Allied Farm Equipment Limited (Appellant)
v.
Minister of National Revenue (Respondent)
Court of Appeal, Jackett C.J., Perrier and Cho-
quette D.JJ.—Montreal, December 12, 1972.
Income tax—Associated companies—Whether associa
tion with foreign company sufficient—Income Tax Act, s.
39(4).
Section 39(4) of the Income Tax Act which deems one
company to be associated with another if certain enumerat
ed tests are satisfied does not apply unless both corpora
tions are subject to income tax under Part I of the Income
Tax Act.
International Fruit Distributors Ltd. v. M.N.R. [1953]
C.T.C. 342, distinguished.
APPEAL from Heald J. [1972] F.C. 263,
reversed.
Philip F. Vineberg, Q.C. for appellant.
George W. Ainslie, Q.C. for respondent.
JAcKETT C.J. (orally)—This is an appeal from
a judgment of the Trial Division, dismissing an
appeal from a judgment of the Tax Appeal
Board, in so far as it dismissed appeals by the
appellant from its assessments under Part I of
the Income Tax Act for its 1960, 1961, 1962,
1963 and 1964 taxation years.
The sole question raised in respect of all
assessments is whether the appellant, which
was a company carrying on business in Canada,
was "associated", within the meaning of section
39(2) of the Income Tax Act, with two other
corporations, which were carrying on business
in Canada, during the taxation years in ques
tion, so that it became subject to a higher scale
of rates on its taxable income than would be
applicable if it were not so "associated".
Before one can attempt to state the question
in issue, it is necessary to attempt to summarize
the scheme of section 39 in an understandable
but sufficiently accurate way.
Part I of the Income Tax Act imposes an
income tax on the annual taxable income of
every person resident or carrying on business in
Canada (section 2).' Section 39 is the provision
that fixes the rate at which that tax is computed
in so far as corporations (as opposed to
individuals) are concerned. The scheme of sec
tion 39 is as follows:
1. Subsection (1) establishes a rate for the
first $35,000 taxable income 2 and a substan
tially higher rate for the balance "except
where otherwise provided".
2. Subsection (2) otherwise provides for the
case "Where two or more corporations are
associated with each other", by providing
that, in such a case, the tax payable by "each
of them" is to be computed at the higher rate
on all its taxable income.
3. Subsection (3) provides that, notwithstand
ing subsection (2), "if all of the corporations
of a group that are associated" take certain
action "the tax payable by each of the corpo
rations" is to be computed in accordance with
a formula whereby the benefit of the lower
rate on $35,000 is distributed among them
and subsection (3a) provides an alternative
method of accomplishing the same result
where "any of the corporations of a group
that are associated" has failed to take such
action.
4. Subsections (4) et seq. provide a set of
very complicated and detailed rules to give a
precise meaning to the otherwise vague, if not
meaningless, concept of corporations that are
"associated" in the first part of the section.
Of these subsections, the two with which we
are concerned are
(a) subsection (4), which provides that "For
the purpose of this section" one corporation
is "associated" with another if any of the
tests enumerated therein is applicable, 3 and
(b) subsection (5), which provides that
"When two corporations are associated, or
are deemed by this subsection to be associat
ed, with the same corporation ..." they shall
"for the purpose of this section" be deemed
to be "associated" with each other.
I shall now endeavour to indicate the ques
tion that has to be decided.
We are concerned here with four corpora
tions, viz.
(a) the appellant, which was resident and car
ried on business in Canada,
(b) two other corporations that were resident
and carried on business in Canada (hereinaf-
ter called "the other Canadian corporations"),
and
(c) a United States corporation that was not
resident and did not carry on business in
Canada.
It is common ground that, applying only the
tests in section 39(4), the appellant was not, for
the purpose of section 39, "associated" with
either of the other Canadian corporations. On
the other hand, if one applied such tests to the
appellant and the United States corporation,
those two corporations would be regarded as
"associated" with each other; and, similarly, if
one applied such tests to either of the other
Canadian corporations and the United States
corporation, a similar result would be achieved.
It is at this point that the difference between the
parties arises. The respondent says that section
39(4) is applicable with the result that the appel
lant and the other Canadian corporations are
associated with the same corporation—the
United States corporation—and it follows that
section 39(5) requires that they "be deemed to
be associated with each other". The appellant,
on the other hand, says that, as the United
States corporation is not subject to tax under
Part I of the Income Tax Act, section 39(4)
cannot be applied in respect of it and there is
therefore no basis for applying section 39(5).
In my view, the correct answer is to be found
by an analysis of the language of subsection (2),
subsection (3), subsection (3a) and subsection
(4) of section 39. Each of the first three of
these subsections sets up a factual case con
cerning "two or more" or "a group" of corpora
tions that are "associated" (which expression
does not have any sufficiently precise sense in
the context) and then lays down a rule to deter
mine "the tax payable by each of them" or "the
tax payable by each of the corporations" falling
within the factual case. Section 39(4) then pro
vides the answer to what is meant in the earlier
subsections when the section speaks about cor
porations that are "associated". It says that
"For the purpose of this section, 4 one corpora
tion is associated with another" if any of the
tests enumerated therein is applicable.
What this analysis shows is
(a) that the tests found in section 39(4) are
only applicable to determine that corpora
tions are "associated" for the purposes of
section 39,
(b) that there are three substantive rules in
section 39 applicable to corporations that are
"associated", and
(c) that each of those rules determines, in
certain circumstances, the amount of "the tax
payable" under Part I of the Income Tax Act
"by each of the corporations" that are "as-
sociated". It follows, in my view, that section
39(4) has no application to determine whether
two corporations are associated unless they
are both subject to income tax under Part I of
the Income Tax Act.
I may say that I can find no conflict between
this conclusion and what was decided in Inter
national Fruit Distributors Ltd. v. M.N.R.
[1953] C.T.C. 342 which decision was upheld, I
understand, without written reasons, by the
Supreme Court of Canada. In that case, it was
argued that the word "person" in the Income
Tax Act did not include a corporation or, at
least, did not include a foreign corporation, and
this argument was rejected. It so happened that
the question there was whether two Canadian
subsidiaries of a United States parent were
related under the predecessor of section
39(4)(b) and I have no doubt that the same
result would follow under section 39(4)(b).
I am, therefore, of the view that the United
States corporation was not "associated" with
the appellant or either of the other Canadian
corporations within the meaning of subsection
(4) of section 39 of the Income Tax Act. It
follows, having regard to a "Special Case" that
was filed in the Trial Division, that
1. The appeal should be allowed with costs, in
this Court and in the Trial Division;
2. The judgment of the Trial Division should
be set aside;
3. The re-assessments of the appellant under
Part I of the Income Tax Act for the 1960,
1961, 1962, 1963 and 1964 taxation years
should be referred back to the respondent for
reconsideration and assessment on the basis
that the appellant was not associated with
Falcon Equipment Company Limited and
Northwest Farm Equipment Limited within
the meaning of section 39 of the Income Tax
Act.
* * *
PERRIER and CHOQUETTE D.B. concurred.
1 It is unnecessary to refer to aspects of the scheme that
concern only individuals such as the imposition of the
charge on persons "employed" in Canada.
2 For purposes of this discussion, it is not necessary to
distinguish between "taxable income" and "amount
taxable".
3 For present purposes, it is irrelevant that, as applicable
to the 1960 taxation year, the subsection contained tests
that were different from those it contained in respect of the
subsequent years.
4 The italics are mine.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.