Supreme Court of Canada
Midwest Hotel Co. v. Minister of National Revenue, [1974] S.C.R. 1119
Date: 1972-10-18
Midwest Hotel Company Limited Appellant;
and
The Minister of National Revenue Respondent.
1972: May 4; 1972: October 18.
Present: Abbott, Judson, Ritchie, Spence and Pigeon JJ.
ON APPEAL FROM THE EXCHEQUER COURT OF CANADA
Taxation—Income tax—Capital cost allowance—Depreciable assets—Assets used in different businesses—“Class”—“Prescribed class”—Recapture of allowance—Income Tax Act, R.S.C. 1952, c. 148, ss. 11(1)(a), 12(1)(a), 12(1)(b), 20(1), 20(2), 139(1)(a), 139(1)(b)—Income Tax Regulations—Validity of Regulation 1101(1).
In its 1963 taxation year appellant sold a hotel business, including building and equipment. Later in the same taxation year, it purchased other assets of the same classes as the depreciable assets included in the sale. Respondent ruled that pursuant to s. 1101(1) of the Regulations, the business sold and the business purchased were different businesses and recaptured the capital cost allowance amounting to $306,237 arising from the sale of the first business. The Tax Appeal Board held that Income Tax Regulation 1101(1) was ultra vires as conflicting with s. 20(2) of the Act. This decision was reversed by the Exchequer Court. Hence the appeal to this Court.
Held (Pigeon J. dissenting): The appeal should be dismissed.
Per Abbott, Judson, Ritchie and Spence JJ.: By s. 11(1)(a) of the Act, the taxpayer may deduct, in computing its income, only such part of its capital cost “as is allowed by regulation”. This is an exception to the general rule of disallowance of capital cost contained in s. 12(1)(a) and s. 12(1)(b) of the Act. Regulation 1101(1) is just as much a part of the definition of classes as is Regulation 1100. What would be property of the same class, if Regulation 1100 alone were considered, becomes property of a separate class, if the case falls within Regulation 1101(1). This Regulation is stated in plain terms: “a
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separate class is hereby prescribed” for properties used in different businesses or acquired for income purposes. Section 1101(1) applies in every case where a taxpayer carries on more than one business or where a taxpayer, in addition to business assets, owns non-business assets in respect of which he is entitled to claim capital cost allowance.
Per Pigeon J., dissenting: The concept of “class” implies a plurality of objects possessing common attributes and the definition of a class is a selection of those attributes. To consider each object individually is the very antithesis of defining a class. The reference to a “prescribed class” in s. 20(1) cannot be construed as authorizing Regulation 1101(1). To prescribe “a separate class” for a particular thing is not to prescribe a class at all but to order that such thing is to be taken out of the class and considered by itself. Regulation 1101(1) is not a regulation prescribing a class as contemplated in s. 20(1), but an amendment of that section providing in substance that, in the case of properties acquired for the purpose of gaining or producing income from a business, the recapture provision shall apply to the proceeds of disposition in excess of the undepreciated cost of that property rather than to the excess over undepreciated capital cost of depreciable property of that class.
A regulation is invalid if not within the scope of the enabling enactment. It is therefore necessary to look at the true nature and effect of the regulation in question. Here the Court must apply the same rules as in adjudicating on the constitutional validity of legislation. The settled principle that calls for a determination of the “real character”, the “pith and substance”, of what purports to be enacted and whether it is “colourable” or is intended to effect its ostensible object, means that the true nature of the legislative act, its substance in purpose, must lie within the endowment of legislative power. The substance of Regulation 1101(1) is not the allocation of deductions from income on account of the capital cost of assets acquired for business use.
APPEAL from a judgment of the Exchequer Court of Canada, reversing a decision of the Tax Appeal Board. Appeal dismissed, Pigeon J. dissenting.
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C.L. Dubin, Q.C., for the appellant.
G.W. Ainslie, Q.C., for the respondent.
The judgment of Abbott, Judson, Ritchie and Spence JJ. was delivered by
JUDSON J.—The Tax Appeal Board held that Income Tax Regulation 1101(1) was ultra vires as conflicting with s. 20(2) of the Act. In doing so it followed a line of its own decisions going back to 1962 which were uniform with one exception. The decision of the Board was reversed in the Exchequer Court. The issue is squarely in this Court for the first time and my opinion is that the judgment of the Exchequer Court should be affirmed. The case has been argued throughout on an agreed statement of facts which require a brief summary.
In its 1963 taxation year, Midwest sold a hotel business, including building and equipment. The depreciable assets included in the sale were within classes 3 and 8. Later in the same taxation year, it purchased other assets in these classes. The Minister ruled that pursuant to s. 1101(1) of the Regulations, the business sold and the business purchased were two different businesses and recaptured the capital cost allowance amounting to $306,237 arising from the sale of the first business. The company contended that Regulation 1101(1) was ultra vires and that there should be no recapture of capital cost allowance in 1963. Its argument was that since the assets of the business sold and the business purchased came within the same classes (classes 3 and 8), the amount recaptured should be applied to reduce the undepreciated capital cost of the new assets in the same classes in accordance with s. 20(2) of the Act. This is the issue and its outcome depends upon the validity of s. 1101(1) of the Regulations.
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The Minister’s position is stated in his notification to the taxpayer under s. 58 of the Act:
The Honourable the Minister of National Revenue having reconsidered the assessment and having considered the facts and reasons set forth in the Notice of Objection hereby confirms the said assessment as having been made in accordance with the provisions of the Act and in particular on the ground that the property of the taxpayer acquired for the purpose of gaining or producing income from the hotel business and the property of the taxpayer acquired for the purpose of gaining or producing income from the business of leasing fixed assets were separate classes within the meaning of subsection (1) of section 1101 of the Income Tax Regulations and accordingly the amount of $315,842.97 has been properly included in computing the taxpayer’s income for the 1963 taxation year in accordance with the provisions of subsection (1) of section 20 of the Act.
Section 20(1) of the Act provides that where depreciable property has been disposed of in a taxation year and the proceeds exceed the undepreciated capital cost of the depreciable property, the amount of the excess shall be “recaptured” and shall be included in computing the income for the year.
Subsection (2) of s. 20 operates to prevent immediate taxation where other property of the same class is acquired in the same year by providing that the otherwise recapturable amount be applied to reduce the undepreciated capital cost of the new assets of the same class so that recapture does not take place until all the assets of that class have been disposed of.
The fallacy in the taxpayer’s argument is that by s. 11(1)(a) of the Act, it may deduct, in computing its income, only such part of its capital cost “as is allowed by regulation”. This is an exception to the general rule of disallowance of capital cost contained in s. 12(1)(a) and s. 12(1)(b) of the Act. Regulation 1101(1) is just as much a part of the definition of classes as is Regulation 1100. What would be the property of
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the same class, if Regulation 1100 alone were considered, becomes property of a separate class, if the case falls within Regulation 1101(1). This Regulation is stated in plain terms:
1101. (1) Where more than one property of a taxpayer is described in the same class in Schedule B and where
(a) one of the properties was acquired for the purpose of gaining or producing income from a business, and
(b) one of the properties was acquired for the purpose of gaining or producing income from another business or from the property,
a separate class is hereby prescribed for the properties that
(i) were acquired for the purpose of gaining or producing income from each business, and
(ii) would otherwise be included in the class.
There can be no doubt about the meaning and effect of this Regulation. It is part and parcel of the whole system of regulation for the prescribing of classes of assets for the purpose of the capital cost allowance which may be claimed under the provisions of the Act. The clear and unambiguous words of the section are that “a separate class is hereby prescribed” for properties used in different businesses or acquired for income purposes. Such a classification is to be applied for all purposes. It is not one which comes into play only when there is a possibility of avoiding recapture under s. 20 of the Act.
Section 1101(1) applies in every case where a taxpayer carries on more than one business or where a taxpayer, in addition to business assets, owns non-business assets in respect of which he is entitled to claim capital cost allowance. It applies with respect to the computation of the capital cost allowance, the recapture of capital cost, and the deduction of terminal losses. There is, therefore, in my opinion, no question of conflict between the Act and the Regulations and therefore no question of invalidity.
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I would dismiss the appeal with costs.
PIGEON J. (dissenting)—Section 11(1)(a) of the Income Tax Act reads:
11. (1) Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year:
(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation;
Part XI of the Income Tax Regulations entitled “Allowances in respect of Capital Cost” opens with the following provision:
1100. (1) Under paragraph (a) of subsection (1) of section 11 of the Act, there is hereby allowed to a taxpayer, in computing his income from a business or property, as the case may be, deductions for each taxation year equal to
(a) such amount as he may claim in respect of property of each of the following classes in Schedule B not exceeding…
Then follows Regulation 1101(1):
1101. (1) Where more than one property of a taxpayer is described in the same class in Schedule B and where
(a) one of the properties was acquired for the purpose of gaining or producing income from a business, and
(b) one of the properties was acquired for the purpose of gaining or producing income from another business or from the property,
a separate class is hereby prescribed for the properties that
(i) were acquired for the purpose of gaining or producing income from each business, and
(ii) would otherwise be included in the class.
The issue in this case is whether this provision of the Regulations was validly enacted under the authority of the Act or whether it is in
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fact an invalid attempt to alter the effect of s. 20(1) of the Act which is as follows:
20. (1) Where depreciable property of a taxpayer of a prescribed class has, in a taxation year, been disposed of and the proceeds of disposition exceed the undepreciated capital cost to him of depreciable property of that class immediately before the disposition, the lesser of
(a) the amount of the excess, or
(b) the amount that the excess would be if the property had been disposed of for the capital cost thereof to the taxpayer,
shall be included in computing his income for the year.
To support the validity of Regulation 1101(1) it is said to be a part of the definition of classes of depreciable property. I cannot agree with this contention for two reasons.
In the first place, one must consider the meaning of the word “class”. In the Oxford Dictionary I find:
6. gen. A number of individuals (persons or things) possessing common attributes, and grouped together under a general or ‘class’ name; a kind, sort, division. (Now the leading sense.)
In my view, the concept of “class” implies a plurality of objects possessing common attributes and the definition of a class is a selection of those attributes. I therefore fail to see how a direction that, under some circumstances, each single object shall form “a separate class” can properly be said to be a definition of a class. To consider each object individually is the very antithesis of defining a class.
In fact, it appears to me that the prescribing of “a separate class” is really nothing else than the elimination of the specified objects from the specified class. The essential purpose of the impugned regulation is to provide that for recaptured taxation (s. 20(1)), properties acquired for a business shall be considered separately from
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other properties of the same class that were not acquired for that same business. No other effect has been shown. Except under very special circumstances, it does not affect the amount that can be claimed as a deduction. In Minister of National Revenue v. Wahn[1], the majority held that, as a general rule, all business losses are to be taken into account in computing the income for a given year. This, of course, results in a taxpayer being entitled to claim capital cost allowance in respect of any property acquired for the purpose of a business, even when he has no profit from that business, because the loss can be set off against other income. It does not seem to me that this result is affected by ss. 139 (1)(a) and (1)(b) enacted in 1960. These provisions have application when income from a specific source is to be separately ascertained or dealt with. The general rule remains that the tax is levied on income from all sources after proper deductions.
It is clear in the present case, as it was in cases decided by the Board in previous years, that the question is not a matter of allocation in respect of capital cost. The question is whether a capital receipt which is not income of the taxpayer, is to be taxed as income by virtue of s. 20(1). Concretely the question is whether a sum of $306,237.80 is to be added to the taxpayer’s income as “capital cost recovery on disposal of Airport Hotel”, thus adding $153,983.51 to the income tax payable for the year in question.
I cannot construe the reference “to a prescribed class” in s. 20(1), as authorizing the impugned regulation. By virtue of s. 139(1)(af) “prescribed year” means “prescribed by regulation”. However, the reference is to a class and, as previously noted, this implies a category of things described by some common attributes. To prescribe “a separate class” for a particular thing is not to prescribe a class at all but to
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order that such thing is to be taken out of the class and considered by itself.
I am, therefore, driven to the conclusion that Regulation 1101(1) is not a regulation prescribing a class as contemplated in s. 20(1), but an amendment of that section providing in substance that, in the case of properties acquired for the purpose of gaining or producing income from a business, the recapture provision shall apply to the proceeds of disposition in excess of the undepreciated cost of that property rather than to the excess over undepreciated capital cost of depreciable property of that class.
It is obvious that a regulation is invalid if not within the scope of the enabling enactement: Booth v. The King[2], Bélanger v. The King[3], Re Gray[4]. In the application of this principle, it is necessary to look at the true nature and effect of the regulation in question. I can see no reason why the same rules should not apply as in adjudicating on the constitutional validity of legislation. The problem is essentially the same namely, the scope of the allocation of legislative authority. If anything, the rules should be more strictly applied in the case of this delegation to the executive seeing that taxing statutes are to be construed strictly, while constitutional enactments are to be construed broadly. Among the many statements of the “pith and substance” rule, I would like to quote the following from the reasons of Rand J. in Switzman v. Elbling[5]:
The settled principle that calls for a determination of the “real character”, the “pith and substance”, of what purports to be enacted and whether it is “colourable” or is intended to effect its ostensible object, means that the true nature of the legislative act, its substance in purpose, must lie within s. 92 or some other endowment of provincial power.
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In my view, the substance of Regulation 1101(1) is not the allocation of deductions from income on account of the capital cost of assets acquired for business use.
I would allow the appeal, reverse the judgment of the Exchequer Court and restore the decision of the Tax Appeal Board with costs in both courts.
Appeal dismissed with costs, PIGEON J. dissenting.
Solicitors for the appellant: Harrison, Elwood, Gregory, Littlejohn & Fleming, London.
Solicitor for the respondent: D.S. Maxwell, Ottawa.