October 07, 2011

Upper Lakes Shipping Limited (Appellant) v. The Minister of Finance (Respondent)

98 DTC 6264
Court of Appeal for Ontario
January 14, 1998

(Court File No. C21628.)

Provincial corporations tax — Calculation of “paid-up capital” — Whether government grants to be included in corporate taxpayer’s paid-up capital in the year of receipt — Corporations Tax Act, R.S.O. 1980, c. 97, as amended, s. 53(1)(b).

In assessing the corporate taxpayer for its 1980 to 1983 taxation years, the Minister included in its paid-up capital for each of those years, government grants received by it during those years. In the Minister’s view, such grants were “earned, capital and any other surplus” within the meaning of the definition of “paid-up capital” in paragraph 53(1)(b) of the Corporations Tax Act (“the Act”). The taxpayer’s appeal to the Ontario Court-General Division was dismissed by Potts, J. ([1995] O.J. 960). The taxpayer appealed to the Court of Appeal for Ontario.

Held: The taxpayer’s appeal was allowed. Under Generally Accepted Accounting Principles (“GAAP”) any government grant related to a capital asset will only be included in the retained earnings or “earned surplus” as the asset is used in the operation of the business. It is not included in “surplus” on receipt. The taxpayer had argued that, in the context of the Act, “earned, capital and any other surplus” are commercial words which can only make sense in an accounting context, and that they, therefore, should be interpreted according to GAAP. The Minister had argued in favour of a broader interpretation in accordance with the ordinary meaning of the phrase. Potts, J. had also adopted this approach. Potts, J.’s conclusion, however, was not the correct one. Although GAAP did not govern the result, in the absence of any statutory definition for the phrase “earned, capital or any other surplus”, resort to ordinary commercial principles was required. The correct approach, therefore, was to treat the grants in issue as items of retained earnings or “earned surplus” over time as the assets were used in the operation of the business. The Minister was ordered to reassess accordingly.