Citation: 2014 TCC 12
Date: 20140114
Docket: 2008-2896(IT)G
BETWEEN:
CONRAD BLACK,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR DETERMINATION
Rip C.J.
[1]
This a determination of
the following question of law made pursuant to section 58 of the Tax
Court of Canada Rules (General Procedure):
Whether, in view of the Canada-United
Kingdom Income Tax Convention (1978) and the Canada-United
Kingdom Income Tax Convention Act (1980) the Minister of National
Revenue ("Minister") may assess tax against the applicant on the
basis that he was a resident of Canada for purposes of the Income Tax Act
on any of the items described in subparagraphs 5(i) to (vi) and
subparagraph 5(viii) of the Amended Amended Notice of Appeal.
[2]
There is no issue that,
absent the Canada – U.K. Tax Convention, for purposes of the Income Tax Act (“Act”),
the applicant was a resident of Canada in 2002. As a resident of Canada, he is required by Part I of the Act to pay tax on his worldwide income.
In 2002, he was also a resident of the U.K. for purposes of U.K. tax. Article 4 of the Convention defines the term “resident of a Contracting State” for the purposes of the Convention and provides tie-breaker
rules for dual residents. By virtue of paragraph (a) of
Article 4(2) of the Convention, the applicant was deemed to be
resident of the U.K. and not Canada. The Minister assessed the applicant income
tax for 2002 on the Assessed Items described in subparagraphs 1(a) to 1(g)
of the Amended Agreed Statement of Facts on the basis he was a resident of
Canada "for purposes of the Act" in 2002. These amounts
included income derived from duties of offices and employments performed
outside of Canada.
[3]
The primary issues in
considering the question to be determined are:
a) whether Article 4(2)
of the Canada‑U.K. Tax Convention deeming the applicant (by the
tie breaker rule) to be resident of the United Kingdom ("U.K.") for
the purposes of the Convention overrides the provisions of the Income
Tax Act so as to prevent the Minister of National Revenue
("Minister") from assessing the applicant under Part I of the Income
Tax Act certain amounts of income described in paragraph 1 of the
Amended Agreed Statement of Facts ("Assessed Items") in 2002 as
resident of Canada for purposes of the Act; and
b) whether or
not Article 27(2) of the Convention applies to enable the Minister
to assess the applicant under Part I of the Act as a resident of Canada on any Assessed Items.
FACTS
[4]
The matter proceeded
by way of the following Amended Agreed Statement of Facts:
1. By a series of reassessments,
the last of which (the "Reassessments") is the subject of this
appeal, the Minister of National Revenue assessed tax against the applicant
under Part I of the Income Tax Act (the "Act") on
the following amounts [referred to in these reasons as "Assessed
Items"]:
(a) $2,862,385 on account of incomes
from the duties of offices and employments performed by the applicant outside
of Canada;
(b) $90,291 on account of the value
of the benefit assumed by the Minister to have been received by the applicant
from 10 Toronto Street Inc ("10 Toronto") for the security
paid in connection with the applicant's home at 26 Park Lane Circle,
Toronto;
(c) $87,834 on account of the value
of the benefit assumed by the Minister to have been received by the applicant
from The Ravelston Corporation ("Ravelston") for an amount paid
to John Hillier;
(d) $326,177 on account of taxable
dividends received by the applicant;
(e) $28,035 on account of interest
and other investment income received by the applicant;
(f) $365,564 on account of benefits
which the Minister assumed that the applicant was deemed to have received under
subsection 15(1), subsection 15(9) and subsection 80.4(2) of the
Act in respect of indebtedness owed by him to Conrad Black Capital
Corporation ("CBCC"); and
(g) $1,367,055 on account of
benefits that the Minister assumed had been conferred upon him as a result of
his use of an airplane to which Hollinger International Inc. had access and
which the applicant used.
2. The Reassessment was made on the
basis that the applicant was a resident of Canada for purposes of the Act
in the 2002 taxation year.
3. The respondent takes the
position that the benefits described in subparagraphs 1(b) and (c),
respectively, were conferred to the applicant in respect of, in the course of,
or by virtue of an office or employment the applicant held with 10 Toronto
and Ravelston, respectively, under paragraph 6(1)(a) of the Act.
4. The respondent takes the
following alternative position with respect to the interest benefit described
in subparagraph 1(f): that the benefit was conferred on the applicant by
virtue of a previous or current office or employment the applicant held with
CBCC under subsections 80.4(1) and (9) of the Act.
5. The respondent takes the
position that the airplane benefit described in subparagraph 1(g) was
conferred on the applicant in respect of, in the course of, or by virtue of an
office or offices or employment or employments held by the applicant with one
or more of Hollinger Inc., Hollinger International Inc., and Ravelston under
paragraph 6(1)(a) of the Act. In the alternative, the respondent
takes the position that the benefit was received by the applicant by virtue of
his direct or indirect shareholding in one or more of those corporations under
subsections 15(1), 56(2) or 246(1) of the Act.
6. The applicant became resident of
the United Kingdom under the law of the U.K. in 1992 and remained so resident
throughout 2002.
7. The applicant was, in the 2002
taxation year, apart from the provisions of the Canada‑United Kingdom
Income Tax Convention (1978) (the "Convention") as enacted
by the Canada‑United Kingdom Tax Convention Act (1980)
(the "Convention Act"), a resident of Canada for purposes of
the Act.
8. The applicant was not resident
in another country, other than Canada or the U.K. in 2002. Nor did he become
resident of any other country between 1992 and 2002.
9. By virtue of paragraph 2 of
Article 4 of the Convention Act, the applicant was deemed to be a
resident of the U.K.
10. The applicant was resident of,
but not domiciled in the U.K. As he was not domiciled in the U.K., the applicant was subject to tax in the U.K. only on such portion of his non U.K. source income as was remitted to or received in the U.K.
11. None of the amounts referred to
in subparagraphs 1(b) through (g) was remitted to or received in the U.K. and therefore none was subject to tax in the U.K.
12. The Minister of National Revenue
assumed that the amount referred to in subparagraph 1(a) was in respect of
the duties of offices or employments performed in the U.S.
13. The applicant says that the
amount referred to in subparagraph 1(a) was in respect of the duties of
offices or employments performed in the U.S. and the U.K.
14. To the extent that the amount
referred to in subparagraph 1(a) relates to the duties or offices or
employments performed in the U.K., it was not remitted to or received in the U.K. but was subject to tax in the U.K.
15. To the extent that the amount
referred to in subparagraph 1(a) relates to the duties of offices or
employments in the U.S., it was not remitted to, received in or subject to tax
in the U.K.
16. The applicant reported in his
return of income for 2002, and the Minister included in his income by the
Reassessment, the amount of $808,226 derived from the duties of offices and
employments performed by him in Canada.
17. If the applicant was a resident
of Canada for purposes of the Act, then the amount of $808,226 was
properly included in computing his income as a resident.
18. If the applicant was not a
resident of Canada for purposes of the Act, then the amount of $808,226
was properly included in computing his income by virtue of subsection 2(3)
and subparagraph 115(1)(a)(i) of the Act.
19. If the applicant was not a
resident of Canada for purposes of the Act, the the Minister was not
entitled to assess tax against the Applicant under Part I of the Act
on any of the items referred to in paragraph 1.
20. If the applicant was a resident
of Canada for the purposes of Act, the then Minister
(a) was entitled to assess tax
against the applicant under Part I of the Act on the amounts
referred to in subparagraph 1(a) that relate to the duties of offices or
employments performed outside the U.K.; and
(b) was entitled to assess tax
against the applicant under Part I of the Act on each of the items
referred to in subparagraphs 1(b) through 1(g), subject to the
determination at trial of whether, and if so, the extent to which, the applicant
received taxable benefits in the amounts described in subparagraphs 1(b),
(c) and (g).
CONVENTION PROVISIONS
[5]
Article 4 of the
Canada‑U.K. Tax Convention, in part, provides that:
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1. For the purposes of
this Convention, the term "resident of a Contracting State" means
any person who, under the law of that State, is liable to taxation therein by
reason of his domicile, residence, place of management or any other criterion
of a similar nature. But this term does not include any person who is liable
to tax in that Contracting State in respect only of income from sources
therein.
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1. Au sens de la présente
Convention, l'expression « résident d'un État contractant » désigne
toute personne qui, en vertu de la législation dudit État, est assujettie à
l'impôt dans cet État en raison de son domicile, de sa résidence, de son
siège de direction ou de tout autre critère de nature analogue. Toutefois,
cette expression ne comprend pas les personnes qui ne sont assujetties à
l'impôt dans cet État contractant que pour les revenus de sources situées
dans cet État.
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2. Where by reason of
the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:
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2. Lorsque, selon la
disposition du paragraphe 1, une personne physique est considérée comme
résident de chacun des États contractants, sa situation est réglée de la
manière suivante :
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(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him. If he has a
permanent home available to him in both Contracting States, he shall be
deemed to be a resident of the Contracting State with which his personal and
economic relations are closer (centre of vital interests);
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a) cette personne est considérée comme résident de l'État contractant où
elle dispose d'un foyer d'habitation permanent. Lorsqu'elle dispose d'un
foyer d'habitation permanent dans chacun des États contractants, elle est
considérée comme résident de l'État contractant avec lequel ses liens
personnels et économiques sont les plus étroits (centre des intérêts vitaux);
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…
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. . .
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[6]
In 2002,
paragraph 2 of Article 27 of the Convention read as follows:
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Where under any provision of this Convention any person is relieved
from tax in a Contracting State on certain income and, under the law in force
in the other Contracting State, that person is subject to tax in that other
State in respect of that income by reference to the amount thereof which is
remitted to or received in that other State, the relief from tax to be
allowed under this Convention in the first-mentioned State shall apply only
to the amounts so remitted or received.
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Lorsque, en
vertu d'une disposition de la présente Convention, une personne a droit dans
un État contractant à un allégement d'impôt sur un certain revenu et, en
vertu de la législation en vigueur dans l'autre État contractant, cette
personne est soumise à l'impôt dans cet autre État à raison du montant de ce
revenu qui y est transféré ou perçu, l'allégement qui doit être accordé dans
le premier État en vertu de la présente Convention ne s'applique qu'au
montant dudit revenu ainsi transféré ou perçu.
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[7]
The Convention was
made part of the law of Canada by the Canada‑U.K. Income Tax
Convention Act 1980 ("Convention Act"). The Convention
Act, at subsections 30(1) and (2), provides that:
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30(1) The Convention is approved and
declared to have the force of law in Canada during such period as, by its
items, the Convention is in force.
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30(1) La Convention est approuvée et a
force de loi au Canada pendant la durée de validité prévue par son
dispositif.
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(2) In the event of any
inconsistency between the provisions of this Part, or the Convention, and the
provisions of any other law, the provisions of this Part and the Convention
prevail to the extent of the inconsistency.
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(2) Les dispositions de la présente
partie et de la Convention l'emportent sur les dispositions incompatibles de
toute autre loi ou règle de droit.
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PARTIES'
SUBMISSIONS
[8]
The applicant submits
that he is not liable for tax in Canada on the Assessed Items. The respondent says
he is liable. Both parties agree that according to the Convention the
applicant it not required to pay tax in the U.K. until such time as the income
of the Assessed Items is remitted or received in the U.K. Therefore, if the
applicant is correct, he is not liable for tax on the Assessed Items in 2002 in
either country. If there is a flaw in the drafting of a tax convention — or
the Act — that does not reflect what the drafter intended and the
error permits a taxpayer to legitimately arrange his affairs so that he is not
liable for tax anywhere, for example, it is not the role of the Court to remedy
the flaw. Nevertheless this is not the situation before me.
a) Applicant
[9]
The applicant submits
that where a person is a resident of Canada by virtue of the Act without
taking into account the Convention but is deemed to be a resident of the
U.K. by virtue of the Convention, there is a "clear
inconsistency". In such a case, he declares, the Convention
prevails over the Act so that such a person will be a resident of the U.K. and not of Canada even for purposes of the Act.
[10]
Therefore, the
applicant concludes, since he was deemed to be a resident of the U.K. under
Article 4(2) of the Convention, he was not a resident of Canada for
purposes of the Act and, therefore, not subject to tax in Canada on the Assessed
Items. In applicant's view he could not have been a resident solely of the U.K. for purposes of the Convention and, at the same time, a resident of Canada for the purposes of the Act. Such a consideration would ignore the provisions
of the Convention and defeat its purpose to avoid double taxation.
[11]
Counsel for the
applicant anticipated the respondent's submissions on Article 27(2) of the
Convention. Counsel argued that Article 27(2) of the Convention
has no application to the matter at bar. It does not entitle the Minister to
assess tax against the applicant under Part I of the Act on his non‑Canadian
office and employment ("O&E") income or any of the other Assessed
Items. Article 27(2), he asserts, applies only to limit the application of
Articles 10, 11 and 12 of the Convention, provisions that relate to
dividends, interest and royalties.
[12]
Counsel explained that a
non‑resident of Canada who receives dividends from a Canadian source is
ordinarily subject to a 25% withholding tax under Part XIII of the Act.
The Convention provides the non‑resident with relief since, under
the Convention, the withholding tax for individuals is 15% on dividends,
for example. However, if the dividend is not remitted or received in the U.K., any relief would be denied: the 25% withholding tax under the Act would be
chargeable.
[13]
Counsel submitted that
the applicant was not subject to tax under Part I of the Act by
virtue of the residency tie-breaker provisions of Article 4(2). There was,
therefore, no "tax [in Canada]" from which the applicant was
"relieved" under "any provision of [the] Convention"
to which paragraph (2) of Article 27 could have applied.
Consequently, applicant's counsel submitted Article 27(2) did not open the
door to permit the Minister to tax the Assessed Items under Part I of the Act.
It only permitted the Minister to assess tax under Part XIII of the Act
at the rate of 25% on dividends and interest received by the applicant that
were not remitted to or received in the U.K., on which the applicant would
otherwise have been "relieved from tax" at the 15% and 10% rates
provided by Articles 10 and 11 of the Convention, respectively. In
this case, paragraph (2) of Article 27 of the Convention
simply could not have, and did not, come into play.
[14]
Finally, applicant
argues that it does not matter that the applicant's non‑Canadian O&E
income may not have been subject to tax in 2002 in either the U.K. or Canada. That fact has no bearing on how the Convention is to be interpreted. Indeed,
to conclude otherwise would be to interpret the Convention as though its
primary purpose was to avoid "double non‑taxation". Canada may not invoke the provisions of the Act as a justification for its failure to
recognize the operation of the Convention by which the applicant is a
resident of the U.K., and not of Canada, for purposes of the Act.
b) Respondent
[15]
The respondent's
position is that the applicant is deemed to be a resident of the U.K. pursuant to Article 4(2) only for the purposes of the Convention. Article
4 "does not dictate the content of [domestic] law on 'residence'".
The object of Article 4(1) is to provide "a definition of the
expression 'resident' of a Contracting State" for the purposes of the Convention.
The applicant was a resident of Canada as a matter of fact within the meaning
of the Act and is to report to the Minister his earned income for 2002
as a resident of Canada. He may deduct income that is exempt from taxation or
claim a reduced rate of income tax according to the provisions of the Convention.
[16]
Contrary to the
applicant's reading of Article 27(2), the respondent's view of that
provision is that where Canada provides the applicant with relief from taxation
on certain income under any provision of the Convention and the income
is subject to tax in the U.K. by reference to the amount that is remitted or
received in the U.K., Canada may tax the amount of income that has not been
remitted to, or received in, the U.K. Canada may tax the applicant as a
resident of Canada, again without restrictions imposed by the Convention,
on his employment income, including benefits, and dividends and interest. And
the Minister so assessed the applicant for 2002.
[17]
It is the respondent's
view that if a particular income or gain is not provided for in the Convention,
Canada is free to include the amount of that income or gain in computing the
applicant's income tax for 2002 in accordance with the Act without any
restriction imposed by the Convention.
ANALYSIS
Interpretation of the Convention
[18]
The Vienna
Convention, at Article 31(1), provides that:
[a] treaty shall be contemplated in good faith in accordance with
ordinary meaning to be given to the terms of the treaty in their content and in
the light of its object and purpose.
[19]
Iacobucci, J., speaking
for the Supreme Court in The Queen v. Crown Forest Industries Limited et al.
("Crown Forest"), declared that "in interpreting a
treaty, the paramount goal is to find the meaning of the words in question.
This process involves looking into the language used and the intention of the
parties." The Court, with approval, referred to Addy, J.'s comments
in J.N. Gladden Estate v. The Queen:
Contrary to an ordinary taxing statute a tax treaty must be given a
liberal interpretation with a view to implementing the true intentions of the
parties. A liberal or legalistic interpretation must be avoided when the basic
object of the treaty might be defeated or frustrated insofar as the particular
item under consideration is concerned.
[20]
In Crown Forest, Iacobucci J. turned to extrinsic materials in order to help
"illustrate and illuminate the intentions of the parties". Such materials
include other international tax conventions, the OECD Model Convention and its
commentaries, technical explanations that accompany treaties and academic
commentary. Even commentaries adopted later may be relied on to interpret a tax
treaty.
He also referred to Articles 31 and 32 of the Vienna Convention.
[21]
In Swantje v. R.
the Federal Court of Appeal cautioned that the approach in interpreting a
treaty and the Act cannot be a purely mechanical one but must be a
functional one, where the scheme must be considered as a whole; one must take into
account the intent of the legislation, its object and spirit and what it
actually accomplishes. This is similar to the Supreme Court's view in Stubart
Investments Ltd. v. The Queen where the Court approved E.A.
Driedger's succinct description of interpretation of statutes:
Today there is only one principle or approach, namely, the words of
an Act are to be read in their entire context and their grammatical and
ordinary sense harmoniously with the scheme of the Act, the object of the Act,
and the intention of Parliament.
[22]
When
interpreting the Convention and its interaction with the Act, I
must adopt a liberal and purposive approach not a mechanical approach. I must
look to the plain language of the treaty and to the intent of the parties.
Article 4
[23]
The object and purpose
of the Convention is what is announced in its title: to avoid double
taxation.
But, as David Ward explains, over the years many countries, including Canada, have adopted in their internal law relieving provisions to eliminate or
substantially reduce double taxation by credit, or exemption, or both. The result,
according to Mr. Ward is that the principal purpose today of a tax treaty,
at least from Canada's perspective, would seem to be the allocation of the
taxing power between the country of the income's source and the taxpayer's
country of residence.
[24]
Article 4 defines
the term "resident of a Contracting State" for the purposes of the Convention.
The parties agree that, in accordance with the "tie breaker"
rule in Article 4(2)(a) of the Convention, in 2002
the applicant resided in the U.K. "for the purposes of the Convention".
At the same time, the respondent argues that, in 2002, the applicant was a resident
of Canada for the purposes of Part I of the Act. The applicant claims
that, if the respondent is correct, then there is an inconsistency between the
applicant being a resident of Canada for the purposes of the Act and a
resident of the U.K. for purposes of the Convention. It is the
applicant's position that, by virtue of subsection 30(2) of the Convention
Act, the Convention prevails: the applicant was a non‑resident
of Canada in 2002 for the purposes of the Act.
[25]
The meaning of the word
"purposes" in Article 4 may assist in understanding whether a
conflict exists. The word "purpose" is defined, in part, in The
Shorter Oxford English Dictionary:
1. The object which one has in view …
3. The object from which anything is done or made, or for which it exists;
end, aim …
In the French language, the word
"sens" means:
2. Ce qu'un signe (notamment un signe de
language) signifie … 3. Donner, fixer le sens d'un mot.
[26]
Whenever
the term "resident of a Contracting State" is found in the Convention,
it is the person defined as such in Article 4 who is "a resident of a
Contracting State" as far as the Convention is concerned. The
dictionary definitions of "purpose" and "sens" stress a
particular object, in the case at bar, the object of the definition being the Convention
itself, nothing else. There is no suggestion of inconsistency. The words
"purpose" and "sens" in Article 4 conforms with the
meaning that could only have been the intention of the parties who drafted the Convention.
[27]
Article 4
determines whether or not a taxpayer who is resident of Canada and the U.K. is eligible for relief under the Convention as a resident of either the U.K. or Canada. On a plain language reading of Article 4, I cannot find any inconsistency
between being a resident of Canada for the purposes of the Act and a
resident of the U.K. for the purposes of the Convention.
[28]
I
know of no authority to the effect that once a person is deemed by the Convention
to be a resident of the U.K. for the purposes of the Convention that
person ceases to be a resident of Canada for the purposes of the Act.
Whether a person is a resident of Canada for purposes of the Act is a
question of fact. That a person deemed by the Convention to be resident
of the U.K. is "ipso facto" a resident of the U.K. and a
non‑resident of Canada for purposes of the Act, as argued by the
applicant, is not only a non sequitur but also wrong. Such a
conclusion reflects a mechanical approach to the interpretation of the Convention
and goes far beyond the intention of the Convention.
[29]
I cannot find an
inconsistency between the Convention and the Act in the language
used and the intention of the drafters of the Convention, the Convention
Act. The provisions of the Convention and the Act can work
side by side without conflict or contradiction. For example, it is clear that
if an income or capital item is not provided for in the Convention, Canada's authority to tax that item is not restricted by the Convention.
[30]
In Friends of the
Oldman River Society the Supreme Court held that for
two statutes to be inconsistent they must either be so contradictory that
following one law would require breaching the other or the two laws must be
unable to stand together:
Ordinarily, then, an Act of Parliament must
prevail over inconsistent or conflicting subordinate legislation. However, as a
matter of construction a court will, where possible, prefer an interpretation
that permits reconciliation of the two. "Inconsistency" in this
context refers to a situation where two legislative enactments cannot stand
together; … the underlying rationale is the same as where subordinate
legislation is said to be inconsistent with another Act of Parliament -- there
is a presumption that the legislature did not intend to make or empower the
making of contradictory enactments. There is also some doctrinal similarity to
the principle of paramountcy in constitutional division of powers cases where
inconsistency has also been defined in terms of contradiction -- i.e.,
"compliance with one law involves breach of the other"; …
In order for there to be an inconsistency then, there must be a
conflict between the operations of the Act and the Convention. An
inconsistency between the Act and Convention would exist, for
example, if Canada taxed the applicant as a resident of Canada in violation of the objects and purposes of the Convention.
[31]
The
Commentaries to the OECD Model Tax Convention state that tax conventions are
not concerned with domestic law:
Conventions for the avoidance of double taxation do not
normally concern themselves with the domestic laws of the Contracting States
laying down the conditions under which a person is to be treated fiscally as
"resident" and, consequently, is fully liable to tax in that State.
They do not lay down standards which the provisions of the domestic laws on
"residence" have to fulfil in order that claims for full tax
liability can be accepted between the Contracting States. In this respect the
States take their stand entirely on the domestic laws.
[32]
An
example of the application of the tiebreaker rules in Article 4(2) is also
provided in the Commentaries:
An example will elucidate the case. An individual has his
permanent home in State A, where his wife and children live. He has had a
stay of more than six months in State B and according to the legislation
of the latter State he is, in consequence of the length of stay, taxed as being
a resident of that State. Thus, both States claim that he is fully liable to
tax. This conflict has to be solved by the Convention.
In this particular case the Article (under
paragraph 2) gives preference to the claim of State A. This
does not, however, imply that the Article lays down special rules on
"residence" and that the domestic laws of State B are ignored
because they are incompatible with such rules. The fact is quite simply that in
the case of such a conflict a choice must necessarily be made between the two
claims, and it is on this point that the Article proposes special rules.
[Emphasis
added.]
[33]
In
the example in the preceding paragraph, one state's claim to tax is given preference
or priority over the other state's claim. No mention is made of an override of
domestic law. This preference language is repeated in the commentary for
Article 4(2):
This paragraph relates to the case where under the
provisions of paragraph 1, an individual is a resident of both Contracting
States.
To solve this conflict special rules must be established
which give the attachment to one State a preference over the attachment
to the other State.
[Emphasis
added.]
The word "preference" is used
in the commentary relating to the various subtests in the tiebreaker rules. In view
of the context, preference must mean giving one state's claim to tax priority
or precedence over the other. If the drafters had intended to extinguish a
state's claim they would have used different language.
[34]
This
view is supported by leading tax authorities. In Introduction to the Law of
Double Taxation Conventions,
Prof. Michael Lang agreed that:
[t]he determination of the residence state is for treaty
purposes only. The residence in just one of the two states does not
automatically mean that in the other state taxes are levied under the limited
tax liability rules. Domestic full tax liability rules of the source state
remain applicable. The amount of tax is determined according to the full tax
liability rules and not according to the limited tax liability rules.
[35]
Prof. Vogel
is of the same view:
[s]ince the taxpayer is 'deemed' to be a non‑resident
only in regard to the application of the treaty's distributive rules, he
continues to be generally subject to those taxation and procedural provisions
of his State of secondary residence which apply to all other taxpayers who are
residents thereof …
[36]
And
earlier, Prof. Vogel explains:
[i]n order to avoid the resultant double taxation or
double non‑taxation, Article 4(2) stipulates — as a so‑called
'tiebreaker — for the purposes of the treaty, i.e. for the proper
applicability of the distributive rules, of which the two contracting States the
person concerned is deemed to be a resident. In this context, 'deemed'
does not indicate a fiction, but rather a legal consequence of the treaty as
opposed to the legal consequence under domestic law; for treaty purposes the
person concerned actually is a resident of the contracting State in question.
[37]
Counsel
for the applicant cited a number of Canadian cases as authorities for the
proposition that the application of the tie‑breaker rules in
Article 4 to determine residency for the purposes of the tax convention is
sufficient on its own to give rise to an inconsistency between the Act
and the Convention.
His conclusion that there is an inconsistency between the Convention and
the Act in this manner is based on a mechanical approach, which is
incompatible with the liberal and purposive approach to interpreting tax
conventions. This approach does not take into account the role of
Article 4 in the scheme of the Convention: a definition of
residency for use by the operative provisions of the Convention to allocate
taxing jurisdiction and avoid double taxation.
[38]
The
applicant's proposition is also not supported by the case law that he has cited.
Each of the taxpayers in these cases could point to an operative Article or
purpose of the relevant tax convention that was being contravened. In these
cases there would have been a violation of the double taxation or allocation
purposes of the relevant tax treaty.
[39]
The
difficulty the applicant faces in the matter at bar is that he cannot point to
any operative provision of the Convention that being a considered
resident of Canada for purposes of the Act would contravene. Double
taxation between Canada and the U.K. is not an issue. The applicant has not
remitted his income to the U.K. and were he to do so he could avail himself of
Article 21 of the Convention.
In fact, given Article 27(2), taxing the applicant would accord with the
purposes of the Convention and the intentions of the drafters.
[40]
Hunter
Douglas Ltd. v. The Queen ("Hunter Douglas") involved
the residency of a corporation under the Act and a tax treaty between Canada and the Netherlands. The Federal Court clearly went beyond a comparison of the residency
definition contained in the Act and the definition contained in the tax
treaty at issue. At paragraph 16, the Court states:
It is under this last amendment, which is inconsistent
with the definition of resident contained in such convention, that the
Defendant attempts to justify classifying the plaintiff as resident in Canada
at the time of such share dividend distribution in 1971 as it was incorporated
before April 27, 1965 in Canada and in preceding taxation years of the
corporation ending after April 26, 1965, it carried on business in Canada.
[Emphasis
added.]
[41]
In
this case the Court acknowledges that the two definitions are inconsistent but
then continues on to examine whether the inconsistency results in a
contravention of the tax treaty. Under the applicant's proposed method of
finding an inconsistency, the analysis would have stopped at paragraph 16 and
not continued. Instead, the Court examined Article IV (which related to
dividends) of the convention and held that the definition of residency in the Act
could not prevail over that Article:
The amendments made in 1962 and 1965 to the Canada
Income Tax Act (supra) contravene the provisions of the
Canada-Netherlands Income Tax Convention and therefore ineffective to abrogate
the provisions of Article IV(5) of such convention. The Minister of
National Revenue for Canada therefore had no authority to impose liability
against the plaintiff company for not withholding the 15% tax on dividends paid
by it to shareholders not resident in Canada.
[42]
In
Allchin v. The Queen ("Allchin") Bell J. of this
Court held that a dual resident taxpayer was deemed by the treaty tie‑breaker
rules to be a resident of the United States, not Canada. After examining the
facts and applying the law, Justice Bell held that:
The combination of evidence describing the nature of the
Appellant's lifestyle and activities in the U.S. and the information contained
in the foregoing chart make it clear that during the years in question her
habitual abode was in the U.S. In accordance with Article IV(2)(b)
of the Treaty the Appellant
shall be deemed to be a resident of the Contracting State in which he has an habitual abode.
Accordingly, the Appellant, as a result of her dual
residence and of the application of the tie‑breaking rules, was, during
the taxation years in question, resident in the U.S. Therefore, she was not
taxable in Canada pursuant to the provisions of Section 2 of the Act
for her 1993, 1994 and 1995 taxation years.
[43]
The
applicant seeks to rely on Justice Bell's conclusion without taking into
account the reasoning by which he reached it. The inconsistency between the
Canada‑U.S. Convention and the Act was a result of the fact that
the Minister was seeking to tax Ms. Allchin on employment income that had
already been taxed by the United States. This would have resulted in double
taxation in contravention of the convention. In his analysis of the Canada‑U.S.
Convention, Justice Bell noted and emphasized the following from the OECD
Commentaries:
I. PRELIMINARY
REMARKS
1. The concept of "resident of a Contracting State" has various functions and is of importance in three cases:
a) in determining a convention's personal scope of
application;
b) in solving cases where double taxation arises
in consequence of a double residence: [Emphasis in the original.]
c) in solving cases where double taxation arises as
a consequence of taxation in the State of residence and in the State of source
or situs.
[44]
Bell J.
also refers to Crown Forest on the same point:
On the same page, Iacobucci, J. said that the Treaty was
intended to benefit Canadians working in the U.S. or vice versa, it
being important to spare such individuals double taxation …
[45]
This
is where the inconsistency between the Act and the Canada‑U.S.
Convention can be found. The Minister was seeking to tax income that was
allocated to the United States under the treaty, which would have resulted in
double taxation.
[46]
Wolf
v. The Queen also involved a dual resident whose status was determined
by the tie‑breaker rules in the Canada‑U.S. Convention. The key
issue in Wolf was whether the taxpayer was a resident of the United States and therefore, could invoke treaty provisions that would exempt his income from tax in
Canada. It was not whether there was an inconsistency between the Act
and the Convention. This is clear from the Federal Court of Appeal's
reasons:
In assessing the appellant for the taxation years 1990
through 1995, the Minister disallowed the deduction of business expenses
claimed (more particularly lodging and travel expenses) on the basis that the
appellant earned employment income and not business income during those years.
The Minister estimated that the appellant was a resident of Canada during the years at issue.
The appellant challenged these assessments alleging that
he remained a citizen and a resident of the United States of America and
that, according to Article IV of the Canada‑U.S. Income Tax
Convention (1980) (the "Convention") as amended, he was not, for
tax purposes, considered to be a resident of Canada during the years at issue.
The appellant also submitted that he was working in Canada as an independent
contractor during those years. He relied on Article XIV of the Convention
and argued that his income was taxable in the United States and not in Canada considering the he did not have a fixed base regularly available to him in Canada.
[Emphasis
added.]
[47]
The
result of the application of the tie‑breaker rules was stated by
Justice Décary:
The Minister has not challenged the Tax Court Judge's
finding that Mr. Wolf was a resident of the United States of America for the purposes of the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital ("the
Convention"). (The Convention was signed at Washington, D.C. on
September 26, 1980, and enacted in law in Canada by the Canada‑United
States Convention Act, 1984, S.C. 1984, c. 20.)
[Emphasis added.]
[48]
Wolf is not an
authority for the proposition that the mere application of the tie‑breaker
rules gives rise to an inconsistency with the Act.
[49]
Applicant's
counsel also cited a decision of the Supreme Administrative Court of Sweden in Lagerman
v. Riksskatteverketthat
supports his position. The Swedish Court considered tax consequences in Sweden of a person deemed resident of Kenya under the Sweden‑Kenya Tax Convention. The
taxpayer P.L. received a dividend or possibly interest in 1986 from a Swedish
dividend fund which he did not declare in his 1980 Swedish tax return. In 1986
he was a resident of Sweden under its tax law but he and his family were living
in Kenya and were also resident of Kenya. The Convention deemed him to be a resident
of Kenya. According to the Convention interest paid from Sweden to a natural person in Kenya may, under the then current laws of Sweden, not be taxed in Sweden. The Court considered P.L. a non‑resident of Sweden for purposes of Swedish
domestic tax law and was therefore exempt from tax on interest. The majority
held that:
The rules of the agreement are significant for determining
residence in the event of so‑called dual residence when it comes to
establishing which State shall be regarded as the State of residence and which
State is to be designated as the source State. For example, what concerns the
present regulations in this case about the right to tax dividends and interest,
are that Kenya, without dispute, is regarded as the State of residence and
Sweden as the source State. In regard to the application of the agreement, it
is common ground that P.L. is regarded as resident in Kenya. Sweden's right to tax the income should thus be viewed in the light of the
provisions of the agreement that include the right of Sweden as source State to
taxation of dividends and interest.
[50]
The
two minority judges opined that P.L. remained a resident of Sweden under Swedish domestic law and was liable for tax in Sweden as a resident of Sweden. The minority view was that "domestic law is not meant to be influenced by the
fact that the agreement states other rules [are] to be applied in its
application … " I agree.
[51]
Article 4(2)
provides preference criteria for instances where a taxpayer is a resident of
both contracting states. These tiebreaker rules deem a dual resident to be a
resident of either Canada or the U.K. for the purposes of the Convention.
Once a taxpayer is a resident of either the U.K. or Canada for the purposes of
the Convention, the other Articles of the Convention operate to
relieve taxation and allocate taxing authority. That is what the Convention
does: it allocates to each country the authority to tax. That a person is
resident of the U.K. for Convention purposes does not affect his or her
status under Canadian law for non‑treaty purposes.
[52]
As respondent's counsel
stated, Canada is required by international law to implement the substance of
the provisions of the Convention.
To respect its obligation, Canada need not treat the applicant as a non‑resident
of Canada for the purposes of the Act. Canada's responsibility is to
insure that the applicant can obtain relief from Canadian taxation to which he
is entitled under the Convention.
[53]
In
summary, a liberal and purposive approach must be adopted when interpreting tax
treaties, not a mechanical approach. I must look to the plain language of the
treaty and to the intent of the parties. When looking for an inconsistency
between the Act and a tax convention, it is the results that should be
examined. An inconsistency only occurs if the result of the application of the Act
is in contradiction with, or in violation of, the purposes of the Convention
and I have not found this to be.
SUBSECTION
250(5) OF THE ACT
[54]
Both parties also referred
to subsection 250(5) of the Act, both submitting that it does not
apply to the matter at bar, but for different reasons. I
agree that subsection 250(5) does not apply. I have not drawn any inferences or
conclusions from the enactment of 250(5) that have affected my analysis of
Article 4(2)
ARTICLE 27(2)
[55]
If I am correct that
the applicant remained a resident of Canada in 2002 insofar as the Act
is concerned, notwithstanding that he is deemed a resident of the U.K. for purposes of the Convention, it is debateable if the respondent has to
resort to Article 27(2) in order to assess the applicant. Nevertheless, I
am addressing the positions of the parties.
[56]
Article 27(2) of
the Convention addresses the U.K. tax treatment of non‑domiciled
residents of the U.K. who are required to pay tax on foreign income only when
it enters the U.K.
[57]
The applicant submits
that Article 27(2) of the Convention does not entitle the Minister
to assess tax against him under Part I of the Act on his non‑Canadian
O&E income or any other Assessed Items on the basis that no amount of such
income was remitted or received in the U.K. The applicant was not
"relieved from tax in [Canada]" "… under any provision of [the] Convention"
on the Assessed Items. Put simply, as I understand applicant's argument, this is
because the applicant was not a resident of Canada for the purposes of both the
Convention and the Act.
[58]
Therefore, the applicant
declares, there was no tax from which he could have been relieved in Canada "under any provision of the [the] Convention" to which
Article 27(2) could have applied. Applicant submits that
Article 27(2) could only permit the Minister to assess tax under
Part XIII of the Act. A U.K. resident who is a non‑resident
of Canada and has received dividend or interest income from sources in Canada that are not remitted to or received in the U.K. can only be taxed by Canada at the rate of 25 percent. If the amounts of dividend and interest are remitted
or received in the U.K., the tax is 15 percent for dividend and
10 percent for interest income, as provided in Articles 10 and 11 of
the Convention respectively.
[59]
The Amended Agreed
Statement of Facts does not specify the source of dividend and interest
included in the Assessed Items. However, the respondent submits in her factum
that the pleadings do and the parties are in agreement on the point, that the
source of dividend and interest is Canada.
[60]
The respondent submits
that the applicant received certain benefits as a direct or indirect
shareholder of various corporations and such benefits are not covered by the Convention.
As a resident of Canada for purposes of the Act, the applicant is liable
for tax under Part I of the Act.
[61]
It is the respondent's
view that the Convention allocates the right to tax between Canada and the U.K. on an item‑by‑item basis. Articles 10, 11 and 15, for example,
allocate the right to tax dividend, interest and employment income basically
depending on the source of the income in Canada and the U.K. If an item is not addressed in the Convention, Canada, insists the respondent, retains
its right to tax the applicant on the basis of his residence in Canada. The respondent refers to David Ward's explanation in "The Other Income
Article of Income Tax Treaties":
Where a treaty does not include an other income article in any form,
unfortunate effects can also occur for taxpayers who, under internal law, are
residents of both contracting states for tax purposes. Although the dual
resident article provides a series of rules by which the taxpayer is considered
to be a resident of only one of two states for purposes of the treaty, the
absence of the other income article means that the treaty does not extent to
this other income of the taxpayer. Therefore, for taxation purposes in respect
of the other income, the taxpayer continues to be resident of both states and
may be liable to full double taxation on all such income, including that
arising in each state and in third states.
[62]
Respondent's counsel
referred to the current version of the Convention containing
Article 20A, an "Other Income" provision. This
new provision generally allows the taxpayer's country of residence for the
purposes of the Convention to tax items of income not specifically
covered in earlier provisions of the Convention. Article 20A does
not apply to the 2002 taxation year.
[63]
According to
Article 27(2), as it applied for 2002, when a person is relieved from tax
in Canada on certain income and under the U.K. law, that person is subject to
tax in the U.K. in respect of the portion of that income that is remitted to or
received in the U.K., Canada will relieve that person from tax only in respect
of the portion of the amount of the income that is remitted to or received in
the U.K. Professor Krishna agrees that, in these circumstances, the
benefits available under the Convention shall apply only to amounts that
are actually taxed in the U.K. by virtue of their remittance or receipt.d
[64]
The applicant's
submission with respect to Article 27(2) is based wholly on the assumption
that the applicant was not subject to tax in Canada on the Assessed Items since
he was a non‑resident of Canada in 2002. And that is the applicant's
problem. I have determined that he was a resident of Canada in 2002 for the purposes
of the Act and, as such, liable for tax on his world income subject to any
allocation by the Convention of taxing power between Canada and the U.K.
Article 27(2) does apply to the applicant and the Canadian tax authority
may assess the applicant since he was resident of Canada in 2002.
[65]
The applicant's O&E
income in 2002 has its source in the United States, which is not party to the Convention.
A number of commentators, such as Professor Vogel, are of the view that
the purpose of Article 27(2) is to allow the state of source to tax income
that has not been remitted to the person's country of residence. If I were to
accept this interpretation, respondent's counsel submits, Canada would not retain the right to tax the applicant's O&E income derived from his employment
in the United States in accordance with Part I of the Act. For this
to be correct, that is Canada's right to tax is limited, counsel submits, words
have to be read into the provision since there is no reference in
Article 27(2) to the source of income or to the state in which it arises.
(Article 27(2) speaks to relief of tax in a Contracting State and the person being subject to tax by reference to amounts remitted or received in the
other Contracting State.)
[66]
Counsel for respondent
referred to several tax conventions to which Canada is a party that contain a
provision permitting it to tax income that has not been remitted to the
person's country of residence. In some cases under such a provision, Canada,
for example, may tax the income only where it is the source of the income while
others provisions are similar to Article 27(2) that do not refer to a
source.
The U.K. also has entered different tax treaties where there are and are not
references to source.
[67]
I agree with respondent
that reading the words such as "arising in Canada" into
Article 27(2) would distort the intended meaning of that provision of the Convention.
I cannot fathom that Canadian and British negotiators would agree to hand over any
taxing authority to a third country, in the case of the applicant, income from
employment in the United States, to the Americans. The applicant was resident
in Canada for purposes of the Act in 2002. As resident of Canada, he is subject to tax on his worldwide income, including income from employment in a
third state unless the Convention determines otherwise, which it does
not.
[68]
Therefore, I determine
that the Minister of National Revenue may assess tax against the applicant on
the basis that he was a resident of Canada for purposes of the Income Tax
Act on any of the items described in subparagraphs 5(i) to (vi) and
subparagraph 5(viii) of the Amended Amended Notice of Appeal.
[69]
The parties may
make submissions in writing as to costs within 60 days.
Signed at Ottawa, Canada, this 14th day of January
2014.
“Gerald J. Rip”
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