T-514-91
Joseph Marcel André Lachance (Plaintiff)
v.
Her Majesty the Queen (Defendant)
INDEXED AS: LACHANCE V. CANADA (TD.)
Trial Division, Pinard J.—Montreal, September 2;
Ottawa, September 4, 1992.
Income tax — Income calculation — Taxpayer, partner in
consulting firm, withdrawing from partnership — Receiving
payment-out from firm in addition to draw for fiscal period —
Residing entirely in Quebec, filing return for 1984 taxation
year accordingly — Minister reassessing for provincial taxes
based on firm's distribution of income by province — Regula
tions s. 2601 providing income earned in each province where
permanent establishment — Act s. 96(1.1) deeming retiring
partner entitled to share of profits to be partner — Whether s.
96(1.1) applying to calculation of income or loss of retiring
partner — Stated to apply for purposes of s. 96(1) — Purpose
of s. 96(1) calculation of income of firm — Not applying to tax
liability of retiring partner.
This was an appeal from a decision of the Tax Court of
Canada dismissing the taxpayer's appeal from a reassessment
for the 1984 taxation year. The taxpayer, a professional engi
neer, became a partner in Woods, Gordon, management con
sultants, in 1972. The partnership agreement was renewed
from time to time until 1983, when the taxpayer withdrew from
the partnership. Under the terms of the partnership agreement,
the taxpayer was paid out some $51,700. This was apart from
his draw on the firm's profits for the fiscal year. The taxpayer
lived only in Quebec and had no permanent establishment else
where; he reported his income on his 1984 return accordingly.
The Minister took the position that the taxpayer's income for
the year was attributable to different provinces on the basis of
the distribution, among the provinces, of the income of Woods,
Gordon, ranging from 0.7% from New Brunswick to 62.6%
from Ontario. The Minister assessed for an additional $13,400
in provincial taxes. Subsection 96(1) of the Act provides that
the income of a partner is calculated as if the firm were an
individual. Section 2601 of the Income Tax Regulations pro
vides that an individual's income in a province is the differ
ence between his total income and his income from outside the
province. Paragraph 96(1.1)(a) provides that, for the purposes
of subsection 96(1), where a retiring partner is entitled to a
share of the profits, he is deemed to be a partner; and para
graph (b) provides that a partner's share of the firm's profit—
or loss—is to be included in his income.
Held, the appeal should be allowed.
The words in subsections 96(1) and (1.1) of the Income Tax
Act must be read in context and in their ordinary sense harmo
niously with the scheme and the object of the Act and the
intention of the legislator, according to the modern rule of stat
utory interpretation articulated by Dreidger and endorsed by
the Supreme Court. It is not the purpose of subsection 96(1.1)
to provide the means of calculating the income or loss on
which a retiring partner will be assessed. The subsection by its
terms applies only "for the purposes of subsection (1) and sec
tions 101 and 103". The only purpose of subsection 96(1) is to
establish the technique for calculating the income or loss for
the year of a member of a partnership. These provisions cannot
apply to determine the tax liability of a "retiring partner"
within the meaning of subsection 96(1.1).
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 96 (as am. by
S.C. 1974-75-76, c. 26, s. 60; 1984, c. 1, s. 43), 120 (as
am. by S.C. 1973-74, c. 45, s. 8; 1977-78, c. 1, s. 57;
1980-81-82-83, c. 48, s. 66; c. 140, s. 79).
Income Tax Regulations, C.R.C., c. 945, ss. 2600 (as am.
by SOR/78-772, s. 3; SOR/81-267, s. 3), 2601, 2603.
CASES JUDICIALLY CONSIDERED
APPLIED:
Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R.
536; [1984] CTC 294; (1984), 84 DTC 6305; 53 N.R.
241.
REFERRED TO:
Harel v. Dep. M. Rev. of Quebec, [1978] 1 S.C.R. 851;
(1977), 80 D.L.R. (3d) 556; [1977] CTC 441; 77 DTC
5438; 18 N.R. 91.
APPEAL from a decision of the Tax Court of
Canada upholding the Minister's reassessment.
Appeal allowed.
COUNSEL:
Guy Du Pont and Ariane Bourque for plaintiff.
Pierre Cossette for defendant.
SOLICITORS;
Phillips & Vineberg, Montréal, for plaintiff.
Deputy Attorney General of Canada for defen
dant.
The following is the English version of the reasons
for judgment rendered by
PINARD J.: The plaintiff is appealing from a deci
sion of the Tax Court of Canada dated November 13,
1990, dismissing his appeal from an assessment dated
October 3, 1985 for the 1984 taxation year. By that
assessment the Minister of National Revenue allo
cated the plaintiff's professional income between
eight provinces other than Quebec, collected provin
cial tax amounting to $13,449.71 which the plaintiff
as a result of this allocation should have paid those
eight provinces, and accordingly reduced the tax
rebate claimed by the plaintiff for taxes in the prov
ince of Quebec. It is of course an appeal de novo.
The facts relating to this action are not in dispute.
Since 1962 the plaintiff has been a member in good
standing of the Order of Engineers of the province of
Quebec. On February 1, 1972 he became a partner
under a written partnership contract concluded
between himself and Woods, Gordon ("WG"), a firm
of management consultants working as a partnership.
The said contract was renewed at more or less regular
intervals and its latest version was executed on or
about February 1, 1983.
The WG partnership's fiscal year ended on Janu-
ary 31 of each year.
On September 30, 1983 the plaintiff formally gave
WG notice that he was withdrawing from the partner
ship. On November 7, 1983 the plaintiff and WG pro
ceeded to calculate the various amounts the plaintiff
was entitled to following his withdrawal from the
partnership, and to this end concluded a written
agreement. The plaintiff's withdrawal took effect on
November 15, 1983.
The calculation of the amounts to which the plain
tiff was entitled under the partnership contract up to
November 15, 1983 gave the following results:
Capital account: $21,000.00
Deemed regular income account: $ 6,049.76
Special credit: $24,648.00
The plaintiff was further entitled to his share of the
WG profits for the period from February 1 to Nov-
ember 15, 1983, that is approximately $110,734.94.
Following his withdrawal from the partnership,
that is after November 15, 1983, the plaintiff ceased
providing services to the partnership and receiving
other income and benefits from it. During the 1984
taxation year he resided exclusively in Quebec and
had no permanent establishment outside that prov
ince.
During the 1984 taxation year WG allocated the
partnership's income as follows:
Newfoundland 1.2%
Nova Scotia 1.0%
New Brunswick 0.7%
Ontario 62.6%
Manitoba 2.7%
Saskatchewan 2.4%
Alberta 11.5%
British Columbia 5.1%
Quebec 12.8%
100.00%
On April 26, 1985 the plaintiff filed his tax return
for the 1984 taxation year. He determined his taxable
income and calculated his taxes based on the fact that
during that taxation year he was living in Quebec
exclusively and had no permanent establishment
outside that province, ascribing all his income,
including that from WG, to the province.
On October 3, 1985 the Minister of National Reve
nue made an assessment by which he allocated the
plaintiff's income for the 1984 taxation year in accor
dance with WG's cross-Canada allocation, thereby
collecting additional provincial tax of $13,449.71
plus interest and reducing the Quebec tax rebate from
$6,138.20 to $4,830.31. These provincial taxes were
broken down as follows:
Newfoundland $227.76
Nova Scotia $176.05
New Brunswick $128.15
Ontario $9,739.66
Manitoba $490.15
Saskatchewan $384.30
Alberta $1,569.94
British Columbia $733.70
Total $13,449.71
The following relevant legislation and regulations
must be set out here:
Provisions of the Income Tax Act, S.C. 1970-71-72, c. 63, as
amended ("the Act"), in effect at the relevant time [s. 96 (as
am. by S.C. 1974-75-76, c. 26, s. 60; 1984, c. 1, s. 43), 120 (as
am. by S.C. 1973-74, c. 45, s. 8; 1977-78, c. 1, s. 57; 1980-81-
82-83, c. 48, s. 66; c. 140, s. 79)]
96. (1) Where a taxpayer is a member of a partnership, his
income, non-capital loss, net capital loss, restricted farm loss
and farm loss, if any, for a taxation year, or his taxable income
earned in Canada for a taxation year, as the case may be, shall
be computed as if
(a) the partnership were a separate person resident in
Canada;
(b) the taxation year of the partnership were its fiscal period;
(c) each partnership activity (including the ownership of
property) were carried on by the partnership as a separate
person ....
(f) the amount of the income of the partnership for a taxation
year from any source or from sources in a particular place
were the income of the taxpayer from that source or from
sources in that particular place, as the case may be, for the
taxation year of the taxpayer in which the partnership's taxa
tion year ends, to the extent of the taxpayer's share thereof;
and....
(1.1) For the purposes of subsection (1) and sections 101
and 103,
(a) where the principal activity of a partnership is carrying
on a business in Canada and the members thereof have
entered into an agreement to allocate a share of the income
or loss of the partnership from any source or from sources in
a particular place, as the case may be, to any taxpayer who
at any time ceased to be a member of
(i) the partnership, or
(ii) a partnership that at any time has ceased to exist or
would, but for subsection 98(1), have ceased to exist, and
either
(A) the members thereof, or
(B) the members of another partnership in which,
immediately after that time, any of the members
referred to in clause (A) became members
have agreed to make such an allocation
or to his spouse, estate or heirs or to any person referred to
in subsection (1.3), that taxpayer, his spouse, estate or heirs,
or that person, as the case may be, shall be deemed to be a
member of the partnership; and
(b) all amounts each of which is an amount equal to the
share of the income or loss referred to in this subsection
allocated to a taxpayer from a partnership in respect of a
particular fiscal year of the partnership shall, notwithstand
ing any other provision of this Act, be included in comput
ing his income for the taxation year in which that fiscal
period of the partnership ends.
(1.4) For the purposes of this Act, a right to a share of the
income or loss of a partnership under an agreement referred to
in subsection (1.1) shall be deemed not to be capital property.
(1.6) Where a partnership carries on a business in a taxation
year, each taxpayer who is deemed by paragraph (1.1)(a) to be
a member of the partnership shall, for the purposes of subsec
tion 2(3), be deemed to carry on that business in Canada in that
year.
120. (1) There shall be added to the tax otherwise payable
under this Part by an individual for a taxation year an amount
that bears the same relation to 47% of the tax otherwise paya
ble under this Part by him for the year that
(a) his income for the year, other than his income earned in
the year in a province ... .
(2) Each individual is deemed to have paid, in prescribed
manner and on prescribed dates, on account of his tax under
this Part for a taxation year an amount that bears the same rela
tion to 3% of the tax otherwise payable under this Part by him
for the year that
(a) his income earned in the year in a province that, on the
1st day of January, 1973, was a province providing school
ing allowances within the meaning of the Youth Allowances
Act,
bears to
(b) his income for the year.
(4) In this section,
(a) "income earned in the year in a province" means
amounts determined under rules prescribed for the purpose
of regulations made on the recommendation of the Minister
of Finance ... .
Provisions of the Income Tax Regulations ("the Regulations")
in effect at the relevant time [C.R.C., c. 945, ss. 2600 (as am.
by SOR/78-772, s. 3; SOR/81-267, s. 3), 2601, 2603]
PART XXVI
INCOME EARNED IN A PROVINCE BY AN INDIVIDUAL
Interpretation
2600. (1) For the purposes of paragraph 120(4)(a) of the
Act, "income earned in the year in a province" by an individ
ual means the aggregate of his incomes earned in the taxation
year in each province as determined in accordance with this
Part.
(2) In this Part, "permanent establishment" means a fixed
place of business of the individual, including an office, a
branch, a mine, an oil well, a farm, a timberland, a factory, a
workshop or a warehouse, and
(a) where an individual carries on business through an
employee or agent, established in a particular place, who has
general authority to contract for his employer or principal or
who has a stock of merchandise owned by his employer or
principal from which he regularly fills orders which he
receives, the individual shall be deemed to have a permanent
establishment in that place;
(b) where an individual uses substantial machinery or equip
ment in a particular place at any time in a taxation year he
shall be deemed to have a permanent establishment in that
place; and
(c) the fact that an individual has business dealings through
a commission agent, broker, or other independent agent, or
maintains an office solely for the purchase of merchandise,
shall not of itself be held to mean that the individual has a
permanent establishment.
Residents of Canada
2601. (1) Where an individual resided in a particular prov
ince on the last day of a taxation year and had no income for
the year from a business with a permanent establishment
outside the province, his income earned in the taxation year in
the province is his income for the year.
(2) Where an individual resided in a particular province on
the last day of a taxation year and had income for the year
from a business with a permanent establishment outside the
province, his income earned in the taxation year in the prov
ince is the amount, if any, by which
(a) his income for the year
exceeds
(b) the aggregate of his income for the year from carrying on
business earned in each other province and each country
other than Canada determined as hereinafter set forth in this
Part.
(3) Where an individual, who resided in Canada on the last
day of a taxation year and who carried on business in a particu
lar province at any time in the year, did not reside in the prov
ince on the last day of the year, his income earned in the taxa
tion year in the province is his income for the year from
carrying on business earned in the province, determined as
hereinafter set forth in this Part.
Income from Business
2603. (1) Where, in a taxation year, an individual had a per
manent establishment in a particular province or a country
other than Canada and had no permanent establishment outside
that province or country, the whole of his income from carry
ing on business for the year shall be deemed to have been
earned therein.
(2) Where, in a taxation year, an individual had no perma
nent establishment in a particular province or country other
than Canada, no part of his income for the year from carrying
on business shall be deemed to have been earned therein.
Assuming that the agreement of November 7, 1983
between the plaintiff and the WG partnership falls
within the scope of subsection 96(1.1) of the Act
above, the fundamental question then is whether this
provision, as the defendant contended, allowed the
Minister of National Revenue to apply subsec
tion 96(1) of the Act above so as to assess the plain
tiff as he did for the 1984 taxation year. In other
words, could the Minister act pursuant to subsec
tions 96(1) and (1.1) of the Act in such a way that, in
the circumstances, the plaintiff would not have all his
income for the 1984 taxation year allocated only to
the province of Quebec?
The defendant's position in this regard seems to
me inconsistent with the very wording of the said
subsection 96(1.1) of the Act, read together with sub
section 96(1) of the same Act, and the provisions of
those subsections must be interpreted in accordance
with the grammatical and ordinary sense of the words
they contain, taking into account their general con
text, the form and object of the Act and, finally, the
intention of Parliament. I thus apply the modern rule
of legislative interpretation as defined by the writer
E. A. Dreidger and stated by the Supreme Court of
Canada, interpreting the provisions of the Income Tax
Act in Stubart Investments Ltd. v. The Queen, [1984]
1 S.C.R. 536 at page 578, as follows:
While not directing his observations exclusively to taxing
statutes, the learned author of Construction of Statutes (2nd ed.
1983), at p. 87, E. A. Dreidger, put the modern rule succinctly:
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.
The purpose of subsection 96(1.1) is clearly not to
determine how to calculate the income or loss of a
retiring partner in connection with his assessment for
a taxation year, taking into account the allowance
resulting from the agreement in question, but simply
to create a fiction which only applies for the purposes
of subsection (1) and sections 101 and 103 of the Act.
The wording of the subsection expressly limits the
application of its paragraphs (a) and (b) "for the pur
poses of subsection (1) and sections 101 and 103":
For the purposes of subsection (1) and Sections 101 and
103, ...
(a)...
(b)....
It is clear that the purposes of subsection 96(1) are
strictly to determine how to calculate for a taxation
year income (or a loss, as the case may be) of a tax
payer who is a member of a partnership, and no one
else. This follows from the very language of the pro
vision, which begins with the words "where a tax
payer is a member of a partnership", and then uses
the possessive adjective "his" with respect to the
income or loss covered by the methods of calculation
provided:
Where a taxpayer is a member of a partnership, his income,
non-capital loss ... if any for a taxation year, or his taxable
income earned in Canada for a taxation year, as the case may
be, shall be computed ...
There is no need to discuss subsections 101 and
103, referred to in subsection 96(1.1), since their par
ticular provisions do not apply directly to the plain-
tiff's case, and in any case they were not relied on by
the defendant.
It accordingly seems clear that subsections 96(1)
and 96(1.1) of the Act, whether taken together or sep
arately, cannot apply to a "retiring partner" within the
meaning of subsection 96(1.1) so as to determine
how for the purposes of his assessment for a taxation
year he is to calculate his income (or loss), and that
income (or loss) must instead be calculated indepen
dently in accordance with the other provisions of the
Act and Regulations.
Incidentally, it is understandable that the fiction
contained in subsection 96(1.1) could prove useful
for the purposes mentioned in subsection 96(1),
namely calculating the income (or loss, as the case
may be) of a taxpayer who is a member of a partner
ship for a taxation year, since, for example, para
graph 96(1)(f) makes the share of each taxpayer who
is a member of the partnership an essential part of the
calculation.
In my opinion, if Parliament had intended that the
fiction mentioned in subsection 96(1.1) should be
used in a taxation year to calculate the income or loss
of a "retiring partner" in the same way as income or
loss of a taxpayer who is a member of the partnership
in question, it would have said so. It would not have
limited the scope of the provision solely to the pur
poses of subsection 96(1) and sections 101 and 103
as it did, bearing in mind inter alia the wording of
subsection 96(1), which applies only to the method
of calculating the income or loss of a taxpayer who
"is a member of a partnership".
As the provisions here are clear and unambiguous,
it will not be necessary to refer to the way their inter
pretation has developed and the changes in their
application, at least since March 29, 1978, by the
Minister of National Revenue. (See Harel v. Dep. M.
Rev. of Quebec, [1978] 1 S.C.R. 851, at pages 858
and 859.)
Judgment is accordingly rendered allowing the
plaintiff's action and referring the reassessment on
appeal back to the Minister of National Revenue for
reconsideration and reassessment in accordance with
these reasons; the whole 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.