A-913-85
Oceanspan Carriers Limited (Appellant)
v.
The Queen (Respondent)
INDEXED AS: OCEANSPAN CARRIERS LTD. v. CANADA
Court of Appeal, Urie, Hugessen and MacGuigan
JJ.—Vancouver, January 13; Ottawa, February
11, 1987.
Income tax — Income calculation — Deductions —
Deductibility of non-capital losses before corporation becom
ing resident and while not carrying on business in Canada
Whether non-capital losses for first fiscal period to be prorat
ed according to days of residence in said period — Income
Tax Act, S.C. 1970-71-72, c. 63, ss. 2, 3(a),(b),(c),(d), 9,
1 1 1 (1)(a),(8)(b), 114, 115(1)(c), 248(1), 249(1).
On June 15, 1976, the appellant, theretofore a non-resident
corporation for the purposes of the Act, became a resident of
Canada. It adopted a fiscal period ending on December 31. In
preparing its returns for the 1977 to 1979 taxation years, it
carried forward its 1976 non-capital losses and carried forward
and applied its accumulated non-capital losses from the 1972 to
1975 fiscal periods. The latter losses had been incurred while
the appellant was still a non-resident and at a time where it
carried on no business in Canada.
The Minister disallowed in toto the application of non-capital
losses incurred prior to 1976. He also disallowed a portion of
the 1976 loss by prorating the total loss in accordance with the
number of days of residence in Canada in the appellant's 1976
fiscal period. The Trial Judge dismissed the appeal from that
decision.
Held, the appeal as to the pre-1976 losses should be dis
missed but allowed as to the 1976 loss.
A corporate non-resident which has no income derived from
Canadian sources is not required to compute its taxable income
within the meaning of the Act and therefore has no need to
utilize non-capital losses under paragraph 111(1)(a). Put in
another way, a non-resident without income from Canadian
sources is not a "taxpayer" because it can never be liable to pay
tax under the Act on its foreign income. Furthermore, it is hard
to conceive how the losses of a non-resident corporation
incurred as a result of business activities outside Canada could
be relevant after it becomes a resident any more than profits
made by it as a non-resident could be taxed in Canada after it
became a resident. The Act becomes applicable to a non-resi
dent corporation only when it becomes a resident. Until then it
is not a "taxpayer" and does not have a "taxation year".
Paragraph 111(1)(a) of the Act therefore does not apply to it
since it refers to "taxation years".
With respect to the 1976 loss, if a corporation becomes a
resident of Canada part way through its fiscal period, tax is
payable on its taxable income for the entire year irrespective of
its source. Logic, common sense, fairness and harmony within
the Act dictate that non-capital losses incurred in the same
factual situation should be treated in the same way.
CASE JUDICIALLY CONSIDERED
APPLIED:
Lea-Don Canada Limited v. Minister of National Reve
nue, [1971] S.C.R. 95; 70 DTC 6271.
COUNSEL:
P. N. Thorsteinsson, Q.C. and Lorne A. Green
for appellant.
J. A. Van Iperen, Q.C. and Max J. Weder for
respondent.
SOLICITORS:
Thorsteinsson, Mitchell, Little, O'Keefe &
Davidson, Vancouver, for appellant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
rendered in English by
URIE J.: This is an appeal from a judgment of
the Trial Division [[1986] 1 C.T.C. 114; 85 DTC
5621] dismissing the appellant's appeal from an
income tax reassessment for its 1976 to 1979
inclusive, taxation years. Briefly, the undisputed
facts follow.
The appellant, which had been incorporated in
Bermuda in 1972, at all material times was owned,
to the extent of 50% at a minimum, by MacMillan
Bloedel Limited. From 1972 to 1980 it carried on
a shipping business. Prior to June 15, 1976 it was a
non-resident corporation for the purposes of the
Income Tax Act ("the Act") [R.S.C. 1952, c. 148
(as am. by S.C. 1970-71-72, c. 63, s. 1)]. On June
15, 1976, it became a corporation resident in
Canada for the purposes of the Act due to a
change in its central management and control.
The appellant adopted a fiscal period, as that
term is defined in the Act, ending on December 31
and on June 30, 1980, filed its first T-2 corpora
tion income tax return in Canada for its 1976
taxation year together with T-2 returns for the
1977, 1978 and 1979 taxation years. The appellant
reported a non-capital loss for tax purposes for its
1976 fiscal period of $1,225,295. In preparing its
returns for the 1977 to 1979 taxation years it
carried forward its 1976 non-capital loss pursuant
to paragraph 111(1) (a) of the Act. In addition, it
carried forward and applied its accumulated non-
capital losses from the 1972 to 1975 fiscal periods
in the sum of $404,118. The effect of the applica
tion of those losses was to reduce the appellant's
taxable income to nil in the 1977, 1978 and 1979
taxation years. The non-capital losses from 1972 to
1975 had, of course, been incurred during the
years when the appellant was still resident in
Bermuda and during which period it carried on no
business in Canada the income from which was
taxable in its hands as a non-resident corporation.
In July 1982, the Minister reassessed the appel
lant's 1976 to 1979 taxation years to disallow in
toto the application of non-capital losses incurred
prior to 1976. He also disallowed a portion of the
1976 loss by prorating the total loss in accordance
with the number of days in 1976 before and after
June 15, the day upon which the appellant became
a resident in Canada for tax purposes. Certain
capital cost allowance claims were also adjusted
but they are not in issue in this appeal. The
appellant's appeal from the reassessment was dis
missed by Rouleau J. in the Trial Division. It is
from that judgment that this appeal has been
brought.
The two issues before us are said by the appel
lant in its Memorandum of Fact and Law to be:
The Appellant submits that the learned Trial Judge erred in
holding that:
(a) non-capital losses incurred in a business not carried on in
Canada by a corporation not resident in Canada at the time
the loss was incurred could not be applied, pursuant to
paragraph 111(1)(a) of the Income Tax Act, against income
earned by the corporation after it became resident in Canada
for tax purposes;
(b) the non-capital loss incurred by the Appellant in the
fiscal period January 1, 1976 to December 31, 1976 had to
be prorated for the purposes of paragraph 111(1)(a) of the
Income Tax Act so that only the portion of the loss thus
considered to have occurred after June 15, 1976 could be
applied against income for subsequent taxation years.
(a) Deduction of non-capital losses of a non-resi
dent of a business not carried on in Canada
The appellant's argument on this branch of its
appeal requires first that the following definitions
in the Act be considered. Subsection 248 (1)
defines the following relevant terms:
248. (1) .. .
"fiscal period" means the period for which the accounts of the
business of the taxpayer have been ordinarily made up and
accepted for purposes of assessment under this Act and, in
the absence of an established practice, the fiscal period is
that adopted by the taxpayer (but no fiscal period may
exceed
(a) in the case of a corporation, 53 weeks, and
(b) in the case of any other taxpayer, 12 months,
and no change in a usual and accepted fiscal period may be
made for the purposes of this Act without the concurrence of
the Minister);
"taxable income" has the meaning assigned by subsection 2(2);
"taxpayer" includes any person whether or not liable to pay
tax;
Subsection 249(1) defines "taxation year" as:
249. (1) For the purpose of this Act, a "taxation year" is
(a) in the case of a corporation, a fiscal period, and
(b) in the case of an individual, a calendar year,
and when a taxation year is referred to by reference to a
calendar year the reference is to the taxation year or years
coinciding with, or ending in, that year.
To appreciate counsel for the appellant's ingeni
ous argument it should be borne in mind that
Division A of Part I of the Act prescribes who
shall be liable for tax thereunder. At all relevant
times, as well as now, it contains only one section,
viz. section 2, reading as follows:
2. (1) An income tax shall be paid as hereinafter required
upon the taxable income for each taxation year of every person
resident in Canada at any time in the year.
(2) The taxable income of a taxpayer for a taxation year is
his income for the year minus the deductions permitted by
Division C.
(3) Where a person who is not taxable under subsection (1)
for a taxation year
(a) was employed in Canada,
(b) carried on a business in Canada, or
(c) disposed of a taxable Canadian property,
at any time in the year or a previous year, an income tax shall
be paid as hereinafter required upon his taxable income earned
in Canada for the year determined in accordance with Division
D.
Division B provides the basis for the computa
tion of taxable income for a taxation year to which
section 2 refers. That is, of course, accomplished
by determining in accordance with Division B, the
taxpayer's income from all sources for the taxation
year from which he is then entitled to the deduc
tions and exemptions permitted under Division C.
Division D provides the basis for the determination
of the taxable income of non-residents.
The relevant sections of Division B and C for
the purposes of the appellant's argument, are para
graph 3(d) and section 9 and paragraphs
111(1)(a) and 111(8)(6). They read as follows at
the material time, namely, 1976:
(From Division B)
3. The income of a taxayer for a taxation year for the
purposes of this Part is his income for the year determined by
the following rules:
(d) determine the amount, if any, by which the remainder
determined under paragraph (c) exceeds the aggregate of
amounts each of which is his loss for the year from an office,
employment, business or property; and
and the remainder, if any, obtained under paragraph (e) is the
taxpayer's income for the year for the purposes of this Part.
9. (1) Subject to this Part, a taxpayer's income for a taxa
tion year from a business or property is his profit therefrom for
the year.
(2) Subject to section 31, a taxpayer's loss for a taxation year
from a business or property is the amount of his loss, if any, for
the taxation year from that source computed by applying the
provisions of this Act respecting computation of income from
that source mutatis mutandis.
(3) In this Act, "income from a property" does not include
any capital gain from the disposition of that property and "loss
from a property" does not include any capital loss from the
disposition of that property.
(From Division C)
111. (1) For the purpose of computing the taxable income
of a taxpayer for a taxation year, there may be deducted from
the income for the year such of the following amounts as are
applicable:
(a) non-capital losses for the 5 taxation years immediately
preceding and the taxation year immediately following the
taxation year, but no amount is deductible in respect of
non-capital losses from the income of any year except to the
extent of the taxpayer's income for the year minus all
deductions permitted by the provisions of this Division other
than this paragraph, paragraph (b) or section 109;
(8) In this section,
(b) "non-capital loss" of a taxpayer for a taxation year
means the amount, if any, by which
(i) the aggregate of all amounts each of which is the
taxpayer's loss for the year from an office, employment,
business or property and all amounts deductible under
section 112 or subsection 113(1) from the taxpayer's
income for the year
exceeds
(ii) the amount determined under paragraph 3(c); and
Paragraph 115(1)(c) is the only portion of Divi
sion D to which reference will be made. In 1976 it
read as follows:
115. (1) For the purposes of this Act, a non-resident
person's taxable income earned in Canada for a taxation year is
the amount of his income for the year that would be determined
under section 3 if
(c) the only losses referred to in paragraph 3(d) were losses
from businesses carried on by him in Canada,
minus the aggregate of such of the deductions from income
permitted for the purpose of computing taxable income as may
reasonably be considered wholly applicable and of such part of
any other of the said deductions as may reasonably be con
sidered applicable.
The appellant's submissions shortly put are
these. The appellant, although not liable to pay
tax, was a "taxpayer" within the broad definition
of the word, when its losses were incurred in 1972
to 1976. They were "non-capital losses" as that
term is defined by paragraph 111(8)(b). In those
years it had a "taxation year" for the purposes of
the Act because it had a "fiscal period". That was
the calendar year. By virtue of paragraph
249(1)(a) its "taxation year" was the calendar
year in 1972 to 1976 inclusive. Therefore, since
"non-capital loss" is defined in paragraph
111(8)(b) to include business losses of a "taxpay-
er" (which by definition included the appellant)
for a "taxation year" which for the appellant was
its calendar year, it was entitled, in computing its
taxable income for the taxation years 1976, 1977
and 1978, after it became a resident corporation,
to deduct its non-capital losses for the years 1972
to 1976 inclusive notwithstanding that it was not a
resident corporation during those years. The Act
during those years, counsel said, did not contain
any qualification on the origin or source of the tax
loss which a resident corporation was entitled to
deduct nor upon the tax status of the taxpayer.
I do not agree. To show why I disagree it is
necessary to revert to first principles as disclosed
by the scheme of Divisions A to D inclusive, of the
Act, the most basic one of which is that both
residents and non-residents are liable to pay tax on
income earned from a source inside Canada. A
non-resident who has no income from any source
in Canada is not liable to pay tax in Canada. Both
residents and non-residents who derive income
from Canadian sources are included, by definition,
in the term "taxpayer" whether liable to pay tax
or not. Their income is computed in accordance
with Division B. By virtue of subsection 2(2) to
ascertain their "taxable income" they are entitled
to the deductions and exemptions referred to in the
Division C. It is only at the conclusion of that
exercise that it is determined whether or not they
are "liable to pay tax". It follows that a corporate
non-resident which has no income derived from
Canadian sources, is not required to compute its
taxable income, as that word is defined, supra,
and, thus, has no need to utilize the deductions
permitted by Division C, including those permitted
under paragraph 111(1) (a)—non-capital losses.
Such a corporation is not "liable to pay tax".
I put the reasoning in another way. The defini
tion of "taxpayer", properly understood in its con
text in the whole of the scheme of the Act, shows,
indisputably in my view, that it refers to resident
individuals or corporations who may be liable to
pay tax at some time whether or not they are, at
any given time, liable therefor. A non-resident
without income from Canadian sources can never
be liable to pay tax under the Act on its foreign
income. It is not, therefore, a corporation contem
plated by the definition of "taxpayer" in the Act.
By the same token, as a non-resident corporation,
any losses which it may have incurred as the result
of its business activities outside of Canada are
irrelevant under the Act. It is hard to conceive how
they could become relevant and capable of utiliza
tion under paragraph 111(1)(a), by osmosis, as it
were, after the non-resident corporation becomes a
resident any more than if it had operated profit
ably as a non-resident, such profit could be taxed
in Canada after it became a resident.
I find further support for this view from the
following. Until it becomes a "taxpayer" a non
resident corporation does not have "[f]or the pur
pose of this Act", a "taxation year" within the
meaning of paragraph 249(1)(a) of the Act, supra.
When it becomes a resident, the Act becomes
applicable to it because it becomes liable to pay
tax. It is then that it becomes a "taxpayer" by
definition. Before that, that term had no applica
tion to it. Consequently, until then, the definition
of "taxation year", was inapplicable to it. It fur-
ther follows that paragraph 111(1) (a) does not
apply to it because that paragraph is referrable to
the "5 taxation years immediately preceding ...
the taxation year". During those five years the
appellant, "for the purpose of the Act", had no
"taxation year". It could not, therefore, deduct its
non-capital losses incurred offshore in the calendar
years 1972, 1973, 1974 and 1975.
Counsel for the appellant, however, argued that
because the appellant had, in 1980, filed T-2
returns for the taxation years 1976 to 1979 inclu
sive on the basis of its 1972 to 1975 "fiscal peri
ods" which in each case was the calendar year and
because these were "accepted for purposes of
assessment under [the] Act" as required by the
definition of "fiscal period" in subsection 248(1)
of the Act, they became taxation years for pur
poses of the Act. The short answer to that submis
sion is that, as earlier stated, a non-resident not
carrying on business in Canada cannot have a
taxation year for Canadian tax purposes. I fail to
understand how it can be given one retroactively.
The appellant's contention, thus, cannot withstand
analysis.
I find support for the foregoing views in the
judgment of the Supreme Court of Canada in
Lea-Don Canada Limited v. Minister of National
Revenue, [1971] S.C.R. 95, at page 99; 70 DTC
6271, at pages 6273-6274 where, admittedly in
another context, Hall J., on behalf of the Court,
held:
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. [Emphasis added.]
A fortiori, a corporation which incurs losses
from business activities outside Canada when it is
neither a resident nor had income from a source in
Canada, and thus is not subject to assessment
under the Act, is not entitled to deduct such losses
to reduce taxable income to nil on income derived
after it becomes a Canadian resident.
The appellant's appeal with respect to the
deductibility of losses in the years 1972 to 1975
inclusive must, therefore, fail.
(b) Deduction of non-capital losses incurred in
1976 during which year the appellant became
a resident
It is the appellant's contention that Parliament
did not intend the rules in Division D to apply to a
corporation where it became a resident of Canada
part way through a taxation year. Moreover, in
counsel's submission, the learned Trial Judge erred
in prorating the non-capital loss for 1976.
Counsel for the respondent replies by arguing
that a non-resident not carrying on business in
Canada cannot have a taxation year for Canadian
tax purposes, a contention with which I agree as
has been seen. The appellant, however, having
become a resident and having elected to adopt the
calendar year as its fiscal period, could only, coun
sel says, have a taxation year dating from June 15,
1976, the date upon which it took up residence in
Canada. In 1976, therefore, its fiscal period for tax
purposes was June 15 to December 31. Therefore,
only non-capital losses incurred in that period
could be deducted pursuant to paragraph
111(1) (a) of the Act. In counsel's view, there is
nothing in the Act which requires that a taxation
year or a fiscal period for a corporation be for a
minimum period. All that is required is that the
period not be in excess of fifty-three weeks. In
such circumstances as here prevail, the Minister is
entitled to prorate losses, as he did, between the
periods of non-residency and residency of the
corporation.
The learned Trial Judge dealt with these sub
missions in the following way [at pages 123
C.T.C.; 5628 DTC]:
To these arguments it needs only to be mentioned that the
absence of explicit provisions enabling the Minister to prorate
plaintiffs losses is not a bar to the solution chosen by the
Minister, especially in view of the fact that the proration of
plaintiffs losses was employed as a consequence of the fiscal
period selected and the system of accounting that was chosen
by the plaintiff. The methodology employed by the Minister
was merely an extension of the statutory restraint of jurisdic
tion imposed by the legislation in the assessment of the tax
liability of a taxpayer.
The competing contentions can be dealt with
briefly. The starting point is subsection 2(1), the
relevant portion of which states that:
2. (1) An income tax shall be paid ... upon the taxable
income for each taxation year of every person resident in
Canada at any time in the year. [Emphasis added.]
In the case of an individual, as opposed to a
corporation, section 114 of the Act' permits a
prorating of income earned in Canada. The effect
of the rule is that only income earned during the
portion of the taxation year in which the individual
is resident in Canada is to be chargeable to tax
unless, during the balance of the year, he was
employed in Canada or carried on business in
Canada. If he was employed or carried on business
in Canada, the whole of his world wide income for
the year would be taxable under subsection 2(1).
114. Where an individual was resident in Canada during
part of a taxation year, and during some other part of the year
was not resident in Canada, was not employed in Canada and
was not carrying on business in Canada, for the purpose of this
Part his taxable income for the taxation year is the aggregate of
(a) his income for the period or periods in the year during
which he was resident in Canada, was employed in Canada
or was carrying on business in Canada, computed as though
such period or periods were the whole taxation year and as
though any disposition of property deemed by subsection
48(1) to have been made by virtue of the taxpayers [sic]
having ceased to be resident in Canada were made in such
period or periods, and
(b) the amount that would be his taxable income earned in
Canada for the year if at no time in the year he had been
resident in Canada, computed as though the portion of the
year that is not in the period or periods referred to in
paragraph (a) were the whole taxation year,
(Continued on next page)
There is no equivalent section to 114 applicable
to corporations. Thus, if a corporation becomes a
resident of Canada part way through its fiscal
period, tax is payable on its taxable income for the
entire year irrespective of its source. Logic,
common sense, fairness and harmony within the
Act dictate that non-capital losses incurred in the
same factual situation should be treated in the
same way. Therefore, when a non-resident corpo
ration whose fiscal period has been the calendar
year becomes a resident part way through that
fiscal period, and does not change its fiscal period,
that becomes its taxation year. That being so,
reading subsection 2(1), paragraphs 3(a), (c) and
(d) and the definitions of "fiscal period" and
"taxation year" together, it is abundantly clear, in
my view, that Division D, in those circumstances,
has no application. Moreover, if it were otherwise,
there would have been no necessity to enact section
114 to prescribe a rule applicable only to individu
als. Non-capital losses incurred in the fiscal period
are, therefore, deductible from income earned
during that period without establishing that they
were incurred only during the time that it was a
resident.
The Trial Judge therefore erred, in my opinion,
in assimilating the prorating rule applicable to
individuals who are residents of Canada for only
part of a taxation year to that of corporations in a
similar factual situation. To do so, as I see it, flies
in the face of the statute.
Accordingly, I would dismiss the appeal on the
first issue and allow the appeal on the second issue
with costs both here and below. I would remit the
matter to the Minister of National Revenue for
(Continued from previous page)
minus the aggregate of such of the deductions from income
permitted for the purpose of computing taxable income as may
reasonably be considered wholly applicable to the period or
periods referred to in paragraph (a) and of such part of any
other of the said deductions as may reasonably be considered
applicable to such period or periods.
reassessment in respect of the appellant's 1976
taxation year in a manner not inconsistent with the
reasons for judgment.
HUGESSEN J.: I agree.
MACGUIGAN J.: I agree.
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.