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Supreme Court of Canada

Taxation—Income tax—Capital cost allowance—Inadequate consideration—Depreciable property—Sale of aircraft to non-resident parent company in transaction not at arm’s length—Aircraft not depreciable property in hands of parent company—Income Tax Act, R.S.C. 1952, c. 148, ss. 17(2), (7), 20(4), 106, 108, 110, 139(1)(av)—Income Tax Regulations, s. 1100(2).

Nassau Leasings Ltd. owned an aircraft which it leased to the appellant, a corporation with which it was not dealing at arm’s length. Both corporations were residents of Canada and were subsidiaries of a parent company, a resident of the Bahamas and not carrying on business in Canada. In 1963, Nassau sold the aircraft to the parent company for $615,500. At that time, the undepreciated capital cost of the aircraft to Nassau was $676,088.32. Nassau deducted this difference in computing its income for 1963 under s. 1100(2) of the Income Tax Regulations. The appellant leased the aircraft from the parent company and, in paying the rent, deducted and remitted to the respondent the withholding tax imposed under Part III of the Income Tax Act. In November 1963, the parent company sold the aircraft in an arm’s length transaction for $892,000.

The respondent, in assessing Nassau for 1963, did so on the basis that Nassau had sold the aircraft to a person with whom it was not dealing at arm’s length and that by virtue of s. 17(2) of the Income Tax Act the proceeds of disposition were the fair market value of the aircraft which the Minister put at $915,500. The question submitted to the Exchequer Court was whether s. 20(4) of the Act was applicable to determine the capital cost of the property to the parent company. The Exchequer Court answered the question in the negative. The

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Court found that the parent company being a non-resident, a computation of its Canadian income was neither necessary nor relevant and further that in its hands the aircraft was not “depreciable property” because, under the Regulations, a capital cost allowance can be claimed by non-residents only if carrying on business in Canada or if receiving income from property within s. 110 of the Act. Nassau has been wound up and the right to appeal was vested in the appellant.

Held: The appeal should be dismissed.

Section 20(4) is concerned with taxpayers entitled to a deduction, not with persons who are not subject to assessment under Part I. A non-resident not carrying on business in Canada is not a person entitled to such a deduction and therefore s. 20(4) cannot properly be said to be applicable to him.

The subsidiary argument that the parent company must be considered a taxpayer because the withholding tax was deducted and remitted to the respondent, is also untenable. The withholding tax provided for by s. 106 of the Act is a tax on gross receipts in Canada by a resident for a non-resident and does not constitute the non-resident a taxpayer within the meaning of s. 20(4).

APPEAL from a judgment of Cattanach J. of the Exchequer Court of Canada[1], in an income tax matter. Appeal dismissed.

S.E. Edwards, Q.C., and J.M. Bradley, for the appellant.

G.W. Ainslie, Q.C., and J.J. Gillihand, for the respondent.

The judgment of the Court was delivered by

HALL J.—The appellant was incorporated under the name “Geo. W. Crothers Limited” on the 14th day of June 1934, by Letters Patent pursuant to the provisions of The Companies Act, R.S.C. 1927, c. 27. By Supplementary Letters Patent dated the 10th day of November 1966, the

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appellant’s name was changed to “Lea-Don Canada Limited”. Nassau Leasings Limited (hereinafter referred to as “Nassau”) was incorporated on the 25th day of January 1960 by Letters Patent pursuant to the provisions of The Corporations Act, 1953 (Ont.), c. 19. At all times material to this appeal the issued shares of both the appellant and Nassau were beneficially owned by Lea-Don Corporation Limited (hereinafter referred to as the “Parent Company”) a corporation incorporated under the laws of the Bahama Islands. Nassau has been wound up. By an Order of the Supreme Court of Ontario, the right to appeal from any assessment against Nassau after November 16, 1964, under the Income Tax Act was vested in the appellant.

This Parent Company did not carry on business in Canada nor was it a resident of Canada. It was a resident of the Bahamas. Both Nassau and the appellant company were corporations which did not deal with each other at arm’s length. Nassau was a resident of Canada and carried on the business of leasing to the appellant an aircraft at a monthly rental of $14,000 which Nassau had acquired in 1960 at a capital cost of $786,232.17. During 1961 and 1962 Nassau modified the interior and installed new radio and electronic equipment at an additional cost of approximately $218,500, making the total capital cost to Nassau $1,004,732.17. This rental arrangement continued from 1960 until May 1963. On June 12, 1963, Nassau sold the aircraft to the Parent Company for $615,500. At the time of the sale, the undepreciated capital cost of the aircraft to Nassau was $676,088.32.

The Parent Company acquired the aircraft subject to the lease to the appellant. The appellant, in paying the rent due to the Parent Company, deducted and remitted to the respondent the withholding tax imposed under Part III of the Income Tax Act.

On November 1, 1963, the Parent Company sold the aircraft to Denison Mines Limited for $892,000.

Nassau, in computing its income for the fiscal year ending June 28, 1963, deducted the sum

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of $60,588.32, claiming that since it had sold the aircraft for a price less than the undepreciated capital cost and had on hand no depreciable property in Class 16 it was entitled to deduct under subs. (2) of s. 1100 of the Income Tax Regulations the amount “that would otherwise be the undepreciated capital cost to him of property of that class at the expiration of the taxation year.”

The respondent, in assessing Nassau, did so on the basis that Nassau had sold the aircraft to a person with whom it was not dealing at arm’s length and that by virtue of s. 17(2) of the Income Tax Act the proceeds of disposition were the fair market value of the aircraft which the Minister put at $915,500. The issue between the appellant and the respondent is as to whether the proceeds of disposition is $615,500 or $915,500 and is dependent upon whether or not s. 17(2) of the Income Tax Act is applicable to the transaction between Nassau and the Parent Company. Section 17(7) of the Income Tax Act provides that if depreciable property had “been disposed of under such circumstances that subsection (4) of section 20 is applicable”, then subs. (2) of s. 17 is not applicable. Accordingly, the question which was submitted to the Exchequer Court was:

15. With reference to the sale of the aircraft by Nassau to the Parent, and with reference to the provisions of subsection (7) of section 17 of the Income Tax Act, was depreciable property of a taxpayer as defined for the purpose of section 20 “disposed of under such circumstances that subsection (4) of section 20 is applicable to determine for the purpose of paragraph (a) of subsection (1) of section 11, the capital cost of the property” to the Parent?

Cattanach J. answered the question in the negative and because of an agreement between the parties as to the fair market value of the aircraft at the time of its sale by Nassau to the Parent Company the matter of the fair market value was adjourned to be dealt with by the Court at a later date.

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The learned trial judge based his conclusion on a finding that the Parent Company being a non-resident, a computation of its Canadian income is neither necessary nor relevant and further that in its hands the aircraft was not “depreciable property” because, under the Regulations, a capital cost allowance can be claimed by non-residents only if carrying on business in Canada or if receiving income from property within s. 110 of the Act.

I agree with Cattanach J. on this finding and with his negative answer to the question which the Court was asked to answer. The appellant rested its case on the proposition that the Parent Company was a taxpayer within the meaning of the Income Tax Act, basing its argument:

(1) on the contention that by virtue of the definition in s. 139(1)(av), ‘“taxpayer’ includes any person whether or not liable to pay tax” and the deduction on account of depreciable property being from income, not from taxable income, is “applicable” to those whose income is not taxable; and

(2) on the narrower basis that the tax withheld on the rent of the aircraft due to the Parent Company and remitted to the respondent under Part III of the Income Tax Act qualified the appellant as a taxpayer.

The argument that the provisions of the Income Tax Act authorizing a deduction on account of the capital cost of depreciable property are applicable to non-residents who are not subject to assessment for income tax under Part I of the Act because such deduction is from income is wholly untenable. It is clear that s. 20(4) is concerned with taxpayers entitled to a deduction, not with persons who are not subject to assessment under Part I. A non-resident not carrying on business in Canada is not a person entitled to such a deduction and therefore s. 20(4) cannot properly be said to be “applicable” to him.

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The subsidiary argument that the Parent Company must be considered a taxpayer within the Income Tax Act because Nassau deducted and remitted to the respondent the withheld tax above mentioned is also untenable. The withholding tax provided for by s. 106 of the Income Tax Act is a tax on gross receipts in Canada by a resident for a non-resident and does not constitute the non-resident, in this case the Parent Company, a taxpayer within the meaning of s. 20(4).

No deduction is permitted from the tax withheld by virtue of s. 106. See s. 108(1) which reads:

108. (1) The tax payable under section 106 is payable on the amounts described therein without any deduction from those amounts whatsoever.

I would, accordingly, dismiss the appeal with costs.

Appeal dismissed with costs.

Solicitors for the appellant: Fraser & Beatty, Toronto.

Solicitor for the respondent: D.S. Maxwell, Ottawa.

 



[1] [1969] 1 Ex. C.R. 594, [1969] C.T.C. 85, 69 D.T.C. 5142.

 

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