1979]
COMMENTS – COMMENTAIRES
Federal Continued Corporations and the Deemed-Resident
Provisions of Section 250(4) of the Income Tax Act
I. Introduction
The notion of residence is fundamental in determining the tax
base under the federal Income Tax Act.1 A determination of resi-
dence will affect the scope of income taxable,2 the rate of tax levied,
the imposition of special taxes,4 the obligation to withhold tax 5
and the availability of tax exemptions and incentives.0 The Income
Tax Act does not provide a general definition of residence for
corporate taxpayers, but does contain a deeming provision which
imposes resident status: by virtue of section 250(4), a corporation
is deemed to have been resident in Canada throughout a taxation
year if, inter alia, the corporation was incorporated in Canada after
April 26, 1965. Generally. a corporation which held non-resident
status prior to April 27, 1965 and did not subsequently carry on
business or situate its central management and control in Canada
is not deemed to be a resident, subject to the powers of the Gover-
nor in Council to make regulations prescribing who is or has been
at any time resident in Canada for the purpose of Part XIII of the
Income Tax Act.7
The purpose of the present essay is to determine whether
foreign corporations continued under the Canada Business Cor-
porations Act s are deemed to be resident Canadian corporations
under the Income Tax Act. The continuance of corporations under
federal legislation is a recent phenomenon (the effective date of
the new companies legislation being December 15, 1975); there are
1 S.C. 1970-71-72, c. 63 as am.
2Ibid., s. 2.
3Ibid., s. 190.
4 Ibid., s. 212.
5 Ibid., s. 215.
6 Ibid., s. 125.
7Ibid., s. 214(13)(a). The foreign business corporation loses its preferential
tax treatment after five years, commencing with the 1972 taxation year of
the corporation: Income Tax Application Rules, 1971, S.C. 1970-71-72, c. 63,
s. 60(2). See generally Poissant, Taxation in Canada of Non-Residents (1976),
4-5; Scace, The Income Tax Law of Canada 3d ed. (1976), 2-12; McDonald,
Cases and Materials on Income Tax 2d ed. (1963), 31-41; LaBrie, The Principles
of Canadian Income Taxation (1965), 18-19; Ward, Smith & Arnold, Current
Tax Planning (1977), vol. III. 192.11[b], 19-242-19-245; Cumyn, A Non-
Resident’s Guide to Canadian Taxation (1977), 14-17.
8 S.C. 1974-75-76, c. 33.
McGILL LAW JOURNAL
[Vol. 25
as well similar provisions in the companies legislation of Ontario,
Alberta and Manitoba. Since continuance by a foreign company
under federal legislation constitutes an “incorporation” under the
Canada Business Corporations Act,10 the question arises how the
deemed-resident provisions of section 250(4) apply to the con-
tinued corporation.
Before embarking on the principal question, this study will deal
with the most important preliminary issue: whether a federal com-
pany continued after December 15, 1975 is a de facto Canadian resi-
dent for tax purposes by virtue of the provisions of the Canada
Business Corporations Act.
II. Statutory effects of continuance
A company incorporated in a foreign jurisdiction may, if autho-
rized by the- laws of the incorporating jtirisdiction, apply to the
Director’1 for a certificate of continuance. 2 The issuance of this
certificate causes the company to become a corporation to which the
Canada Business Corporations Act applies in the same way as if it
had been incorporated under that Act.”3 The articles of continuance
are deemed to be the articles of incorporation, and the certificate of
‘)The mechanism of continuance has been enacted to attract foreign entre-
preneurs into operating in Canada through a local corporate vehicle;
the
technique, to a lesser degree, was designed to facilitate interjurisdictional
amalgamation, and thereby eliminate the cumbersome procedure of sale
of assets and corporate dissolution in the foreign jurisdiction, or reincor-
poration and ultimate amalgamation in Canada. See generally Iacobucci,
Pilkington & Prichard, Canadian Business Corporations (1977), 438-40, 444;
Lavine, The Business Corporations Act … An Analysis (1971), 299-300; Grant,
Continuance and Discontinuance under the Canada Business Corporations Act
[1975] Meredith Memorial Lectures 475; Dickerson, Howard & Getz, Pro-
posals for a New Business Corporations Law for Canada (171), vol. I, 121,
365: “Similar provisions are commonplace in U.S. statutes but are generally
characterized as inter-state mergers or consolidations. A similar regime could
have been adopted here, but that would have entailed adoption of a whole
body of complex rules governing interjurisdictional amalgamations
… If
interjurisdictional amalgamation is desired, it can be effected in two steps:
first, continuance under the laws of the desired jurisdiction; and second, an
amalgamation [.]” See also American Bar Foundation, Model Business Cor-
poration Act Annotated 2d ed. (1971), vol. 3, s. 77. For analogous provincial
continuance legislation, see inter alia The Companies Act, R.SA. 1970, c. 60, ss.
157-159; The Business Corporations Act, R.S.O. 1970, c. 53, ss. 198-200; The
Companies Act, R.S.M. 1970, c. C160, ss. 129-131.
10 S.C. 1974-75-76, c. 33, s. 181(4).
“Appointed under the Canada Business Corporations Act, s. 253.
12Ibid., s. 181(2) and (3).
1s Ibid., s. 181(4).
19791
COMMENTS – COMMENTAIRES
continuance is deemed to be the-certificate of incorporation of the
continued corporation.’ 4 The property of the company and its liabi-
lities and pending claims become that of the continued corporation.15
Furthermore, continuance does not deprive a shareholder of any
right which he claims, nor does it relieve him of any liability in
respect of an issued share.’
A. Resident Canadian directors
Seeing that continuance forces the company to comply with the
Canada Business Corporations Act in all respects, 17 the Canadian-
resident-majority rule affecting the board of provisional and elected
directors must be observed. The articles of continuance must con-
tain a notice of directors, a majority of whom are required to be
resident Canadians; 18 and no business can be transacted at meetings
of directors unless a majority of the quorum are resident Cana-
dians.19
The residency qualifications of the directors, however, are not
absolute. Notwithstanding the Canadian-resident-majority rule, a
holding company need not have more than one-third of its director-
ship resident in Canada so long as it earns less than five per cent
of its gross revenues (including the revenues of its subsidiaries) in
Canada.?* A continued corporation is not required, for the purpose
of transacting business, to secure a quorum of directors having a
majority of Canadian residents, if -a resident Canadian director
unable to attend the meeting approves in writing or by telephone
the business transacted, and if fifty per cent of the quorum other-
wise consists of resident Canadian directors.1 It should be noted
at this stage that the term “resident Canadian” is defined on. the
basis of Canadian citizenship or landed immigrant status, together
with “ordinarily resident” status, without reference to the Income
Tax Act on the latter element? 2
14 Ibid.
15 Ibid., s. 181(6).
16 Ibid., s. 181(7).
11 Subject to special rules affecting continued corporations, e.g., ss. 45(9),
181(8).
s. 109(2) and (3).
18Ibid., ss. 182(2), 101(1), 100(3).
‘9Ibid.,
2OIbid., s. 100(4).
21Ibid., s. 109(4). See also s. 110(2).
22 Ibid., s. 2(1). See s. 191(3) regarding deemed residence of a shareholder.
The term “ordinarily resident” appears in s. 250(3) of the Income Tax Act
and has been judicially considered in Thomson v. M.N.R. [1945] Ex. C.R. 17,
2 D.T.C. 684; aff’d [1946] S.C.R. 209, 2 D.T.C. 812.
McGILL LAW JOURNAL
[Vol. 25
B. Canadian registered office and meetings
A continued corporation must maintain at all times a registered
office in the place within Canada specified in its articles of conti-
nuance23 and keep at its office the corporate records and registers.
While the use of a required registered office in Canada may have
the possible effect of fixing the corporate residence, the Canada
Business Corporations Act envisages and permits the use of extra-
territorial offices for accounting and directors’ records. 2-1 Notwith-
standing the necessity of a Canadian registered office, the directors
may, unless the articles or by-laws otherwise provide, meet to
transact business at any place they deem fit, whether inside or out-
side Canada. The same option is available to shareholders in
respect of their meetings, provided all shareholders entitled to vote
at that meeting so agree.2?
C. Central management and control
Regardless of the rules respecting resident Canadian directors
and Canadian registered offices, a continued corporation may prac-
tically and validly perform the bulk of its corporate operations
extra-territorially –
indeed, in the foreign jurisdiction where it was
initially incorporated. While the Canada Business Corporations
Act attempts to impart a Canadian identity to the corporate vehicle,
it is fair to say that the legislation does not seek to attribute to the
corporation a defined residence for the purpose of income taxation.
While the statutory definition of residence has been discussed, the
common law definition has still to be explored.
The statutory deeming of corporate residence in section 250(4)
of the Income Tax Act does not by its. wording purport to provide
a definition of residence, nor is it intended to be all-encompassing
if such a definition is provided elsewhere. It does not, for example,
rule out the possibility of a multiplicity of residences for tax pur-
poses,27 nor does it deny the traditional common law criteria for
residency developed in De Beers Consolidated Mines, Ltd v. Howe.28
This judgment set forth the following principles:
(1) a company resides for the purposes of income tax where its
23Ibid., ss. 181(2), 6(l)(b), 19(1).
24Ibid., s. 20(2), (3), (4), (5).
25Ibid., s. 109(1).
26Ibid., s. 126(2).
27 See, e.g., Income Tax Act, s. 214(13)(b).
28 [1906] A.C. 455 (H.L.) per Lord Loreburn L.C.
1979]
(2)
COMMENTS – COMMENTAIRES
real business is carried on, that is, where the central manage-
ment and control actually abide;
the test for corporate residency is a pure question of fact, to
be determined, not according to corporate regulations or by-
laws, but by a scrutiny of the course of business and trading;
(3) factors to be considered in determining residence include: the
location of the principal business office, the location of the
directors’ meetings, the residence of a majority of the directors,
the place of incorporation and registered office, and the location
of the policy and decision-making process of the entire cor-
porate activity.”
The residency of directors and the place of registered offices
and meetings are therefore factors to be used in determining cor-
porate residence. While it is admitted that these factors have played
an often crucial role in judicial consideration of the problem, 0
there is little doubt that their presence is not conclusive. The courts
are willing to disregard the formal or minimal statutory require-
ments of the company in favour of its “real business” location. In
effect, formal characteristics of the company are often used as a
mere accessory tool in determining the true tax residence of the
corporate undertaking 8 The following table provides an analysis
of the factors, including statutory requirements, used in Canada
in determining residence.
This review of the Canadian jurisprudence indicates that there
is a correlation between a finding of Canadian residency and the
fact that a majority, if not all, of the directors are resident Cana-
dians. The correlation is not absolute, however, nor is it divorced
from the overriding consideration that the resident directors are
as well the de facto managers and controllers of the corporation.
The location of incorporation and the existence of a registered office
is given little consideration except as corroboration of the site of
central management. Where formal meetings are held by nominal
directors or shareholders, the location of such meetings is not
29 Ibid., 458-59.
30 See table, infra, p. 116.
31The Judicial Committee appears to emphasize the formal aspects of
the corporate set-up in British Columbia Elec. Ry v. The King [1946] A.C.
527, 538 (P.C.). Unlike the requirements under the Canada Business Cor-
porations Act, the company in that case was obliged by its articles of
association to hold all general and directors’ meetings in Canada, and all
directors were required to be resident Canadians. On a similar fact pattern
with the contrary emphasis, see Egyptian Delta Land & Inv. Co. v. Todd
[1929] A.C. 1, 15 (H.L.).
McGILL LAW JOURNAL
04)
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[Vol. 25
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deemed significant. No judicial decision applies the strictly de jure
approach in analyzing the question of central management and con-
trol. Accordingly, one may conclude that the residency requirements
under the Canada Business Corporations Act do not conclusively
determine the income tax residence of a continued corporation.
32 A) Bedford Overseas Freighters Ltd v. M.N.R. [1970] C.T.C. 69 (Ex.). See
also Unit Constr. Co. v. Bullock [1960] A.C. 351 (H.L.).
B) M.N.R. v. Crossley Carpets (Canada) Ltd [1968] C.T.C. 570 (Ex.), aff’g
67 D.T.C. 522 (T.A.B.).
M.N.R. [1968] Tax A.B.C. 652.
C) Zehnder & Co. v. M.N.R. [1970] C.T.C. 85 (Ex.). See also Sifneos v.
D) B.C. Elec. Ry v. The King, supra, note 31. See also American Wheela.
brator & Equip. Corp. v. M.N.R. (1951) 4 Tax A.B.C. 356:
E) M.N.R. v. Tara Explor. & Dev. Co. [1974] S.C.R. 1057, [1972] C.T.C.
328, 72 D.T.C. 6288.
F) Yamaska S.S. Co. v. M.N.R. (1961) 61 D.T.C. 716 (TA.B.).
G) Victoria Ins. Co. v. M.N.R. [1977] C.T.C. 2443 (T.R.B.).
H) The Hampstead Apts Ltd v. M.N.R. [1971] Tax A.B.C. 1161.
1979]
COMMENTS – COMMENTAIRES
III. Deemed residence
The principal question whether a foreign corporation continued
after December 15, 1975 under the Canada Business Corporations
Act may be deemed resident in Canada in accordance with section
250(4) of the Income Tax Act may now be considered.
Although continuance subjects a corporation to the Canada
Business Corporations Act as if it had been incorporated under
that Act, the fact of continuance does not affect pre-existing cor-
porate rights and liabilities, including shareholders’ rights. Con-
tinuance does n6t create a new corporate entity by way of reincor-
poration; it merely subjects imported corporations to new internal
jurisdictional rules as of the date of continuance. The non-creative
aspect of continuance may be more clearly seen in the treatment
of federal companies incorporated under the Canada Corporations
Act3 which are required to continue under the new Act by December
15, 1980: the purpose of continuance in this regard is not to cause
a reincorporation, but to subject all federal companies, without
change in identity or existence, to the new legislation at an orderly
pace. 4 The suggested consequence is that continued corporations
do not fall under the deemed-resident provisions of section 250(4).
The residency issue has been indirectly treated by the Depart-
ment of National Revenue in an advance rulinge 5 respecting the tax
implications of a continuance into Alberta of an Ontario corpora-
tion. The Department ruled that a company incorporated in Ontario
prior to 1960 will not be considered to have been incorporated in
Alberta after April 26, 1965 within the meaning of section 250(4)
of the Income Tax Act where continuance occurs after that date.
Although inter-provincial continuance is not within the scope of
the present discussion, there is no substantive difference between
federal and provincial statutory mechanics and effects of conti-
nuance.
It is further suggested that the words “incorporated in Canada”
used in section 250(4) must refer to the creation of the corporate
vehicle with its original powers, rights and liabilities. The word
“incorporated” used in section 250(4)(a), for example, cannot be
said to include “incorporated by continuance” because it is statu-
torily impossible to have federally continued corporations on April
27, 1965. Certainly Parliament is entitled to alter the meaning of
3 R.S.C. 1970, c. C-32.
S4 Canada Business Corporations Act, S.C. 1974-75-76, c. 33, s. 4.
35 Ruling No. TR-1, June 24, 1974.
McGILL LAW JOURNAL
[Vol. 25
words used in prior legislation by subsequent statutory instrument;
but there is little 6 to justify a radical expansion of the term “in-
corporated” as used in the tax legislation. One might be tempted
to look by way of analogy to the mechanism of amalgamation and
the recent decision of the Supreme Court of Canada in Deltona Corp.
v. M.N.R 7 In that case, two Canadian incorporated companies con-
trolled by an American parent corporation were amalgamated in
Canada. When the assets of the amalgamated company were subse-
quently liquidated by way of dividend distribution, the Minister
imposed a fifteen per cent non-resident tax on the distribution,
alleging that the amalgamated company was resident in Canada.
The Court held that the amalgamated company was deemed to be
resident in Canada by virtue of section 139(4a)(a) 38 [now 250(4)
(a)] of the Income Tax Act, since the amalgamation itself consti-
tuted an “incorporation” within the meaning of that section.” It
is to be noted that the applicable companies legislation at the time 0
referred, as it does now, 4′ to the amalgamated companies being
“continued” as one corporation as a juridical consequence of the
fusion. Nevertheless, a clear distinction must be drawn between the
mechanisms of amalgamation and continuance: the former results
in a corporation that did not exist before,42
the latter in the
acquisition by a pre-existing corporation of Canadian corporate
status. The distinguishing aspect of amalgamation
is expressly
confirmed in section 87(2) of the Income Tax Act, which indicates
that the corporate entity formed as a result of the amalgamation
shall be deemed to be a new corporation, the first taxation year
of which shall be deemed to have commenced at the time of the
amalgamation.
Notwithstanding the debate as to whether continuance implies
reincorporation or jurisdictional modification of corporate exis-
tence, the peculiar wording of section 250(4) may arguably cover the
S Aside from the ambiguous proposition in s. 181 of the Canada Business
Corporations Act.
37 (1973) 73 D.T.C. 5180, aff’g (1971) 71 D.T.C. 5186 (Ex.).
38 R.S.C. 1952, c. 148, as am. by S.C. 1960-61, c. 49, s. 38(6) and S.C. 1965,
c. 18, s. 28(4).
-9 Supra, note 37, 5199-5200.
40 Canada Corporations Act, s. 137(13)(a).
41 Canada Business Corporations Act, s. 180(a).
42The conclusion is drawn by Cattanach 1. in the case of Deltona Corp.
v. M.N.R., supra, note 37, 5200 (Ex.). See also Stanward Corp. v. Denison Mines
Ltd [1968] S.C.R. 441; and Income Tax Rulings TR-3, July 8, 1974; TR-37,
August 9, 1976.
1979]
COMMENTS – COMMENTAIRES
case of certain continued corporations. Let us deal with the case
of a company incorporated in December 1965 in a foreign juris-
diction and continued in 1977 in Canada. Section 250(4)(a) deems
resident a corporation “incorporated after April 26, 1965” (which
is our case), and “incorporated in Canada” (which it may be, by
way of continuance, in 1977). If we read the statutory phrasing as
referring to a corporation which has a double birth date –
that
of its initial foreign incorporation and that of 6ontinuance –
then
continued corporations may be deemed resident. However, even
upon a liberal reading of the statute, it is evident that continued
corporations originally incorporated prior to April 27, 1965 which
never subsequently carried on business nor situated central man-
agement and control in Canada would not be deemed to be resi-
dent. We are then faced with the unacceptable premise that the
legislature seeks to discriminate among imported continued cor-
porations according to the year of initial incorporation. Even if
such discrimination were acceptable, due regard must be given to
the grammar of the deemed-resident provisions of the provincial
tax statutes, such as the Quebec Taxation Act,43 which deems resi-
in Canada after
dent a corporation which “was
April 26, 1965” without making further reference to an arguable
second birth date of the corporation. A clear incompatibility on
the notion of residence between federal and provincial statutes
could neither have been envisioned nor intentionally created.
incorporated
In the event that continuance is ultimately determined by the
courts to mean the extinction of the original corporation and re-
incorporation under section 250(4), the consequences appear varied.
A corporation incorporated in Canada after April 26, 1965 and
continued under a foreign jurisdiction in accordance with section
182 of the Canada Business Corporations Act may be taxed on a
deemed disposition of its property under section 48(1) of the
Income Tax Act, provided that it had always been a de facto non-
resident. The original corporation, if extinguished by continuance
in Canada, would likewise be taxed on the disposition of its taxable
Canadian property which would theoretically accrue to the new
continued corporate entity. Such a continued corporation would
fall within the meaning of a “Canadian corporation” and a
“taxable Canadian corporation” 4 and consequently would obtain
some qualification for the small business deduction, 4
5 dividend tax
43S.Q. 1972, c. 23, s. 11(a).
44 Income Tax Act, s. 89(1)(a) and (i).
45 Ibid., s. 125.
McGILL LAW JOURNAL
(Vol. 25
credit in the hands of shareholders, 4 status as an investment or
mutual fund corporation, 47 eligibility under the amalgamation
rules, 8 and avoidance of the additional branch tax under Part
XIV.49 These implications at first appear disconcerting when we
consider that it is theoretically possible for the continued cor-
poration to situate its central management and control in its original
incorporating jurisdiction, and effectively function as if it were
still the original foreign corporation subject to the relatively mild
burden of electing Canadian resident directors and having a formal
office in Canada. However, where the continued corporation (for
reasons of business practice, shareholders’ desire, or simple inertia)
retains its central management and control in the initial incor-
porating jurisdiction, the practical effect of section 250(4) would be
to create a dual residency, making the corporation subject in certain
circumstances to double taxation on its income from all sources.6 o
IV. Summary
The view implicitly accepted by the Department of National
Revenue, and thus far uncontradicted by any court decision, sup-
ports the theory that federal continued corporations under the
Canada Business Corporations Act are not to be deemed resident
under section 250(4) of the Income Tax Act. This view is largely
based on the understanding that continuance does not effect an
incorporation ex nihilo, but merely creates a jurisdictional variance
in the operations of an existing foreign company.
Lazar Sarna*
46Ibid., ss. 82(1)(b) and 121.
47Ibid., s. 131(8).
48 Ibid., s. 87.
49 Ibid., s. 219.
50 Subject to possible relief by tax treaty arrangements between the relevant
jurisdictions: see Pyrcz, The Basis of Canadian Corporate Taxation: Residence
(1973) 21 Can. Tax J. 374, 388-390.
* BA., B.C.L. (McGill), LL.M., member of the Bar of Quebec.
19791
COMMENTS – COMMENTAIRES
What is Interest? Tomell Investments Limited v.
East Marstock Lands Limited
The division of legislative powers under sections 91 and 92 of
the British North America Act, 18671 depends not only upon which
particular federal and provincial laws are examined by the courts,
but also upon the order in which those laws are examined. This is
particularly true because the courts have always leaned in favour of
the constitutionality of laws. Illustrative of this proposition are the
decisions that have attempted to rationalize the potential overlap
of the exclusive provincial jurisdiction over contracts2 and Parlia-
ment’s exclusive jurisdiction over interest.’ As -“interest” obviously
is the narrower category of subject matter, the problem of over-
lap might have been easily solved by a constitutional challenge to
the validity of the Interest Act.4 However, it was not until the
Supreme Court of Canada heard Tomell Investments Ltd v. East
Marstock Lands Ltd5 that such a challenge arose.
Of course, some sections of the Interest Act, such as sections
2 and 6, provided no problemY Parliament has used only the word
“interest” in those sections and, absent any definition of interest
1 30-31 Vict., c. 3 (U.K.).
2 Contracts fall within “Property and Civil Rights in the Province”, ibid.,
3 Ibid., s. 91:19.
4R.S.C. 1970, c. 1-18. This statute was clearly enacted pursuant to s. 91:19,
s. 92:13.
ibid.
5 (1977) 77 D.L.R. (3d) 145, 16 N.R. 139 per Pigeon J. (Judson, Ritchie,
Spence, Dickson and Beetz JJ. concurring; Laskin CJ.C. and Martland J.
concurring in the result), aft’g the decision of the Ontario Court of Appeal
(no recorded reasons), atf’g 8 O.R. (2d) 396, 58 D.L.R. (3d) 172 (H.C.). [Re-
ferences infra are cited to 77 D.L.R. (3d).]
0 Ss. 2 and 6 read as follows:
2. Except as otherwise provided by this or by any other Act of the
Parliament of Canada, any person may stipulate for, allow and exact, on
any contract or agreement whatever, any rate of interest or discount that
is agreed upon.
6. Whenever any principal money or interest secured by mortgage of
real estate is, by the mortgage, made payable on the sinking fund plan, or
on any plan under which the payments of principal money and interest are
blended, or on any plan that involves an allowance of interest on stipulated
repayments, no interest whatever shall be chargeable, payable or recoverable,
on any part of the principal money advanced, unless the mortgage contains
a statement showing the amount of such principal money and the rate of
interest chargeable thereon, calculated yearly or half-yearly, not in advance.
McGILL LAW JOURNAL
[Vol. 25
in the Act, it has been safe to assume that those sections do not
exceed Parliament’s constitutional jurisdiction. It has been common
ground in all the cases that the word “interest” must embrace, at
a minimum, the day-to-day accrual of charges for money borrowed.
Therefore, provincial legislation that sought simply to alter the rate
of interest has been held to be ultra vires.Y Yet the question has
been whether the meaning of “interest” for constitutional purposes
was wide enough to approximate the total cost for the use of the
borrowed principal. A wider definition would embrace such phe-
noma as bonuses and penalties. Such items can be converted to a
per diem accrual rate, but usually are collected collaterally to the
contract specifying the interest rate (particularly in the case of
mortgages), and often become payable only upon the happening of
such contingencies as the debtor falling into arrears or the creditor
being forced to take legal action.
In a series of decisions involving provincial legislation, culminat-
ing with the decision in A.-G. Ontario v. Barfried Enterprises Ltd,8
the Supreme Court of Canada moved to restrict the meaning of
“interest” to the narrowest of concepts, the per diem accrual.
In Barfried, The Unconscionable Transactions Relief Act0 was
alleged to be legislation in relation to interest. By section 2 of that
Act, the Court was empowered to rewrite a contract of lending if
it concluded that the cost of the loan was excessive and the trans-
action harsh and unconscionable. The “cost of the loan” was defined
to mean (in part): “… the whole cost to the debtor of money lent
and inoludes interest, discount, subscription, premium, dues, bonus,
commission, brokerage fees and charges [.]”10
The majority held that the legislation was in relation to property
and civil rights and only incidentally affected interest. To reach this
conclusion, Mr Justice Judson felt compelled to restrict the mean-
ing of “interest”:
The day-to-day accrual of interest seems
to me to be an essential
characteristic. All the other items mentioned in [the cost of the loan in]
7Reference Re Sask. Farm Sec. Act [1947] S.C.R. 394, [1947] 3 D.L.R. 689,
aff’d [1949] A.C. 110 (sub nom. A.-G. Sask. v. A.-G. Can.), [1949] 1 W.W.R. 742
(sub nom. Ref. re The Farm Sec. Act, 1944 (Sask.)) (P.C.); and Board of
Trustees of the Lethbridge N. Irrig. Dist. v. IOF [1940] A.C. 513, [1940] 2
D.L.R. 273, [1940] 1 W.W.R. 502 (P.C.).
8 [1963] S.C.R. 570, 42 D.L.R. (2d) 137 per Judson J. (Taschereau C.J., Cart–
wright, Fauteux and Hall JI. concurring; Martland and Ritchie JJ. dissenting),
rev’g [1962] O.R. 1103, 35 D.L.R. (2d) 449 (C.A.).
9 Now R.S.O. 1970, c. 472.
10 Ibid., s. I(a).
19791
COMMENTS – COMMENTAIRES
The Unconscionable Transactions Relief Act except discount lack this
characteristic. They are not interest. In most of these unconscionable
schemes of lending the vice is in the bonus.”
The majority also saw no conflict with section 2 of the Interest
Act which permits parties to stipulate whatever rate of interest they
wish.12 However, Martland and Ritchie JJ. in dissent, while refusing
to pass upon the validity of the Act, did see a conflict with section 2:
The power of the Court to act .under this Act arises only if it has
found that the cost of the loan is excessive. It is true that it must also
find the transaction to be harsh and unconscionable, but it may happen,
as it did in the present case, that the judge who hears the case decides
that the transaction is harsh and unconscionable because of the excessive
cost of the loan. The result is that the very Court to which a creditor
must resort in order to enforce payment of the interest or discount
which the Interest Act says he may exact is, by the Provincial legislation,
empowered to decide whether that interest or discount is, in all the
circumstances, excessive. Furthermore, if that Court decides that it is
excessive and that the transaction is harsh and unconscionable, it may
relieve the debtor of the obligation of paying that portion of his obliga-
tion which it considers to be excessive, and thus is in a position to
relieve him from the payment of an obligation which the Parliament of
Canada has stated the creditor is entitled to exact from him.13
In my view the meaning of “interest” subscribed to by the
majority in Barfried is too restrictive, if not unrealistic, and, as
has been indicated,’ 4 throws doubt upon the validity of federal
legislation such as the Small Loans Act.1 5
In Tomeil,’0 the Supreme Court had to rule upon the validity
of section 8 of the Interest Act, which states:
8.(1) No fine or penalty or rate of interest shall be stipulated for, taken,
reserved or exacted on any arrears of principal or interest secured by
mortgage of real estate, that has the effect of increasing the charge on
“Supra, note 8, 575.
‘2 See supra, note 6.
Is Supra, note 8, 582-83.
14Rayner & McLaren (eds.), Falconbridge On Mortgages 4th ed. (1977),
679-80.
15 R.S.C. 1970, c. S-11, of which s. 2 reads in part: “‘cost’ of a loan means
the whole of the cost of the loan to the borrower whether the cost is
called interest or is claimed as discount, deduction from an advance, com-
mission, brokerage, chattel mortgage and recording fees, fines, penalties or
charges for inquiries, defaults or renewals or otherwise, and whether paid
to or charged by the lender or paid to or charged by any other person, and
whether fixed and determined by the loan contract itself, or in whole or in
part by any other collateral contract or document by which the charges, if
any, imposed under the loan contract or the terms of the repayment of the
loan are effectively varied [.J”
16Supra, note 5.
McGILL LAW JOURNAL
[Vol. 25
any such arrears beyond the rate of interest payable on principal money
not in arrears.
(2) Nothing in this section has the effect of prohibiting a contract for
the payment of interest on arrears of interest or principal at any rate
not greater than the rate payable on principal money not in arrears.
Default had entitled the lender to a bonus equal to three months
interest on the principal. The monthly interest on the principal was
$6,000, at the specified rate of sixteen per cent. The arrears amount-
ed to six months, or $36,000. The payment of the bonus would thus
be $18,000, indicating a rate of fifty per cent on the arrears. This
was clearly a breach of section 8(1). 17
The Court had faced the interpretation, but not the constitu-
tionality, of section 8 in Immeubles Fournier Inc. v. Construction
St-Hilaire.18 In that case, Mr Justice Pigeon held that the words
“fine” and “penalty” must mean something more than “interest”
and could not be equated thereto:
In my view, we should not in any way here de6i’de on the extent of the
federal power regarding interest. Any adoption of a construction of s. 8
by reference to the extent of that power would, at least in the circum-
stances of this case, be tantamount to a decision on the extent of that
power. Clearly this would be the very object of any argument on consti-
tutionality if the issue of constitutionality were raised. In my opinion,
s. 8 must consequently be construed irrespective of the argument that
respondent seeks to make from the provisions of the constitution, and
accordingly the constitutional question must be left completely open.
As to the construction of the section by itself, I have already indicated
why it does not appear to me that the words “penalty” and “fine” can be
limited to what would be interest, that is to something accruing on a
daily basis. This is not a case in which the maxim noscitur a socils
should be applied, as counsel for the respondent urged us to do, relying
on certain sentences found in Maxwell on the Interpretation of Statutes,
10th ed., p. 332. One needs only read the cases cited by the author to see
that his statement cannot apply in the present circumstances. The suggest-
ed construction would amount to no less than depriving the words
“penalty” and “fine” of any meaning, since “rate of interest” obviously
includes whatever may be described as interest.19
In Tomell, Mr Justice Pigeon reiterated both the Barfried and
St-Hilaire decisions, holding that interest meant day-to-day accrual
and that the words “fine” and “penalty” in section 8 must refer
17 It should be noted that if the arrears had amounted to $112,500, the bonus
of $18,000 (three months interest) would not have offended s. 8(1), as it would
then have represented a rate of 16% on the arrears.
IS [1975] 2 S.C.R. 2, 52 D.L.R. (3d) 89, 10 N.R. 541 per Pigeon J. (Laskin
C.J.C., Spence, Dickson and Beetz J. concurring; Martland, Judson, Ritchie
and de Grandpr6 JJ. dissenting), rev’g [1972] CA. 35 (Que. C.A.).
19 Ibid., 16.
197/9]
COMMENTS – COMMENTAIRES
to something other than interest00 He stressed that interest could
not be equated to cost of loan. 21 However, he did find that Parlia-
ment -had the right to specify the rate of interest on arrears and that,
to make the legislation effective, it also had the right to deal with
matters that were not interest, such. as fines and penalties: not to
permit Parliament to do so would rob it of effectivenessl He thus
found the legislation valid on -the doctrine of ancillary powers:
In my opinion, s. 8 of the Interest Act is valid federal legislation in respect
of interest because, although it does not deal exclusively with interest in
the strict sense of a charge accruing day by day, it is, insofar as it deals
with other charges, a valid exercise of ancillary power designed to make
effective the intention that the effective rate of interest over arrears of
principal or interest should never be greater than the rate payable on
principal money not in arrears.P
Chief Justice Laskin saw no need to rely upon the doctrine of
ancillary powers and stated cryptically:
Parliament is, in my view, entitled to require creditors to abstain from
making or exacting a charge on arrears that goes beyond the rate of
interest fixed for principal not in arrears and, in that respect, to prevent
them from escaping the stricture through a designation of the charge
as a fine or a penalty. This is an assertion of the interest power sim-
pliciter, and, as in Attorney-General of Canada v. Nykorak (1962), 33
D.L.R. (2d) 373,
[1962] S.C.R. 331, 37 W.W.R. 660, it is unnecessary to
invoke any doctrine of ancillary power.24
Thus, the decision would seem to permit the enactment of
federal legislation embracing matters that are not interest. If interest
is not to be equated to the total cost of a loan, but Parliament may
legislate with respect to charges that are not interest in order to
enforce its stipulated rates, where is the line to be drawn?
The decision seems to be consistent with earlier jurisprudence
in confirming that, for constitutional purposes, “interest” is con-
fined to charges that accrue on a daily basis. Admittedly, the Laskin
judgment is open to the interpretation that the meaning of “interest”
is not so circumscribed.
Partly as a result of the order in which the issues have been
adjudicated, the jurisdictional boundaries have been obscured and
there exists at this point a measure of functional concurrency5 in
2oSupra, note 5, 150-51.
21 Ibid., 153.
22Ibid., 151.
23 Ibid., 154.
24 Ibid., 147.
25 See Leigh, The Criminal Law Power: A Move Towards Functional Con-
currency? (1967) 5 Alta L. Rev. 237.
McGILL LAW JOURNAL
[Vol. 25
the field of financing of borrowed money. The provinces may clearly
legislate in relation to interest in some circumstances and Parlia-
ment may clearly legislate with respect to charges that are not in-
terest in some circumstances. As a result, the meaning of “interest”
has become less important than the possibility of conflict or re-
pugnancy between federal and provincial legislation as analysed
by Martland and Ritchie JJ. in Barfried.26 A clearer interpretation of
interest might be achieved in future by a reference or private
pursuit of the constitutionality of the Small Loans Act.21
J. A. MacKenzie*
2 6 See supra, p. 123.
27 R.S.C. 1970, c. S-1i.
* Associate Professor, Faculty of Law (Common Law Section), University
of Ottawa, Ottawa.
