Flanagan Hotel Company Limited (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Heald J.—Saskatoon, Saskatche-
wan, November 16; Ottawa, November 23,
1972.
Income tax—Capital cost allowances recaptured—Elec-
tion to average tax on amount recaptured—Whether election
permitted with respect to one class only—Income Tax Act, s.
43(1).
Where capital cost allowances previously allowed for
depreciable assets are required to be included in a taxpay
er's income under section 20 of the Income Tax Act. section
43(1) permits the taxpayer to elect to pay tax on the
recaptured amount as if it had been received in equal
portions over a number of years.
Held, on its proper construction section 43(1) requires the
taxpayer to elect with respect to the amount recaptured on
all classes of depreciable property owned by him and does
not permit him to elect with respect to any particular
prescribed class.
INCOME tax appeal.
John Stack for appellant.
Frank Dubrule, Q.C., and R. Crump for
respondent.
HEALD J.—This is an appeal from the deci
sion of the Tax Appeal Board dated July 22,
1971 in respect of the income tax re-assessment
for the appellant's taxation year 1967.
The parties have proceeded by way of special
case stated for the opinion of the Court pursu
ant to Rule 475. The relevant portions of the
stated case are as follows:
1. The Appellant is a body corporate, incorporated on the
15th of July, 1910 pursuant to the laws of the Province of
Saskatchewan.
2. The Appellant carried on its business as a hotel opera
tor, operating the Senator Hotel at the City of Saskatoon in
Canada from 1910 to 1967 and duly filed an income tax
return including financial statements, when and as required.
Its fiscal year at all times was the calendar year.
3. In the carrying on of its business the Appellant owned
depreciable property within the meaning of the Income Tax
Act and the Income Tax Regulations described as Classes 1,
3,8,9 and 12.
4. From the 1st of January, 1949 to the 31st of Decem-
ber, 1966 the Appellant claimed and was allowed pursuant
to the provisions of the Income Tax Act and Income Tax
Regulations an allowance on account of capital cost with
respect to the said classes as follows:
CLASS 1 $ 574.74
CLASS 3 80,542.09
CLASS 8 103,064.33
CLASS 9 383.75
CLASS 12 6,063.66
$190,628.57
5. The Appellant on or about the 25th day of October
A.D. 1967 sold the said Senator Hotel and all the depre-
ciable property it had in each of the said classes in connec
tion with that hotel in one transaction.
6. Of the selling price of the said Senator Hotel and its
assets the parties to the said sale with respect to the said
classes of assets allocated to each of the said classes a
portion of the selling price equal to the undepreciated
capital cost as at 31st of December, 1966 plus an amount at
least equal to the amount of capital cost allowance claimed
and allowed as stated in paragraph 4 hereof.
7. Pursuant to section 20(1) of the Income Tax Act the
amount (subject to any other provision of the Income Tax
Act) which is to be added to the income of the Appellant for
its 1967 taxation year is as follows:
CLASS 1 $ 575.74 [sic]
CLASS 3 80,542.09
CLASS 8 103,064.33
CLASS 9 383.75
CLASS 12 6,063.66
$190,628.57
8. In its return of income for the taxation year ending on
the 31st of December, A.D. 1967, the year in which it sold
the said depreciable property the Appellant purported to
elect pursuant to section 43(1) of the Income Tax Act to use
the provisions of that section with respect to Class 8 prop
erty, only, that is, the taxpayer elected to have only the
amount of $103,064.33 taxed as though it were income
equally over the previous five years.
9. The Respondent on receipt of the income tax return of
the Appellant for its 1967 taxation year and on reading what
he thought was the purported election pursuant to section
43(1) of the Income Tax Act, was of the opinion that the
election had to be with respect to the amount of $190,-
628.57 and with no lesser amount.
10. The Respondent acting on the opinion set forth in
paragraph 8 hereof and after having computed the Appel
lant's income tax on the premise that the Appellant's pur
ported election was for the sum of $190,628.57 and having
computed the tax on the basis there was no election,
assessed the Appellant on the basis there was no election
since by his computation the tax assessed on that basis was
less than the tax assessed on the basis that there was an
election with respect to the sum of $190,628.57.
11. The Appellant while still contending it has the right to
elect pursuant to section 43(1) as it did elect, agrees that if
this Honourable Court should be of the opinion that it has
not such a right, the reassessment appealed from is correct.
QUESTION FOR THE COURT
12. The question for the opinion of the Court is as
follows:
Must the election contemplated in section 43(1) of the
Income Tax Act for the 1967 taxation year when made be
in respect of all amounts to be brought into income
pursuant to section 20(1) of the said Act.
DISPOSITION
13. The parties agree that if the Court is of the opinion in
the affirmative on the said question, judgment shall be
entered for the Respondent dismissing the appeal with
costs, but if the Court is of the opinion in the negative on
the said question, judgment shall be entered for the Appel
lant allowing the appeal with costs.
I should observe that the reference to para
graph 8 in paragraph 10 of the stated case is
obviously in error and the reference should be
to paragraph 9 rather than to paragraph 8.
The narrow question then for decision in this
appeal is as stated in paragraph 12 of the stated
case:
Must the election contemplated in section 43(1) of the
Income Tax Act for the 1967 taxation year when made be
in respect of all amounts to be brought into income
pursuant to section 20(1) of the said Act.
The pertinent portions of the Income Tax Act
read as follows:
20. (1) Where depreciable property of a taxpayer of a
prescribed class has, in a taxation year, been disposed of
and the proceeds of disposition exceed the undepreciated
capital cost to him of depreciable property of that class
immediately before the disposition, the lesser of
(a) the amount of the excess, or
(b) the amount that the excess would be if the property
had been disposed of for the capital cost thereof to the
taxpayer,
shall be included in computing his income for the year.
43. (1) Where an amount is included in computing a
taxpayer's income for a taxation year by virtue of section
20, the taxpayer may elect to pay, as tax for the year under
this Part, in lieu of the amount that would otherwise be
payable, an amount equal to the aggregate of
(a) the tax that would be payable by the taxpayer for the
year under this Part (before making any deduction under
section 33, 38, 40, 41 or 41A) if no amount were included
in computing the taxpayer's income for the year by virtue
of section 20, and
(b) the aggregate of the amounts by which the taxpayer's
taxes under this Part (before making any deduction under
section 33, 38, 40, 41 or 41A) would have been increased
if the portion of the amount so included by virtue of
section 20 determined under subsection (2) had been
included in computing the taxpayer's income for each of
the taxation years in the period determined under subsec
tion (2),
minus any amount deductible for the year under section 33,
38,40,41 or 41a.
(2) Where the period during which the taxpayer was not
exempt from tax under this Part and
(a) if a corporation, carried on business in Canada, and
(b) if an individual, was resident in Canada,
immediately before the taxation year for which an amount
is included in computing his income by virtue of section 20
is only one taxation year or less, subsection (1) does not
apply; and where that period
(i) is more than one taxation year and not more than 2
taxation years, the portion referred to in paragraph (b)
of subsection (1) is and the period referred to therein
is the 2 immediately preceding taxation years,
(ii) is more than 2 taxation years and not more than 3
taxation years, the portion referred to in paragraph (b)
of subsection (1) is 1/3 and the period referred to
therein is the 3 immediately preceding taxation years.
(iii) is more than 3 taxation years and not more than 4
taxation years, the portion referred to in paragraph (b)
of subsection (1) is } and the period referred to therein
is the 4 immediately preceding taxation years, and
(iv) is more than 4 taxation years, the portion referred
to in paragraph (b) of subsection (1) is 1/5 and the
period referred to therein is the 5 immediately preced
ing taxation years.
Counsel for the appellant submitted that
because of the reference to section 20 and
section 43(1), it is necessary, for a proper inter
pretation of the word "amount" as used in
section 43 to have regard particularly to section
20(1) and that section 20(1) provides that when
the proceeds of disposition exceed the unde-
preciated capital cost of a prescribed class, (ital-
ics mine), then, and in such an event, the lesser
of (a) the amount of the excess, or (b) the
amount that the excess would be if the property
had been disposed of for the capital cost there
of to the taxpayer, shall be included in comput
ing income for the year in question.
His submission then is that the "amount"
spoken of in section 43 (1) which gives the elec
tion right to the taxpayer is the amount of a
particular or prescribed class and that the tax
payer has his right of election under section
43(1) in respect of every class of depreciable
assets of which he is possessed and that the
taxpayer has every right under section 43(1) to
elect with respect to one or more of the classes
of depreciable property owned by him and in
respect of which he is taxed under section
20(1).
With every deference, I cannot concur in this
interpretation of section 43(1).
Section 20 is included in Division B of Part I
of the Act and is entitled Computation of
Income. Section 43 is included in Division E of
Part I of the Act and is entitled Computation of
Tax. Under and by virtue of section 20(1), the
sum of $190,628.57 is added to appellant's
1967 income. That figure may be broken down
into five different figures representing five dif
ferent classes of depreciable assets under the
Regulations but the total figure is the "amount"
referred to in section 43. A careful considera
tion of section 43(1)(a) and (b) reveals that in at
least three instances reference is made to the
"amount" included in the taxpayer's income by
virtue of section 20. I am satisfied that this
"amount" necessarily includes all, and not only
a portion of the component parts of the deemed
income under section 20.
Section 20 includes in the income of a tax
payer recaptured capital cost allowance. Such a
book profit on the sale of depreciable property
represents the cumulative effect, over the
years, of depreciation claimed for tax purposes
in excess of actual depreciation in value. Such
recaptured income could be, and in this case is,
a very substantial sum relative to the taxpayer's
normal annual income and would place him in
an abnormally high tax bracket for a single
year, with damaging effect on his after-tax
income. Thus section 43 provides an alternative
method of computing the tax. Instead of com
puting tax on his real taxable income for the
year, which includes the amount so recaptured,
the taxpayer may, in effect, treat the recaptured
amount as having been received as income in
equal portions in each of the five preceding
taxation years. By spreading this special income
in this way, hardship which might otherwise
result from liability for tax in an abnormally
high bracket may be avoided.
Thus, section 43 provides a privilege or a
benefit on a taxpayer who finds himself in this
situation and said section should be interpreted
in the manner described in The Canadian Ency
clopedic Digest (Ontario), vol. 10, 2nd edition at
page 488 where it is stated:
While a taxing Act is to be construed strictly in favour of
the taxpayer, a statute under which an exemption is claimed
from a burden imposed upon the community at large is also
to be narrowly construed against the claim to be exempt. As
taxation is the rule and exemption the exception the inten
tion to make an exemption ought to be expressed in clear
and unambiguous terms, and it cannot be taken to have
been intended when the language of the statute on which it
depends is doubtful and uncertain... .
Thus, the appellant is in the position here of
having to establish that section 43(1) does, in
clear and unambiguous terms, allow it to make
an election in respect of only a portion of the
capital cost recaptured under section 20.
Looking at section 43(1), it seems to me that
the plain meaning of the words used therein is
that the total amount and only the total amount
can be averaged and that section 43(1) is
capable of no other sensible construction.
It is instructive to look at other sections in
the Income Tax Act where election privileges
are given to taxpayers under different
circumstances.
For example, section 42 permits averaging
for farmers and fishermen. Farmers and fisher
men are recognized as being peculiarly vulner-
able to the vagaries of nature and to the result
ing unpredictable fluctuations in their income
from one year to another. The purpose of sec
tion 42 is to introduce a measure of stability in
the level of tax rates applicable to such taxpay
ers by extending to them the privilege, if they
so wish, of averaging their income over five
year blocks instead of paying tax on an annual
basis like other taxpayers. Section 42(1)(a)
requires that the total income, including invest
ment and other income, be ascertained and it is
the total income, after allowable deductions,
that is averaged. Section 42(1)(a) uses the
words "ascertain the amount". I note that here,
as in section 43(1), the word "amount" is used
to describe the total income. In the same way, I
am satisfied that the word "amount" as used in
section 43(1) is used to describe the total
amount, and only the total amount added to
income by virtue of section 20.
Section 43A, enacted after section 43, gives
an election to the Minister with respect to incor
rect valuation of a taxpayer's inventory and it
also uses the word "amount" in the context of
the total or entire amount added to income
under the section.
I am accordingly of the view that the question
posed in paragraph 12 of the stated case must
be answered in the affirmative. It follows that
the appeal is dismissed with costs.
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.