Date: 19990604
Docket: 97-2379-IT-G
BETWEEN:
SYBRON CANADA LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
O'Connor, J.T.C.C.
[1] These appeals were heard at London, Ontario on May 10, 1999.
Facts
[2] The principal facts are set forth in an Agreed Partial Statement of Facts which was filed along with Exhibit A-1 comprising volumes 1 and 2 of a Joint Book of Documents (18 in number) the authenticity and truth of which were admitted by the parties. The Agreed Statement of Facts reads as follows:
AGREED STATEMENT OF FACTS
For the purposes of this appeal, the parties agree to the following partial statement of facts.
1. Sybron Commonwealth Holdings Inc. ("SCHI") is a nonresident Corporation.
2. Prior to October 22, 1987, the Appellant's predecessor by amalgamation, the former Sybron Canada Limited ("Old Sybron"), was a wholly-owned subsidiary of SCHI.
3. SAC/Commonwealth Holdings Inc. ("SACCHI") is a nonresident Corporation.
4. The Appellant's predecessor by amalgamation, 152927 Canada Inc. ("Holdco") was incorporated on November 12, 1986 and was acquired by SACCHI on October 16, 1987.
5. Holdco acquired all of the outstanding shares of Old Sybron on October 22, 1987 for U.S. $30 million. The purchase price was satisfied with the issue by Holdco to SCHI of two promissory notes of U.S. $8 million and U.S. $22 million respectively.
6. On April 20, 1988 Old Sybron filed its tax return for the fiscal period January 1, 1987 to October 22, 1987 (Document 17)
7. On October 23, 1987 SACCHI transferred U.S. $8 million to Holdco. On that same date, the funds were used by Holdco to pay the U.S. $8 million promissory note payable to SCHI
8. The U.S. $8 million transferred to Holdco constituted a capital contribution by SACCHI to Holdco on October 23, 1987.
9. Holdco incurred an interest expense of $3,259,787 (the "Interest Expense") on the U.S. $22 million promissory note payable to SCHI between October 22, 1987 and September 30, 1988.
10. The Interest Expense was interest paid by Holdco on outstanding indebtedness to a specified nonresident as those terms are used in section 18 of the Income Tax Act.
11. Holdco established a fiscal period and taxation year end of September 30 upon the filing of a tax return for the period commencing on incorporation on November 12, 1986 and terminating on September 30, 1987.
12. As a consequence of the acquisition of control of Holdco by SACCHI, Holdco's taxation year commencing October 1, 1987 was deemed to have ended on October 15, 1987.
13. As a consequence of the acquisition of control of Holdco by SACCHI, Holdco had a taxation year commence on October 16, 1987.
14. On September 30, 1988 Holdco and Old Sybron amalgamated to form the Appellant. (Document 6)
15. On March 31, 1989 Old Sybron filed its tax return for the fiscal period October 23, 1987 to September 30, 1988 (Document 18)
16. By letter dated November 10, 1993 the Minister of National Revenue per Michael Brescacin wrote to the Appellant advising that Revenue Canada had completed its review of the Appellant in respect of its 1989, 1990 and 1991 taxation years, and proposing certain adjustments accordingly (Document 14)
17. By letter dated January 18, 1994 counsel for the Appellant wrote to Mr. Brescacin's attention in response to the aforesaid Nov. 10, 1993 letter (Document 15)
18. The aforesaid letter dated January 18, 1994 constituted the first communication received by the Minister of National Revenue that the Appellant desired to have a different fiscal year end for Holdco in respect of its 1988 taxation year than the date of September 30, specified in 1988 Holdco's tax return filed January 1992 (Document 1)
19. By letter dated March 15, 1994 ... Mr. Brescacin wrote to the Appellant's counsel in response to the aforesaid January 18, 1994 letter (Document 16)
20. Appellant's counsel prepared the three income tax returns and accompanying financial statements on behalf of Holdco, filed June 1 1994, for the following three periods respectively: October 1, 1987 to October 15, 1987 (Documents 11 and 2); October 16, 1987 to October 31, 1987 (Documents 12 and 3); November 1, 1987 to September 29, 1988 (Documents 13 and 4)
21. In January 1992 Holdco filed a form T2 corporate income tax return described as being in respect of the period commencing October 1, 1987 and ending on September 30, 1988 (the "Original 1988 Return"). (Document 1)
22. Holdco deducted the Interest Expense in computing income for tax purposes and reported a non-capital loss of $1,097,221 in the Original 1988 Return.
23. The Appellant deducted the calculated 1988 non-capital loss of $1,097,221 in computing taxable income in its taxation year ended September 30, 1989.
24. The Minister by way of a reassessment reflected in a notice of reassessment dated May 4, 1994, serial number 3807173 (the "First 1988 Reassessment") disallowed interest expense of $3,259,538 claimed by the Appellant in computing income in the Original 1988 Return and assessed the Appellant tax in respect of a taxation year ended September 30, 1988 (Document 7)
25. By way of a reassessment reflected in a notice of reassessment dated May 4, 1994, serial No. 3807174, ("the First 1989 Reassessment") Revenue Canada disallowed the claim by the Appellant of a non-capital loss, arising from the 1988 taxation year of Holdco in the amount of $1,097,221, in computing taxable income for the Appellant's taxation year ended September 30, 1989. (Document 9)
26. By way of a reassessment reflected in a notice of reassessment dated May 4, 1994, serial number 3807175, ("the 1990 Reassessment") Revenue Canada reassessed the Appellant as having taxable income of $5,907,551.
27. The Appellant objected to the First 1988 Reassessment, the First 1989 Reassessment, and the 1990 Reassessment.
28. The Minister further re-assessed the 1988 taxation year of Holdco, as reflected on a notice of reassessment dated May 9, 1997 (the "Second 1988 Reassessment"), which reassessment in effect confirmed the disallowance of interest expense claimed by the Appellant in respect of the 1988 taxation year of Holdco, and resulted in a non-capital loss of $499.00 being recognized for Holdco's 1988 taxation year. (Document 8)
29. The Minister further re-assessed the 1989 taxation year of the Appellant, as reflected on a notice of reassessment dated May 9, 1997 (the "Second 1989 Reassessment"), which reassessment allowed the Appellant to deduct in computing taxable income for its 1989 taxation year the non-capital loss of $499.00 determined in respect of Holdco's 1988 taxation year, and assessed the Appellant as having taxable income of $1,632,501. (Document 10)
30. The Minister confirmed the 1990 Reassessment of the Appellant on the basis that there was no non-capital loss available from the 1988 taxation year of Holdco to deduct in calculating the taxable income of the Appellant for the 1990 taxation year.
31. The period reflected on the Original 1988 Return does not represent a recognized taxation year of the Appellant.
32. On June 1, 1994 the Appellant filed on behalf of Holdco a form T2 federal corporate income tax return in respect of the period commencing October 1, 1987 and ending October 15, 1987. (Document 11)
33. On June 1, 1994 the Appellant filed on behalf of Holdco a form T2 federal corporate income tax return in respect of the period commencing October 16, 1987 and ending October 31, 1987. (Document 12)
34. On June 1, 1994 the Appellant filed on behalf of Holdco a form T2 federal corporate income tax return in respect of the period commencing November 1, 1987 and concluding on September 29, 1988. (Document 13)
35. The notices of assessment and reassessment issued by the Minister and identified as being in respect of a taxation year described as ending 30/09/88 are assessments in respect of the taxation year of Holdco commencing October 16, 1987 and ending on September 29, 1988, immediately prior to the amalgamation of Holdco and Old Sybron.
36. The Minister has at no time separately assessed Holdco in respect of the taxation year commencing October 1, 1987, and ending October 15, 1987.
37. On February 1, 1988 the shareholders of Holdco executed a resolution designating that the financial year of the Corporation shall end on the last day of September in each year. (Document 5)
The parties agree to the above as an accurate statement of facts but reserve the right to call witnesses to establish other facts.
[3]Testimony was given by Michael Brescacin, an appeals officer of Revenue Canada. He testified that he audited Old Sybron and Sybron in 1991 and audited Holdco in 1993.
[4] He stated that in January 1992 the Appellant's controller, Don McDonald sent him by facsimile the Original 1988 Return and financial statements for Holdings for the fiscal period October 1, 1987 to September 30, 1988 and that in February 1993 Mr. McDonald asked Mr. Brescacin why that return had not been assessed. Apparently it had not been assessed because only a facsimile had been filed. So Mr. McDonald filed the hard copy of that return on February 13, 1993 and it was assessed as filed in March 1993.
[5] After the foregoing there followed the letters, assessments, reassessments and returns referred to in paragraphs 16, 17, 19, 20, 24, 32, 33 and 34 of the Agreed Statement of Facts.
Issue
[6] The sole issue is whether Holdco, predecessor to the Appellant validly established the three fiscal periods indicated in the returns filed June 1, 1994. The resolution of this issue in turn will resolve the issues of the deductibility of the Interest Expense in the 1988 year and the carry forward of non-capital losses in the 1989 and 1990 years (paragraphs 9, 24, 25, 26, 28, 29 and 30 of the Agreed Statement of Facts).
Submissions of the Appellant
[7] The principal submissions of the Appellant are found in the following extracts from the Appellant's Written Memorandum:
6) It is the position of the Appellant that the Original 1988 Return filed by Holdco is in effect a nullity, and that in any event, Holdco has not established a fiscal period for the taxation year which began on October 16, 1987, and that consequently no such fiscal period adopted by the Appellant has been accepted by the Respondent for purposes of assessment.
7) It is the position of the Appellant that the alleged fiscal period of October 16, 1987 to September 29, 1988 is a fiscal period unilaterally imposed on Holdco by the Respondent, that it does not satisfy the definition of "fiscal period" found in the Act as a "period for which the accounts of the business of the taxpayer have ordinarily made up and accepted for purposes of assessment", and that accordingly it does not constitute a fiscal period or taxation year for purposes of the Income Tax Act.
8) The issue is of relevance in respect of the deductibility of interest expense incurred by Holdco on indebtedness owing to a related nonresident of Canada. Subsection 18 (4) of the Income Tax Act restricts the deductibility of interest on related nonresident debt based upon a formula which takes into account contributed surplus at the beginning of the particular taxation year. If the taxation year of Holdco which commenced on October 16, 1987 does not terminate until September 29, 1988, all interest expense incurred by Holdco on the indebtedness to the related nonresident is not deductible in that taxation year. However, if the taxation year which commenced on October 16, 1987 terminates at October 31, 1987 pursuant to the income tax returns filed by the Appellant on behalf of Holdco in 1994, then the formula applicable under subsection 18 (4) would provide that the interest expense incurred on the indebtedness to the related nonresident would be deductible for the period commencing November 1, 1987 and terminating at September 29, 1988 as a consequence of the contribution of capital of U.S. $8 million made in Holdco by its shareholder (SACCHI) on October 23, 1987.
...
23) Subsection 150 (1) of the Income Tax Act requires ... that a corporation file a return of income for each taxation year of the Corporation. The only return which has been filed by Holdco for the period of time which includes October 15 and October 16, 1987 is the Original 1988 Return. The Appellant submits that the Original 1988 Return is a nullity, and is of no effect for purposes of the Income Tax Act. The Original 1988 Return includes at least two separate taxation years, one commencing October 1, 1987 and one commencing October 16, 1987 and it does not therefore comply with requirements of subsection 150 (1) as a separate return of income for each taxation year.
A return of income for each taxation year in the case of a corporation ... shall, without notice or demand therefor, be filed with the Minister in prescribed form containing prescribed information,
Subsection 150(l) Income Tax Act
24) As a consequence of the fact that Holdco had never filed income tax returns as required by subsection 150 (1) for the taxation year which commenced October 1, 1987 and terminated on October 15, 1987 and for the taxation year which commenced on October 16, 1987, the Appellant prepared and filed the three income tax returns and accompanying financial statements on behalf of Holdco, filed June 1 1994, for the following three periods respectively:
• October 1, 1987 to October 15, 1987 (Document 2);
• October 16, 1987 to October 31, 1987 (Document 3);
• November 1, 1987 to September 29, 1988 (Document 4).
25) The first of these income tax returns reflect the normal taxation year of Holdco which began on October 1, 1987 and which was terminated as a consequence of the acquisition of control [of] Holdco on October 16, 1987.
Subsection 249(4)(a), 256(9) ...
26) The second of these income tax returns represents the taxation year which commenced on October 16, 1987 and which the Appellant chose to terminate on a normal month end at October 31, 1987, in what the Appellant considered to be compliance with the provisions of subsection 249 (4) of the Income Tax Act. Paragraph 249(4)(b) provides that "a new tax year for the corporation shall be deemed to have commenced" at the time of the acquisition.
Paragraph 249(4)(b) ...
27) The Appellant selected October 31, 1987 as a termination date for the taxation year which commenced on October 16, 1987 pursuant to the authority of paragraph 249(4)(d) of the Income Tax Act which provides that for the purpose of determining the corporation's fiscal period after the acquisition of control of the corporation, "the corporation shall be deemed not to have established a fiscal period before that time".
Where at any time control of a corporation ... is acquired by a person or group of persons, for the purposes of this Act,
...
(d) for the purpose of determining the corporation's fiscal period after that time, the corporation shall be deemed not to have established a fiscal period before that time.
Paragraph 249(4)(d)
28) The third of these income tax returns represents the taxation year which the Appellant considered to commence on November 1, 1987, as a consequence of the filing of the second of these income tax returns, and which terminated at September 29, 1988 as a consequence of the amalgamation of Holdco and Old Sybron on September 30, 1988, pursuant to the provisions of paragraph 87(2)(a) of the Act which provides that the taxation year of an amalgamating corporation "shall be deemed to have ended immediately before the amalgamation".....
...
32) That the Appellant states that Holdco cannot be taken to have adopted a fiscal period which ended at September 30, 1988 by virtue of the filing of the Original 1988 Return for two reasons. The first reason is that the Original 1988 Return is an invalid return which purported to report income for the period October 1, 1987 to September 30, 1988 and that this is not a valid taxation year as a consequence of the acquisition of control of Holdco on October 15, 1987, and the application of the provisions of subsection 249 (4) which create a taxation year ended on October 15, 1987 when read in combination with subsection 256 (9).
33) The Respondent would have the Appellant bound by a return of income which purports to be in respect of a taxation year which at law cannot exist. The Respondent would have the Appellant bound by a tax return which according to the logic of the Respondent is a return in respect of two separate taxation years, October 1, 1987 to October 15, 1987, and October 16, 1987 to September 29, 1988, when Section 150(l) of the Act specifically requires a tax return in prescribed form be filed for each taxation year.
34) [The Appellant here discusses the second reason which is not germane to the issues in dispute.]
35) The Respondent also takes the position that selection of an end of the fiscal period which began on October 16, 1987 as at the end of September, 1988 is indicated by the fact that the new amalgamated corporation filed subsequent tax returns for 1989, 1990, 1991 and the 1992 using a September year end as well.
Documents 16, p. 2, Joint Book of Documents
36) The Appellant submits that the fiscal year end of the new amalgamated corporation is irrelevant to the determination of the issue as to whether or not Holdco was entitled to file the tax return of June 1, 1994 in which it selected October 31, 1987 as the termination date of the taxation year of Holdco which began October 16, 1987. The corporation which arose from the amalgamation of Holdco and old Sybron is for income tax purposes a new and distinctive corporation separate and apart from both of its predecessor corporations regardless of the position at corporate law.
... the respondent is, for tax purposes, deemed to be a new corporation whose first taxation year is deemed to have commenced at the time of the amalgamation. As a new corporation, the appellant manifestly is not [the predecessor], whatever the situation may be under ordinary corporate law principles.
The Queen v. Pan Ocean Oil Ltd., ... 94 D.T.C. 6412, ...
37) ... The Appellant simply maintains that it has not adopted a fiscal period for the taxation year which commenced on October 16, 1987. ... Holdco did not file a return of income pursuant to section 150 for either the taxation year which commenced October 1, 1987 or the taxation year which commenced on October 16, 1987 by filing the Original 1988 Return. The first time in which proper returns of income were filed by or on behalf of Holdco for those taxation years were the returns of filed June 1, 1994 as found at [tabs] 2,3, and 4 of the Joint Book of Documents.
38) The assessment of Holdco by the Respondent is not pursuant to any return of income filed by Holdco, but rather is made pursuant to the power of the Respondent to assess the tax liability of a taxpayer whether or not a return of income has been filed.
The Minister is not bound by a return or information supplied by or on behalf of a taxpayer and, in making an assessment, may, notwithstanding a return or information so supplied or if no return has been filed, assess the tax payable under this Part.
Subsection 152(7)
39) In view of the fact that the assessment of Holdco arises pursuant to the power to assess whether or not a return of income has been filed, and no proper return of income has been filed in respect of the period October 16, 1987 to September 29, 1988, Holdco cannot be found to have satisfied the conditions of the definition of "fiscal period" in subsection 248(l) of the Income Tax Act.
...
41) The Respondent asserts at paragraph 14 of the [Reply] that the Appellant has submitted revised year ends solely for the purpose of circumventing the application of subsection 18 (4) of the Income Tax Act. The Appellant states that in view of the fact that Holdco had not previously selected or adopted a fiscal year end for the taxation year which commenced on October 16, 1987, the Appellant was free to do so. The Appellant states that whether or not minimizing the disallowance of interest expense pursuant to subsection 18 (4) was a motivating factor in the choice of year ends is an irrelevant consideration. The Supreme Court of Canada has repeatedly upheld ... the right of taxpayers to organize their affairs so is to minimize the tax which would otherwise arise.
"The fact that the directors of the company may have intended to obtain a tax savings by acquiring the asset is irrelevant. It is a fundamental principle of tax law that "every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it would otherwise be ".
Hickman Motors Limited v. Her Majesty The Queen [1997] 11 C.T.C. 213 (Supreme Court of Canada), paragraph 8
"Finally, it is important to remember that this Court held unanimously in Stubart, supra, at p. 5 75, that a transaction should not be disregarded for tax purposes because it has no independent or bona fide business purpose... Thus, taxpayers can arrange their affairs in a particular way for the sole purpose of deliberately [availing] themselves of tax reduction devices in the ITA. "
Melville Neuman v. Her Majesty The Queen 1998 CarswelI Nat 685, [1998] 3 C.T.C. 177 (Supreme Court of Canada), paragraph 39
Submissions of the Respondent
The principal submissions of the Respondent are found in the following extracts from the Respondent's Written Memorandum:
6. Holdco established a fiscal period and taxation year-end of September 30 upon the filing of a tax return for the period commencing on its November 12, 1986 incorporation, and terminating on September 30, 1987 Reply, para. 9(e);
7. Old Sybron also had a fiscal period ending September 30 for accounting and tax purposes (Reply, para. 9(k));
...
9. The Appellant established and has continued with a fiscal year end of September 30 for accounting and tax purposes (Reply, para. 9(l));
...
17. The US $8 million could not be considered "contributed surplus" and as such part of Holdco's equity for purposes of subsection 18(4) as it was not held by Holdco at the beginning of the fiscal year Holdco had reported (Brescacin testimony);
...
25. The effect of interposing a taxation year end of October 23, 1987 (or October 30, 1987 as was ultimately filed) for Holdco would be that the aforesaid application of subsection 18(4) of the Act would be circumvented. The opening "contributed surplus" for the new year (e.g. starting October 24) would be US $8 million which would assist the three to one ratio specified by subsection 18(4), allowing the Appellant a much larger portion of the Interest Expense claimed and denied for, that year (none of which was incurred prior to October 23, 1987) (Brascacin testimony);
26. The Minister's view is that starting a new taxation year, with October 16, 1987 and running to September 29 or 30 1988 would still result in Holdco's contributed surplus at the beginning of the last taxation year-prior to September 30, 1988 amalgamation to, be zero as the US $8 million was not injected until October 23, 1987 (Brescacin testimony);
...
Issue:
29. The issue is whether the Appellant can, without the Minister's concurrence, retroactively alter its fiscal period by [inserting] a new fiscal period (October 16 to 31, 1987) within a previously reported fiscal period with [a] September year end?
Legal Submissions:
30. The request by the Appellant for a revised year end ending on October 31, 1987 was made after Holdco had filed a corporate income tax return in respect of the period commencing October 1, 1987 and ending September 30, 1988, and after the Appellant had been both assessed (March 17, 1993) and reassessed (May 4, 1994) in respect of same;
31. The Respondent submits that the period commencing October 16, 1987 and ending October 31, 1097 is invalid as given that Holdco had previously selected a fiscal period ending at September end for 1987 and 1988, the Appellant on behalf of Holdco cannot select a new fiscal period retroactively;
32. Further, the Respondent submits that these revised year ends were selected by the Appellant for the sole purpose of circumventing the application of subsection 18(4) of the Act with respect to the Interest Expense.
...
34. In the Oudot case the taxpayer started a farm implement business in August 1962 and adopted March 31 as the end of his fiscal year. For his 1964 return a new accountant overlooked the established year end and included profits for a period ending December 31. Mr. Weldon of the Tax Review Board held inter alia there had been no effective change in the taxpayer's fiscal period, as there was no basis for concluding, given the definition of "fiscal period", that the Minister had given his concurrence. to a change of fiscal, period. In, his reasons for judgment Mr. Weldon 'adopted the following statement re the definition of "fiscal period":
The purpose of this definition is to permit flexibility in establishing a fiscal period without allowing it to lead to abuses. As a general rule, a taxpayer may adopt any date he chooses on which to close his books and make up his accounts for the period then ended, which the Act refers to throughout as the 'fiscal period'. A fiscal period may be shorter than a year but it may not be longer (with a minor exception in the case of corporations ... ). Once a fiscal period has been adopted, it must be adhered to for income purposes until the Minister's approval for a change to a different fiscal period is obtained. This latter provision is designed to prevent taxpayers from changing fiscal periods in such a way as to shift profits from one calendar year to another in order to take advantage of announced or anticipated changes in income tax rates.
Fiscal periods are usually adopted to coincide with the taxpayer's natural business cycle, or to end when inventories are at their lowest ebb, and a change in fiscal period to better achieve such an end will normally be readily concurred in by the Minister. ...
It is not stipulated that the concurrence of the Minister must be obtained first, before a change is made, but merely that no change that is made will be accepted for income tax purposes unless it is concurred in. Any change for sound business reasons may be expected to be approved in retrospect, once concurrence is requested.
Oudot v. MNR., [1970] Tax A.B.C. 915 (T.R.B.), paras. 6, 14, 15
35. Mr. Weldon further observed:
On the basis of the statement quoted above, it is quite apparent that the changing of the established and accepted fiscal period, or year end of a business and the adoption of another fiscal period or year end therefor is not a simple step to, be casually and, unilaterally taken by a taxpayer, but one which bristles with problems and one which can only be taken and acted on for tax purposes after the matter has been laid before the Minister, and he has given his concurrence thereto under Section 139(1)(i) of. the Act [predecessor of the present subsection 248(1)] definition of "fiscal period"]. In other words, one would assume as a matter of course that the all-important 'concurrence of the Minister', which is a statutory condition imposed by parliament, is only obtained by a taxpayer by making, application therefor to the Minister who, obviously, must be satisfied before granting his concurrence thereto that the taxpayer knows what he is doing, and that his reasons for requesting the changeover to a new fiscal period or year end for his business are sound and convincing and not objectionable in any way, bearing in mind the above-mentioned statutory requirement with regard to the obtaining of the Minister's concurrence to the changing of an established and accepted fiscal period or year end of a business... [italics added]
Ibid., para. 16
36. The Holdco September 30, 1988 Tax return is not a nullity. It does contain certain legal errors due to non-recognition that by virtue of Holdco's acquisition by SACCHI on October 15, 1987 Holdco's control changed and so it commenced a new fiscal period on that date by virtue of subsection 249(4) of the Act. And likewise, by virtue of its amalgamation on September 30, 1988, Holdco's last fiscal period ended September 29, 1988 in accordance with paragraph 87(2)(a) of the Act;
37. However neither of those errors can deflect the fact that by that return Holdco adopted, or more accurately, continued its practice of closing its accounting books for tax purposes at the end of each September, not at the end of October as retroactively sought for 1987 by the Appellant in 1994;
38. Indeed it is not clear given the definition of "fiscal period" that even the minister can give concurrence to retroactive changes. In this case it is to be remembered that the Holdco September 30, 1988 tax return had already been both assessed and reassessed before the Appellant's altered tax returns were filed June 1, 1994;
39. The Appellant is raising its own legal errors to avoid application of the definition of "fiscal period", so as to engage in retroactive tax planning to have the Interest Expense allowed. Ironically the very purpose of the requirement in the '"fiscal period" definition for the Minister's concurrence is to prevent such abuses, to the integrity, of the federal fisc;
40. Just, as the law is the basis for identifying the legal errors, the Appellant, itself made and is now seeking to shelter under, so too is the law the source of the definition of "fiscal period" The purpose of this definition was clearly elaborated upon in the Oudot case, supra. This law should be, fully applied in furtherance of that purpose, to prevent taxpayer abuses,
41. That purpose would be completely frustrated, and the income tax system opened to substantial, abuse, were the Appellant's position permitted.
Analysis and Decision
[8] Subsection 248(1) of the Act defines "fiscal period" as the period for which the accounts of the business have been ordinarily made up and accepted for purposes of assessment under the Act and, in the absence of an established practice, the fiscal period is that adopted by the taxpayer but no fiscal period may exceed in the case of a corporation 53 weeks and no change in a usual and accepted fiscal period may be made without the concurrence of the Minister.
[9] The meaning of "fiscal period" was considered in a number of cases, mostly before the former Tax Appeal Board. All of the cases stood for the proposition that where the taxpayer had established a fiscal period, that period could not be changed, except with the concurrence of the Minister; see, for example, Oudot cited above.
[10] In Bishay v. M.N.R., 95 DTC 5619, a more recent decision of the Federal Court Trial Division, Mackay, J. said the following in regard to fiscal periods:
In addition, once the Minister has assessed a taxpayer on the basis of a fiscal year for the purposes of one taxation year, the fiscal period has been 'established' for the purposes of the Act and the Minister is entitled to assess the taxpayer using the same fiscal period the following year: Vumbaca v. M.N.R. (1967), 67 DTC 365 (Tax App. Bd.).
[11] In the present case I do not believe that the Appellant established a fiscal year upon which the Minister could rely in assessing. Through no decision of the taxpayer, and solely through operation of the Act, the taxation year of Holdco was deemed to have ended immediately prior to the change of control which occurred on October 16, 1987. In my opinion, it was open to the Appellant to establish a fiscal period for the new taxation year commencing on October 16, 1987, and there was no established practice to lead the Minister to the conclusion that that taxation year was in respect of the fiscal period October 16, 1987 to September 29, 1988.
[12] Further, in my opinion, no fiscal period after October 15, 1987 was accepted by the Minister except the one for the period October 15, 1987 to September 30, 1988, based on the taxpayer's Original 1988 Return which was erroneous in that it included two taxation years, and exceeded 53 weeks. The first taxation year ended October 15, 1987 as a result of the acquisition of control of Holdco. The second commenced October 16, 1987. Thus the Original 1988 Return was erroneous as were the assessments and reassessments based thereon.
[13] Moreover, the choice of September 30 as the year end on Holdco's initial return and the choice of that same day by the Appellant for years after the period under consideration are irrelevant.
[14] There was no need for the Minister's concurrence to the fiscal period adopted by the taxpayer, i.e., October 16, 1987 to October 31, 1987 because it was not the result of a change desired by the taxpayer of an established fiscal year. No fiscal period for the year commencing October 16, 1987 was ever established until the returns filed in 1994. Paragraph 249(4)(d) of the Act states clearly that after a change of control the corporation shall be deemed not to have established a fiscal period before that time.
[15] Again, I can find no provision in the Act establishing time limits on the Appellant for the choice of fiscal years it made in June 1994.
[16] Although not critical to this judgment, I note the following:
Subsection 18(4) of the Act restricts a deduction for interest paid or payable by a corporation resident in Canada in a taxation year on debts owing to specified non-residents if the ratio of those debts to the corporation's equity exceeds three to one. The rules contained therein are referred to as the "thin capitalization rules", which were commented upon by Reed, J., in Uddenholm Limited v. The Queen, 87 DTC 5431 (F.C.T.D.), wherein she said the following at 5432:
There is no dispute as to the purpose of subsections 18(4) to (8) of the Income Tax Act, R.S.C. 1952, c. 148 as amended. Those provisions are directed at preventing non-residents of Canada who own significant shareholdings (generally over 25%), in Canadian resident corporations, from withdrawing the profits of the Canadian corporation in the form of interest payments rather than in the form of dividends paid on the shares of the corporation. I quote from page 4423 of the CCH Canadian Tax Service:
Both interest and dividends paid to non-residents are subject to withholding tax under Part XIII but since interest is, but for the limitation in subsection 18(4), deductible in computing the income of the resident corporation subject to Canadian tax, it would clearly be to a non-resident's advantage to finance the operation of a Canadian resident corporation through interest bearing debt rather than through share capital, which would lead to the establishment of thinly capitalized corporations.
[17] Had the $8 million capital contribution by SACCHI been made a mere seven or eight days earlier, Holdco would have been entitled to the Interest Deduction without the necessity of adopting the fiscal periods which the Minister wants to disallow.
[18] For the above reasons, the appeals are allowed with costs.
Signed at Ottawa, Canada this 4th day of June, 1999.
"T.P. O'Connor"
J.T.C.C.