



COURT OF APPEAL FOR BRITISH COLUMBIA




Citation:



Coast Capital Savings Credit Union v. British Columbia
  (Attorney General),









2011 BCCA 20




Date: 20110124

Docket: CA037833

Between:

Coast Capital
Savings Credit Union

Respondent

(Petitioner)

And

Her Majesty the
Queen in Right of the
Province of British Columbia

Appellant

(Respondent)




Before:



The Honourable Madam Justice Ryan





The Honourable Madam Justice Newbury





The Honourable Mr. Justice Hinkson




On
appeal from the Supreme Court of British Columbia, December 23, 2009

(
Coast Capital
Savings Credit Union v. British Columbia (Attorney General)
,

2009
BCSC 1768, Vancouver Registry, Docket Number S088755




Counsel for the Appellant:



A.H. Dalmyn





Counsel for the Respondent:



D.G. Cowper, Q.C.

H. Brinton





Place and Date of Hearing:



Vancouver, British
  Columbia

November 24, 2010





Written Submissions Received:



December 14, 2010 and
December 21, 2010







Place and Date of Judgment:



Vancouver, British
  Columbia

January 24, 2011





Written Reasons by:





The Honourable Madam Justice Newbury





Concurred in by:





The Honourable Madam Justice Ryan

The Honourable Mr. Justice Hinkson










Reasons for Judgment of the Honourable
Madam Justice Newbury:

[1]

This appeal requires us to consider the meaning of the unlikely phrase
non-equity shares used in s. 7(2) of the
Corporation Capital Tax Act
,
R.S.B.C. 1996, c. 73 (the 
CCTA
), a statute that was repealed in
April 2010.  At all material times, s. 7(2) specified that the capital
stock of a credit union (one of the main components of paid up capital, on
which the tax was assessed) does not include its non-equity shares as defined
by the
Financial Institutions Act
, R.S.B.C. 1996, c. 141 (the 
FIA
).
 Section 1(1) of the
FIA
provided a two-pronged definition of
non-equity share that remained unchanged from its enactment in 1992
throughout the relevant period  i.e., a share of a credit union that (i) evidences
indebtedness of the credit union and (ii) does not represent an equity
interest therein.  Conversely, equity share was defined to mean a share that
represents an equity interest in a credit union.

[2]

Until 2008, s. 1(5) of the
CCTA
specified that the amount[s]
relevant to the computation of the paid up capital of a credit union were to
be the amounts reflected in its financial statements prepared in accordance
with generally accepted accounting principles (GAAP).  In 2008, however, when
the Minister of Small Business and Revenue had before him an appeal from the
respondent Coast Capital Savings Credit Union (Coast Capital) in respect of
reassessments of its corporation capital tax for the 2003-6 taxation years, s. 7(2)
of the
CCTA
was amended, retroactive to January 1,
2001
, to
exclude the reference to GAAP in connection with the calculation of capital
stock.

[3]

The chambers judge below, whose reasons are indexed at 2008 BCSC 1768, described
this change as having retroactively expunged the legislative basis upon which Coast
Capital had legitimately been planning its affairs for the past seven years.  Nevertheless,
he found that certain Class C shares issued by Coast Capital in 2003 came
within the definition of non-equity share in the
FIA
and thus the
CCTA.
He therefore ordered that the amount paid up on such shares was not
required to be included in the calculation of the credit unions capital stock and
did not constitute part of its paid up capital for purposes of corporation
capital tax.

[4]

For the reasons that follow, I am of the view that the chambers judge,
Mr. Justice Grauer, did not err in so concluding and that Her Majestys appeal
must be dismissed.

Factual Background

[5]

Coast Capital was formed in 2000 as a result of the amalgamation of two
predecessor credit unions under the
Credit Union Incorporation Act,
R.S.B.C.
1996, c. 82

(the
CUIA).
Section 56 thereof permits a credit
union to provide in its constitution or rules for one or more classes of shares
and to attach special rights and restrictions thereto.  At all material times, the
Rules of Coast Capital authorized it to issue seven classes of shares, namely
Class A, B, C, D and E Equity shares, Preferred Equity shares, and Class P
Non-Equity shares.  Class A Equity shares were required to be purchased as a
condition of membership in the credit union, and were required to be redeemed
upon termination of membership.  Money invested in such shares was, the Rules
stated, not guaranteed by the Credit Union Deposit Insurance Corporation
(CUDIC).  On the winding-up or dissolution of the credit union, the holders
of Class A shares were entitled to receive its net assets, subject to the prior
rights of the holders of all other classes of shares.  All of these
characteristics were consistent with the requirements of the
CUIA
.

[6]

The Class C Equity shares had a par value of $1 each and were to be non-transferable
and non-voting.  The directors of the credit union were authorized to fix the
special rights and restrictions to be attached to them generally, but they would
carry a non-cumulative dividend.  On the liquidation or winding-up of the credit
union, the holders would, subject to the prior rights of holders of Class P Non-Equity
and Preferred Equity shares, be entitled to receive, rateably with the holders
of the Class B, D and E Equity shares, only their par value plus any declared
but unpaid dividends.  According to the Rules, money invested in these shares
was not guaranteed by CUDIC.

[7]

As I understand it, Coast Capital did not issue any Class C Equity
shares until May 2003, when it issued a disclosure statement (the functional equivalent
of an offering memorandum) dated May 6, 2003 offering to issue up to
50,000,000 such shares (which it referred to as Class C shares) to its
members resident in British Columbia.  The memorandum described the more
specific rights and restrictions that had been attached to the Class C shares
in accordance with the Rules: they carried a non-cumulative dividend of 6% per
annum and were not only redeemable (for their par value), but were
required
to be redeemed on a fixed date  June 27, 2009 (the Maturity Date).  As
required by s. 60 of the
CUIA
in respect of equity shares, the offering
document warned that they were not guaranteed by CUDIC and were not transferable
except with the approval of the Board.  Thus, the document said, there was no
bona
fide
market through which these shares may be sold or traded.  The rights
of Class C shareholders on the liquidation or dissolution of the credit union were
described in terms that tracked the wording in the Rules:

In the event of liquidation,
dissolution or winding-up of Coast Capital, any surplus property remaining
after the satisfaction of the liabilities of Coast Capital, including the costs
of winding up and dissolution, will be distributed first, by payment of a
dividend on any outstanding Non-Equity Shares of Coast Capital at a reasonable
rate determined by the liquidator and second, by distributing the balance
remaining to the holders of Equity Shares in accordance with the Rules of Coast
Capital. The Rules provide that subject to the prior rights of holders of
Non-Equity Shares and Preferred Equity Shares, the holders of Class C Equity
Shares (rateably with holders of Class B Equity Shares, Class D Equity Shares
and Class E Equity Shares) shall be entitled to receive the par value ($1.00)
of the Class C Shares, together with any declared but unpaid dividends thereon,
in priority to holders of Membership Shares upon the dissolution, liquidation
and winding up of Coast Capital.
Holders of Class C Equity Shares shall not
be entitled to any further distribution by Coast Capital
. Each series of
Class C Equity Shares, including the Class C Equity Shares  Series 1 described
in this Disclosure Statement, shall rank
pari passu
with every other
series of Class C Equity Shares in regard to payment of dividends and the
distribution of assets in the event of liquidation, dissolution or winding-up.  [Emphasis
added.]

[8]

At the time the Class C shares were issued, the legislative provisions relevant
to this appeal were contained in the
CCTA
and
FIA
.  Sections 1(5)
and 7 of the
CCTA
read as follows:

1(5)      Except as otherwise provided in this Act, for the
purpose of determining the carrying value of the assets of a financial
corporation, or any other amount relevant to the computation of a financial
corporation's B.C. paid up capital for a taxation year, the amounts that must
be used are the amounts reflected in the financial statements of the financial
corporation from the taxation year that have been

(a)        prepared
in accordance with generally accepted accounting principles, and

(b)        presented to the
shareholders of the financial corporation.

7(1)      The aggregate paid up capital of a financial
corporation ... means the aggregate of the amounts, computed at the end of its
taxation year, of its

(a)        capital stock,

(b)        contributed surplus, and

(c)        retained earnings

(2)        For the purposes of
subsection (1),
the capital stock of a credit union does not include its non-equity
shares as defined by the
Financial Institutions Act
.
[Emphasis
added.]

[9]

The
FIA
defined equity share and non-equity share as follows:

1(1)      In this Act and in the
Company Act
as it
applies for the purposes of this Act:

...

equity share means a share in a
credit union that represents an equity interest in a credit union;

...

non-equity share means a share
in a credit union that

(a)
evidences
indebtedness of the credit union to the holder of the share
, and

(b)
does not represent an
equity interest in the credit union
;

[Emphasis added.]

[10]

The evidence is unchallenged that the Class C shares issued pursuant to
the disclosure statement were shown as liabilities on Coast Capitals financial
statements  treatment that, according to the credit unions external auditors,
accorded with GAAP.  (Section 3861.11 of the CICA Handbook states that the
substance of a final instrument, rather than its legal form, governs its
classification on the issuers balance sheet and that some final instruments
take the legal form of equity but are liabilities in substance, and others may
combine features associated in equity instruments and features associated in
final liabilities.)  In any event, the balance sheet treatment of the Class C
shares meant that, as noted by the chambers judge at para. 9 of his
reasons, the shares did not appear as any form of equity or share capital and
that the credit union did not include them in its computation of paid up
capital for
CCTA
purposes beginning in 2003.

[11]

The Minister seemed at first to have accepted this calculation, but in
July 2007, he issued revised notices of assessment for each of the years 2003-6
which increased the amount of Coast Capitals paid up capital by the aggregate
par value of the issued Class C shares.  A senior tax auditor in the Ministers
department wrote in explanation to the credit union:

The
Corporation Capital Tax Act
(
CCTA
), in
subsection 7(2), specifically excludes non-equity shares from the tax base of a
Credit Union. The
CCTA
adopts the same meaning for non-equity shares as
is provided in the
Financial Institutions Act
(FIA).
With reference
to the FIAs
Capital Requirements Regulation,
shares with the
characteristics of the Class C Shares are considered equity shares
.

In addition, the Class C Shares constitute an
investment
in the Corporation
.
The intent behind the
CCTA
has been to
tax such capital.

Finally, the Corporation, in
their disclosure statement of May 6, 2003, described these shares as being
equity shares.  [Emphasis added.]

[12]

The Vice-President Finance of Coast Capital responded by letter dated
September 10, 2007, relying heavily on the fact that GAAP required
presentation of the Class C shares as debt.  He enclosed a memorandum of law prepared
by the credit unions solicitors.  It is not in evidence, but the letter cited
Ford
Credit Canada Ltd. v. Her Majesty the Queen
2006 TCC 441, (
affd.
2007 FCA 225) in support of Coast Capitals position.  In
Ford Credit
,
the Court had to determine whether the taxpayer was required by
s. 181.3(3) of the
Income Tax Act
to include the amount of certain redeemable
(i.e.,
redeemable at the companys option from time to time
) preferred
shares in its capital for purposes of the Large Corporations Tax.  The tax was
assessed on the capital stock of a corporation and s. 181(3) of the Act contained
a provision similar to s. 1(5) of the
CCTA
quoted above (see
para. 8).  The taxpayer adduced evidence from a chartered accountant to
the effect that under GAAP, substance prevails over form and that the salient
features of the shares justified their balance sheet treatment as debt rather
than capital stock.

[13]

Chief Justice Bowman said this about the interpretation of words used by
accountants in statutes:

Without subsection
181(3) the Class C special shares would be capital stock notwithstanding the
fact that as a matter of economic substance, accountants may treat them as
debt. It is true that undefined accounting concepts should generally be given a
meaning that accountants would assign to them:
Canfor Limited
v
.
Minister
of Finance for British Columbia,
[1976] C.T.C. 429 at 431; [1977] C.T.C.
269; [1978] 1 S.C.R. 1047;
Upper Lakes Shipping Ltd.
v.

M.N.R.,
[1998] 3 C.T.C. 281;
Reford v. M.N.R.,
71 DTC 5053. Nonetheless, the
principles stated in those cases do not, in the absence of specific statutory
direction, allow accounting treatment to prevail over the legal meaning of
words in the
Income Tax Act.
In other words, accounting concepts are to
be given in appropriate circumstances a meaning that is familiar to
accountants. This is not, however, the same as saying that if words have a
clear meaning in law, the fact that accountants may, on the substance over form
principle, treat them as having a different meaning, the legal meaning can be
ignored. If, however, Parliament wishes us to do just that, it is clearly
within its power to do so.

He allowed the taxpayers appeal, concluding that:

At all events we have here a balance sheet that is clearly
prepared in accordance with GAAP and the amount of the Class C special shares
is shown as debt (but not long-term debt as defined in section 181) not as
capital stock.

Mr. Erlichman has put forward every argument that is
available but I do not think, with respect, that he can overcome the fact that
Parliament has in this instance given a role to the accountants and to GAAP
that neither Parliament nor the courts have seen fit to do absent a specific
provision. Generally speaking the Canadian courts in tax matters show little
deference to GAAP (see
Ikea Limited v. The Queen
, 94 DTC 1112 (TCC), 96
DTC 6526 (FCA), 98 DTC 6092 (SCC). In Part I.3 they are required to do so. Mr.
Erlichman in paragraph 23 of his written argument said:

If the Court accepts that the Class C Special Shares are
excluded by operation of subsection 181(3) of the Act and that deference should
be given to accounting principles even when terms are not specific to
accounting, it is respectfully submitted that the effect would be to surrender
the determination of the fiscal base of the LCT to a non-elected group of
accountants.

This prospect may be a little
upsetting to lawyers and judges but I think that that is precisely what
Parliament has said should be done, and what this court and the Federal Court
of Appeal have done.  [At paras. 23-5.].

[14]

In response to Coast Capitals letter and memorandum, the Ministry simply
acknowledged receipt of the notice of appeal, reminding the credit union that [t]ax
that has been assessed is payable even though a notice of objection is
submitted.  The credit union duly complied, remitting approximately $1.9
million to the Province.

[15]

It was another year before Coast Capital received the Ministers substantive
response to its notice of appeal.  In the meantime, the Legislature amended
s. 7(2) of the
CCTA
, retroactively to January 1, 2001: see s. 10
of the
Budget Measures Implementation Act, 2008,
S.B.C. 2008,
c. 10.  The amended s. 7(2) now provided as follows:

7(2)
Despite subsection 1(5),
for the purposes of
subsection 1 of this section,

(a)        subject to paragraph (b),
of the capital stock of a financial corporation
includes all shares in the
financial corporation
, and

(b)        the capital stock of a credit union does not
include its non-equity shares as defined by the
Financial Institutions Act
.
[Emphasis added.]

Obviously, the insertion of
the phrase Despite section 1(5) meant that GAAP was no longer determinative
of the components of the capital stock of a credit union for purposes of the
CCTA
. 
(Whether the amendment had the effect of making form prevail over substance
remains to be seen.)  The amended paragraph (a) also clarified that a financial
corporations capital stock included all shares  but this remained 
subject
to
paragraph (b), the exception for non-equity shares.  (The Minister
neglected to recognize this exception when he stated at para. 44 of his
factum that The Legislature, which sets taxes and regulates the provincial
budget closely, amended s. 7(2)(a) of the
CCTA
retroactively to
provide that the capital stock of a corporation includes all shares in the financial
corporation.  The Legislature did not exempt the respondent, which would have
been unfair to other credit unions that had raised working capital by issuing
equity shares.  With respect, this submission was inaccurate regarding Coast
Capitals position.  It ignores the express exception to para. (a), and the
credit union was not relying on an exemption for itself, but on the exception
in s. 7(2)(b) for non-equity shares issued by any financial corporation, a
term defined to include a credit union.)

[16]

By letter dated September 17, 2008 to Coast Capital, the Minister
distinguished
Ford Credit
on the basis that GAAP was now irrelevant, and
continued:

... in the [
CCTA
], the legislature has provided
specific statutory meaning that must be taken into consideration when
determining which shares of a credit union are to be included in its capital
stock under the Act. Section 7(2) of the Act provides direction that the
legislature intended only those amounts representing shares that are considered
non-equity shares for regulatory purposes to be excluded from a credit
unions tax base.

It is the ministrys position that the Act specifically
adopted the FIA definition for non-equity shares for the exclusive purpose of
determining which shares of a credit union should be included in its tax base.
The
Capital Requirements Regulation to the FIA clearly provides that shares with
characteristics like those of the Class C shares are considered to be shares
which represent an equity interest in a credit union
. By specifically
adopting the meaning of a non-equity share in the FIA, as it relates to
credit unions, the legislature intended that the classification for regulatory
purposes be adopted for corporation capital tax purposes.

Furthermore, the Act was amended
in 2008 to clarify that, effective January 1, 2001, all shares of capital
stock, regardless of presentation as a liability or as shareholders equity on
the corporations balance sheet, must be included in capital stock for the
purposes of calculating B.C. paid up capital under the Act. Only non-equity
shares as defined by the FIA are excluded from the determination of a credit
unions B.C. paid-up capital. I understand that in a Disclosure Statement
regarding the proposed sale and issue of the Class C shares, and for regulatory
purposes, Coast Capital classified these shares as equity shares. Thus, I have
concluded that the inclusion of the Class C shares in the tax base for the
years under appeal was appropriate
.
[Emphasis added.]

[17]

The
FIA
, which is the regulatory statute referred to,

requires
that a financial institution maintain an adequate capital base in relation to
the business carried on by it.  The
Capital Requirements Regulation
to
the
FIA
, B.C. Reg. No. 315/90, specifies the components of the capital
base of a financial institution, notably
excluding
non-equity shares of
a credit union (see s. 1(1))
and
redeemable shares unless the
redemption rights are restricted such that the financial institution is not
required under any circumstances to redeem shares of the particular class at a
rate of more that 10% of the issued and outstanding shares during any one-year
period (see s. 3(b)).  Clearly, then, Coast Capitals Class C shares would
be excluded from the calculation of its capital base under the regulation on
one basis, if not both.  The Minister did not pursue his argument based on the
regulation in Supreme Court or in this court.

[18]

In due course, Coast Capital exercised its right under s. 33(1) of
the
CCTA
to appeal the Ministers decision.  The appeal was a new
hearing that was not limited to the evidence and issues already before the
Minister.

[19]

The Class C shares were duly redeemed by Coast Capital on their Maturity
Date in 2009.

The Chambers Judges
Reasons

[20]

Coast Capitals petition came on for hearing before Grauer J. on
September 11, 2009 and he issued his reasons on December 23, 2009.  He
began his analysis by noting the two branches of the definition of non-equity
share in the
FIA
.  He observed that the Minister was not disputing
that the Class C shares evidenced indebtedness of the credit union as required
by the first branch.  (Para. 16.)  When we questioned counsel on this
point, Mr. Dalmyn for the Minister told us that this concession had been
made by counsel below but that it had not been precise.  We later requested
that counsel for the Minister clarify his position on the point and we received
written submissions from both parties.  I will advert to those submissions near
the end of these reasons.  In the court below, however, the Minister expressly
did not dispute that Coast Capitals Class C shares evidenced indebtedness on its
part.  Thus the remaining issue, as formulated by Grauer J., turned on the
second branch of the definition:

... whether the Class C Shares
represent an equity interest in Coast Capital within the meaning of the second
branch of the definition of non-equity share set out in the
FIA
and
imported into the
CCTA
.  [At para. 17.]

[21]

The chambers judge turned to the Ministers argument that since the
Class C shares had been referred to as Class C
Equity
shares (my
emphasis) in the disclosure statement (and, one might add, in Coast Capitals Rules),
they
could not
be non-equity shares for
CCTA
purposes.  Grauer
J. rejected the credit unions response that the nomenclature ascribed to the shares
in the offering was irrelevant; but at the same time he accepted that
particularly in the taxation context, form must give way to substance, and
that how these shares were characterized in the disclosure statement is not, by
itself determinative of the issue.  (Para. 22.)

[22]

The Court did not find persuasive the fact that deposits, a term
defined by s. 260 of the
FIA
to include money invested in
non-equity
shares, are insured by CUDIC whereas the offering memorandum had warned
investors, presumably in compliance with s. 60(3) of the
CUIA
, that the
Class C shares were
not
insured.  Grauer J. stated:

... It follows, submits the respondent, that money invested
in Class C Shares cannot be money invested in non-equity shares as that term
is used in s. 260 of the
FIA
, so that non-equity shares cannot be
interpreted in a manner that would include the Class C Shares.  I disagree.

Section 260, which appears in Part 9 of the
FIA
,
governing Deposit Insurance and Stabilization of Credit Unions, is not
concerned with defining non-equity shares.  Moreover, the definition of non-equity
shares does not say that they are shares that qualify as deposits in
accordance with s. 260 of the
FIA
,
nor does it include a requirement
that non-equity shares be shares that are insured by the CUDIC, which easily
could have been stated if intended.  There could be many reasons why the Class
C Shares are not insured by the CUDIC that have nothing to do with whether they
are equity or non-equity shares
.

With respect, the
respondent's
argument appears to be circular
.  The question we are here considering is
this:  do the Class C Shares in their substance represent an equity interest in
the credit union?  That is the test that the legislature chose.  It seems to me
that in order to succeed, the respondent must show that the words equity interest
in a credit union as employed in the second branch of the definition have some
special meaning, when construed contextually, different from their ordinary
meaning.  Counsel for the respondent was unable, however, to point me to any
particular usage in the statutes framework that would support such an
approach.  In particular
, there was nothing brought to my attention that
would require non-equity shares as defined to be construed as limited to a
particular type of historical non-equity share peculiar to credit unions.  That
could have readily been specified if that was what was intended
.  [Emphasis
added.]

The Court did not find it necessary to resolve these and
other apparent inconsistencies in the statutory provisions.  In Grauer J.s words,
the fact remains that the Legislature has chosen a particular definition of
non-equity share for tax purposes, and it is that which concerns us. 
(Para. 24.)

[23]

On the issue of whether the Class C shares represented an equity
interest in Coast Capital, the chambers judge noted
A. Valin Petroleums
Ltd. v. Imperial Oil Ltd.
2007 ABQB 134, (2007) 28 B.L.R. (4th) 60, where
the Court had stated:

The word equity is not ambiguous.  It is a word of ordinary
use, particularly in the commercial context ....

Debt and equity are distinct
concepts
.  Debt is a claim on the assets of the corporation and is created
when money is borrowed.  With that arises an obligation on the corporation to
repay that money.  Corporate equity, however, is comprised of the corporation's
total assets unencumbered by debt or other liabilities
.
It is the
residual economic interest in the corporations assets, after all outstanding
debts have been satisfied
.  See C. Nicholls,
Corporate Finance and
Canadian Law
(Toronto: Carswell, 2000) at page 9.  [At paras. 39-40;
emphasis added.]

Not surprisingly, Coast Capital argued that holders of
the Class C shares could not be said to have a residual economic interest in its
assets, given the fact they were  all redeemable for their par value on the
Maturity Date in 2009, and holders were  restricted to recovery of the par value
of their shares on a winding-up or dissolution.

[24]

The Ministers first argument in response was that the
CCTA, FIA
and
CUIA
all employ the term non-equity share and thus that the
Legislature must have intended that term to have the same meaning in each of
the three statutes.  The chambers judge did not find this submission to be
particularly helpful: as he noted, [o]ne readily accepts that the phrase
non-equity shares means the same thing in all three statutes, as it is
defined precisely the same way in all three statutes.  No presumption is
necessary.  (Para. 33.)

[25]

On the question of residual interest, the Minister contended that a
shareholder who on dissolution is entitled to receive unpaid dividends and a
return of his or her investment, is considered to hold an equity interest in
accordance within the ordinary meaning of equity.  The chambers judge noted
that no authority had been cited for this proposition and that the association
of such rights with non-equity shares in s. 260 of the
FIA,
the
application of GAAP, and the ordinary meaning of debt and equity all
suggested otherwise.  He quoted a passage from Coast Capitals Rules which
provided for the rights of the various classes of its shares on winding-up.  As
we have seen, these included the restriction that after payment to the holders
of the Class C Equity shares of the amounts so payable to them, they shall not
be entitled to share in any further distribution of the property or assets of
the Credit Union.  There was nothing in the attributes of the Class C shares that
gave their holders the right to a residual or equity interest in Coast Capitals
assets.  Thus, he concluded:

... given their fixed term, their fixed rate of return, their
lack of conversion rights, their entitlement to no more than the return of par
value plus the non-cumulative dividends of 6% per annum, and their ranking ahead
of those shareholders entitled to a residual interest,
they have all the
characteristics of instruments of indebtedness on the part of the credit union
to their holders, and nothing more.

For these reasons, I conclude
that Coast Capital's Class C Shares are shares in the credit union that (a)
evidence an indebtedness of the credit union to the holders of the shares, and
(b) do not represent an equity interest in the credit union.  They therefore
meet the definition of non-equity share in the
CCTA
, imported from the
FIA
.
Just as a taxpayer cannot escape taxation by choosing a
non-taxable form to transact what is taxable in substance, the taxation
authority cannot take advantage of the taxpayer's use of a taxable form to
describe a transaction that in substance is non-taxable by the authority's own
statutory provisions
.  [At paras. 46-7; emphasis added.]

[26]

In the result, the Court allowed Coast Capitals appeals from the
Ministers revised assessments for its 2003-6 taxation years and ordered the
Minister to refund the amounts paid by the credit union pursuant to the earlier
notices of revised assessment.

On
Appeal

Legislative Background

[27]

The Ministers submissions on appeal again rest largely on the thicket of
regulatory and tax statute that govern credit unions in this province, but do
necessitate a deeper analysis of the predecessor provisions as well as those
now in effect.  The concept of non-equity shares was first introduced in this legislative
context in 1981 by the
Credit Union Amendment Act,

1981,
S.B.C.
1981, c. 3.  Before then, the
Credit Union Act
, R.S.B.C. 1979,
c. 29, had simply provided in s. 33 that a credit union could issue
shares having a denomination of $1 each and that special rights or
restrictions could be attached to one or more classes.  At least impliedly, a member
was required to own a minimum number of shares specified in the rules:
s. 25.  Section 136 provided that money invested in shares of a credit
union was guaranteed by the provincial credit union share and deposit
guarantee fund.  The Minister says that credit unions generally issued $1
nominal shares to members, but he provided no evidence as to what kinds of shares,
if any, were regarded by regulatory authorities as non-equity shares at that
time.

[28]

The
Credit Union Amendment Act
,
1981
defined equity
share as a share that was not guaranteed, and non-equity share as one that was
guaranteed, by what was then called the Provincial Credit Union Guarantee Fund
under Part 3 of the
Credit Union Act
.  Equity shares were made subject
to various restrictions  they could not, for example, be issued unless they
were fully paid up at par value (s. 33(6)); certificates representing
them were required to be marked NON-GUARANTEED (s. 33(8)); they could
not be redeemed if the redemption would reduce the credit unions statutory
reserve below a prescribed amount (s. 33.1(2)); and a credit union could
not give financial assistance to a member for the purchase of such shares
(s. 39.1(a)).  The revised s. 34 of the
Credit Union Act
also
stated:

Conversion of existing shares

34.       After June 25, 1975, each fully paid share of a
credit union issued under the former Act and
having a denomination of $5 is
converted into one fully paid non-equity share having a denomination of $1 for
each $1 that has been paid on it
and a part payment remaining on a share
having a denomination of $5 is a part payment on an additional non-equity share
having a denomination of $1.  [Emphasis added.]

This provision replaced a similar one which had referred
to shares rather than non-equity shares, and on its face, it admits of no
exceptions.  It is the only reference to any conversion of shares to
non-equity shares that I have been able to locate.

[29]

The distinction between equity and non-equity shares was carried forward
into the
CUIA
in 1989, which came into force the same year as the
FIA
.
 However, as we have seen, the
CUIA
adopted by reference the definitions
of equity share and non-equity share in s. 1(1) of the new
FIA
. 
For convenience, I set them out again below:

equity
share means a share in a credit union that represents an equity interest in a
credit union;

...

non-equity share means a share in a credit union that

(a)        evidences
indebtedness of the credit union to the holder of the share, and

(b)        does not represent an
equity interest in the credit union ...

As Grauer J. emphasized, this definition made no
reference to the question of guarantee by CUDIC, which insured deposits of credit
unions pursuant to s. 265 of the
FIA
.  (The
FIA
at
s. 259 defined deposits to include money invested in non-equity shares
of a credit union.  These provisions are now found at ss. 260 and 266(1)
of the
FIA
.)

[30]

Like its predecessor, the
CUIA
required that as a condition of
membership, a member purchase a minimum number of equity shares, also referred
to as membership shares.  (Section 44).  According to s. 64(2), equity
shares were transferable  which the Class C shares were not  and were subject
to many of the restrictions previously imposed by the
Credit Union Act
. 
The
CUIA
did not provide for any conversion of shares issued under the
previous legislation.  (Shares issued under rules of a credit union that
pre-dated the
CUIA
were not recognized as membership shares under the
CUIA
unless the rule under which they were issued mirrored s. 44(1) of the
CUIA
:
see
CUIA
, S.B.C. 1989, c. 23, at ss. 44(1)-(3).)

[31]

Sections 33 and 34 provided, and still provide, that on a winding-up of
a credit union, any assets remaining after the payment of liabilities be paid to
the holders of equity shares, or if none are outstanding, to CUDIC. 
Presumably, this applies notwithstanding the particular label given by a
credit union to its classes of shares.  If Coast Capital were being wound up,
for example, the holders of Class A Equity shares would have a valid complaint
if Class C shareholders were allowed to participate in the distribution of net
assets, since, as seen earlier, the holders of Class C shares are entitled only
to the return of their investment plus unpaid dividends.  From this point of
view, one might conclude that the name given to these shares was in fact a misnomer.

Analysis:
Equity Interest?

[32]

The Ministers argument in this court seemed to have three prongs.  The
first was not new: it was again contended that because the Class C shares were
called Class C
Equity
 shares in Coast Capitals Rules and in the
offering memorandum, and were stated not to be guaranteed by CUDIC, the chambers
judge should have found they were equity shares for purposes of the
CCTA
.
 Second, it was argued that the chambers judge should have applied a
contextual and purposive approach to statutory interpretation, which would
have led to the conclusion that non-equity share was intended to mean what counsel
for the Minister referred to as old-fashioned non-equity shares  i.e.,
shares that were in existence prior to 1989 but were not required to be
converted into Class A Equity shares and, presumably, continued to be
guaranteed.  Thus while the Minister acknowledged that the chambers judges
interpretation of equity interest in the definition of non-equity share was
plausible in an abstract way, he submits it was wrong in context.  Third,
the Minister says the chambers judge allowed GAAP to prevail over the
relevant provisions describing non-equity shares in the
CUIA
and
FIA,
and that he erred in so doing.

[33]

It would appear to be common ground that Canadian courts interpret and
apply tax statutes based on the economic and legal substance of transactions
rather than the label attached by the taxpayer to the transaction in question. 
Thus the Minister states at para. 18 of his factum:


The Courts apply tax statutes based on the
economic and legal substance of transactions
. The relevant legal
characteristics of a transaction are fixed and do not change for tax purposes.
In
Shell Canada Ltd. v. Canada,
[1999] 3 S.C.R. 622, McLachlin J., as
she then was, said that analysis based on economic realities was subject to a
caveat that
the taxpayers legal relationships must be respected
, and
that recharacterization of legal relationships:

39        ... is only permissible if the label attached by
the taxpayer to the particular transaction does not properly reflect its actual
legal effect:
Continental Bank Leasing Corp. v. Canada
[1998] 2
S.C.R. 298, at para. 21,
per
Bastarache J.  [Emphasis added.]

[34]

The Minister also acknowledged that Driedgers modern approach to
statutory interpretation (which Driedger characterizes as a reconciliation of
three older rules of interpretation: see E.A. Driedger,
Construction of
Statutes
(2nd ed., 1983) at 81-7) now applies to taxation statutes with
equal force as it does to other statutes.  The chambers judge was obviously
aware of this approach, as he cited several Canadian cases in which it has been
applied, including
Placer Dome Canada Ltd. v. Ontario (Minister of Finance)
2006 SCC 20, [2006] 1 S.C.R. 715.  There the principle and its nuances in the
taxation context were described by LeBel J. for the Court:

In
Stubart Investments Ltd. v. The Queen,
[1984] 1
S.C.R. 536, this Court rejected the strict approach to the construction of
taxation statutes and held that the modern approach applies to taxation
statutes no less than it does to other statutes.  That is, 
the words
of an Act are to be read in their entire context and in their grammatical and
ordinary sense harmoniously with the scheme of the Act, the object of the Act,
and the intention of Parliament
 (p. 578): see
65302 British
Columbia Ltd. v. Canada,
[1999] 3 S.C.R. 804, at para. 50.  However,
because of the degree of precision and detail characteristic of many tax
provisions,
a greater emphasis has often been placed on textual
interpretation where taxation statutes are concerned
:
Canada Trustco
Mortgage Co. v. Canada,
[2005] 2 S.C.R. 601, 2005 SCC 54, at para.
11.  Taxpayers are entitled to rely on the clear meaning of taxation
provisions in structuring their affairs.
Where the words of a statute
are precise and unequivocal, those words will play a dominant role in the
interpretive process.

On the other hand, where the words of a statute give rise to
more than one reasonable interpretation, the ordinary meaning of words will
play a lesser role
,
and greater recourse to the context and purpose of
the Act may be necessary:
Canada Trustco
, at para. 10.  Moreover,
as McLachlin C.J. noted at para. 47, [e]ven where the meaning of particular
provisions may not appear to be ambiguous at first glance, statutory context
and purpose may reveal or resolve latent ambiguities.  The Chief Justice
went on to explain that in order to resolve explicit and latent ambiguities in
taxation legislation, 
the courts must undertake a unified textual,
contextual and purposive approach to statutory interpretation
.

The interpretive approach is thus
informed by the level of precision and clarity with which a taxing provision is
drafted.  Where such a provision admits of no ambiguity in its meaning or
in its application to the facts, it must simply be applied.
Reference
to the purpose of the provision cannot be used to create an unexpressed
exception to clear language
: see P. W. Hogg, J. E. Magee and J. Li,
Principles
of Canadian Income Tax Law
(5th ed. 2005), at p. 569;
Shell Canada Ltd.
v. Canada,
[1999] 3 S.C.R. 622.  [At paras. 21-3; emphasis added.]

[35]

In my view, the chambers judge clearly strove to give effect to the legal
substance or actual legal effect of the Class C shares.  He correctly
concluded that neither the nomenclature of the Class C Equity shares (which
of course Coast Capital could change by amending its Rules) nor the fact they
were stated not guaranteed by CUDIC was determinative of whether they came
within the definition in the
FIA
.  I agree with him that if the
Legislature had intended that the phrase non-equity share was to be
restricted to shares that carried or did not carry a guarantee it would have
been an easy matter to so state.  (In fact, the legislation did so from 1981 to
1989, when it was amended.  Presumably, a change from this circular approach
was intended.)  Similarly, if it had been intended that the definition of the
shares was to refer to an historic class of shares that existed under
previous legislation, that could also have been specified.  As it is, however, there
is simply no basis for construing non-equity share
as defined in
s. 1(1) of the
FIA

as referring to some very specific type
of share that the Minister was unable to define and that seems to have been
obsolete even before the
FIA
definition was enacted.

[36]

Nor can I agree that the chambers judge fell into the error of allowing GAAP
to prevail over the relevant statutory provisions.  He was obviously
cognizant of the 2008 revision which made GAAP no longer determinative of the
components of the capital stock of a credit union for purposes of the
CCTA
. 
This made it necessary to interpret the term non-equity share in its
grammatical and ordinary sense harmoniously with the scheme and object of the
statute, as described in
Placer Dome.
In connection with the object of
the Act and the intention of the Legislature, it was not enough in my view for
the Minister to say that the Legislature clearly decided not to extend special
treatment to working capital raised by credit unions by issuing redeemable preferred
shares.  The definition makes no reference to redeemable preferred shares and
nothing in the statutory context suggests that the definition should be thus
constrained.  The Legislature clearly
did
intend to exempt from the
capital stock of a credit union those shares that satisfied the two branches of
the definition in the
FIA 
no more and no less.

[37]

The chambers judge did not find any ambiguity, patent or otherwise, in
construing the definition of non-equity share in the
FIA
.  As we have
seen, he referred to the ordinary meaning of equity with reference to the
rights and restrictions attached to the Class C shares under Coast Capitals
Rules.  Contrary to a suggestion made by the Minister in his factum, he
regarded equity shares and non-equity shares as mutually exclusive, reasoning
that since the Class C shares did not represent a residual interest in Coast
Capital, they could not be regarded as equity shares within the meaning of
the statute.

[38]

The Minister has not pointed us to any contextual factor, case law or
other authority that calls into question the principle that in its ordinary and
grammatical sense, equity refers to a residual interest in the corporate body
in question (and that conversely, a non-equity share is one that does
not
participate in the residue).  Grauer J.s interpretation is consistent with various
dictionary definitions of equity, and with longstanding judicial authority.
Jowitts
Dictionary of English Law
(2nd ed., 1977), for example, defines equity
share capital as issued share capital excluding any part thereof which,
neither as respects dividends nor as respects capital, carries any right to
participate beyond a specified amount in a distribution.
Palmers Company
Law
(25th ed., 1992) similarly states that equity share capital is an
accounting term that includes issued share capital except shares limited to a
specific amount as regards dividends and capital (para. 4012).  In
Canadian
Business Corporations Law
(2nd ed., 2007), K.P. McGuinness writes that Common
shares are often referred to as equity shares because they are entitled to
the equity of the company, that is the residue remaining after the payment of
all profits after all prior claims, such as loan interest and preference
dividends and capital after repayment of all prior claims as to capital, such
as tax, creditors, loan capital, and (generally) preference shares.  (At
373-4.)

[39]

Unless the restrictions attached to the Class C shares were a sham
(which the Minister did not assert), then, it is clear that these shares, which
were restricted to a 6% non-cumulative dividend and to the amount paid up
thereon on the winding-up or dissolution of the credit union, did not represent
an equity interest in the ordinary meaning of the term.  It follows in my view that
the second branch of the statutory definition was met.

Evidence
of Indebtedness?

[40]

I return finally to the first branch of the definition  the requirement
that the shares evidence indebtedness of the credit union to the shareholder.  In
his written response to our request for clarification of the Ministers
position, Mr. Dalmyn recounted the positions taken below by the Minister
and Coast Capital.  He stated that the Minister was
not
withdrawing his
admission that the Class C shares were debt shares
under GAAP
 (my
emphasis) and that counsel for the Minister below (not counsel in this court)
agrees that the chambers judge fairly interpreted the Provinces position
when he stated that the Minister did not dispute that the Class C shares
evidenced indebtedness of the credit union  without more.  At the same time,
Mr. Dalmyn wrote that in
this
court, the Minister had argued the Class C
shares did not evidence indebtedness prior to redemption in 2009  an argument
that, with respect, was not in the Ministers factum or counsels oral
argument.  Nor did the Minister provide a substantive argument on the question of
indebtedness in his clarifying letter.  Mr. Dalmyns letter stated:

The Provinces Written Submissions were delivered after the
record was complete, a few days before the hearing. There is no suggestion that
the Respondent expected this concession or relied on it in the sense that it
failed to present evidence. The Province submits that there is no prejudice to
the Respondent, as no further evidence could have shed any light on the point.
There is no suggestion that learned counsel for Coast Capital failed to
consider the issues. Indeed, he had presented a thorough Written Submission to
supplement his detailed Outline.

The Province submits that it has
presented an argument on a question of law, involving the interpretation of the
Disclosure Statement, the
Credit Union Incorporation Act
, the
FIA
and the
CCTA
. The Province submits that its arguments in this Court have
been properly raised on the record, and involve elaboration or supplementary
argument to arguments advanced in the Court below and this Court.

[41]

Having given the Minister an opportunity to argue the point, and no
substantive submission having been received, I would in normal circumstances
decide the appeal on the basis that the point was well and truly conceded below
and cannot now be asserted in this court.  As Mr. Cowper noted in his
responding submission, this court has warned in the past that A litigant who
deliberately adopts, for whatever reason, a position in the court below, must
live with it in this Court.  (
Per
Southin J.A. in
Protection Mutual
Insurance Co. v. Beaumont
(1991) 58 B.C.L.R. (2d) 290 at para. 26,
Armstrong
v. North West Life Insurance Co. of Canada
(1990) 48 B.C.L.R. (2d) 131
(C.A.), at 134.)  However, we are concerned here with a taxing statute (albeit
one that is no longer in force), and the issue may be of importance to persons
other than the parties.  We are not bound by a concession on a point of law:
see
M v. H
[1999] 2 S.C.R. 3 at para. 45;
Ocean Port Hotel Ltd. v.
British Columbia (General Manager, Liquor Control and Licensing Branch)
[2001]
2 S.C.R. 781 at 44.  In my view, we should carry out our own analysis on the
point.

[42]

The possibility that shares may be of a hybrid nature was discussed by
the Supreme Court of Canada in
Canada Deposit Insurance Corp. v. Canadian
Commercial Bank
[1992] 3 S.C.R. 558, where the question was whether funds
advanced by the respondents to the Canadian Commercial Bank, then in a solvency
crisis, had been an investment of capital or a loan (in which latter event
the respondents were entitled to be paid out by the liquidator pursuant to the
Winding-up
Act
, R.S.C. 1985, c. W-11.)  The Court held on an examination of the terms
of the parties Participation Agreement and the surrounding circumstances
that the advance was, in substance, a loan rather than an investment of
capital.  (At 598.)  In reaching this conclusion, Iacobucci J. for the Court
said this about the co-existence of the debt and equity aspects of the transaction:

As I see it, the fact that the
transaction contains both debt and equity features does not, in itself, pose an
insurmountable obstacle to characterizing the advance of $255 million. Instead
of trying to pigeonhole the entire agreement between the Participants and CCB
in one of two categories, I see nothing wrong in recognizing the arrangement
for what it is, namely, one of a hybrid nature, combining elements of both debt
and equity but which, in substance, reflects a debtor-creditor relationship.
Financial and capital markets have been most creative in the variety of
investments and securities that have been fashioned to meet the needs and
interests of those who participate in those markets. It is not because an
agreement has certain equity features that a court must either ignore these
features as if they did not exist or characterize the transaction on the whole
as an investment. There is an alternative. It is permissible, and often
required, or desirable, for debt and equity to co-exist in a given financial
transaction without altering the substance of the agreement. Furthermore, it
does not follow that each and every aspect of such an agreement must be given
the exact same weight when addressing a characterization issue. Again, it is
not because there are equity features that it is necessarily an investment in
capital. This is particularly true when, as here, the equity features are
nothing more than supplementary to and not definitive of the essence of the
transaction. When a court is searching for the
substance
of a particular
transaction, it should not too easily be distracted by aspects which are, in
reality, only incidental or secondary in nature to the main thrust of the
agreement. [At 590-91.]

[43]

In
Re Central Capital Corp.
(1996) 27 O.R. (3d) 494, the Ontario
Court of Appeal split on the question of whether the holders of certain
redeemable preferred shares in Central Capital Corp. (CCC) had a provable
claim against CCC under the
Companies Creditors Arrangement Act
. 
Evidently, some of the preferred shares entitled their holders to retract them
at $25 per share on July 1, 1992, while other series of the shares entitled the
holders to retract them on or after September 1994 for $1 per share, subject to
the provisions of the
Canada Business Corporations Act
(
CBCA
). 
Section 36(2) of the
CBCA
codified the common law prohibition on the
redemption of shares of a corporation when it was insolvent or where the
redemption would render the corporation insolvent.

[44]

CCC became insolvent in late 1991 and
CCAA
proceedings were
commenced in early 1992.  A plan was devised under which certain creditors
would exchange part of their claims for shares and debentures of a new
corporation (Newco) and creditors of CCC would receive 90% of the common
shares in a reorganized CCC.  To participate as a creditor in the
reorganization, s. 12(1) of the
CCAA
required that a person have a
claim provable in bankruptcy.  Section 121(1) of the
Bankruptcy and
Insolvency Act
(
BIA
) stated that all debts and liabilities,
present or future, were deemed to be provable claims.

[45]

M, the holder of redeemable retractable preferred shares, purported to
exercise his right of retraction in April and May of 1992, but CCC did not
redeem the shares, and obviously could not do so legally.  M subsequently sought
to file a proof of claim.  In September 1992, SYH, the holder of the series
of preferred shares that were to be retractable in September 1994, also filed a
proof of claim.  Both claims were disallowed by the court-appointed administrator
on the basis that it would be contrary to the
CBCA
for CCC to redeem the
shares given its insolvent position, and in the case of SYHs shares, given also
that the date for redemption had not yet arrived.  The lower court upheld the administrators
decision, ruling that M and SYH were not creditors because they did not have
claims provable under the
BIA
.

[46]

On appeal, the majority of the Court affirmed the lower court, with Finlayson
J.A. dissenting.  Weiler J.A. and Laskin J.A. wrote separate concurring reasons.

[47]

Weiler J.A. noted that the two shareholder groups in question had agreed
that the effect of s. 36(1) of the
CBCA
was to render the
agreement (i.e., the agreement in the articles of the corporation between it
and its shareholders) to redeem the shares unenforceable.  She rejected the
notion, based on a 1989 decision of this court (
Re East Chilliwack
Agricultural Cooperative
(1989) 74 C.B.R. (N.S.) 1, 58 D.L.R. (4th) 11)
that the
CBCA
did not extinguish the debt or liability said to have been
created on Ms purported attempt to redeem his shares.  In her analysis:

Here, the effect of Central
Capital's inability to redeem its shares due to insolvency is very much in
issue and cannot be ignored. Although the articles provide for the redemption
of all of the shares held by [M] and SYH on or after the retraction date, the
articles also state that Central Capital will only redeem so many of its shares
as would not be contrary to law. Pursuant to s. 36(1) of the
CBCA
, a
corporation may purchase or redeem redeemable shares, but the corporation is
prohibited from doing so if the corporation is unable to pay its liabilities as
they become due or if the assets of the corporation are less than the total of
its liabilities and the amount required for the redemption. Because Central
Capital could not comply with the solvency requirements, redemption would be contrary
to law.  [At 525-26.]

[48]

Weiler J.A. also noted that there was nothing in CCCs articles to
support the idea that once a shareholder had requested the redemption of his
shares, he or she ceased to have status as a shareholder.  In the alternative,
even if she were wrong that the true nature of the transactions relationship
to the capital structure was one of equity, and even if one adopted a broad
view of the meaning of debt or liability, she considered that CCCs
obligation to redeem the shares did not give M and SYH claims provable in bankruptcy. 
In her analysis:

Here, the contract to repurchase
the shares, while perfectly valid, is without effect to the extent that there
is a conflict between the corporation's promise to redeem the shares and its
statutory obligation under s. 36 of the
CBCA
not to reduce its capital
where it is insolvent. As was the case in the
Holowach
decision,
this
statutory overlay renders Central Capital's promise to redeem the appellants'
preferred shares unenforceable
. Although there is a right to receive
payment, the effect of the solvency provision of the
CBCA
means that
there
is no right to enforce payment. Inasmuch as there is no right to enforce
payment, the promise is not one which can be proved as a claim
.  [At 533; emphasis
added.]

[49]

Laskin J.A., concurring, acknowledged that redeemable or retractable
preferred shares are somewhat different from conventional equity capital, in
that the right of retraction appears to be a basic characteristic of a debtor-creditor
relationship.  (At 536.)  This being the case, the Court had to determine the
substance of the relationship between the shareholder and the CCC, as
indicated by
Canada Deposit Insurance Corp., supra
.  On an examination
of the Articles of CCC and the share purchase agreements, he noted that the shareholders
had agreed to take preferred shares instead of typical debt instruments such as
bonds or debentures; that the shares were recorded in CCCs financial
statements as capital stock; that the holders continued to be entitled to
receive dividends on their shares and to vote for the election of directors,
both of which were well recognized rights of shareholders; that these rights
continued until the shares were in fact redeemed; and that on a liquidation or
winding-up, the holders ranked with other shareholders and therefore,
implicitly, behind creditors.  Laskin J.A. continued:

It seems to me that these
appellants must be either shareholders or creditors. Except for declared
dividends, they cannot be both. Once they are characterized as shareholders,
their rights of retraction do not create a debtor-creditor relationship. These
rights enable them to call for the repayment of their capital on a specific
date (and at an agreed-upon price) provided the company is solvent. Ordinarily
shareholders have to recoup their investment by selling their shares to third
parties. If they have retraction rights, however, they can compel the company
(if solvent) to repay their investment at a given time for a given price. But
the right of retraction provides for the return of capital not for the
repayment of a loan. Certainly the [
CBCA
] treats a redemption of shares
as a return of capital because s. 39 of the statute requires a company on a
redemption to deduct from its stated capital account an amount equal to the
value of the shares redeemed. The shares redeemed are then either cancelled or
returned to the status of authorized but unissued shares.  [At 540.]

Laskin J.A. also declined to follow
Re East
Chilliwack,
which he noted was distinguishable in any event.  After referring
to some U.S. case law considering the rights of shareholders in the event of
insolvency, he concluded that M and SYH were in substance not creditors and
that neither the existence nor the purported exercise of their retraction
rights had turned them into creditors.

[50]

Finlayson J.A. in dissent was also concerned with the substance of the
transaction that had led to the issuance of the shares in question.  In his
analysis, the retraction clauses attached to the shares were promises by CCC
to pay fixed amounts on definite dates to the shareholders and evidenced a debt
to them.  (At 512.)  He continued:

I have no difficulty in finding that the appellants
preferred shares with their retraction clauses are of a hybrid nature,
combining elements of both debt and equity. As to the equity component, the
appellants are shareholders prior to exercising their retraction rights in that
they have the right to vote in certain circumstances and have a right to
receive dividends when and if they are declared by the board of directors. The
debt component is more significant however. The shares were not issued to
investors, but to vendors of property. The vendors were entitled to receive a
fixed sum at a specified time in payment therefor. Pending payment, the vendors
were entitled to receive dividends which were the equivalent of interest on the
unpaid balance.

I can think of no reason why the
holders of these preferred shares should not be treated as both shareholders
and creditors. It does not concern me that these appellants act as shareholders
before their retraction rights are exercisable. Nor do I see any hardship to
other creditors of Central Capital arising from the ability of these appellants
to claim as creditors in the restructuring of the company given that the
appellants are unpaid with respect to substantial assets sold to the
corporation and now transferred on the restructuring to [Newco].  [At 513.]

[51]

Finlayson J.A. rejected the proposition that because the
CBCA
(like
the common law) precluded CCC from redeeming shares when it was insolvent, the
preferred shareholders could not be said to have a provable claim.  He reasoned
as follows:

... regarding the insolvency
argument, these various statutes prohibit payments of any kind to shareholders
by an insolvent company. As I understand it, counsel does not question that
when a dividend has been lawfully declared by a corporation, it is a debt of
the corporation and each shareholder is entitled to sue the corporation for his
proportion: see
Fraser
and
Stewart
,
supra
, at p. 220 for a
list of authorities. However, once a company is insolvent it cannot make
payments to shareholders or creditors so long as it continues to be insolvent.
On the other hand, nowhere in the
CBCA
or elsewhere will we find authority
for the proposition that once a corporation is insolvent, it is no longer
obliged to pay its debts. The obligation is postponed until the insolvency is
corrected or the corporation makes an accommodation with its creditors and
obtains a release with or without the assistance of the various statutes
dealing with insolvency.  [At 516.]

[52]

Finally, Finlayson J.A. also rejected the argument that because the
preferred shares were not eligible for redemption or retraction as at the date
of the stay order under the
CCAA
, they did not come within the broad
umbrella of debts and liabilities, present and future, to which [the
corporation] is subject.  In his analysis, this fact did not mean that they
were not provable claims under s. 121 of the
BIA,
and the stay
order did not purport to extinguish the debt created by the retraction clause,
even if the debt was payable on a future date.  (At 516-17.)

[53]

We are of course not concerned with bankruptcy or insolvency in the case
at bar, nor with an unenforceable obligation; nor are we required to
characterize the Class C shares as anything other than shares.  Clearly, they are
shares. Our task here is less difficult than those facing the Court in
Re
Central Capital
, since the
FIA
expressly contemplates shares that
contain debt features.  We need only determine whether the Class C shares
evidence indebtedness of Coast Capital to its shareholders.

[54]

The term indebtedness and its root debt may be used narrowly or
broadly.  Thus whether they appear in the
BIA
(
Interclaim Holdings v.
Down
2001 BCCA 65 at paras. 29-32), the
Companies Creditors Arrangement
Act
(
Re Canadian Airlines Corp.
(2001) 92 Alta. L.R. (3d) 140 at
paras. 20-27), the
Treaties of Peace Act
, S.C. 1919 (2nd sess.), c. 30, (
The
Custodian v. Passavant
[1928] S.C.R. 242 at 249-54), or the
Court Order
Enforcement Act
, (
Taxsave Consultants Ltd. v. Pacific Lamp Corp.
(1990)
52 B.C.L.R. (2d) 128 at 132-33) to name but a few, they will be given meaning
consistent with their context: see
Barrette v. Crabtree Estate
[1993] 1
S.C.R. 1027 at 1048-9.

[55]

As Weiler J.A. noted in
Central Capital Corp., supra, Blacks Law
Dictionary
(6th ed., 1990) offers three different definitions as follows:

A sum of money due by certain and express agreement.
A
specified sum of money owing to one person from another
, including not only
the obligation of debtor to pay but right of creditor to receive and enforce
payment ...

A
fixed and certain obligation
to pay money or some other valuable thing or things, either in the present or
in the future. In a still more general sense, that which is due from one person
to another
, whether money, goods or services. In a broad sense, any duty to
respond to another in money, labor, or service; it may even mean a moral or
honourary obligation, unenforceable by legal action. Also, sometimes an
aggregate of separate debts, or the total sum of existing claims against person
or company. Thus we speak of the national debt, the bonded debt of a
corporation, etc.  [Emphasis added.]

[56]

The obligation of Coast Capital to pay to its Class C shareholders the
par value of the shares on the Maturity Date in 2009 was clearly an obligation
to pay a sum of money due, and was enforceable by the shareholders on or after
that date.  Until then, the obligation was in the future.  Counsel for the
Minister seemed to suggest in passing in his letter of December 14, 2010 that the
Class C shares did not represent indebtedness of the credit union prior to the
Maturity Date, although they may have done so from and after June 27, 2009.  This
submission depends on a narrow construction that restricts debt to an
obligation that is due and owing unconditionally.

[57]

It seems to me that if we were to so interpret indebtedness, we would
be restricting the scope of non-equity shares almost out of existence.  It is
difficult to imagine how even the most debt-like share could be said to
evidence indebtedness given that it is almost impossible to conjure up a share
that would not require that a condition of some kind be met before the
obligation to redeem becomes enforceable.  Further, it seems to me that interpreting
indebted in the ordinary and grammatical sense of the word, most reasonable
people would agree, for example, that a mortgagor whose mortgage becomes due
ten years from now is nevertheless indebted to the mortgagee and would be
required to disclose the mortgage if he or she were asked to list his debts.  On
balance, then, I am not persuaded that on a proper application of the modern
approach to statutory interpretation, we should confine indebtedness to
indebtedness that is due and owing unconditionally.  Rather, I would be content
to adopt the definition of debt that appears in numerous Canadian and English
cases, namely:

A debt is defined to be a sum of
money which is certainly, and at all events, payable without regard to the fact
whether it be payable now or at a future time.

(See also
Mail Printing Co. v. Clarkson
(1898) 25
O.A.R. 1 at 9 (C.A.);
Enterprise Capital Management Inc. v. Semi-Tech Corp.
(1999) 10 C.B.R. (4th) 133 (Ont. S.C.J.);
Dyadic Industries International
Ltd. v. Award Cleaners Ltd.
(1996) 114 Man.R. (2d) 193 (Q.B.) at para. 15;
see also
Mortimore v. Inland Revenue Commissioners
(1864) 33 L.J. Ex.
263;
Tapp v. Jones
(1875) L.R. 10 Q.B. 591;
P. Lyall & Sons
Construction Co. Ltd. (In Liquidation) v. Baker, et al.
[1933] 21 O.R. 286
(C.A.);
Webb v. Stenton
(1883) 11 Q.B.D. 518 at 527;
Barsi v. Farcas
[1924]
1 D.L.R. 1154 (Sask. C.A.);
Souris Credit Union Ltd. v. MacDonald
(1986)
61 Nfld. & P.E.I.R. 1 (P.E.I.S.C., Gen. Div.).

[58]

Accordingly, even in the absence of the Ministers concession, I would conclude
that the Class C shares issued by Coast Capital did evidence indebtedness to
their holders and that the first branch of the statutory definition was also
met.

[59]

I would dismiss the appeal.

The
Honourable Madam Justice Newbury

I agree:

The
Honourable Madam Justice Ryan

I agree:

The Honourable Mr. Justice
Hinkson


