Tax Court of Canada Judgments

Date: 19980702

Docket: 96-4254-IT-G

BETWEEN:

ELAN DEVELOPMENT LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Hamlyn, J.T.C.C.

[1] These appeals are in respect of the Appellant’s 1991, 1992 and 1993 taxation years.

[2] In computing income for the 1991, 1992 and 1993 taxation years, the Appellant, Elan Development Ltd. (“Elan”), claimed the small business deduction.

[3] In reassessing the Appellant for the 1991, 1992 and 1993 taxation years, the Minister of National Revenue (the “Minister”) disallowed the said deduction.

FACTS

[4] At the hearing, the parties filed a Statement of Agreed Facts. It reads:

1. The Appellant, Elan Development Ltd., was incorporated pursuant to the law of the Province of Manitoba;

2. Throughout 1991, 1992 and 1993, 67847 Manitoba Ltd., incorporated pursuant to the laws of Manitoba, was the sole shareholder of the Appellant;

3. Throughout 1991, 1992 and 1993, Norbert Hansch was the sole shareholder of 67847 Manitoba Ltd.;

4. Ernst Hansch Construction Ltd. was incorporated pursuant to the laws of the Province of Manitoba;

5. Throughout 1991, 1992 and 1993, 50% of the shares of Ernst Hansch Construction Ltd. were owned by NH and 21% were owned by MP.

6. MP is the brother-in-law of NH and was so related throughout 1991, 1992 and 1993.

7. In computing income for the 1991, 1992 and 1993 taxation years, the Appellant claimed the small business deduction.

8. By Notices of Reassessment dated July 31, 1995 the Minister of National Revenue reassessed the Appellant on the basis that it was associated with Ernst Hansch Construction Ltd. throughout the taxation years 1991, 1992 and 1993 by reason of paragraph 256(1)(d) of the Income Tax Act R.S.C. 1985, chapter 1 (5th Supp.) (the “ACT”) and disallowed the said deduction.

9. On October 30, 1995, the Appellant filed Notices of Objection with the Minister of National Revenue, objecting to the said reassessments.

10. By Notification dated August 14, 1996 the Minister confirmed the said reassessment pursuant to paragraph 256(1)(d) and subsection 125(3) of the Act.

ISSUE

[5] The issue in these appeals is whether paragraphs 251(6)(a) and (b) and subparagraph 55(5)(e)(i) of the Income Tax Act (the “Act”) are contrary to section 15 of the Canadian Charter of Rights and Freedoms (the “Charter”) and as a result whether the Appellant is thus entitled to the small business deduction.

ANALYSIS

[6] Section 125 of the Act allows a Canadian-controlled private corporation to deduct a business limit of $200,000.

[7] The purpose of section 125 is to give preferential tax treatment to Canadian-controlled private corporations including the small business deduction. However, by virtue of the provisions of section 125 and in particular subsections 3 and 4 thereof, that deduction cannot be shared by companies that are associated.

[8] The purpose of section 256 of the Act is to discourage the multiplication of corporations carrying on business in order to get greater advantage from the lower tax rate.

[9] In this case, the Appellant claimed the said deduction. The Minister disallowed the deduction on the basis that the Appellant is an associated corporation as defined by paragraph 256(1)(d) of the Act. Consequently, pursuant to subparagraphs 251(6)(a) and (b), the shareholders of Ernst Hansch Construction Ltd., Mr. Norbert Hansch and his brother-in-law, Mr. Manfred Pflug, are connected.

[10] The Appellant submits that paragraphs 251(6)(a) and (b) of the Act violate subsection 15(1) of the Charter.[1] Paragraphs 251(6)(a) and (b) of the Act deem brothers and brother-in-laws to be related and thus not dealing at arm’s length. The Appellant argues that these provisions discriminate brothers and brother-in-laws from other taxpayers. In addition, the Appellant alleges discrepancy of treatment in the Act. It submits that while paragraphs 251(6)(a) and (b) deem brothers and brother-in-laws to be related, subparagraph 55(5)(e)(i) of the Act deems brothers and sisters to be not related with each other.

[11] Subsection 55(2) of the Act is an anti-avoidance provision which has the effect of converting certain tax-free dividends into (taxable) capital gains. The object is to prevent capital gains stripping.

[12] The Minister’s reassessment does not rely on subparagraph 55(5)(e)(i). As it was not relied on by the Minister to reassess the Appellant, there is no factual foundation upon which the Court can determine the constitutionality of that section. Charter decisions are not made in the factual vacuum.[2] Moreover, this subparagraph was not in force during the material taxation years.

[13] Section 256 of the Act provides for circumstances in which two corporations are associated. In the case at bar, the Appellant is an associated corporation under paragraph 256(1)(d) of the Act. The purpose of the rules provided in section 256 is to prevent the multiplication of the small business deduction through the use of more than one corporation to carry on business activities. Paragraph 256(1)(d) of the Act refers to the concept of ‘related persons’. This term arises in a number of provisions in the Act. Most of these provisions are designed to prevent tax avoidance. The different groups of persons enumerated under subsection 251(6) of the Act are deemed to be related, thus not dealing with each other at arm’s length. Accordingly, if two or more persons are related as defined in subsection 251(6), they will not be dealing at arm’s length, regardless of the actual dealings between them.

[14] In determining whether a provision violates subsection 15(1) of the Charter, the Supreme Court of Canada established a test in Andrews v. Law Society of British Columbia, [1989] 1 S.C.R. 143. At pages 174-175, McIntyre, J. gave the following definition of discrimination:

I would say then that discrimination may be described as a distinction, whether intentional or not but based on grounds relating to personal characteristics of the individual or group, which has the effect of imposing burdens, obligations or disadvantages on such individual or group not imposed upon others, or which withholds or limits access to opportunities, benefits, and advantages available to other members of society. Distinctions based on personal characteristics attributed to an individual solely on the basis of association with a group will rarely escape the charge of discrimination, while those based on an individual’s merits and capacities will rarely be so classed.

[15] In Ontario Public Service Employees Union et al. v. The National Citizens Coalition Inc. et al., 87 DTC 5270 (Ont. H.C.), affirmed by the Ontario Court of Appeal (90 DTC 6326), Galligan, J. of the Ontario High Court comments at page 5272:

The Income Tax Act is full of examples where one taxpayer for certain reasons has certain deductions which another taxpayer does not have. Also, certain taxpayers are called upon to pay more taxes than others. Some taxpayers are called upon to pay taxes at a higher rate than others.

[16] Undoubtedly, paragraphs 251(6)(a) and (b), as well as subparagraph 55(5)(e)(i), of the Act do make a distinction between persons related by blood or marriage from other taxpayers. The same issue has been raised in different cases. The question of discriminatory distinction in the Act was dealt with in The Queen et al. v. Thibaudeau, 95 DTC 5273 (S.C.C.). The Supreme Court of Canada held that the creation of distinctions is inherent in the Act and does not violate section 15 of the Charter. Gonthier, J. stated at page 5280 that:

It is of the very essence of the ITA to make distinctions, so as to generate revenue for the government while equitably reconciling a range of necessarily divergent interests. In view of this, the right to the equal benefit of the law cannot mean that each taxpayer has an equal right to receive the same amounts, deductions or benefits, but merely a right to be equally governed by the law. The basic purpose of s. 15 of the Charter was explained by McIntyre, J. in Andrews,supra, at p. 171:

It is clear that the purpose of s. 15 is to ensure equality in the formulation and application of the law. The promotion of equality entails the promotion of a society in which all are secure in the knowledge that they are recognized at law as human beings equally deserving of concern, respect and consideration.

That being the case, one should not confuse the concept of fiscal equity, which is concerned with the best distribution of the tax burden in light of the need for revenue, the taxpayers’ ability to pay and the economic and social policies of the government, with the concept of the right to equality, which as I shall explain in detail later means that a member of a group shall not be disadvantaged on account of an irrelevant personal characteristic shared by that group.

[17] A similar issue was dealt with in Laflamme v. M.N.R., 93 DTC 50 (T.C.C.). Watson, D.J.T.C.C. examined the constitutionality of subsection 15(2) of the Act which refers to the concept of ‘related persons’ under subsection 251(1) of the Act. At page 53, he says:

A distinction made on the basis of a blood relationship or dependence to a shareholder is directly relevant to this purpose. It follows that the legislator has distinguished shareholders and persons connected to shareholders in this Act because they are best placed to take advantage of their controlling position.

[18] And at pages 53-54, he says:

Under subsection 15(2) of the Income Tax Act, all shareholders and persons connected with a shareholder are treated in the same way without discrimination based on one of the grounds of discrimination mentioned in subsection 15(1) of the Charter or a ground similar to those mentioned. The fact hat a “connected” person is treated differently from a person not so connected, or that a shareholder or employee receives different treatment from someone not a shareholder or employee, is not discrimination. Within the class of persons affected by subsection 15(2) of the Income Tax Act, there is equal treatment, equal protection and equal benefit without discrimination.

[19] Furthermore, it is well established that section 15 is limited to individuals and does not apply to corporations like the Appellant. In Edmonton Journal v. Alta. (A.G.), [1989] 2 S.C.R. 1326, the Appellant argued that section 30 of the Alberta Judicature Act contravenes subsection 2(b) and section 15 of the Charter which respectively guarantee the right of freedom of expression and legal equality. While the Supreme Court of Canada held that section 30 of the Alberta Judicature Act infringes subsection 2(b) of the Charter, LaForest, J. concluded, at page 1382, that “s. 15 [of the Charter] is limited to individuals, it does not apply to corporations like the appellant”. Therefore, section 30 of the said Act does not infringe section 15 of the Charter. See Canada (Minister of Industry, Trade and Commerce) v. Central Cartage Co. et al (No. 1) 109 N.R. 357 (F.C.A.).

[20] Notwithstanding this jurisprudence the Appellant submits this case is a unique circumstance and the Charter applies because the corporation’s status is based on individuals. This may be a unique circumstance, but this does not change the fact that the Charter does not protect corporations.

[21] Hence, I conclude that individual distinctions affecting the Appellant’s status does not bring it under the Charter.

SUMMARY

[22] The constitutionality of section 55(5)(e)(i) cannot be considered by this Court as it was not the basis of the assessment in dispute and notwithstanding a corporation is not protected by the Charter.

[23] The comparison section 15 analysis undertaken in relation to subsections 251(6)(a) and (b) by the Appellant in its submission pursuant to the tests set forth in Andrews (supra) and Thibaudeau (supra) lead to a conclusion the Act makes distinctions but those distinctions are not based on irrelevant personal differences. As such, those distinctions are not discriminatory within the meaning of subsection 15(1) of the Charter.

[24] Lastly, as set forth the Charter does not confer protection to corporations.

[25] Thus, I conclude, for these reasons, that there is no infringement of section 15 of the Charter.

DECISION

[26] The appeals are dismissed.

Signed at Ottawa, Canada, this 2nd day of July 1998.

“D. Hamlyn”

J.T.C.C.

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