T-2227-78
The Bank of Nova Scotia (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Addy J.—Toronto, November 13
and 14; Ottawa, December 12, 1979.
Income tax — Income calculation — Deductions — Foreign
tax credit — Plaintiff claimed tax credit for tax paid to
United Kingdom for doing business there — Appeal against
reassessment by the Minister of its 1972 income tax return
Whether the amount of tax credit, when translated into
Canadian dollars is to be calculated according to the rate of
exchange existing when the tax was actually paid, or according
to the rate of exchange existing when it accrued — Appeal
allowed — Income Tax Act, S.C. 1970-71-72, c. 63, s.
126(2)(a),(b),(7)(a)(1) (as amended retroactively by S.C. 1973-
74, c. 14, s. 39(2)) — Canada-United Kingdom Income Tax
Agreement Act, 1967, S.C. 1966-67, c. 75, Part IV, s. 11,
Schedule IV, Art. 21.
The plaintiff appeals against a reassessment of its 1972
income tax return. The plaintiff carried on business in the
United Kingdom, the law of which provided that, although the
plaintiff became liable for the tax on the amount of business
transacted there during its 1972 fiscal year, the tax would only
become payable fourteen months after the end of that year. The
fiscal year of the plaintiff ended on October 31, 1972, and the
tax was paid when due on January 1, 1974. The plaintiff, as
required by law, set aside in pounds sterling an estimated
amount required to meet the tax. It was entitled, until the U.K.
taxes were actually paid, to use in its U.K. business transac
tions, the amount so set aside, providing the amount always
remained payable entirely in sterling. The sole issue is whether
the amount of tax credit to which the plaintiff is to be entitled,
when translated into Canadian dollars, is to be calculated
according to the rate of exchange in existence as of the time
when the tax was actually paid, or whether it is to be calculated
in accordance with the rate of exchange existing when it
accrued. The Crown maintains that since the only possible
interpretation of section 126(2)(a) of the Income Tax Act is
that the tax must have been paid in order for the foreign tax
credit to be applied, that the taxpayer is not entitled to any
credit until that time and that he is only entitled to a credit for
the amount actually paid, it necessarily follows that in order to
give effect to the intent and purpose of the Act, the rate which
must be applied is the exchange rate applicable at the time of
payment when translating that payment into Canadian dollars.
The plaintiff argues that since the statute is silent as to what
exchange rate is to be applied when translating what has been
paid in foreign tax into Canadian dollars, then ordinary
accounting and commercial principles dictate that the same
measure, that is, the weighted average rate in the year, be used
to translate profits, expenses, taxable income and tax credits.
Held, the appeal is allowed. Whether the right to a credit
arises at the time when the United Kingdom tax accrues and
becomes payable or whether it arises only when the tax is
actually paid the credit must in both cases be calculated by
translating the amount of tax payable in sterling into Canadian
dollars in accordance with the weighted average rate of
exchange prevailing during the taxation year under consider
ation. The above decision is based upon the following consider
ations: that both the law and generally accepted good account
ing practice require that the plaintiff carry out its accounting
on an accrual basis; that generally accepted good accounting
practices do not apply only to the calculation of profits and
losses under section 9 of the Income Tax Act but to all matters
of account unless there exists some statutory impediment to the
application of those practices; that generally accepted good
accounting practice would normally require the unpaid United
Kingdom taxes, which accrued in 1972, to be carried in the
books of the plaintiff for that year and until payment at the
weighted average rate of exchange for 1972; that there exists
no specific provision in the Income Tax Act itself which would
require the credit in pounds sterling to be translated into
Canadian dollars according to the rate of exchange existing at
the date of actual payment, nor would the translation in
accordance with the weighted average rate in effect for the year
during which the liability for the foreign tax was incurred,
offend against the general scheme or purpose of the Act or any
of its specific provisions; that it is more logical and simpler for
the taxpâyer (and especially a corporate taxpayer who must
account to its shareholders) who is accounting on an accrual
basis, to carry in his tax returns as well as in his general
financial statements the same yardstick for tax liabilities and
tax credits as for normal profits and losses before taxes; that it
is more consistent that the same measure be applicable to
paragraphs (a) and (b) of section 126(2), than to have two
different methods of calculating tax credits in the same section;
and that except for section 127(1) pertaining to certain provin
cial logging tax credits, the credit under section 126(2)(a) is
the only one in the Income Tax Act where a credit must be
allocated to a specific taxation year which is not necessarily the
year of payment of the amount.
Dominion Taxicab Association v. Minister of National
Revenue [1954] S.C.R. 82, applied. Associated Investors
of Canada Ltd. v. Minister of National Revenue [1967] 2
Ex.C.R. 96, applied. Canadian General Electric Co. v.
Minister of National Revenue [1962] S.C.R. 3, applied.
Minister of National Revenue v. John Colford Contract
ing Co. Ltd. 60 DTC 1131, referred to. Greig (Inspector of
Taxes) v. Ashton [1956] 3 All E.R. 123, referred to.
Interprovincial Pipe Line Co. v. Minister of National
Revenue [1968] 1 Ex.C.R. 25, referred to.
INCOME tax appeal.
COUNSEL:
S. E. Edwards, Q.C. and J. L. McDougall for
plaintiff.
W. Lefebvre and J. Côté for defendant.
SOLICITORS:
Fraser & Beatty, Toronto, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
ADDY J.: The plaintiff taxpayer appeals against
a reassessment by the Minister of its income tax
return for the 1972 taxation year. The appeal
relates to a tax credit claimed by the taxpayer
pursuant to section 126(2)(a) of the Income Tax
Act' for United Kingdom tax paid for the business
which it carried on in that jurisdiction during the
period in question.
An agreed statement of facts was filed. There is
no issue between the parties as to the facts, as to
the law of the United Kingdom applicable thereto
nor as to the total amount payable to that govern
ment for that period in pounds sterling, namely,
£179,596. The sole issue before this Court is
whether the amount of tax credit to which the
plaintiff is to be entitled, when translated into
Canadian dollars is to be calculated according to
the rate of exchange in existence as of the time
when the tax was actually paid on the 1st of
January 1974, or whether it is to be calculated in
accordance with the rate of exchange existing
when it accrued, namely during the 1972 fiscal
year.
The law of the United Kingdom, which has
since been modified to some extent, then provided
that, although the plaintiff became liable for the
tax on the basis of the amount of business trans
acted there during its 1972 fiscal year, the tax
would only become payable fourteen months after
the end of that year. The fiscal year of the Bank
ended on the 31st of October 1972, and the entire
tax was accordingly paid when due and payable on
the 1st of January 1974, except for a comparative
ly small amount of some £15,209 which had been
withheld at source during the period, in respect of
interest on certain United Kingdom Government
bonds.
S.C. 1970-71-72, c. 63 (as amended retroactively by S.C.
1973-74, c. 14, s. 39(2)).
The policies of the Bank of England, which by
law are binding on the plaintiff, also provided that,
during the taxation period, foreign banks would
have to set aside in pounds sterling an estimated
amount required to meet the tax. The plaintiff,
accordingly, set aside at the end of the first three
of its quarterly accounting periods, sterling or
assets payable in sterling which it estimated as
being sufficient to meet the liability. It was en
titled, until the United Kingdom taxes were actu
ally paid, to use in its United Kingdom business
transactions, the amount so set aside to meet its
liability for the taxes, providing the amount always
remained payable entirely in sterling.
For Canadian taxation purposes the foreign cur
rency profits and losses obviously must be
expressed in terms of Canadian currency. Due to
the constantly fluctuating foreign exchange situa
tion, where there is an accounting for profits and
losses on an accrual basis of accounting for a given
fiscal period, it would be impossible to translate
each entry as it occurs into Canadian funds in
accordance with the prevailing rate of exchange
existing at that time. It is therefore not only
common accounting practice and good sense but it
is a practice fully accepted and recognized by the
defendant, that an average rate of exchange known
as the weighted average of the rates prevailing
during the period in question is used to translate
into Canadian funds, at the end of the period the
foreign profits realized and the losses incurred
during that period. In the case at bar, it is common
ground that the weighted average figure of curren
cy exchange for the fiscal period ending the 31st of
October 1972, was 2.52122 Canadian dollars to
the pound sterling. Therefore, if that figure is
used, the credit for £179,596 amounts to $452,794.
On the other hand, if the rate of exchange existing
on the date of payment is used, namely, 2.3131 for
the £15,209 withheld at source and 2.2954 for the
balance of the tax paid on the 1st of January 1974,
the resulting tax credit would only be $412,514.
The difference between the two figures amounts to
$40,280.
The relevant portion of section 126 of the
Income Tax Act reads as follows:
126... .
(2) Where a taxpayer who was resident in Canada at any
time in a taxation year carried on business in the year in a
country other than Canada, he may deduct from the tax for the
year otherwise payable under this Part by him an amount not
exceeding the least of
(a) such part of the aggregate of the business-income tax
paid by him for the year in respect of businesses carried on
by him in that country and his foreign-tax carryover in
respect of that country for the year as the taxpayer may
claim,
(b) the amount determined under subsection (2.1) for the
year in respect of businesses carried on by him in that
country, and
"Business-income tax" is defined by section
126(7)(a) as follows:
126....
(7) In this section,
(a) "business-income tax" paid by a taxpayer for a taxation
year in respect of businesses carried on by him in a country
other than Canada (in this paragraph referred to as the
"business country") means such portion of any income or
profits tax paid by him for the year to the government of any
country other than Canada or to a state, province or other
political subdivision of any such country as
(i) may reasonably be regarded as tax in respect of the
income of the taxpayer from any business carried on by
him in the business country, and
The Canada-United Kingdom Income Tax
Agreement (hereinafter referred to as "the Tax
Agreement") authorized by the Canada-United
Kingdom Income Tax Agreement Act, 1967 2
(hereinafter referred to as the "Tax Agreement
Act") are relevant to the issue before me.
Article 21 of the Tax Agreement reads:
ARTICLE 21.
(2) Subject to the provisions of the law of Canada regarding
the deduction from tax payable in Canada of tax paid in a
territory outside Canada (which shall not affect the general
principle hereof), United Kingdom tax payable in respect of
income from sources within the United Kingdom shall be
deducted from any Canadian tax payable in respect of that
income. Where such income is a dividend paid before 6 April,
1966, by a company which is a resident of the United Kingdom,
the deduction shall take into account any United Kingdom
income tax appropriate to the dividend.
2 S.C. 1966-67, c. 75, Part IV.
Section 11 of the Tax Agreement Act reads:
11. (1) The Agreement entered into between the Govern
ment of Canada and the Government of the United Kingdom of
Great Britain and Northern Ireland, set out in Schedule IV, is
approved and declared to have the force of law in Canada
during such period as, by its terms, the Agreement is in force.
(2) In the event of any inconsistency between the provisions
of this Part, or the Agreement, and the operation of any other
law, the provisions of this Part and the Agreement prevail to
the extent of the inconsistency.
The argument centred to a great extent around
the word "paid" in the expression "business-
income tax paid by him" contained in section
126(2)(a) and in the expression "income or profits
tax paid by him" in section 126(7)(a), as opposed
to the word "payable" in the expression "United
Kingdom tax payable in respect of ..." as con
tained in Article 21 of the Tax Agreement.
Wherever a term is not defined in the Act, then,
unless the context otherwise requires, it must be
given its common ordinary meaning and, where
the term is a common commercial or financial one
its meaning must be determined according to ordi
nary commercial or financial principles. (See
Dominion Taxicab Association v. M.N.R. 3 ) The
word "payable" normally does not mean "paid".
Kohler's Dictionary for Accountants, 5th ed.
defines "payable" as follows: "adj. "Unpaid
whether or not due. n. A liability; a debt owing to
another; an account or note payable." Normally,
for an amount to be payable there must be a clear
legal though not necessarily immediate obligation
to pay it. (Refer M.N.R. v. John Colford Con
tracting Company Limited 4 as to the similar com
ment relating to the word "receivable.") It seems
self-evident that ordinarily an amount which is
payable is not yet paid and conversely an amount
which is paid is no longer payable. The state of
being "payable" always precedes the state of being
"paid" in point of time.
Counsel for the defendant argued that since
section 126(2)(a) of the Income Tax Act mentions
that the taxes are to be "paid" and that Article 21
of the Tax Agreement mentioned only that the
United Kingdom taxes are to be "payable" then,
because of section 11(2) of the Tax Agreement
Act, the only way of avoiding inconsistency and of
3 [1954] S.C.R. 82 at p. 85.
4 60 DTC 1131 at pp. 1134 and 1135.
reconciling the two is to resolve the inconsistency
in favour of the Tax Agreement and find that
'paid" in section 126(2)(a) really means "pay-
able."
I—Assuming that the expression "tax payable" in
the Tax Agreement does prevail over the
expression "tax paid" in section 126(2)(a) of
the Income Tax Act.
If, notwithstanding the opening words of limita
tion of Article 21(2) of the Tax Agreement, it was
found that section 11(2) of the Tax Agreement
Act does cause the expression "tax payable" in the
Tax Agreement to prevail over the expression "tax
paid" in section 126(2)(a) of the Income Tax Act,
to the extent of creating in the case of United
Kingdom tax liability a right to a Canadian tax
credit as soon as the United Kingdom tax accrues
and becomes "payable" in the ordinary sense of
that word, then it is quite evident that the appeal
must succeed: the right to credit would arise at the
end of the taxation year, that is at the end of
October 1972, and the rate of exchange existing at
the time of actual payments would have absolutely
nothing to do with calculating the credit.
II—Assuming that "tax payable" in the Tax
Agreement means "tax paid" as in section
126(2)(a) of the Income Tax Act.
In this latter case the problem is much more
involved. On examining the wording of the Tax
Agreement it seems that any inconsistency which
might appear to exist between "paid" and "pay-
able" might possibly be resolved quite properly
and logically by attributing the meaning of "paid"
to Article 21(2) of the Tax Agreement where it is
stated that "... United Kingdom taxes payable in
respect of income from sources within the United
Kingdom shall be deducted from any Canadian
tax payable in I respect of that income." Such a
substitution might not contradict nor do violence
to the meaning of that Article; on the contrary, it
might be argued that the word "payable" as there
used could just, as readily be read as "paid". The
situation is almost identical to that considered in
the case of Greig (Inspector of Taxes) v. Ashton 5
where Harman J. stated:
5 [1956] 3 All E.R. 123 at p. 125.
The portion of the convention providing for double taxation
relief with the United States appears in the Schedule to the
Double Taxation Relief (Taxes on Income) (U.S.A.) Order,
1946 (S.R. & O. 1946 No. 1327), of which art. XIII (2)
provides:
Subject to such provisions ... as may be enacted in the
United Kingdom, United States tax payable in respect of
income from sources within the United States shall be
allowed as a credit against any United Kingdom tax payable
in respect of that income.
It is agreed that "payable" in one sense must mean "paid";
in other words, credit cannot be given in England for tax which
has not been paid in the United States. So that anybody who, in
respect of income from sources within the United States (i.e.,
here, the work done by the taxpayer in the United States), finds
himself liable for tax to the United States is allowed a credit
against the United Kingdom tax payable in respect of the same
income. [The underlining is mine.]
Thus, it would follow that, in order for a taxpay
er to become entitled to the tax credit for a foreign
tax, the latter must not only be payable but must
actually have been paid at the time when it is
claimed. One could say that the actual tax credit
really flows from the Income Tax Act and not
from the Tax Agreement, Article 21 of the Tax
Agreement only serving to make it clear against
what tax otherwise payable the credit is to be
applied.
An expert witness called on behalf of the plain
tiff testified that the Bank kept its accounts and
prepared its statements on an accrual method
rather than on a cash method not only because it
was obliged by law to do so under the Bank Act 6
but also because it is usual and normal commercial
and accounting practice to do so. He stated that a
cash method of keeping accounts for such a corpo
ration would be unlikely to result in a proper
matching of costs and revenues and would in effect
be misleading. I accept this opinion and counsel
for the defendant does so as well.
The witness added that since the plaintiff main
tains its accounts and prepares its statements for
shareholders in Canadian currency, it is necessary
to translate into Canadian funds, its foreign reve
nues, costs, taxes and profits attributable to the
fiscal period as well as its assets and liabilities at
the end of the fiscal period. When United King
dom income tax is not due for payment until
6 R.S.C. 1970, c. B-I.
fourteen months after the end of the fiscal year, it
is evident that the exchange rate which will prevail
at the time of payment is not known when the
financial statements are prepared or even by the
time that the Canadian income tax statements are
required to be filed and the Canadian tax paid.
Accordingly, it is impossible to use the exchange
rate that would be prevailing at the time of pay
ment where the time of payment has not arrived
and, therefore, the only exchange rate which might
be used in such financial return is the weighted
average one for the fiscal period. He stated further
that the retaining of the provision for the United
Kingdom taxes in sterling rather than in dollars or
other currency obviously had the effect of guard
ing against a loss which might otherwise arise by
reason of fluctuations in the foreign exchange rate.
An unfavourable rate prevailing at the time of
payment would of course produce a loss, as the
payment of United Kingdom taxes must be paid in
sterling.
I accept this statement and the witness's opinion
that, since the Bank is accounting on an accrual
basis as opposed to a cash basis, in the circum
stances of this case general commercial and
accounting practice would require that the liability
for United Kingdom taxes for a fiscal year be
reflected in the books of the plaintiff for the year
in accordance with the weighted average rate of
exchange prevailing during the fiscal period in
issue. I also accept that it represents the true state
of affairs as of the end of that period, especially
since the amount set aside a for the liability is fixed
in sterling assets and not subject to change.
It is well established that when calculating, pur
suant to section 9 of the Income Tax Act, the
profits and losses of a business, these must be
determined in accordance with ordinary commer
cial principles, subject to any specific provision to
the contrary in the statute, and that the question is
ultimately one of law for the Court, the evidence
of experts not being in any way conclusively bind
ing. (See Associated Investors of Canada Limited
v. M.N.R. 7 and Canadian General Electric Com
pany v. M.N.R. 8 )
[1967] 2 Ex.C.R. 96 at p. 101.
8 [1962] S.C.R. 3 at pp. 12 to 15.
I do not accede, however, to the argument of
counsel for the defendant that generally recog
nized accounting and commercial principles are to
be applied solely to the calculation of profit and
loss as well as revenues and expenditures before
arriving at taxable income and that these princi
ples are not applicable at any time during a later
stage such as when one is considering and express
ing foreign tax credits to be deducted from taxable
income. Generally recognized accounting and
commercial principles and practices are to be
applied to all matters of commercial and taxation
accounting unless there is something in the taxing
statute which precludes them from coming into
play. The legislator when dealing with financial
and commercial matters in any enactment, includ
ing of course a taxing statute, is to be presumed at
law to be aware of the general financial and
commercial principles which are relevant to the
subject-matter covered by the legislation. The Act
pertains to business and financial matters and is
addressed to the general public. It follows that
where no particular mention is made as to any
variation from common ordinary practice or where
the attainment of the objects of the legislation does
not necessarily require such variation, then
common practice and generally recognized
accounting and commercial principles and ter
minology must be deemed to apply.
Because of the particular wording of section
126(2), however, even though I accept the evi
dence of the plaintiff's expert as above stated, the
matter is by no means disposed of. The Crown
maintains that since the only possible interpreta
tion of section 126(2)(a) is that the tax must have
been paid in order for the foreign tax credit to be
applied, that the taxpayer is not entitled to any
credit until that time and that he is only entitled to
a credit for the amount actually paid, it necessarily
follows that in order to give effect to the intent and
purpose of the Act, the rate which must be applied
is the exchange rate applicable at the time of
payment when translating that payment into
Canadian dollars.
Counsel for the plaintiff on the other hand has
advanced several cogent arguments in support of
his interpretation. They are based on the concept
that, even if the right to a credit should arise only
after payment of the foreign tax, section 126 as
well as the Income Tax Act generally, leave totally
unanswered the question as to what exchange rate
is to be applied when translating what has been
paid in foreign tax into Canadian dollars. Since
the statute is completely silent on the question,
there would therefore be no reason why one should
not apply ordinary accounting and commercial
principles which normally require all assets and
liabilities in any fiscal year to be measured by the
same yardstick: where the weighted average rate in
the year is adopted and used by both the taxpayer
and the taxing authority to translate all profits and
expenses and the taxable income in any given
fiscal period into Canadian dollars, it would be
only logical, reasonable and consistent that the
same measure be used to translate tax credits
applicable to the same period, since these credits
arose by reason of the amount of foreign tax which
accrued during the same period. He argued further
that this approach is not only logical, reasonable
and consistent but is also fair to both parties. On
the other hand the use of the rate of exchange in
effect as of the date of payment rather than that
prevailing during the period when the liability for
the foreign tax arose and was effectively borne by
the provision of funds to meet it, would automati
cally render the taxpayer subject to double taxa
tion to the extent that the Canadian Government
did not allow credit for the United Kingdom tax
paid where, as in the present case, at the time of
payment the rate of exchange was not favourable
to the taxpayer. This would contravene the express
provision of the Tax Agreement itself which in its
preamble states that the parties desire "to con
clude an Agreement for the avoidance of double
taxation ...."
The purpose of foreign tax agreements generally
is to avoid double taxation of the taxpayer who is
taxed in his country of residence on the basis of his
world income and is at the same time taxed in the
foreign country on the basis of the part of his
business done there. (Refer Simon's Taxes, 3rd
ed., Volume F, paragraph F1.252 and also Wheat-
croft, The Law of Income Tax, Surtax and Profits
Tax section 1-735.) The same principle, of course
applies to the Tax Agreement in the case at bar. In
this regard reference is made to Interprovincial
Pipe Line Company v. M.N.R. 9 where Jackett P.,
as he then was, dealt with the former section 41
which is now section 126 of the present Act; see
also A. R. A. Scace, The Income Tax Law of
Canada, 3rd ed., at page 668 and 1971 Canadian
Tax Journal, Volume 19, by James Scott Peterson
on "Canada's Foreign Tax Credit System" at
page 89.
It is important to note, however, that, even if the
interpretation of section 126(2)(a) of the Act
which counsel for the Minister urges upon this
Court, is to be adopted, the statute itself would not
thereby cause double taxation: the taxpayer in a
case such as the present one, who might wish to
avoid the possibility of double taxation due to an
unfavourable rate of exchange which might exist
fourteen months after the end of the fiscal period
in question, has the very simple alternative of
paying the United Kingdom tax immediately,
during or at the end of the fiscal year itself and not
wait for the fourteen months to run. There is no
legal impediment whatsoever to this course being
adopted. The argument that a bank would be
absolutely foolish not to take advantage of the free
use of that money for fourteen months is without a
doubt a very valid and indeed an unanswerable one
from a practical business standpoint, but the fact
remains that it is not the taxing statute which
causes the double taxation but solely the business
decision of the taxpayer who chooses to risk the
possibility of suffering the financial consequences
of a lesser credit at the end of the fourteen-month
period in exchange for the very real, substantial
and undeniable benefit during that period of the
use of those assets set aside for United Kingdom
taxes. It follows that even if one were to find that
the rate at time of payment had to be used, this
would not result in the statute having built into it
the incidence of double taxation as any such taxa
tion penalty would result entirely from the free
choice of the taxpayer. I therefore reject this argu
ment of the plaintiff based on double taxation.
Another argument advanced was that if the
interpretation of the defendant is to be followed,
then, one must find that within section 126 itself
two rates are to prevail because the amount to be
9 [1968] 1 Ex.C.R. 25 at p. 30.
determined under subsection 126(2)(b) as opposed
to 126(2)(a), must pertain in effect to the
amounts, determined on the accrual accounting
basis, of the businesses carried on by the taxpayer
in the foreign country concerned, during the period
in question. This, of course, when the amounts are
translated into Canadian dollars, would bring into
play the weighted average rate of exchange then
existing. The defendant's interpretation of section
126(2)(a) would bring into play a completely dif
ferent rate, that is, the rate prevailing as of the
time of payment which, of course, is the fixed rate
determined on that very day on a cash basis. This,
in my view, is not a compelling argument but it
does have some bearing on the issue.
An objection somewhat similar to the last one
was advanced by the plaintiff to the effect that, if
the foreign exchange rate applicable is to be the
rate prevailing at the date of payment of the
foreign tax, we would then be obliged to conclude
that section 126(2)(a) would have built into it as
an integral part of the section, the absolute
requirement of submitting a revised return in every
case where the taxpayer is entitled to pay the
foreign tax at a later date. The Canadian taxpayer
can only claim in his return the tax credit at the
rate prevailing at the time of filing his return since
he would have no idea of what the constantly
fluctuating foreign exchange rate might be several
months later. It would be sheer coincidence if both
rates were identical.
This last objection is answered and, in my view,
is completely and effectively disposed of if in fact
no legal right to a foreign tax credit arises until the
tax is actually paid, as no credit whatsoever based
on that tax could legally be claimed until that time
in any event and, therefore, the taxpayer would
have to submit a revised return claiming the credit
when he actually paid the foreign tax. On the
other hand, if he paid foreign tax before submit
ting his Canadian return he could then claim the
credit at the rate prevailing as of the date of
payment.
Counsel for the defendant could only point to
one other section in the Income Tax Act, namely
section 127 (1) pertaining to provincial logging tax
credits, where a tax credit, which is granted only
after payment of an amount, must be allocated to
a specific taxation year which is not necessarily the
year of payment of the sum claimed as a credit. In
the latter case, since the credit comes from provin
cial governments in Canadian dollars, there can of
course be no question of foreign exchange rates
and the situation under consideration in the case at
bar can never arise. In all other sections where
credits are granted after payment of any sums,
those credits are applicable exclusively in reduc
tion of tax in the taxation year when payment is
actually made, e.g.: section 20(1) (aa) pertaining to
landscaping expenses and section 20(1)(bb) per
taining to payment for legal advice on sale of a
security. The scarcity and even the non-existence
of other similar provisions in the taxing statute can
have no effect on the interpretation of a section
other than inducing the authority interpreting the
enactment to examine it with special care and
possibly with a view to maintaining consistency
and uniformity in the Act, if the context does not
otherwise require.
Another aspect of this case is that the specific
wording of the procedural provisions of the Act
would appear to preclude the plaintiff from obtain
ing as of right any tax credit whatsoever, if it
could not be claimed before the foreign tax was
actually paid. A corporation must file its return
within six months from the end of the year (refer
section 150(1)(a)). The Minister must then "with
all due despatch" carry out the assessment (refer
section 152(1)). A taxpayer then has only ninety
days to object to the assessment (refer section
165). This whole procedure will normally take
much less than fourteen months. If the right to
claim depends on payment and if the taxpayer has
not paid the United Kingdom tax he would have
no legal grounds for claiming it in his return or, if
he does claim it, for objecting to an assessment
denying it. The assessment would then become
final and binding on the taxpayer, as there are
only two cases provided for in the Act where an
assessment which has become final may be re
opened for rectification as of right by the taxpayer,
namely, under section 152(6) to carry back a loss
incurred during a year immediately following the
taxation year in question and, under section 49(4),
where a capital loss may be claimed back on the
exercising of an option.
It follows that, if the tax credit cannot legally be
claimed in the tax return before payment of the
foreign tax or at least before the ninety days
provided for in section 165 have expired, the right
to a tax credit might well be lost irrevocably,
unless the Minister should choose to reassess the
taxpayer, as was done in the case at bar.
This argument would be extremely relevant and
quite effective in determining the question whether
or not a foreign tax credit can be claimed before
the foreign tax is paid. However, if as I have
assumed in this part of my reasons, the wording of
section 126(2)(a) is not affected by the wording of
the Tax Agreement and the right to the credit only
arises when the foreign tax is actually paid, then a
hiatus in the procedural provisions of the Income
Tax Act could not be used to defeat an explicit,
essential and fundamental right to the foreign tax
credit.
If the right to a credit does not arise before
payment of the tax, then, until that time, it mat
ters not what might be the basis of calculating a
non-existent credit and, finally, when the time
comes to pay the foreign tax, the ninety-day period
would have expired and the procedural anomaly
above referred to would have taken effect regard
less of what may be the basis of calculation of the
tax credit at that time. The argument is, therefore,
of no help to the plaintiff although it would clearly
point out the requirement for an amendment of the
Act to allow a return to be rectified in such
circumstances.
On the assumption that the foreign tax must be
paid and not merely be payable before the right to
a tax credit for same arises, I arrive at the follow
ing conclusions based on the above facts, expert
opinion and considerations:
1. That both the law and generally accepted
good accounting practice require that the plain
tiff carry out its accounting on an accrual basis,
as in fact it did during the year in issue.
2. That generally accepted good accounting
practices do not apply only to the calculation of
profits and losses under section 9 of the Income
Tax Act but to all matters of account unless
there exists some statutory impediment to the
application of those practices.
3. That generally accepted good accounting
practice would normally require the unpaid
United Kingdom taxes, which accrued in 1972,
to be carried in the books of the plaintiff for that
year and until payment at the weighted average
rate of exchange for 1972.
4. That there exists no specific provision in the
Income Tax Act itself, which would require the
credit in pounds sterling to be translated into
Canadian dollars according to the rate of
exchange existing at the date of actual payment,
nor would the translation in accordance with the
weighted average rate in effect for the year
during which the liability for the foreign tax was
incurred, offend against the general scheme or
purpose of the Act or any of its specific
provisions.
5. That no double taxation would be involved if
the exchange rate at time of payment were used.
6. That neither method of calculation is basical
ly unfair to either party nor more likely than the
other to work to the disadvantage of anyone
since the rate of exchange may always vary
either way.
7. The procedural anomaly which would appear
to prevent a foreign tax liability paid after the
ninety-day period for appeal has expired, from
being claimed as a tax credit, is of no assistance
to the plaintiff.
8. That the following considerations, although
not in any way compelling, would, if anything,
tend to favour the weighted average rate of the
fiscal year in question being used:
(a) It is more logical and simpler for the
taxpayer (and especially a corporate taxpayer
who must account to its shareholders) who is
accounting on an accrual basis, to carry in his
tax returns as well as in his general financial
statements the same yardstick for tax liabili
ties and tax credits as for normal profits and
losses before taxes.
(b) It is more consistent that the same meas
ure be applicable to paragraphs (a) and (b) of
section 126(2), than to have two different
methods of calculating tax credits in the same
section.
(c) Except for section 127(1) pertaining to
certain provincial logging tax credits, the
credit under section 126(2)(a) is the only one
in the Income Tax Act where a credit must be
allocated to a specific taxation year which is
not necessarily the year of payment of the
amount.
9. When section 126(2)(a) is considered by
itself or in isolation and without taking into
account normal accounting practices or any
other factors, it would seem to be more natural
and normal to calculate the value of tax in
Canadian dollars at the rate of exchange in
effect at the date of payment, although there is
nothing in the section which actually requires
this.
Notwithstanding paragraph 9 above, because of
considerations 1, 2, 3, 4 and 8, I would find that
the translation into Canadian dollars should be
carried out in accordance with the weighted aver
age rate of exchange in effect for the taxation
period in question.
Should I be in error in finding that this principle
applies to all foreign tax credit cases, then, I would
find that, in the particular circumstances of this
case, because United Kingdom law requires that
the tax be set aside in sterling during the taxation
year when it accrued and be kept in sterling until
ultimate payment in sterling, the weighted average
rate of foreign exchange should apply in any event.
III—Finding
I therefore conclude that whether the right to a
credit arises at the time when the United Kingdom
tax accrues and becomes payable or whether it
arises only when the tax is actually paid the credit
must in both cases be calculated by translating the
amount of tax payable in sterling into Canadian
dollars in accordance with the weighted average
rate of exchange prevailing during the taxation
year under consideration.
Since it is not necessary for me to decide the
question of when the right to the tax credit for
United Kingdom taxes actually arises in order to
dispose of the litigation between the parties, I am
deliberately refraining from doing so.
I wish to point out, however, that there should
be some legislation enacted to clarify either the
Income Tax Act or the Canada-United Kingdom
Income Tax Agreement Act, 1967 or both in this
respect, for the following reasons:
1. Two taxing statutes covering the same
subject-matter should not on their face appear to
contradict each other and the taxpayer should not,
in order to determine his rights, be obliged to refer
to jurisprudence in such a situation, when an
amendment to one or the other piece of legislation
could easily clarify the situation.
2. If, as the Minister of National Revenue has
urged upon this Court, the right to a tax credit for
United Kingdom taxes should only arise on pay
ment of same, the statute should clearly state so.
In such event, the resulting procedural anomaly as
to the present absence of any right on the part of
the taxpayer to submit an amended return after
the ninety-day period has expired, in order to
claim the tax credit, should also be corrected. The
Minister would also, in such event, be obliged to
collect the full amount of the Canadian tax pend
ing payment of the United Kingdom tax. This does
not appear to be the practice at the present time.
For the above reasons, the appeal will be
allowed with costs and the assessment of the plain
tiff for the 1972 year shall accordingly be referred
back to the Minister for reassessment.
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.