FCMI Financial Corporation v. Canada (Finance), 2007 ONCA 316

CITATION: FCMI Financial Corporation v. Canada (Finance), 2007 ONCA 316

DATE: 20070427

DOCKET: C44653

COURT OF APPEAL FOR ONTARIO

LASKIN, ARMSTRONG and LAFORME JJ.A.

BETWEEN:

FCMI FINANCIAL CORPORATION (formerly 398737 Ontario Limited)

Appellant (Respondent in Appeal)

and

THE MINISTER OF FINANCE (formerly The Minister of Revenue)

Respondent (Appellant in Appeal)

Dona M.H. Salmon for the appellant

Cosimo Fiorenza and Jacques Bernier for the respondent

Heard: October 2, 2006

On appeal from the judgment of Justice John B. McMahon of the Superior Court of Justice, dated June 27, 2005, with reasons reported at [2005] O.J. No. 6074.

LASKIN J.A.:

A. INTRODUCTION

[1] Under s. 58 of Ontario’s Corporations Tax Act, R.S.O. 1990, c. C.40 (“CTA”),[^1] every corporation that is subject to Ontario corporate income tax must also pay an annual capital tax on its use of capital in Ontario. The capital tax is generally based on a corporation’s surplus. It is calculated on a corporation’s world paid-up capital, which includes its paid-up capital arising from any interest in a partnership.

[2] In this case, the Minister of Finance has appealed three rulings of McMahon J. These rulings were made on an appeal by FCMI Financial Corporation arising from the Minister’s reassessment of FCMI’s liability for capital tax in the years 1984 to 1989.

[3] The three issues on which the Minister appeals to this court are as follows:

1. The trial judge erred in holding that in calculating its taxable paid-up capital for Celebrity Place LP, FCMI could use its own fiscal year end instead of Celebrity Place’s fiscal year end.

2. The trial judge erred in permitting FCMI to use its income tax reassessments to reduce its paid-up capital for the years 1984 to 1988.

3. The trial judge erred in holding that FCMI could rely on a revised financial statement to calculate its 1989 paid-up capital.

B. ANALYSIS

First Issue: Did the trial judge err in holding that in calculating its taxable paid-up capital for Celebrity Place LP, FCMI could use its own fiscal year end instead of Celebrity Place’s fiscal year end?

[4] FCMI is an investment corporation. During the taxation years in question, it held investments in marketable securities, joint ventures and limited partnerships. In the late-1980s it held a 99.48 per cent interest in a limited partnership called Celebrity Place LP, which had been formed to develop a residential condominium complex in Toronto.

[5] Under s. 61(5) of the CTA, the taxable paid-up capital of a corporation includes the corporation’s proportionate share of the paid-up capital of any partnership in which the corporation has an interest. The partnership is treated as if it were a corporation. Sections 61(5)(a) and (b) provide:

(5) For the purpose of subsection (1), the paid-up capital of the corporate partners of a partnership shall, with respect to their interests in the partnership, be determined in accordance with the following rules:

(a) determine the paid-up capital of the partnership as if it were a corporation;

(b) allocate the paid-up capital of the partnership as determined under clause (a) to each partner thereof in the same proportion as the share of the profits to which the partner is entitled under the partnership agreement;

[6] When FCMI filed its corporate tax returns for 1988 and 1989, it failed to include any amount of paid-up capital for its interest in Celebrity Place LP. The Minister discovered this omission during a tax audit of FCMI in 1994. He reassessed FCMI to include as part of its taxable paid-up capital, its share of Celebrity Place’s paid-up capital.

[7] FCMI’s fiscal year end is October 31; Celebrity Place’s fiscal year end is December 31. In reassessing FCMI to include its share of the paid-up capital of Celebrity Place, the Minister used Celebrity Place’s year end. For FCMI’s 1988 taxation year, he used Celebrity Place’s December 31, 1987 financial statement, and for FCMI’s 1989 taxation year, he used Celebrity Place’s December 31, 1988 statement.

[8] FCMI objected. It asked to use its own fiscal year end. It had prepared and given to the Minister revised financial statements, which calculated FCMI’s taxable paid-up capital for 1988 and 1989 using financial statements of Celebrity Place as at October 31 in each of the two years. Using October 31 was economically advantageous for FCMI because it had disposed of a substantial portion of the partnership’s property between December 31, 1987 and October 31, 1988, and again between December 31, 1988 and October 31, 1989. These dispositions materially reduced FCMI’s taxable paid-up capital arising from its interest in Celebrity Place.

[9] The Minister, however, would not accept FCMI’s position. He contended that previously for its interest in partnerships, FCMI had used the partnership’s year end. It could not now pick a different year end simply to gain a tax advantage. FCMI appealed the Minister’s decision, and this became the main issue before the trial judge.

[10] The trial judge concluded that the Minister had erred in refusing to permit FCMI to use its own fiscal year end to calculate its taxable paid-up capital arising from its interest in Celebrity Place. I agree with the trial judge’s conclusion. In my view, his conclusion is supported by the language of the statute, as well as an interpretation bulletin published by the Corporations Tax Branch of the Ministry on how a corporation should calculate its taxable paid-up capital when it has an interest in a partnership and the partnership year end differs from its own year end.

[11] Section 3(1) of the CTA sets out the basic rule for calculating a corporation’s capital tax: unless the statute provides otherwise, the corporation is to use its fiscal (taxation) year end.

(1) Unless otherwise provided in this Act, any tax imposed by this Act shall be determined on the amount of the paid-up capital or other subject in respect of which the amount of the tax is to be ascertained as such paid-up capital or other subject stood at the close of the taxation year of the corporation for which the tax is imposed.[^2]

Thus, if s. 3(1) governs, FCMI’s position is consistent with the statute. That leaves the question whether the CTA otherwise provides. The Minister argues that it does otherwise provide in s. 61(5), and he also argues that s. 249 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), supports his interpretation. I do not agree.

[12] For convenience I reproduce ss. 61(5)(a) and (b) of the CTA:

(5) For the purpose of subsection (1), the paid-up capital of the corporate partners of a partnership shall, with respect to their interests in the partnership, be determined in accordance with the following rules:

(a) determine the paid-up capital of the partnership as if it were a corporation;

(b) allocate the paid-up capital of the partnership as determined under clause (a) to each partner thereof in the same proportion as the share of the profits to which the partner is entitled under the partnership agreement;

[13] The Minister submits that s. 61(5) directs FCMI to calculate its paid-up capital arising from its interest in Celebrity Place at the end of Celebrity Place’s taxation year. I do not read s. 61(5) that way. To me, it is a provision that addresses computation, not timing. And, if it addresses timing at all, it is arguably more plausible to read s. 61(5) in a way favourable to FCMI’s position. Section 61(5)(a) directs FCMI to determine its paid-up capital arising from its interest in Celebrity Place as if Celebrity Place were a corporation. As that is so, it makes sense to determine the paid-up capital of a partnership at the same point in time – here October 31 – as that of the corporation that must pay the capital tax.

[14] Since s. 61(5) seems to address computation not timing, or at least does not yield a clear answer to which year end should be used, the basic rule in s. 3(1) should govern. Thus, FCMI is justified in calculating its share of paid-up capital in Celebrity Place as at October 31.

[15] Moreover, I do not think that the Income Tax Act advances the Minister’s position. Section 1(1)(a) of the CTA does make certain provisions of the Income Tax Act and their interpretations applicable to the CTA. The Minister relies on s. 249(1)(a) of the Income Tax Act, which defines a “taxation year” in the case of a corporation, as its fiscal period. So the Minister says that if Celebrity Place is to be treated as a corporation, its taxation year must be its fiscal period, that is the period ending December 31 of each year.

[16] However, s. 249 as well as s. 96(1)(b) of the Income Tax Act – which stipulates that where a taxpayer is a member of a partnership, the taxpayer’s income shall be computed as if the taxation year of the partnership were its fiscal period – are specifically directed to the calculation of a taxpayer’s income for the purpose of paying income tax. They cannot be imported into s. 61 of the CTA for the purpose of calculating an entirely different tax: capital tax.

[17] Perhaps because the calculation of a corporation’s capital tax where the corporation had an interest in a partnership was unclear, the Corporations Tax Branch of the Ministry published an interpretation bulletin to assist corporations. Interpretation Bulletin L-16, “Capital Tax 1981 Budget Changes and Administrative Policy Update” (24 November 1981), addresses the very situation FCMI confronted: how to calculate its taxable paid-up capital where the fiscal year of the partnership in which it has an interest does not coincide with its own taxation year. In such a case, the Branch prefers that the corporation use a partnership balance sheet as at the corporation’s taxation year end, but will accept a balance sheet as at the partnership’s year end. Interpretation Bulletin L-16 reads as follows:

When the fiscal year of the partnership does not coincide with the taxation year of the corporate partner, the Branch’s policy has been to accept the partnership’s financial statements at the date closest to the taxation year end of the corporate partner (see Interpretation Bulletin Number L-7R) where financial statements coinciding with the corporation’s year-end were not prepared.

For taxation years ending after May 19, 1981, a corporation should include in its taxable capital for a year its share of partnership taxable liabilities for those partnerships whose year-end falls within the taxation year of the corporation. For example, a partnership’s fiscal year may run from April 1, 1981 to March 31, 1982 whereas the corporate partner’s taxation year may end on December 31, 1981. The Branch would prefer a partnership balance sheet as at December 31, 1981, but where this is not available, the partnership balance sheet as at March 31, 1981 is acceptable for capital tax purposes. This change in reporting partnerships’ “Liabilities” for capital tax purposes will match reporting of partnerships’ income for income tax purposes.

[18] Although not binding on this court, interpretation bulletins have been found to be persuasive in the event of ambiguity: Mattabi Mines Ltd. v. Ontario (Minister of Revenue), 1988 58 (SCC), [1988] 2 S.C.R. 175 at 195-97; Roth (W.E.) Construction Ltd. v. Ontario (Minister of Finance) (2001), 2001 24069 (ON CA), 141 O.A.C. 366 at para. 26 (Ont. C.A.). In my view, ss. 3(1) and 61(5) of the CTA support FCMI’s use of Celebrity Place’s financial statements at its own October 31 year end. However, even if I were to find that those provisions, when read together, result in ambiguity, Interpretation Bulletin L-16 clarifies the matter in favour of FCMI.

[19] Here, FCMI followed the Branch’s preferred option, as described in its interpretation bulletin. It prepared and submitted financial statements for Celebrity Place as at its own year end, October 31. The Minister then said that it could not do so. Respectfully, the Minister’s position makes no sense. FCMI calculated its taxable paid-up capital consistently with what the statute and the interpretation bulletin called for. The Minister was wrong to have rejected FCMI’s calculations.

[20] The Minister’s real complaint, I expect, is that FCMI has been inconsistent. In previous years it used a partnership year end rather than its own year end. It changed its practice only because of the tax advantages of doing so. If that is the Minister’s complaint then he should challenge FCMI’s previous practice. He had no basis to challenge what FCMI did for 1988 and 1989. I would not give effect to this ground of appeal.

Second Issue: Did the trial judge err in permitting FCMI to use its income tax reassessments to reduce its paid-up capital for the years 1984 to 1988?

[21] Under s. 61(1)(b) of the CTA, a corporation’s paid-up capital includes its earned surplus. Thus, the less a corporation’s earned surplus, the less its taxable paid-up capital. Here FCMI sought to use unpaid income tax reassessments to reduce its earned surplus. However, the Minister refused to permit it to do so.

[22] The facts that give rise to this dispute are as follows. In the years leading up to 1982, FCMI accumulated approximately 9.9 million dollars in income tax liabilities. It did not pay this tax. The federal government issued a notice of reassessment for income tax in 1985, and the provincial government issued a notice of reassessment in 1986. In March 1992, FCMI asked to reduce its paid-up capital for the years 1984 to 1988 because of the reassessments. The Minister refused and FCMI appealed the refusal. The trial judge allowed FCMI’s appeal, and the Minister now appeals this issue to this court.

[23] The Minister refused FCMI’s request for three reasons: first, he said that FCMI’s request was out of time and was therefore statute-barred; second, he said that a corporation is not entitled to retroactively reduce its earned surplus for a taxation year by a later unpaid reassessment; third, he said that until the additional income tax assessed is paid, it amounts to a government advance or loan to FCMI and therefore, under s. 61(1)(d) of the CTA, is included in the corporation’s paid-up capital.

(i) Out of time?

[24] On May 30, 1990, the Minister issued notices reassessing FCMI for capital tax for each of the years 1984 to 1988. On July 9, 1990, FCMI filed notices of objection. These notices were timely but gave no specific reason for the objection. Twenty months later, on March 12, 1992, FCMI for the first time requested that its taxable paid-up capital be reduced because of its income tax reassessments. The Minister’s position is that FCMI was barred by the statute from making this objection because it did not do so within 180 days of the assessment, as required by ss. 84(1) and (1.1) of the CTA.

[25] Sections 84(1) and (1.1) state that a corporation must specify its objection with supporting facts and reasons. A general objection does not comply with the Act. These sections provide:

(1) Subject to subsection 92 (3), a corporation that objects to an assessment may, within 180 days from the day of mailing of the notice of assessment, serve on the Minister a notice of objection in the form approved by the Minister.

(1.1) The notice of objection shall,

(a) clearly describe each issue raised by way of objection; and

(b) fully set out the facts and reasons relied on by the corporation in respect of each issue.

Under s. 85(2.1) a corporation’s right of appeal is also circumscribed by s. 84(1.1). Section 85(2.1) states:

(2.1) A corporation is entitled to raise by way of appeal only those issues raised by it in a notice of objection to the assessment being appealed and in respect of which it complied or was deemed to have complied with subsection 84 (1.1).

[26] If these provisions had been in force when the capital tax notices of reassessment and notices of objection were issued, then the Minister’s argument would have merit. But they were not. The requirement for specificity came into the statute by amendment in 1997.[^3] In July 1990 when FCMI delivered general notices of objection, it met the requirements of the statute then in force. For this reason the Minister’s argument that FCMI’s objection was out of time must fail.

(ii) Retroactive reduction?

[27] The Minister contends that a corporation’s earned surplus and therefore its paid-up capital must be determined at the end of a taxation year. Additional income tax later assessed cannot be used to alter that determination.

[28] The Minister acknowledges that, as an administrative concession, he will permit a corporation to retroactively reduce its earned surplus for a taxation year if the additional income tax reassessment was issued before the end of the taxation year and the tax has been paid. FCMI did not qualify for this administrative concession because it did not pay the tax. Therefore, according to the Minister, FCMI was not entitled to reduce retroactively its earned surplus.

[29] The trial judge rejected the Minister’s contention. He held, at para. 19, that the Minister had failed to put forward any legislative or regulatory rule preventing a retroactive claim:

The respondent has been unable to provide legislative or a regulatory rule which would disentitle the appellant from making the claim retroactively. Further, it would seem the Ministry has made several administrative concessions in relation to allowing corporations to retroactively reassess. It was the conduct of the government in reassessing the appellant that resulted in the appellant’s desire to adjust its earned surplus to reflect the actions of the government. I do not find any reason that would bar allowing the appellant to take into consideration the additional income tax assessed in deducting the amount of the corporation’s earned surplus under s. 61(1) of the C.T.A.

[30] I agree with the trial judge’s analysis and therefore would not give effect to the Minister’s argument on retroactivity.

(iii) Government advance or loan?

[31] Under s. 61(1)(d) of the CTA, a government advance or loan to a corporation is included in the corporation’s paid-up capital. That section provides:

(1) The paid-up capital of a corporation for a taxation year is its paid-up capital as it stood at the close of the taxation year and includes,

(d) all sums or credits advanced or loaned to the corporation,

(i) in the case of a corporation incorporated with share capital, by its shareholders, and

(ii) in the case of a corporation incorporated without share capital, by its members,

directly or indirectly or by any person related to any of its shareholders or members, as the case may be, or by any other corporation and all sums advanced or loaned to the corporation by any government;

[32] The Minister submits that unpaid income tax should be treated as an advance or loan by the government to the corporation, and therefore cannot be used to reduce the corporation’s taxable paid-up capital. The trial judge did not accept the submission. He held, at para. 21:

On a plain reading of s. 61(1)(d), I cannot see that advising the appellant that it owes money to the respondent could be considered an act of lending. The respondent simply is advising that pursuant to statute the appellant has a financial obligation to pay an amount of money to the government. To me, this is not a loan, but a tax liability created by statute. I am satisfied that the liability for income tax owing is not a sum or credit advanced or loaned pursuant to s. 61(1)(d).

[33] I am not persuaded that the trial judge erred in so holding. As the statute does not define “advance” or “loan”, the ordinary meaning of these words should prevail: Roth, supra, at para. 13. An advance or loan connotes a commercial transaction where value is transferred in exchange for a debt. The parties to the transaction intend to create and do create a debtor/lender relationship. Indeed, Black’s Law Dictionary, 8th ed., defines “advance” as “[t]he furnishing of money or goods before any consideration is received in return.” And, it defines “loan” as “[a]n act of lending; a grant of something for temporary use.”

[34] Here, the liability imposed on FCMI was created by statute. The parties did not intend to establish a debtor/lender relationship. There was no “furnishing”, “act” or “grant”. In ordinary parlance, we do not think of an income tax liability as an advance or loan.

[35] I would therefore not give effect to any of the Minister’s three submissions on this second issue.

Third Issue: Did the trial judge err in holding that FCMI could rely on a revised financial statement to calculate its 1989 taxable paid-up capital?

[36] To calculate its 1989 taxable paid-up capital, FCMI first used an unaudited financial statement not prepared in accordance with generally accepted accounting principles (GAAP). FCMI relied on this unaudited statement in filing its 1989 corporate tax return.

[37] FCMI then concluded that the unaudited statement was inaccurate. It sent to the Minister a revised statement, which had been audited and complied with GAAP. Although the Minister acknowledged that the revised statement sought to correct an error in the unaudited statement, he contended that FCMI could not rely on the revised statement. He claimed that in filing the revised statement, FCMI was trying to artificially reduce its taxable paid-up capital contrary to s. 62(10) of the CTA.

[38] The trial judge rejected the Minister’s contention. He expressly found that FCMI was not taking steps to artificially reduce its taxable paid-up capital but was doing no more than correcting a mistake in its financial statements. He concluded that the Minister was wrong to have refused to allow FCMI to rely on the revised statement.

[39] The Minister renews on appeal the argument he made before the trial judge. He has not, however, put forward any basis to overturn the trial judge’s finding, a finding that seems entirely reasonable. I would not give effect to this ground of appeal.

C. CONCLUSION

[40] I would dismiss the Minister’s appeal. The trial judge did not err in holding that for the years 1988 and 1989, FCMI could determine its taxable paid-up capital attributable to its interest in Celebrity Place by using financial statements as at October 31 in each of these years; or in holding that FCMI could use its income tax reassessments to reduce its taxable paid-up capital for the years 1984 to 1988; or in holding that FCMI could rely on a revised financial statement to calculate its taxable paid-up capital for 1989.

[41] FCMI is entitled to its costs of the appeal, which I would fix at $7,500, inclusive of disbursements and GST.

RELEASED: April 27, 2007 “John Laskin J.A.”

“I agree Robert P. Armstrong J.A.”

JL “I agree H.S. LaForme J.A.”

[^1]: The relevant provisions of the CTA have been amended since the events giving rise to this litigation took place. Unless otherwise stated, in these reasons I refer to the provisions in force when the events occured.

[^2]: Similarly section 59 of the CTA states: “Except as provided in section 60, the taxable paid-up capital of a corporation shall be measured as at the close of the taxation year for which the tax imposed by section 58 is levied and is its taxable paid-up capital determined under Division B of this Part.”

[^3]: The CTA was amended by the Tax Credits to Create Jobs Act, 1997, S.O. 1997, c. 43, Sched. A, ss. 47(1), 48, to include ss. 84(1) and (1.1), and s. 85(2.1).