The Supreme Court Redefines Taxable Consideration: Daishowa-Marubeni International Ltd. v. Canada

The Supreme Court’s decision in Daishowa-Marubeni International Ltd. v. Canada, 2013 SCC 29, addressed the question of how much tax was owed by a forestry company on the sale of land with environmental reclamation obligations.  It will be of considerable economic significance for all types of resource industries.  This can be divined from the range of interveners in the case, prominent among them the Canadian Association of Petroleum Producers.

It also represents a further evolution of the Supreme Court of Canada’s (SCC) “modern” approach to statutory interpretation.   This should make it interesting to the legal profession as a whole, rather than just tax practitioners.  Justice Rothstein, writing for a unanimous court, overruled the interpretation of the Income Tax Act (ITA) applied by both the Tax Court and the Federal Court of Appeal.   His interpretation arguably goes beyond what is usually called purposive, and instead calls for tax law to be logical and fair — he uses the term “symmetry.”  

This principle is most important for tax statutes, but it could also be relevant for a variety of statutes in the realm of economic and environmental regulation.   The complexity of these statutes and the issues they deal with provides a basis for arguing that the legislature could not anticipate the problem before the court, and would have written the statute differently if it had.

Ever since Rizzo Shoes, [1998] 1 S.C.R. 27, the SCC has taken an explicitly purposive approach to statutory interpretation:  “The words of an Act are to be read in their entire context … harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament” (p. 28).  The key question is how far the courts can take this.   Taken to the extreme, it would give the courts carte blanche to re-write the law, saying, “of course the legislature wanted to do the right thing, and this is what it would have written if it had thought about all the ramifications.”   The problem is that the “right thing” is not always crystal clear, which is why there are debates and disagreements in Parliament. 

In Rizzo, workers lost their jobs due to their employer’s bankruptcy.  The statute neglected to state that they should be treated the same as those who had been explicitly dismissed, and therefore entitled to severance.  The judicial amendment to the statute in Rizzo is a conceptually simple one in comparison to what was done in Daishowa.  

Rizzo is most often cited as the authority for purposive interpretation, but in the tax context the principle had already been evoked much earlier in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536.[1]  The SCC returned to the subject in Copthorne Holdings, 2011 SCC 63, another unanimous tax decision written by Justice Rothstein.   In that case, he was more reticent on the subject of expansive statutory interpretation, suggesting that it should not be based on  “a value judgment of what is right or wrong nor with theories about what tax law ought to be or ought to do” (para. 70).  It could be argued that this is the step the court has taken in the case under review.

Daishowa involved the sale of timber lands in Alberta by Daishowa-Marubeni to Tolko Industries, for a sum of $186 million in cash.  An Alberta statute requires the owner of such timber lands to replant trees in the areas where they have been cut down.   The contract between Daishowa and Tolko called for the purchaser to assume the cost of replanting the trees, explicitly valued in the contract at $11 million.  The Minister assessed Daishowa for unpaid taxes, on the grounds that the actual proceeds of the sale was $197 million, including the value to Daishowa of being relieved of its pre-existing liability to replant the trees it had cut down.

The ITA at s 248(1) states that “‘amount’ means money, rights or things expressed in terms of the amount of money or the value in terms of money of the right or thing…”   At the Court of Appeal, the majority affirmed the trial judge’s ruling that  “the sale price of a property is commonly defined to include any consideration received by a seller from a buyer, including cash, property and/or the assumption of liabilities.” (2011 FCA 267 at para. 49).

The lower court judgements would likely have treated Daishowa unjustly, and they appear to fly in the face of economic logic.   As noted by Justice Rothstein, at the time Daishowa was selling the trees, it was not allowed to deduct from its taxable income the future cost of replanting them.   Therefore, including the $11 million cost of replanting the trees in the proceeds of disposition would have resulted in paying tax on an amount that is not really income.  That was the economic justification for the SCC’s decision, but economic logic by itself would not provide a judicial justification to allow the court to overcome the fairly clear meaning of the statute, which implied that Daishowa was required to include the $11 million in income.

How did Justice Rothstein get around the standard interpretation of what is consideration?   He used the analogy of a building that is damaged and in need of repair.   On this interpretation, Daishowa was selling the land in “as-is” condition, and the $11 million could be characterized as a discount from what it would have been worth if it had been in good condition.  The obligation to replant the trees runs with the ownership of the land, and it was legally impossible for the purchaser to buy it without assuming this obligation.  On this view, the $11 million was not part of the consideration on the sale.   A critic might suggest that Justice Rothstein did not clearly confront or refute the lower courts’ interpretation with respect to Daishowa’s statutory liability to replant, and rather side-stepped the issue with this theory.

Justice Rothstein capped it off by stating that “the conclusion I have reached — that a purchaser’s assumption of reforestation obligations does not form part of the vendor’s proceeds of disposition — avoids this asymmetry…. an interpretation of the Act that promotes symmetry and fairness through a harmonious taxation scheme is to be preferred over an interpretation which promotes neither value.”   

Constitutional purists will disapprove of such a wide degree of judicial discretion in deciding what the law ought to be, but the other eight members of the court all concurred, so that is how the wind is blowing in Ottawa.    Tax practitioners have widely applauded the decision in Daishowa as being in line with commercial common sense.   The decision was probably a reasonable one based on tax policy.   However, in many circumstances, opinions about what is fair or wise in taxation can differ greatly.  A highly subjective approach to statutory interpretation may create increased uncertainty for lawyers trying to advise their clients about how courts will interpret the law in the future.    


[1] An excellent history can be found in Stephen W. Bowman, “Interpretation of Tax Legislation:  The Evolution of Purposive Analysis,” 43 Canadian Tax Journal, No. 5 (1995), 1167.



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