Docket: A-189-16
Citation:
2017 FCA 3
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CORAM:
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PELLETIER J.A.
STRATAS J.A.
WOODS J.A.
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BETWEEN:
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SOCIÉTÉ GÉNÉRALE VALEURS
MOBILIÈRES INC.
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Appellant
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and
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HER MAJESTY THE
QUEEN
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Respondent
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REASONS FOR JUDGMENT OF THE COURT
(Delivered from the Bench at Toronto, Ontario, on
January 10, 2017).
WOODS J.A.
[1]
In the course of an appeal instituted in the Tax
Court of Canada by Société Générale Valeurs Mobilières Inc., the Crown sought a
determination of questions of law pursuant to subsection 58(1) of the Tax
Court of Canada Rules (General Procedure). With the consent of Société
Générale, the Associate Chief Justice of the Tax Court set the matter down for
determination.
[2]
In a decision cited as 2016 TCC 131, Paris J.
(the judge) ultimately decided the questions in the Crown’s favour, and Société
Générale has appealed to this Court.
[3]
The questions for determination relate to the tax
sparing provision in the Convention between the Government of Canada and the
Government of the Federative Republic of Brazil for the Avoidance of Double
Taxation with Respect to Taxes on Income (1984) (the Treaty). In general, this
provision requires Canada to limit Canadian tax on certain Brazilian source
income so that Canadian taxpayers may benefit from tax incentives provided on
this income by Brazil. If it were not for the tax sparing provision, Canada
would have the right to tax Canadian residents on this income in Canada. The
Treaty mechanism requires Canada to provide a foreign tax credit on the
qualifying Brazilian income as if Brazilian tax were imposed even if the income
was not taxed in Brazil.
[4]
The specific questions before Tax Court concerned
the calculation of the Canadian foreign tax credit. In particular, did the
relevant Treaty provision require Canada to provide a foreign tax credit
calculated by reference to Canadian tax on gross income?
[5]
The specific questions are reproduced below:
Where a Canadian resident taxpayer earns bond
interest income arising in Brazil that may be taxed by Brazil under Article XI
of Canada’s tax treaty with Brazil, and earns taxable income from other
sources, is the amount of Canadian income tax that is referred to in Article
XXII(2) of the treaty as being “appropriate to the income which may be taxed in
Brazil”:
a. equal to the Canadian income tax on the amount of such interest
income that is or is deemed to be taxed in Brazil, which is a gross amount; and
b. if the answer to (a) is yes, what is the proper test for
determining the Canadian income tax payable on the gross amount of income
derived from Brazil;
c. if the answer to (a) is no, what is the proper test for
determining which amounts of the Canadian resident taxpayer should be included
and/or deducted from the gross income arising from sources in Brazil?
[6]
The relevant provision is the second sentence of
Article XXII(2) of the Treaty, which reads: “The
deduction shall not, however, exceed that part of the income tax as computed
before the deduction is given, which is appropriate to the income which may be
taxed in Brazil.”
[7]
The context provided to the judge to answer
these questions was a simple statement of hypothetical facts agreed to by the
parties. These are:
1. A Canadian resident taxpayer earns bond interest income which arises
in Brazil.
2. The bond interest may be taxed by Brazil under Article XI of the
Treaty.
3. The taxpayer earns income from other sources that is taxable in
Canada.
4.
The taxpayer is deemed by Article XXII(3) of the
Treaty to have paid Brazilian tax equal to 20 percent of the gross bond
interest arising in Brazil.
[8]
The determinations of the judge are reproduced
below.
1. The amount of Canadian income tax referred to in the second
sentence of Article XXII(2) of the Treaty as being “appropriate to the
income which may be taxed in Brazil” is the actual Canadian income tax
attributable [to] the income taxed in Brazil, which is computed on the net
income arising from Brazil.
2. The proper test for determining which amounts of the Canadian
resident taxpayer should be included or deducted from the gross interest
arising from sources in Brazil is that found in subsection 4(1) of the Income
Tax Act.
[9]
Société Générale submits that the judge erred in
determining that Canada may limit the foreign tax credit to actual Canadian tax
on net bond interest. It submits that the relevant amount is to be calculated
as the gross bond interest multiplied by the Canadian tax rate. This issue is a
question of law for which the standard of review is correctness (Housen v.
Nikolaissen, 2002 SCC 33).
[10]
In our view, the judge correctly determined the
questions, and we agree with the reasons that he gave.
[11]
In this Court, Société Générale submits that the
judge’s interpretation of the Treaty should be rejected because it is
inconsistent with the clear language of the provision. It also submits that, if
the judge’s interpretation were correct, the drafters of the Treaty would have
used the language that was used in many other treaties.
[12]
We disagree with these submissions. In our view,
the judge’s interpretation is more consistent with the language of the relevant
provision. In particular, the judge is correct that the ordinary meaning of the
text takes into account not only the gross income which may be taxed by Brazil,
but also the actual Canadian tax as computed under the Income Tax Act,
which is based on net income.
[13]
The interpretation by the judge is the one that
is most consistent with the text, the context and the purpose of the provision.
[14]
Finally, we acknowledge that the text of the
Treaty may be different from many of Canada’s other treaties. However, in these
circumstances this is not a reason in and of itself to give the provision a
different interpretation.
[15]
The appeal will be dismissed, with costs in this
Court and in the Court below.
"Judith M. Woods"
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