. It now seems unnecessary to note that tax laws apply to legal situations and that these legal situations must be analysed in terms of the provincial private law. There are many decisions that remind us of this principle.

The King v. Dominion Engineering Co. Ltd. (1944)

In The King v. Dominion Engineering Co. Ltd.,[10] the taxpayer had contracted to build a machine for another company. The contract provided for payment of the sale price in nine equal monthly payments and for a final payment after the machine was in operation (but in no event later than six months from the date of final shipment of the machine). Title in the machine was not to be transferred until the sale price had been paid in full. The purchaser of the machine went into bankruptcy before the machine was delivered. At the time it was declared bankrupt, the purchaser had made six of the nine monthly payments. The taxpayer had remitted the 8 percent sales tax for the first six monthly payments under paragraph 86(1)(a) of the Special War Revenue Act[11] to the tax authorities.

According to the Crown, since the last three monthly payments were provided for under the contract, the taxpayer owed the applicable sales tax even though the purchaser had never made those payments. With respect to the final payment, the Crown had conceded that no tax was owed since the final payment did not become payable until the machine had been delivered, and the delivery had never taken place.

The Supreme Court held that the sales tax was payable only in respect of an executory contract leading to a transfer of possession and title of the property. Furthermore, according to the Court, the tax payable was based on the agreement between the parties, and the tax could fluctuate if the parties to the contract decided, after the contract had been signed, to lower or raise the price. According to the Court, the sales tax was also subject to the variations in the contract terms that could be imposed by operation of law as a result of the purchaser's bankruptcy and liquidation. In the case at bar, as the purchaser had declared bankruptcy before it made the last three monthly payments, the Court decided that the payments had ceased to become "due and payable" and no sales tax should be levied on them.

Justice Rand made the following comments in which Justices Kerwin and Taschereau concurred:

The legal liability at any time for any portion of the tax in no degree restricts the parties in good faith from modifying the contract as they see fit, and a fortiori it does not prevent a modification by operation of law. If, in the legal result, the actual transaction ceases to be one of sale, then the necessary support for the tax disappears. That result, at least where to termination of the contract does not effect a total rescission, will not affect the right to taxes on any portion of the price paid to the seller nor does it touch those that have been collected or reduced to judgment by the Crown.[12]

The Supreme Court, therefore, made it clear in Dominion Engineering Co. Ltd. that, for the purposes of the application of a tax statute, in that case, the former Special War Revenue Act, the legal relationship in question must be interpreted in the light of the agreements between the parties, modified, if necessary, by the private law (in that case, the laws applicable to bankruptcy).

Perron v. M.N.R. (1960)

The Tax Appeal Board applied the principle of complementarity between tax law and provincial private law in Perron v. M.N.R.[13] In that case, the taxpayer had sold a hotel in 1956, accepting that the balance of the sale price be secured by a mortgage containing a giving in payment clause. The taxpayer took back the hotel on April 23, 1958, as a result of the purchaser's failure to meet her obligations. In an assessment issued on April 15, 1958, Revenue Canada assessed the taxpayer for the 1956 taxation year for the recapture of capital cost allowance resulting from the disposition of the hotel in 1956. The taxpayer appealed the assessment on the basis that the exercise of the giving in payment clause had had the effect of retroactively cancelling the effects of the 1956 sale and that, as a result, no tax could be levied with respect to a transaction that was deemed never to have taken place.

The Tax Appeal Board found in favour of the taxpayer. As can be seen from reading the following excerpt, the principle of complementarity underlay the Tax Appeal Board's decision:

If income tax is a creation of the Act which imposes it, that Act must apply within the framework of the civil laws governing legal relationships between individuals. The tax is grafted, as it were, on the legal tree which covers with its shadow the rights and obligations arising from the contracts.


It should be remembered that the legal relationships of the parties to a contract and the consequences of that contract must be respected by the persons responsible for administering the Income Tax Act. What must be taken into account above all are the real nature of the contracts and their effects on the contracting parties and on third parties, with respect to the general law of the place -- common law, or Quebec Civil Law, as the case may be.[14]

Frank Sura v. M.N.R. (1962)[15]

In Sura v. M.N.R.,[16] the taxpayer was married under the matrimonial regime of community of property. The question at issue was to determine whether the income of the community was solely the income of the taxpayer or whether half the income was the taxpayer's and half his wife's. Justice Taschereau, for the Supreme Court, decided that, for the purposes of federal income tax, the income of the community must be taxed in the hands of the person who had the absolute enjoyment of the income.

Justice Taschereau analysed the provisions of the former Civil Code of Lower Canada and concluded that, in a community of property regime, unless there was an agreement to the contrary, the husband was the sole administrator of the community and had the absolute enjoyment of the income from the community property. Consequently, according to Justice Taschereau, the husband alone was liable for the income tax despite his opinion that there was no doubt that the spouses were co-owners of the community property.[17] In obiter, Justice Taschereau ruled on the effects of the partition of community property following the dissolution of the matrimonial regime and admitted that in civil law such partition was declaratory and did not represent a transmission of property.

The Queen v. Lagueux & Frères Inc. (1974)

In The Queen v. Lagueux & Frères Inc.,[18] the Federal Court - Trial Division had to decide whether the taxpayer in question had purchased or leased some equipment. The taxpayer claimed that it had leased the equipment, whereas Revenue Canada argued that the taxpayer had purchased it. The Court ruled that the contracts at issue were conditional sales (suspensive condition) and not leases.

The following excerpt from the decision of Justice Décary in this case again clearly states the principle of the complementarity of tax law with provincial private law:

In my opinion fiscal law is an accessory system, which applies only to the effects produced by contracts.  Once the nature of the contracts is determined by the civil law, the Income Tax Act comes into effect, but only then, to place fiscal consequences on those contracts.  Without a contract, without a law and an obligation, there can be no fiscal levy. Application of the Income Tax Act is subject to a civil determination, whether such a determination be according to civil or common law.[19]