Laskin,
J
(all
concur):—The
two
appellants,
Swiss
Bank
Corporation
and
Swiss
Credit
Bank,
who
make
common
cause,
are
non-residents
claiming
exemption
from
the
15%
tax
levied
upon
them
in
respect
of
interest
paid
to
them
by
an
Ontario
real
estate
company
pursuant
to
certain
lending
indentures
between
that
company
and
the
two
banks.
Assessments
for
the
taxation
years
1966,
1967
and
1968
are
in
issue,
and
the
appeals
depend
on
whether
the
amounts
taxed
were
“interest
payable
.
.
.
to
a
person
with
whom
the
payer
is
dealing
at
arm’s
length”.
The
quoted
words
come
from
clause
106(1
)(b)(iii)(A)
of
the
Income
Tax
Act,
RSC
1952,
c
148,
as
amended,
which
reads
as
follows:
106.
(1)
Every
non-resident
person
shall
pay
an
income
tax
of
15%
on
every
amount
that
a
person
resident
in
Canada
pays
or
credits,
or
is
deemed
by
Part
I
to
pay
or
credit,
to
him
as,
on
account
or
in
lieu
of
payment
of,
or
in
satisfaction
of,
(b)
interest
except
(iii)
interest
payable
in
a
currency
other
than
Canadian
currency
to
a
person
with
whom
the
payer
is
dealing
at
arm’s
length,
on
(A)
any
obligation
where
the
evidence
of
indebtedness
was
issued
on
or
before
December
20,
1960,
It
is
conceded
by
the
respondent
Minister
that
the
payments
to
the
banks
fall
within
the
exception
in
all
respects
other
than
the
arm’s
length
requirement.
Thurlow,
J,
from
whose
judgment
of
May
31,
1971
the
banks
have
appealed
to
this
Court,
was
of
the
opinion
that
this
requirement
was
not
met
and,
consequently,
he
affirmed
the
assessments.
For
the
reasons
which
follow,
I
agree
with
his
conclusion.
I
point
out
here
that
no
issue
is
taken
whether
the
banks
should
have
been
assessed
at
all;
the
proceedings
are
directed
to
the
operation
of
clause
106(1
)(b)(iii)(A)
in
the
circumstances
hereinafter
set
out.
The
appellant
banks
are
not
related
to
each
other
but
they
cooperated
in
raising
money
for
investment
in
Canadian
real
estate
by
inviting
public
subscriptions
to
a
Swiss
fund
known
as
the
Canada-
Immobil
Investment
Fund.
Subscribers
to
the
fund
(which
itself
had
no
juridical
personality)
were
given
bearer
coupon
certificates
in
one
and
five
share
denominations,
signed
by
the
two
banks
as
trustees
and
also
by
the
manager
of
the
fund,
the
Société
Internationale
de
Placements
(hereinafter
referred
to
as
SIP),
a
Swiss
corporation
of
which
the
two
banks
are
major
shareholders,
each
holding
40%
of
the
shares.
A
third
bank
not
directly
involved
in
soliciting
subscriptions
to
the
fund
holds
the
remaining
20%.
The
certificates
for
shares
in
the
fund
are
in
three
languages,
German,
French
and
English,
and
bear
the
following
inscription,
in
the
English
version,
on
their
face:
Each
share
entitles
the
holder
thereof
to
a
proportionate
right
of
co-owner-
ship
in
the
assets
of
the
Fund
according
to
article
1
of
the
Regulations
reproduced
overleaf.
Each
share’s
participation
in
the
co-ownership
corresponds
to
the
assets
of
the
Fund
divided
by
the
number
of
shares
outstanding.
The
determination
of
value
of
each
share
as
well
as
the
rights
and
obligations
of
the
certificate
holders
are
governed
by
the
Regulations
(articles
7
and
4).
Each
holder
accepts
these
Regulations
and
any
subsequent
amendment
thereof
as
binding
(article
27).
I
shall
refer
later
to
the
regulations,
but
I
note
at
this
point
that
in
1966
the
Swiss
Parliament
enacted
legislation,
effective
February
1,
1967,
which
applied
to
all
investment
funds
in
the
country,
whether
theretofore
or
thereafter
established,
and
which
provided
that
subscribers
are
creditors
rather
than
persons
having
proportionate
rights
of
co-
ownership
in
the
assets
of
the
fund.
Although
the
regulations
under
which
the
Canada-!mmobil
Fund
was
administered
were
recast
in
1969
to
conform
to
the
legislation,
nothing
turns
on
this
in
the
present
case.
It
will
be
convenient
to
refer
to
the
regulations
in
force
during
the
taxation
years
in
question
here.
The
regulations
state
the
purpose
of
the
fund
to
be
the
investment
of
its
moneys
in
Canadian
real
estate
by
founding
or
financing
or
taking
over
real
estate
companies.
Under
the
regulations,
SIP
has
full
power
of
investment
and
reinvestment
of
the
assets
of
the
fund
which,
however,
are
to
be
in
the
custody
of
the
appellant
banks
which
are
also
to
hold
all
proceeds
of
the
sale
of
real
estate
and
all
shares
of
companies
“owned”
by
the
fund,
and
are
to
act
as
paying
agents
in
distributing
annually
to
the
certificate
holders
the
net
profits
from
investments.
The
regulations
provide
that
SIP
“shall
exercise
the
functions
of
a
common
contractual
representative”
of
the
certificate
holders
and
that
“to
the
extent
that
[S.I.P.],
in
acting
on
behalf
of
the
certificate
holders,
[has]
to
assume
or
incur
any
liability,
the
Fund
shall
be
answerable
for
such
liability’.
Moreover,
‘as
soon
as
such
an
obligation
is
in
view,
the
trustees
shall
release
investments
to
the
extent
required
in
order
that
the
necessary
cash
amounts
may
be
available
on
the
due
date”.
The
fund
was
to
be
of
unlimited
duration
subject
to
the
right
of
SIP
to
liquidate
it
upon
six
months’
notice.
Certificate
holders
have
no
right
to
a
dissolution
or
distribution
of
assets
but
may
demand
repurchase
of
their
shares
at
any
time.
The
regulations
prescribe
certain
commissions
on
subscription
of
shares
and
on
investment
of
moneys
of
the
fund
which
it
is
unnecessary
to
detail;
and,
in
addition,
operating
expenses
are
chargeable
against
investments
or
income
derived
therefrom.
In
the
words
of
the
regulations,
“the
holders
of
certificates
entrust
the
managers
and
the
trustees
respectively
with
the
safe
custody,
administration
and
representation
of
the
.
.
.
Fund”.
Acting
under
its
powers
given
by
the
regulations,
SIP
caused
the
incorporation
of
an
Ontario
company,
City
Park
Apartments
Ltd,
to
serve
as
the
vehicle
for
the
investment
of
moneys
of
the
fund.
SIP
was
the
registered
owner
of
all
shares
of
this
company
which
engaged
in
the
construction
and
operation
of
apartment
buildings.
The
money
for
its
enterprises
was
advanced
by
the
banks
under
lending
indentures
which
styled
them
as
trustees
of
the
fund
and
which
provided
for
interest
at
7
/2%
per
annum.
The
Ontario
company
agreed
under
the
indentures
to
obtain
its
financing
only
from
the
appellant
banks
which
were
entitled
to
convert
their
advances
into
a
loan
upon
mortgage
as
a
first
charge
upon
the
company’s
real
estate.
No
time
limit
was
fixed
for
repayment,
but
either
the
lender
or
borrower
could
upon
six
weeks’
notice
claim
or
offer
repayment
in
whole
or
in
part.
City
Park’s
profits
on
its
operations
were
not
sufficient
in
the
taxation
years
in
question
to
enable
it
to
pay
the
prescribed
interest
on
the
loans
made
to
it
by
the
banks
out
of
the
fund,
and
SIP
authorized
waiver
of
portions
of
the
required
interest
payments.
In
addressing
himself
to
the
“arm’s
length”
issue
arising
under
clause
106(1
)(b)(iii)(A),
Thurlow,
J
dealt
with
it
both
on
the
basis
that
the
banks
were
recipients
of
the
interest
payments
made
by
City
Park
and
that
the
certificate
holders
were
the
recipients,
but
he
preferred
the
view
that
the
banks
and
SIP
were
acting
in
concert
in
respect
of
the
investment
in
and
yield
from
City
Park’s
operations
and
that,
having
regard
to
the
position
of
the
two
banks
vis-à-vis
SIP
and
SIP’s
position
vis-a-vis
City
Park,
it
could
not
be
said
that
City
Park,
as
payer,
was
dealing
with
them
at
arm’s
length.
He
concluded
that
“as
a
practical
matter,
it
appears
to
me
that
the
payment
of
the
interest
by
City
Park
did
amount
to
nothing
more
than
the
moving
of
money
from
one
of
the
fund’s
pockets
to
another”.
The
appellant
banks
contend
that
the
certificate
holders
were
the
persons
to
whom
the
interest
was
payable
by
City
Park,
within
clause
106(1
)(b)(ii
i)(A)
;
and
although
the
Minister’s
primary
position
was
that
the
two
banks
and
SIP
were
the
payees,
as
held
by
the
trial
judge,
he
rested
his
case
equally
on
the
alternative
position
that
the
certificate
holders
were
the
payees.
In
my
opinion,
the
banks’
contention
and
the
alternative
position
of
the
Minister
are
correct.
Neither
the
manager
nor
the
depositaries
of
moneys
in
the
fund,
advanced
as
an
investment
for
the
benefit
of
the
subscribing
certificate
holders,
have
any
beneficial
right
to
the
interest.
Indeed,
the
one
as
agent
and
the
others
as
fiduciaries
are
merely
the
instruments
through
which
the
funds
collected
from
the
certificate
holders
were
channelled
to
City
Park
by
way
of
an
interest
bearing
loan.
The
regulations
governing
the
fund
make
clear
the
entitlement
of
the
certificate
holders
to
the
net
profits
of
investments,
and
it
is
equally
evident
from
the
lending
indentures
that
it
is
only
as
trustees
and
pursuant
to
those
regulations
that
the
banks
made
the
advances
to
City
Park.
The
fact
that
management
fees
and
commissions
are
involved
in
the
investment
of
moneys
of
the
fund
and
in
the
annual
distribution
of
profits
does
not
detract
from
the
substance
of
the
matter
under
discussion.
Are
then
the
certificate
holders
payees
of
the
interest
with
whom
City
Park
is
dealing
at
arm’s
length?
Although
SIP
is,
in
effect,
a
creature
of
the
appellant
banks
and
City
Park,
in
turn,
is
a
creature
of
SIP
and
both
are
instruments
for
the
investment
of
moneys
subscribed
by
the
certificate
holders,
the
submission
of
the
banks
is
that
the
regulations,
binding
as
they
are
upon
the
certificate
holders,
establish
a
regime
which
puts
them
at
arm’s
length
from
City
Park.
Reference
was
made
to
the
expert
evidence
of
a
Swiss
lawyer
that
the
certificate
holders
alone
were
the
beneficiaries
of
income
from
the
fund,
but
that,
even
before
the
Swiss
legislation
of
1966,
they
had
no
rights
in
rem
in
the
capital
assets
of
the
fund
but
only
rights
in
personam,
realizable
on
liquidation.
Rights
in
rem
were
in
the
banks,
although
as
fiduciaries,
and
similarly
as
to
SIP
in
so
far
as
it
obtained
transfers
of
fund
moneys
to
its
account
and
created
City
Park
as
a
wholly-owned
vehicle
for
investment
of
such
moneys.
What
this
evidence
is
said
to
show
is
that
there
is
an
ownership
position
in
the
banks
and
in
SIP
in
respect
of
assets
of
the
fund;
and
that
in
view
of
the
binding
terms
of
the
regulations
giving
independent
investment
discretion
to
SIP,
there
is
a
control
in
relation
to
City
Park
which
precludes
any
conclusion
that
the
latter
is
not
at
arm’s
length
with
the
certificate
holders.
This
submission
was
fortified
by
pointing
to
the
fact
that
the
certificate
holders
cannot
vote
the
shares
of
City
Park
or
direct
SIP
in
the
exercise
of
its
powers,
cannot
enforce
or
waive
payments
of
interest
by
City
Park,
or
interfere
with
the
assets
of
the
fund
or
the
accounts
in
which
they
are
held
or
to
which
they
are
transferred.
In
fine,
since
the
certificate
holders
have
only
the
right
to
have
their
coupons
redeemed
annually
and
to
have
their
shares
repurchased,
they
stand
(so
it
is
contended)
completely
outside
of
any
relationship
to
City
Park
that
would
negate
arm’s
length
dealing.
In
my
opinion,
the
interposition
of
the
managing
agent
and
the
two
depositaries
between
City
Park
and
the
certificate
holders
does
not,
despite
the
regulations,
create
an
arm’s
length
situation
between
them,
within
the
exception
in
clause
106(1
)(b)(iii)(A).
City
Park
owes
its
very
existence
to
the
funds
provided
by
the
certificate
holders,
is
without
support
from
any
other
source
and
those
funds
are
committed
to
provide
a
return
only
to
the
certificate
holders.
In
short,
City
Park
is
completely
a
captive
to
the
interests
of
the
certificate
holders,
acting
through
professional
managers
and
fiduciaries.
Although
the
circumstances
here
do
not
present
the
common
type
of
non-arm’s
length
dealing
referred
to
by
this
Court
in
MNR
v
Sheldon's
Engineering
Ltd,
[1955]
SCR
637;
[1955]
CTC
174;
55
DTC
1110,
they
bring
this
case
within
the
principle
that
underlies
the
disqualification
expressed
in
clause
106(1
)(b)(iii)(A),
namely,
that
the
payer
and
payee
must
not
be
persons
who,
effectively,
are
dealing
exclusively
with
each
other
through
a
fund
provided
by
the
payee
for
the
benefit
of
the
payee.
A
sound
reason
for
this
that
the
enactment
itself
suggests
is
the
assurance
that
the
interest
rate
will
reflect
ordinary
commercial
dealing
between
parties
acting
in
their
separate
interests.
A
lender-borrower
relationship
which
does
not
offer
this
assurance
because
there
are,
in
effect,
no
separate
interests
must
be
held
to
be
outside
of
the
exception
that
exempts
a
non-resident
from
taxation
on
Canadian
interest
payments.
The
fact
that
the
interest
actually
authorized
or
paid
is
consistent
with
arm’s
length
dealing
is
not
enough
in
itself
to
avoid
this
conclusion.
I
would
dismiss
these
appeals
with
costs.