TMI Blog1948 (10) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Companies Act of the Province of Ontario, having its head office at the City of Hamilton, Ontario. The appellant's business is the manufacture and sale of agricultural implements and parts thereof and business incidental thereto. The manufacturing operations of the appellant are carried on entirely outside the Province of Saskatchewan and its selling operations are carried on partly in Saskatchewan and partly in other provinces and countries. The appellant has no directors resident in Saskatchewan, no meetings of its Board of Directors are held in Saskatchewan, and its central management and control abide at its head office in Hamilton, Ontario. The appellant's selling business in Saskatchewan is carried on at branch offices. All monies received by the appellant in Saskatchewan are deposited in separate bank accounts and remitted in full to the appellant's said head office, which sends to the Saskatchewan branches such monies as are required for operating and incidental expenses. On these facts it is common ground that, for income tax purposes, the appellant resides outside of Saskatchewan, and this has been assumed in the Courts in Canada. 3. The Province ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an article is sold at a profit to a member of the public by a company which has manufactured the article and has also sold it through its own selling organisation, it may be said that there are two stages in the production of the net profit (1) the manufacture of the article (2) the sale of the article, and that part of the net profit should be attributed to each stage, the part attributed to the earlier stage being described as a manufacturing profit. To quote from the judgment delivered by Sir Lyman Duff, C. J., in the present case, in the Supreme Court of Canada: The Appellant Company is admittedly resident out-Bide of Saskatchewan, within the meaning of this provision; and the business of the Company in Saskatchewan is limited to making contracts of sale by its agents and by them receiving the proceeds or such sales. The profits of the Company are derived from a series of operations, including the purchase of raw material or partly manufactured articles, completely manufacturing its products and transporting and selling them, and receiving the proceeds of such Bales. The essence of its profit making business is a series of operations as a whole. That part of the proceeds o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which that phrase is used in the Act. 10. Section 7 imposes the tax, and the following portions of it must be quoted: (1) There shall be assessed, levied and paid upon the income during the preceding year of every person: (d) who, not being resident in Saskatchewan, is carrying on business in Saskatchewan during such year; a tax at the rates applicable to persons other than corporations and joint stock companies set forth in the Sch. 1 to this Act, upon the amount of income in excess of the exemptions granted by this Act; provided that the said rates shall not apply to corporations and joint stock companies, other than personal corporations. (3) Save as herein otherwise provided, every corporation and joint stock company, no matter how created or organised, residing or ordinarily resident or carrying on business within the province, shall pay a tax, at the rate applicable thereto set forth in the Sch. 1 to this Act, upon its income during the preceding year. (4) Where the commissioner is unable to determine or to obtain the information required to ascertain the income within the province of any corporation or joint stock company or of any class of corporations, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income derived therefrom in Saskatchewan. (2) The minister shall have full discretion as to the manner of determining such proportionate part. 25. Nothing in Ss. 23 and 24 shall in any way affect the generality of the term 'carrying on business' as used elsewhere in this Act. 13. Regulations were made by the Lieutenant-Governor in Council, in purported exercise of the power conferred upon him by s. 7 (4) of the 1932 Act, They are in the following terms : 1. Interest, dividends, rents and royalties less their proportionate share of deductions allowed shall be separately determined or ascertained, and if they are received in connection with the trade or business of the taxpayer in the Province, shall be income liable to taxation. 2. The income referred to in regulation 1 having been separately determined and ascertained, the remainder of the income of the tax payer liable to taxation shall be taken to be such percentage of the remainder of the income as the sales within the Province bear to the total sales. The sales of the taxpayer shall be measured by the gross amount which the taxpayer has received during the preceding year from sales and othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Act, 1932. 14. It is common ground between the parties that in making the three assessments now in question the Commissioner acted upon Regulation 2. It is also common ground that the Commissioner, in making these assessments had no evidence of and did not compute or ascertain any net profit or gain arising from or earned in the appellant's business in Saskatchewan, but, after computing the net income of the appellant everywhere, purported to fix the appellant's income applicable to Saskatchewan by applying the percentage mentioned in that Regulation. The assessment for 1936 is typical, reading in part as follows; Net income subject to allocation 1,148,239.83 Gross Sales of Company everywhere... 11,489,313.45 Gross Sales of Company in Sask ? 2,128,603.92 Percentage of Sask, Sales to Total Sales ? 18.5268% Income applicable to Sask. 18.5268% of $1,148,239.88 ? 212,732.11 Amount of tax at 5%... 10,636.60 Less t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t appealed to the Court of Appeal for Saskatchewan pursuant to s. 42, Treasury Department Act, 1938, and before that Court the three appeals were, by consent, treated and argued as one appeal. 18. The Court of Appeal reserved judgment and on 2nd April 1940 delivered judgment holding that it had no jurisdiction to entertain the appeal with respect to the assessment for 1934 but holding that the assessments for 1935 and 1936 were defective in, not giving the appellant a deduction in respect of a reserve for bad debts. The assessments for those two years were set aside and referred back to the Commissioner for re-assessment, with instructions to reconsider the question of bad debt reserve, as stated in the judgment. In other respects the Court of Appeal dismissed the appellant's appeal but allowed the appellant two-thirds of its costs of the appeals to the Court of Appeal and to the Judge of the King's Bench Court. 19. By special leave of the Court of Appeal, the appellant appealed to the Supreme Court of Canada from the judgment of the Court of Appeal, except there parts of the said judgment upon which the appellant succeeded. The respondents cross appealed to the Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from its business in Saskatchewan, not the profits arising from the company's manufacturing business in Ontario and from the company's operations in Saskatchewan taken together, but the profits arising from the company's operations in Saskatchewan. 22. Their Lordships find themselves entirely in agreement with these observations. They think that there is to be found in ss. 21 to 25inclusive a scheme for dealing (inter alia) with the taxation of profits which are earned, or arise, or accrue or are derived it matters not which phrase is used from the activities of persons or corporations who carry on certain activities within the Province of Sakatchewan and other activities outside that Province. Section 21 applies both to resident and to non-resident corporations, and is plainly directed to preventing an artificial reduction of the net profit arising from the business of such corporations in Saskatchewan. Section 22 contemplates the case of a person residing and regularly employed outside Saskatchewan, who renders certain services within the that Province. Sections23 and 24 show that the Legislature contemplated, in the case of a non-resident person, a charge of ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on all the stages.... The fallacy of the judgment of the Supreme Court in this and in Tindal'a case: (18 N.S.W.L.K. 378) is in leaving out of sight the Initial stages, and fastening their attention exclusively on the final stage in the production of the income. 24. In their Lordships' view, the fallacy of regarding a profit as arising solely at the place of sale appears also in the arguments advanced on behalf of the respondents in the present case. Counsel on their behalf contended that when money was received by the appellant in Saskatchewan as a result of a sale in Saskatchewan the whole of the net profit on the sale arose from the business of the appellant in Saskatchewan, and no apportionment was necessary. They referred to certain cases in which various Courts have found no reason for treating a profit as being earned or as arising partly within and partly without a particular country. In no one of these cases, however, was the relevant section accompanied by other sections contemplating such an apportionment of profits as is provided for by Ss. 23 and 24in the present case. Reference was also made to the judgment of the Supreme Court of Canada in Wm. Wrigley ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case, because it pays no regard to the question of manufacturing profit. In their Lordships' opinion the present case falls within Regulation 3 and the Commissioner should have carried out the assessment under that Regulation, giving due regard to the question of manufacturing profit. They add that in their view the facts brought the present case within the terms of s. 7 (4), as the appellant's system of keeping accounts during the three periods in question resulted in the Minister being unable to determine the income within the Province of the appellant without recourse to the Regulations. 27. Two other points raised by counsel for the appellant should be briefly mentioned. They contended that if the Acts of 1932 and 1936 or the Regulations purported to tax income of the appellant arising outside Saskatchewan, then they went beyond the power conferred upon the Province, by S. 92 (2), British North America Act, 1867, to impose taxation within the Province. This was an alternative argument, and as the appellant's main contention has succeeded the alternative argument does not arise. In their Lordships' view, neither the Acts of 1932 and 1936 nor th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e years is higher than it should have been. 28. This particular view of the facts is not shown to be vitiated by any incorrect view of the law, as no question of manufacturing profit outside Saskatchewan entered into it. 29. Counsel for the respondents sought to rely upon certain findings by the Commissioner. of Income tax, the Board of Revenue Commissioners and Anderson J. as being findings of fact which concluded the matter in favour of the respondents. This argument was accepted by Rinfret J. (as he then was). In his judgment in the Supreme Court with which Crocket and Kerwin J. concurred, he said : At the outset, the appellant is met by the difficulty that the question whether profits or gains arose within or without Saskatchewan is really a question of fact already decided against it by the Commissioner of Income-tax, the Board of Revenue Commissioners and the Judge of the Court of King's Bench. 30. Hudson J. who agreed with Rinfret J. in dismissing the appeal to the Supreme Court, observed : Now it is claimed that the mode of allocation prescribed in the regulations, in its application to the assessments here, fails to take into account manufactur ..... 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