The matter of fictions in our Tax Act was on my mind this week. Second Life has nothing on the Income Tax Act when it comes to creating a virtual reality. I’m thinking of the various tax rules that deem something to be one thing for tax purposes when the thing otherwise has no existence in reality as we know it. Take as just one example the rule that says changing the use to which property is put may be regarded as a sale for tax purposes. In the tax world, the deemed sale can mean taxes are payable even though there has been no sale in fact and no cash realized. (I’ll not go into the various exceptions/elections this sort of rule requires to avoid absolute chaos amongst people living in the real world.) There are many of these deeming rules sprinkled throughout the Tax Act.
What got me thinking about this was a recent case involving a deemed ownership of shares for purposes of the definition of Canadian-controlled private corporation in paragraph 127(5)(b) (Bioartificial Gel Technologies Inc. (Bagtech), 2012 TCC 120). Status as a CCPC brings with it certain tax benefits, one of which is the ability to earn refundable investment tax credits for doing qualified research and development work in Canada. Generally, a corporation qualifies as a CCPC as long as it is not “controlled” by non-residents, or a combination of non-residents and one or more public companies. In a case in 2002, the Federal Court of Appeal held that a group of unrelated NR shareholders did not control a CCPC even though the group owned in aggregate more than 50% of the voting shares (Silicon Graphics, 2002 FCA 260). Parliament responded by amending the definition of CCPC to provide that all of the shares owned by NRs and public corporations are deemed to be owned by a single “particular person” in deciding whether the corporation qualifies as a CCPC. Nothing in the language of the amendment deals with the possibility that the real shareholders involved may be subject to restrictions in a Unanimous Shareholders Agreement. In that event, is the hypothetical “particular person” subject to the USA, too?
This was the specific issue in the Bioartificial case. The Crown argued that the terms of the USA should be ignored; nothing in the amended definition of CCPC indicated Parliament intended the hypothetical person to be subject to any such agreement. More importantly, the Crown argued that the hypothetical person, being a fiction, could never in fact be a party to any agreement, let alone a USA. This was the point that intrigued me. The Crown relies on a statutory fiction (the ownership of shares by a notional person standing in the shoes of the real shareholders), but then ignores the agreement binding the real shareholders on the basis that the statutory fiction usurps all of the “real world” facts. The Tax Court didn’t buy the argument. It said the statutory fiction should extend no further than identifying the person deemed to own the shares After that, the facts in the real world govern. (For the record, the case is under appeal.)
The argument that Parliament could never have intended its hypothetical shareholder to be subject to a USA notwithstanding the absence of words to this effect points up a different sort of fiction. We are told to look for the “intention of Parliament” when interpreting a section. But this intention is to be gleaned from the text, context and purpose of the enactment itself. While certain non-statutory aids to interpretation may be considered, they are not by themselves determinative. In fact, the most logical person to ask about intention – the person who actually drafted the section – cannot be consulted! It is what Parliament says in the enactment, not what the draftsman might have intended to say, that governs.
The idea that most parliamentarians actually understand (let alone have read) complicated pieces of proposed tax legislation is fictional in the extreme, yet we pay lip service to it. Why? Because we have to assume Parliament means what the words of any particular section say, regardless of what individual legislators may have thought they meant at the time they passed the legislation. Otherwise, we would be hopelessly adrift on a sea of speculation trying to ascertain our responsibilities under the law. So it is the fair meaning of the actual words used that ought to govern, and in most cases, does. And truth be told, as imperfect as this approach may be in any particular case, to my mind it is preferable to one in which I have to guess at the scope of some unexpressed legislative intention.