Citation: 2011 TCC 25
Date: 20110114
Docket: 2008-2540(IT)G
BETWEEN:
SAIPEM UK LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers J.
[1]
This is an appeal of
the appellant's reassessments in respect of its taxation years ended December
31, 2004, 2005 and 2006, which reassessments are dated November 18, 2008. The
reassessments were substituted for the initial assessments, which had been
confirmed by the Minister of National Revenue on May 14, 2008.
[2]
The appellant, a non-resident of
Canada, claimed deductions in computing its taxable income, for the purposes of
the Income Tax Act (the "Act"), from activities carried
on by it in Canada through a "permanent establishment" (a
"PE") within the meaning of the Convention Between the Government
of Canada and the Government of the United Kingdom of Great Britain and
Northern Ireland for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income and Capital Gains, as
amended (the "Canada‑UK treaty").
[3]
The deductions relate
to certain non-capital losses from business activities carried on in Canada by a corporation — Saipem Energy International Limited
(SEI) — that, at all material times, was related to the appellant within the
meaning of the Act, and that was wound up, within the meaning of
subsection 88(1.1) of the Act, into the appellant. The deductions
claimed with respect to the SEI losses were $592,697 for the 2004 taxation
year, $839,799 for the 2005 taxation year and $5,601,461 for the 2006 taxation
year, which deductions were disallowed by the Minister of National Revenue (the
Minister).
[4]
The parties submitted a Partial
Agreed Statement of Facts, which is reproduced below:
1. The Appellant was incorporated in the United Kingdom and was at all material
times a non-resident of Canada and a resident of the United
Kingdom for purposes of the Income Tax Act and
the Canada-United Kingdom Tax Convention.
2. Saipem Energy International Limited (“SEI”)
was incorporated in the United Kingdom and was at all material times a resident of the United Kingdom, and
not of Canada, for purposes of
the Income Tax Act and the Canada-United Kingdom Tax Convention.
3. SEI was incorporated as a wholly-owned
subsidiary of Saipem International B.V. (“SIBV”), a company incorporated in,
and at all material times a resident of, the Netherlands and not a resident of Canada.
4. The Appellant and SEI were part of the same
group of related corporations (the (“Saipem Group”)
The SEI losses
5. During the 2001, 2002 and 2003 taxation
years, SEI carried on business in Canada through a permanent establishment, within the meaning of the Canada-United
Kingdom Tax Convention.
6. As of December 31, 2003, the closing balance
of SEI's non-capital losses for income tax purposes was $7,033,957.
These losses were not deducted by SEI in computing its income.
7. The losses would have been deductible by SEI
in the 2004, 2005 and 2006 taxation years, had SEI had such taxation years and
sufficient income in those years.
The winding-up of SEI
8. On February 7, 2003, the Appellant notified
certain employees of SEI that their employment would be transferred to
the Appellant on April 1, 2003.
9. On May 19, 2003, SEI's Board of
Directors recommended that SEI's shares, assets and business be transferred to
the Appellant in order to facilitate the Saipem Group reorganisation in the United
Kingdom. The stated objective was to liquidate SEI in the Appellant.
10. By June 30, 2003, SEI has finished its
trading activities and the majority of its personnel had been transferred to
the Appellant.
11. On November 21, 2003, the Appellant's Board of
Directors adopted a resolution to purchase all of the issued and outstanding
shares of SEI from SIBV and to place SEI in the voluntary winding-up.
12. On December 9, 2003, SIBV's Managing Board
resolved to sell to the Appellant all of the issued and outstanding shares of
SEI.
13. On December 16, 2003, the shares of SEI were
transferred to the Appellant.
14. On December 16, 2003, SEI sold some of
its assets (office equipment and contracts) to the Appellant.
15. On July 10, 2006, the Liquidators Final Return
for the winding-up of SEI was filed with the UK Companies House.
16.
On October 13, 2006, SEI was struck off the
register of the UK Companies House, pursuant to the Insolvency Act, 1986 (UK).
The Appellant's 2004, 2005 and 2006 taxation years
17.
During its 2004, 2005 and 2006 taxation years,
the Appellant carried on a business in Canada, through a permanent establishment, within the meaning of the Canada-United
Kingdom Tax Convention.
18.
The Appellant established November 21, 2003, as
the commencement date of SEI's winding-up.
19.
In filing its income tax returns for the 2004,
2005 and 2006 taxation years, the Appellant claimed deductions with respect to
the SEI losses in the amounts of $592,697, $839,799 and $5,601,461
respectively.
20.
In October 2007, the Minister of National
Revenue issued Notices of Assessment for the Appellant's 2004, 2005 and 2006
taxation years, disallowing the deduction of the SEI losses. The Notices of
Assessment were confirmed on May 14, 2008.
[5]
The respondent has
denied the deductions for the said taxation years on the basis that the
requirement that the parent corporation, namely the appellant, and the wound-up
subsidiary (SEI) be Canadian corporations as defined by subsection 89(1)
of the Act is not met. That fact is acknowledged by the appellant, but
the appellant, submits that the deductions should be allowed on the basis that
the Canadian corporation requirement found in subsection 88(1) of the Act
amounts to discrimination based on nationality against a PE contrary to Article
22 of the Canada-UK Treaty.
[6]
Subsection 89(1) of the
Act defines a Canadian corporation as follows:
"Canadian corporation" at any time
means a corporation that is resident in Canada at that time and was
(a) incorporated in Canada, or
(b) resident in Canada throughout
the period that began on June 18, 1971 and that ends at that time,
and . . . .
[7]
Subsection 89(1) therefore
sets out two ways in which a corporation can be a “Canadian corporation”. It provides
that a corporation must be resident in Canada and have been incorporated in Canada, or that a corporation not incorporated in Canada must
have been resident in Canada since at least June 18, 1971 to be
considered a “Canadian corporation”.
[8]
In order to be resident
in Canada, a corporation must satisfy the common law
“management and control” residency test or be considered a Canadian resident
under subsection 250(4) of the Act, which provides that a corporation incorporated
in Canada after April 26, 1965 is deemed to be a
Canadian resident.
[9]
Subsection 250(5) of
the Act is an exception to subsection 250(4) of the Act and provides
as follows:
Deemed non-resident — Notwithstanding any other provision of
this Act (other than paragraph 126(1.1)(a)), a person is deemed not to
be resident in Canada at a time if, at that time, the person would, but for
this subsection and any tax treaty, be resident in Canada for the purposes of
this Act but is, under a tax treaty with another country, resident in the other
country and not resident in Canada.
[10]
The tax treaty
reference is a reference to the tie-breaker rule regarding resident status contained
in tax treaties. The rule is stated in Article 4 of the Canada-UK Treaty, which
clarifies the meaning of "resident of a contracting state".
[11]
Subsection 88(1.1) of
the Act (reproduced at the end of these reasons) sets out requirements,
other than that the parent and subsidiary corporations be Canadian
corporations, that need to be met before the subsection can apply. These other
requirements, such as the timing of the deductions, the nature of the loss, and
the ownership requirement, are not issues in these appeals. The parties have so
informed the Court.
[12]
Paragraph 1 of Article
22 of the Canada-UK Treaty prohibits discrimination based on nationality.
It reads as follows:
I. The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any
requirement connected therewith which is other or more burdensome than the
taxation and connected requirements to which nationals of that other State in
the same circumstances are or may be subjected.
[13]
Paragraph 2 of Article
22 of the Canada-UK Treaty prohibits discrimination based on permanent
establishment status. It reads:
2. The taxation on a permanent establishment
which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied
in that other State than the taxation levied on enterprises of that other State
carrying on the same activities. This provision shall not be construed as
obliging either Contracting
State to grant to individuals not resident in its territory those personal
allowances and reliefs for tax purposes which are by law available only to
individuals who are so resident.
[14]
In a nutshell, the appellant
is asking this Court whether the restricted application of subsection 88(1.1)
of the Act to only “Canadian
corporations”,
thereby excluding its
application in respect of the winding-up of SEI into the appellant, violates
the appellant's right, as a national of the United Kingdom and for the
purposes of the Canada-UK Treaty, to non-discriminatory treatment guaranteed by
paragraphs 1 and 2 of Article 22 of the Canada-UK Treaty reproduced above.
Principles of Tax Treaty Interpretation
[15]
The former Income Tax
Appeal Board in Saunders v. M.N.R., 54 DTC 524, addressed the
principles of tax treaty interpretation in the following words at
page 526:
The accepted principle appears to be that a taxing Act must be
construed against either the Crown or the person sought to be charged, with
perfect strictness — so far as the intention of Parliament is discoverable.
Where a tax convention is involved, however, the situation is different and a
liberal interpretation is usual, in the interests of the comity of nations. Tax
conventions are negotiated primarily to remedy a subject's tax position by the
avoidance of double taxation rather than to make it more burdensome. This fact
is indicated in the preamble to the Convention. Accordingly, it is undesirable
to look beyond the four corners of the Convention and Protocol when seeking to
ascertain the exact meaning of a particular phrase or word therein.
[16]
In Crown Forest
Industries Ltd. v. Canada, [1995] 2 S.C.R. 802, Mr. Justice
Iacobucci of the Supreme Court of Canada stated that "[i]n interpreting a
treaty, the paramount goal is to find the meaning of the words in question.
This process involves looking to the language used and the intentions of the
parties" (paragraph 22). At paragraph 43, he stated:
Reviewing the intentions of the
drafters of a taxation convention is a very important element in delineating
the scope of the application of that treaty. As noted by Addy J. in J. N.
Gladden Estate v. The Queen, [1985] 1 C.T.C. 163 (F.C.T.D.), at pp. 166-67:
Contrary to an ordinary taxing statute a tax treaty or
convention must be given a liberal interpretation with a view to implementing
the true intentions of the parties. A literal or legalistic interpretation must
be avoided when the basic object of the treaty might be defeated or frustrated
in so far as the particular item under consideration is concerned.
[17]
The Organisation for
Economic Co-operation and Development (OECD) has published Commentaries on its
Model Convention with Respect to Taxes on Income and on Capital, July 2008
(the "Model Convention"). Article 24 of the Model Convention is
similar to Article 22 of the Canada-UK Treaty, but Canada
has reserved its position on Article 24. Although the Court cannot give
legal weight to the OECD's Commentaries unless they have been interpreted in
Canadian law, the courts have nonetheless used those Commentaries as a guide in
the interpretation and application of tax treaties in cases where the parties
have not registered an objection to the Commentaries. The Federal Court of
Appeal in Prévost Car Inc. v. The Queen, 2009 FCA 57, stated that:
10 The worldwide
recognition of the provisions of the Model Convention and their incorporation
into a majority of bilateral conventions have made the Commentaries on the
provisions of the OECD Model a widely-accepted guide to the interpretation and
application of the provisions of existing bilateral conventions (see Crown
Forest Industries Ltd. v. Canada, [1995] 2 S.C.R. 802 . . . .
11 The same may be said with respect to later commentaries,
when they represent a fair interpretation of the words of the Model Convention
and do not conflict with Commentaries in existence at the time a specific
treaty was entered [into] and when, of course, neither treaty partner has
registered an objection to the new Commentaries.
Discrimination Contrary to Article 22(1) of
the Canada-UK Treaty
The Appellant's Position
[18]
The appellant submits
that, for tax purposes, non-residents carrying on business in Canada are treated as though they were residents with
respect to those activities that they carry on in Canada.
The appellant supports this position by referring to sections 111 and 115 of
the Act. Section 115 defines the taxable income earned in Canada by a
non-resident carrying on business in Canada and, according
to the appellant, both the appellant's PE in Canada
and the wound-up subsidiary's PE are subject to tax under section 115 of the Act.
[19]
That being so, the appellant
points out that non-residents carrying on a business in Canada are allowed
deductions and, in particular, can deduct non-capital losses under subsection
111(1) in calculating their income for tax purposes. The appellant also refers
to paragraph 115(1)(f) of the Act, which, in cases where all or
substantially all of a non-resident's income is included in computing its
taxable income earned in Canada for a taxation year, allows the non-resident to
make such other deduction permitted for the purpose of computing taxable income
as may reasonably be considered wholly applicable. So, under paragraph 115(1)(d)
of the Act, there is no difference between a resident and a non-resident
in terms of the treatment of losses.
[20]
The appellant submits
that subsection 88(1.1) of the Act, which allows a parent corporation to
deduct its wound-up subsidiary's loss, complements section 111 of the Act
and that subsection 88(1.1) is Parliament's recognition that losses can be used
within a family group.
[21]
Counsel for the appellant
refers to the "Vienna Convention on the Law of Treaties", which
spells out the rules of treaty interpretation. According to the appellant,
treaties "should be interpreted very generously to give effect to the
intent of the parties"; in other words, if the parties to a treaty say
"we will have a clause in our agreement such as the non-discrimination
clause", it must mean that sometimes that clause applies.
[22]
Counsel for the appellant
also quoted tax specialists Richard Lewin and J. Scott Wilkie in Studies
on International Fiscal Law, vol. LXXVIIIb, at pages 357–358 in
support of the proposition that:
"To discriminate is to distinguish or differentiate in the
treatment of persons for taxation purposes in ways or for reasons that are "unreasonable,
arbitrary or irrelevant" with the result that the subject or object of
discrimination is treated less favourably than the subject or object of comparison".
[23]
The appellant also
quotes the tax specialists' discussion on discrimination and tax policy in
asserting that discriminatory provisions in the Act are allowable if
they are justified on public policy grounds, and submits that there is no
public policy justification for denying the appellant the benefit of subsection
88(1.1).
[24]
Counsel for the appellant
therefore submits that the "Canadian corporation" requirement found in
subsection 88(1.1) of the Act is contrary to Article 22(1) of the
Canada-UK Treaty, which prohibits discrimination based on nationality. The
residency and incorporation requirements imposed by subsection 89(1) of the Act,
which must be met in order for an entity to qualify as a "Canadian
corporation", amount to requiring that the corporations be nationals of
Canada. Counsel explains that the incorporation requirement in subsection 89(1)
is based on nationality in that a corporation incorporated in Canada is a
national of Canada. To support his submission, counsel for
the appellant refers to subsection 250(4) of the Act, which deems
corporations incorporated in Canada to be residents of Canada for the purposes of the Act. Thus, according
to counsel for the appellant, a corporation must be incorporated in Canada
(i.e. a national of Canada) in order to be a resident in Canada.
[25]
With regard to the words
"in the same circumstances" found in paragraph 22(1) of the
Canada-UK Treaty, counsel for the appellant acknowledges that the Treaty only
applies to taxpayers "in the same circumstances" as those of
nationals of the state concerned, but does not agree that the appellant and a
Canadian corporation are not in the same circumstances simply because one is a
resident and the other is a non-resident of Canada. If that were to be
accepted, counsel submits, paragraph 22(1) of the Canada-UK Treaty would never
apply because the comparison is always between a resident and a non-resident.
Counsel states his position as follows:
Our position is that for 88(1.1) application, the residence of the
Appellant is UK is not sufficient to distinguish the situation of that company
as UK with reference to losses to that of a Canadian corporation, residence in
itself is not a sufficient distinguishing feature. As I said already, the
starting point is that 111 applies to all in the same way, residents or
non-residents, so therefore the test is Canadian activities.
Counsel goes on to give his reasons in support of his
position (pages 59–64 of transcript).
. . . first . . . if SUK and SEI . . . have
incorporated in Canada, each would be deemed by virtue of 250 sub 4 to be
resident of Canada. So
therefore . . . the resident element in the definition in 88(1.1) is collapsed
into simply a corporation. . . . incorporation in Canada requirement. So, if Canadian incorporation is sufficient for
88(1.1) then no further conditions are imposed on Canadian nationals, the only
condition would be Canadian incorporation. So discrimination is based on the
location of incorporation in this case. If they had been both incorporated
here, there would be no further conditions imposed.
Second reason, non-residents are in same situation as Canadian
residents with respect to their losses . . . section 115(1), 115(d) and it's
exactly the same as that was allowed to residents confirmed by the convention.
. . . third reason, 115(1)(d) is open ended and had there been
impediments or had there been additional conditions imposed for the deductions
as there is under 115(1)(f) and Parliament said, "you're going to get your
losses but only, the carry back, carry forth, but only if ninety percent (90%)
of your income is from Canadian activities."
The fourth reason, residents and non-residents are similarly
situated with respect to their PE . . . .
. . . with respect to paragraph 1, the last reason . . . for
purposes of 1 . . . it stands to reason that the residence of the Appellant.
SUK, cannot be an acceptable basis for discrimination because otherwise you
could violate paragraph 2 by saying, "well, I'm going to discriminate
based on residence" and that . . . violating paragraph 2 would justify the
violation of paragraph 1 . . . .
[26]
In concluding, counsel
for the Appellant gives examples of discrimination in the Act that are,
in his view, justifiable for policy reasons, unlike the discrimination found in
subsection 88(1.1) of the Act. Counsel submits the following:
In the cases of losses, you cannot identify .
. . a policy objective. If the activities are in Canada, all in Canada, and if losses are suffered, the mechanics of
section . . . 111 apply and the only issue between us is, well do the
wind-up provisions apply in the case of a treaty partner which the UK is in the case where we have a non-discrimination
clause . . . .
[27]
Counsel for the appellant
agrees that there is a policy designed under our Canadian legislation that
prohibits the importation into Canada of losses suffered abroad. He says that
the comparison to be made is really between foreign entities carrying on
business in Canada through their PE and Canadian entities
carrying on similar activities in Canada. In other
words, you take a Canadian parent corporation with a Canadian subsidiary and
having access to the latter's losses and compare it to a foreign parent corporation
with a Canadian PE and ask yourself if there is any policy reason not to let all
losses from the Canadian activities be, through a winding-up, treated as
losses of the family of entities and therefore accessible to the parent.
The Respondent's Position
[28]
The respondent began by
reminding the Court that, in order to benefit from subsection 88(1.1) of the Act,
the parent corporation and the wound-up subsidiary each has to be a "Canadian
corporation" as defined by the Act. On the following two bases, the
respondent disagrees with the appellant's argument that the Canadian
corporation requirement is reduced to an incorporation requirement in light of
the deeming provision of subsection 250(4) of the Act:
(a)
First, the respondent
refers to the definition of "Canadian corporation" in subsection
89(1) of the Act. That section provides two ways that a corporation can
qualify as a Canadian corporation. A corporation is a Canadian corporation if :
(i) it is resident
and incorporated in Canada, or
(ii) it is resident
in Canada under, for example, the common law test (the
management and control residency test), but was incorporated elsewhere.
(b)
Second, the respondent
explains that there are three ways to determine the residency of corporations
in Canada:
(i) under
statutory rules,
(ii) at Common Law,
or
(iii)
by virtue of
international tax treaties.
[29]
The respondent submits
that it is possible for a corporation to be resident in more than one country.
As an example, a corporation can be a resident in Canada by virtue of its
Canadian incorporation, under subsection 250(4), and resident in the UK by virtue of the common law (management and control) test.
In such a case, according to the respondent, subsection 250(5) of the Act
applies, along with the tie-breaker rules in the Canada-UK Treaty, to determine
the corporation's residency for tax purposes. Applying the tie-breaker rules,
it might be determined that the corporation is not a resident of Canada even though it was incorporated in Canada. Another example would be a corporation incorporated
in a particular jurisdiction (such as Canada) and continued
in another jurisdiction. Such a corporation is deemed under subsection 250(5.1)
of the Act not to have been incorporated in Canada and the deeming
provision in subsection 250(4) of the Act does not apply so as to make
it a resident of Canada.
[30]
Regarding the
principles of treaty interpretation, the respondent also referred to the Crown Forest case, supra, and the Prévost Car case, supra, to
support the view that the paramount goal is to find the meaning of the words by
looking at the language of the treaty and the intention of the parties. With
regard to ascertaining the intention of the parties, the respondent reminds the
Court that the Supreme Court of Canada and the Federal Court of Appeal, in
those cases, accepted the use of the OECD Model Convention and the official
Commentary thereon to assist in that respect. The Federal Court of Appeal also
commented that a Commentary written after the parties have entered into a
treaty can also be used when it does not conflict with the Commentary in
existence at the time that specific treaty was entered into and where neither
party thereto has registered an objection to the Commentary.
[31]
The respondent submits
that Article 22 of the Canada-UK Treaty is not a broad rule against all types
of discrimination but rather eliminates discrimination in certain very specific
situations. The respondent suggests that Canada
has been conservative in extending non-discrimination rights in its treaties. In
support of that view, the respondent quoted from a discussion by
Joel Nitikman and Lincoln Schreiner of non-discrimination entitled
"Non-discrimination at the Crossroads of International Taxation" and published
in Studies on International Fiscal Law, vol. 93a (Rotterdam:
International Fiscal Association, 2008). The excerpt quoted reads as follows
(page 192):
Although the model Canadian treaty is not open to the public, and
there is little published government policy on ND clauses, Canada appears to be
of the belief that it is entitled to discriminate on the basis of residence and
will do so, as evidenced by the very recent treaty negotiations with Finland on
one hand (an EU member), and the USA and Mexico on the other hand (both NAFTA
members). These taken together clearly indicate that Canada is very conservative about extending ND rights in its DTCs. This
supports the premise at the beginning of this report, that Canada reserves the right to discriminate
where appropriate for Canadian public policy reasons.
As a practical matter, discrimination for tax purposes is not a
prominent issue in Canada with foreign nationals, as evidenced by the lack of
litigation and because foreign persons simply see (with good advice) the differences
before them, and then appropriately measure and weigh the additional cost of
adapting . . . .
[32]
The respondent submits
that "Canada has made a reservation on the OECD Model
with respect to non-discrimination, has adopted very specific non-discrimination
clauses and . . . that unless we fall under those non-discrimination clauses,
there is no broad rule that would prevent it and obviously we take the position
that here the fact situation does not fall under either [of] those clauses".
[33]
The respondent submits
that Article 22(1) of the Canada-UK Treaty can be understood as providing that
"the appellant, who is a national of the UK cannot be subjected in Canada
to taxation that is other or more burdensome than the taxation to which a
national of Canada who is in the same circumstances and this is key, is or may
be subjected to". The respondent suggests that "in the same
circumstances" means that all relevant factors, including, in particular,
the country of residence of the taxpayer, are the same such that a corporation that
is a non-resident of Canada for income tax purposes cannot be said to be in the
same circumstances as a taxpayer who is a resident of Canada. It therefore
follows, according to the respondent, that the appellant, as a national of the UK,
cannot be subjected in Canada to taxation which is more burdensome than
the taxation to which a national of Canada who is also a non-resident of Canada may be subjected.
[34]
The Respondent goes on
to suggest that in order to determine whether subsection 88(1.1) of the Act
violates the appellant's rights under Article 22(1) of the Canada-UK Treaty,
one must ascertain how subsection 88(1.1) applies to nationals of Canada who
are non-residents. According to the respondent, a corporation that is a Canadian
national but is not a resident of Canada cannot benefit from the application of
subsection 88(1.1) of the Act because, as a non-resident, that
corporation does not qualify as a "Canadian corporation". Hence, the appellant
is not being treated any differently than Canadian nationals who are in the
same circumstances as it.
[35]
In support of her argument,
the respondent refers to the OECD Model Convention and the Commentary thereon
for the purpose of ascertaining the parties' intention in entering into the
Canada-UK Treaty. Article 24 of the Model Convention provides that:
Nationals of a Contracting State shall not be subjected in the other Contracting State to any
taxation or any requirement connected therewith, which is other or more
burdensome than the taxation and connected requirements
to which nationals of that other State in the same circumstances, in particular
with respect to residence, are . . . subjected.
[36]
That provision
according to the respondent, indicates that the issue of residency is a
determining factor in establishing whether taxpayers are in the same
circumstances. The respondent further referred to the Commentary on the Model
Convention, which makes it clear that the expression "in the same
circumstances" would be sufficient by itself to establish that a taxpayer
who is a resident of a Contracting State and one who is not a resident of
that State are not in the same circumstances.
[37]
The respondent further
explains that if the appellant was a resident of Canada under the common law
and the treaty tie-breaker rules, Article 22(1) would come into play as long as
the other requirements of subsection 88(1.1) were met, because the appellant
would be in the same situation with respect to residence as a corporation that
is a Canadian national. The respondent suggests that even if the appellant were
a resident of Canada, it would not benefit from the application
of subsection 88(1.1) of the Act because its wound-up subsidiary is not
a Canadian corporation. The respondent asserts that there would be no discrimination
in that case because a Canadian corporation that winds-up a foreign subsidiary
that has a PE in Canada would likewise not benefit from the application of subsection
88(1.1) of the Act.
[38]
In response to the
issue raised by the appellant that corporations incorporated in Canada are automatically residents of Canada, the respondent referred to the Commentary on Article
24 of the Model Tax Convention, at paragraph 17:
. . . A company will usually derive its status as such from the laws
in force in the State in which it has been incorporated or registered. Under
the domestic law of many countries, however, incorporation or registration
constitutes the criterion, or one of the criteria, to determine the residence
of companies for the purposes of Article 4. Since paragraph 1 of Article 24
prevents different treatment based on nationality but only with respect to
persons or entities "in the same circumstances, in particular with respect
to residence", it is therefore important to distinguish, for purposes of that
paragraph, a different treatment that is solely based on nationality from a
different treatment that relates to other circumstances and, in particular,
residence. . . .
[39]
The respondent submits
that subsection 88(1.1) of the Act does not draw a distinction only between
corporations incorporated here and those incorporated elsewhere. The first
distinction it draws is with regard to whether the company is a company
resident in Canada.
Analysis
[40]
Paragraph 1 of Article
22 of the Canada-UK Treaty prohibits discrimination based on nationality. The
term "national" in the Treaty means:
(i) in relation to the United Kingdom, any British citizen, or any
British subject not possessing the citizenship of any other Commonwealth
country or territory, provided that citizen or subject has the right of abode
in the United Kingdom; and any legal person, partnership, association or other
entity deriving its status as such from the law in force in the United Kingdom;
(ii) in relation to Canada, all citizens of
Canada and all legal persons, partnerships and associations deriving their
status as such from the law in force in Canada.
[41]
It therefore follows
that the nationality of a corporation is determined by its place of
incorporation. (See also Janson v. Driefontein Consolidated Mines, Ltd.,
[1902] A.C. 484 (H.L), at page 501, and Daimler Co. v. Continental Tyre and
Rubber Co. (Great Britain) Ltd., [1916] 2 A.C. 307 (H.L.). The prohibited
discrimination is that based on nationality, not on residence.
[42]
It is relevant and fair
to say that there are no Canadian decisions on the application of a
non-discrimination provision in a tax treaty. That being said, the Court of
Appeal of New Zealand in C.I.R. v. United Dominions Trust Ltd., [1973] 2
NZLR 555, had the opportunity to examine the application of Article XIX(1) of the
Double Taxation Relief Agreement between the UK and New Zealand with regard to The
Land and Income Tax Act 1954 of New Zealand. Article XIX(1) is a
non-discrimination provision, similar to Article 22(1) of the Canada-UK Tax
Treaty, which prohibits tax discrimination on the basis of nationality. Article
XIX(1) reads as follows:
The nationals of one of the territories shall not be subjected in
the other territory to any taxation or any requirement connected therewith
which is more burdensome than the taxation and connected requirements to which
the nationals of the latter territory in the same circumstances are or may be
subjected.
[43]
The relevant issues
before the New Zealand Court of Appeal were whether United Dominions Trust Ltd.,
a UK banking and finance company carrying on business in England, had to pay
income tax at a higher rate on the interest it received from its subsidiary, a
company incorporated and carrying on business in New Zealand, than it would
have had to pay had it been a resident of New Zealand, and whether it likewise
had to pay tax at a higher rate on a proportionate share of the proprietary
income of its New Zealand subsidiary for which it was assessed. The
question was whether either issue involved a form of discrimination prohibited
by Article XIX(1) of the Double Taxation Relief Agreement.
[44]
The Court held that
discrimination on the basis of residence does not amount to discrimination on
the basis of nationality for the purpose of the non-discrimination provision in
Article XIX(1). It is worth reproducing a part of McCarthy P.'s decision, found at pages 561–562.
. . . the important words in deciding the first issue are "in
the same circumstances". The word "same" carries the connotation
of uniformity, of exactness in comparison. The phrase does not ordinarily mean
in roughly similar circumstances: it means in substantially identical
circumstances in all areas except nationality. Can then the difference in
residence be accepted in this case as a valid basis for applying a different
tax rate or must nationality be seen as the true basis of the distinction made.
I bear in mind that these two terms, residence and nationality, and
especially the latter, are treacherous words for they are somewhat artificial
when applied to corporate bodies. But in the Agreement I find strong
recognition of the importance of the concept of residence as the source of
taxing power and of the right of contracting parties to impose different rates
or conditions of tax on companies according to residence. I see this in the
definitions in Article II, especially in para (1)(l) and (m), in Article
VII, in Article XVII, and as I have already said, in Article XIX itself in
paras (2) and (4). Moreover, the Agreement seems to me to accept the right of
the taxing country to determine the criteria by which it determines residence,
and I think that this can be said of the residence of companies as well as that
of individuals. Article II(1)(l)(i), for example, defines the term
"resident of New Zealand" as meaning a New Zealand company and any
other person who is resident in New Zealand for the purposes of New Zealand tax
[see Article 4(1) of the Canada-UK Treaty]. . . . So the words "for the
purposes of New Zealand tax" seem to me to involve a recognition of the
right of New Zealand to determine what corporate bodies, even possibly
companies additional to those covered by the definition of New Zealand company
appearing in Article II(1)(j), are to be treated as resident for the purposes of
its taxation.
I do not find the hypothetical example of the company incorporated
in New Zealand but, in fact, located and trading overseas which was so
much relied upon by Mr Patterson in his submissions to us, as an obstruction to
the prominence I give the matter of residence when determining whether it can
fairly be said that the discrimination in this case was based on nationality.
It is true that the only difference between the hypothetical company and the
respondent is the former's birth in this country, but birth is not an
unimportant factor to be taken into account in prescribing a test of residence
for companies. If a company obtains its existence and status wholly by virtue
of the law of the country in which it was incorporated, it seems to me supportable,
both as a matter of justice and on recognised tax practice, to base residence
on the fact of incorporation. New Zealand has chosen to do that, and I think it is a little superficial to
say, in such circumstances, that the essential substance of the difference
between the two companies is a matter of nationality and not residence. It
should not be overlooked that the test of residence can be of advantage to a
company incorporated in the United Kingdom which as a result of having its
centre of administrative management in New Zealand and not in the United
Kingdom is taken, in terms of s 166, to be resident in this country and
entitled to be assessed at the lower rate, whereas another company of the same
birth but resident in the United Kingdom must be assessed at the higher rate.
In my judgment the better view is that the discrimination against
the respondent of which it complains is based on a difference of residence and
not on nationality, and that this discrimination is not in breach of the Agreement.
The respondent cannot claim to be "in the same circumstances" for the
purposes of Article XIX(1) as a company which is resident in New Zealand. . . .
[45]
It is also worth
reproducing the OECD Commentary on Article 24, which is consistent with the New
Zealand decision that nationals of one Contracting State that are non-residents of the other Contracting State are not in the same circumstances as resident nationals of that
other Contracting State. The Commentary reads as follows:
[t]he various provision of Article 24 prevent differences in tax
treatment that are solely based on certain specific grounds (e.g. nationality,
in the case of paragraph 1). Thus, for these paragraphs to apply, other
relevant aspects must be the same. The various provisions of Article 24 use
different wording to achieve that result (e.g. "in the same
circumstances" in paragraphs 1 and 2; "carrying on the same
activities" in paragraph 3 . . . .
The expression "in the same circumstances" refers to
taxpayers (individuals, legal persons, partnerships and associations) placed,
from the point of view of the application of the ordinary taxation laws and
regulations, in substantially similar circumstances both in law and in fact.
The expression "in particular with respect to residence" [note: this
expression is absent from Article 22(1) of the Canada-UK Treaty] makes clear
that the residence of the taxpayer is one of the factors that are relevant in
determining whether taxpayers are placed in similar circumstances. The
expression "in the same circumstances" would be sufficient by itself
to establish that a taxpayer who is resident of a Contracting State and one who is not a resident of that State are not in the
same circumstances.
By virtue of that definition [the definition of "national"
at Article 3(1)(g) of the Model Convention], in the case of a legal person such
as a company, " national of a Contracting State" means a legal
person "deriving its status as such from the laws in force in that
Contracting State". A company will usually derive its status as such from
the laws in force in the State in which it has been incorporated or registered.
Under the domestic law of many countries, however, incorporation or
registration constitutes the criterion, or one of the criteria, to determine
the residence of companies for the purposes of Article 4. Since paragraph 1 of
Article 24 prevents different treatment based on nationality but only with
respect to persons or entities "in the same circumstances, in particular
with respect to residence", it is therefore important to distinguish, for
purposes of that paragraph, a different treatment that is solely based on
nationality from a different treatment that relates to other circumstances and,
in particular, residence. . . . paragraph 1 only prohibits discrimination
based on a different nationality and requires that all other relevant factors,
including the residence of the entity, be the same. The different treatment of
residents and non-residents is a crucial feature of domestic tax systems and
tax treaties; when Article 24 is read in the context of the other Articles of
the Convention, most of which provide for a different treatment of residents
and non-residents, it is clear that two companies that are not residents of the
same State for purposes of the Convention (under the rules of Article 4 [same
article in the Canada-UK Treaty]) are usually not in the same circumstances for
purposes of paragraph 1.
[46]
In light of the Supreme
Court of Canada decision in Crown Forest, supra, a case in which
that court agreed to examine the OECD Commentary on an article of the Model
Convention that differed slightly in wording from the article of the Canada-UK
Tax Treaty at issue using the Commentary on Article 24(1) of the Model
Convention as a tool to interpret Article 22(1) of the Canada-UK Treaty here
should not be too problematic in this case either, even though Article 22(1) of
the Treaty is not identical to Article 24(1) of the Model Convention.
[47]
In Canadian Tax Paper No.
90, titled "Tax Discrimination Against Aliens, Non-Residents, and Foreign
Activities: Canada, Australia, New Zealand, the United Kingdom, and the United States" (Canadian
Tax Foundation, 1991, at pages 69–70), commentator Brian J. Arnold
explains the interaction between nationality, incorporation and residency and
arrives at the same conclusion as that in the OECD Commentary. According to
him, a tax provision that discriminates on the basis of residency cannot be
said to be discriminating on the basis of nationality unless it does so
explicitly.
. . . the place of incorporation of a corporation is similar in many
respects to citizenship with respect to individuals. Citizenship is largely
irrelevant in determining whether or not an individual is taxable on his
worldwide income or only his Canadian source income. In contrast, incorporation
in Canada (except for certain
transitional arrangements) is determinative of a company's tax residence in Canada and accordingly its liability to
Canadian tax on its worldwide income. Under the OECD model treaty and most tax
treaties, a corporation is considered to be a national of the country under
whose laws it derives its status. Therefore, tax provisions can be considered
to discriminate on the basis of nationality where they treat corporations
incorporated outside Canada less favourably than those incorporated in Canada. The difficulty is that, since Canada treats corporations incorporated in
Canada as resident in Canada
for tax purposes, it is impossible to differentiate between provisions that
discriminate on the basis of nationality and those that discriminate on the
basis of residence. The Canadian tax system contains many provisions that
distinguish between resident and non-resident corporations and may therefore
distinguish between corporations incorporated in and outside Canada. Most corporations incorporated in Canada, however, would also be considered
to be resident in Canada on the basis of their central management and control
in Canada, even if they were not
incorporated in Canada. In
effect, for most corporations, the place of incorporation test is a proxy for
the central management and control test of residence. Therefore, only
provisions that distinguish between corporations expressly on the basis of
their place of incorporation can reasonably be considered to discriminate on
the basis of nationality. In fact, there are no provisions in the Canadian tax
system that discriminate on this basis.
[48]
This brings me to the
appellant's contention that the only corporations that can qualify as
"Canadian corporations" under subsection 89(1) of the Act are corporations
that are Canadian nationals and that the Canadian corporation requirement in
subsection 88(1.1) of the Act thus amounts to discrimination founded on
nationality contrary to Article 22(1) of the Canada-UK Treaty.
[49]
It is true that
paragraph (a) of the definition of "Canadian corporation" in
subsection 89(1) of the Act, imposes a nationality requirement in that
the corporation must have been incorporated in Canada, thereby becoming a
national of Canada, but this requirement is in addition to the Canadian
residency requirement laid down in the introductory portion of the definition.
In addition, under paragraph (b) of the definition, a corporation
that has been resident in Canada since at least June 18, 1971 qualifies as
a Canadian corporation. That paragraph does not impose a nationality
requirement because it does not require that the corporation have been
incorporated in Canada. Therefore, had the appellant and its
wound-up subsidiary each qualified as a "Canadian corporation" under
paragraph (b) of the definition of that term in subsection 89(1) of the Act,
the appellant could have deducted its subsidiary's losses under subsection
88(1.1) of the Act.
[50]
In other words, paragraph
(a) of the definition of "Canadian corporation" in subsection
89(1) imposes a nationality requirement combined with a residency requirement,
but paragraph (b) does not impose a nationality requirement. Thus, a
corporation need not have been incorporated in Canada in order to be a resident
of Canada. Residency can also be determined by the
application of subsections 250(4) and 250(5) of the Act or by the application
of the common law "management and control" test. Therefore, a
corporation that was not incorporated in Canada,
can be a resident of Canada if its management and control is found to be in Canada or a corporation that was incorporated in Canada can
be deemed a non-resident of Canada through the application of subsection
250(5) of the Act. Corporations do not qualify as "Canadian
corporations" simply because of their Canadian nationality, as suggested
by the appellant.
[51]
The appellant's other
contention is that subsection 88(1.1) is discriminatory because, as a national
of the U.K., it is subjected to taxation which is more
burdensome than the taxation to which nationals of Canada
"in the same circumstances" are subjected. The appellant further
suggests that for the purpose of determining whether subsection 88(1.1) is
discriminatory, Article 22(1) of the Canada-UK Treaty calls for a comparison
between the appellant and a national of Canada
that is in the same circumstances as the appellant. Accordingly, the appellant
suggests that it and its wound-up subsidiary are in the same circumstances as a
Canadian entity carrying on a similar business in Canada that has the benefit
of subsection 88(1.1) of the Act by virtue of being a "Canadian
corporation" under paragraph (a) of the definition of that term in
subsection 8a(1) of the Act. The only thing distinguishing both
situations is, according to the appellant, the nationality of the corporations.
I would agree with the appellant if residency was the equivalent of nationality,
but I do not believe that to be the case. Not all Canadian nationals can be
deemed to be resident in Canada under subsection 250(4) of the Act by
virtue of their incorporation in Canada. Moreover, as mentioned earlier,
subsection 250(5) of the Act deems corporations incorporated in Canada to be non-residents in certain circumstances.
[52]
The proper comparison,
in light of the above, would be to compare the appellant with a Canadian
national that is a non-resident of Canada and that has a
non-resident wound-up subsidiary. That non-resident Canadian national would not
qualify as a "Canadian corporation" under subsection 89(1) and
therefore would not have access to its wound-up subsidiary's losses under
subsection 88(1.1) of the Act.
[53]
I therefore conclude
that the Canadian corporation requirement of subsection 88(1.1) does not
amount to discrimination against the appellant that is based on nationality
contrary to Article 22(1) of the Canada-UK Treaty.
[54]
Finally, I would
suggest that, as submitted by the respondent, in a situation where one was
comparing the appellant with a corporation that is a Canadian national resident
in Canada and having a wound-up subsidiary that is a Canadian national resident
in Canada — the appellant (for the sake of argument) also being a resident of
Canada and having a Canadian resident wound-up subsidiary and neither entity
qualifying as a "Canadian corporation" under subsection 89(1)
(because of the year of period of residency) — that situation would give rise
to discrimination as the Canadian corporation resident in Canada would be able
to deduct the non-capital losses of its wound-up subsidiary under subsection
88(1.1) of the Act while the appellant, also resident in Canada, would
not be able to. Article 22(1) of the Canada-UK Treaty would, in my opinion,
apply in such a circumstance.
Discrimination contrary to Article 22(2) of
the Canada-UK Treaty
The Appellant's Position
[55]
The appellant's
interpretation of Article 22(2) of the Canada-UK Treaty is that Canada, by signing the Treaty, has agreed that an enterprise
of the appellant in Canada should not be in a less favourable position than a
Canadian national operating in Canada. Counsel for the appellant states that
Article 22(2) extends to such an enterprise the application of
sections 111 and 115 of the Act and of loss carry-back and carry-forward.
The appellant quotes the 2003 version of the OECD commentary on Article 24(3)
of the Model Convention, which reads as follows:
Permanent establishments should also have the option that is
available in most countries to resident enterprises of carrying forward or
backward a loss brought out at the close of an accounting period within a
certain period of time (e.g. 5 years). It is hardly necessary to specify
that in the case of permanent establishments it is the loss on their own
business activities, as shown in the separate accounts for these activities, which
will qualify for such carry-forward.
The Respondent's Position
[56]
The respondent reminds
the Court that Article 22(2) of the Treaty refers to taxation of a permanent establishment
and argues that what is being compared in Article 22(2) is the taxation of the
PE of a non-resident and the taxation of enterprises resident in Canada.
[57]
The respondent refers
to Article 7 of the Canada-UK Treaty and states that Canada
and the UK have agreed not to tax business profits earned in Canada or in the UK by residents of
the other State unless the taxpayer has a PE in the source State. Article 7(2)
provides that the profit attributed to the PE is profit which it might be
expected to make if it were an enterprise dealing independently with the
enterprise of which it is a permanent establishment. The respondent also refers
to Article 7(3) which provides that the only deductions which can be taken into
account when determining the profits of a PE are those for the expenses
incurred for the purposes of the PE.
[58]
The respondent argues
that the taxation of a PE referred to in Article 22(2) of the Treaty is very
much about the profits of that permanent establishment and the deduction of
expenses incurred in the context of the activities of that permanent
establishment. The scope of Article 22(2), according to the respondent, is
limited to the taxation of the permanent establishment itself and does not deal
with the taxation of the enterprise as a whole, nor does it extend to taking
into account the relationship between an enterprise and other enterprises, in
particular through rules that allow the transfer of losses between
corporations. The respondent argues, and I quote from page 118 of the
transcript:
What subsection 88(1.1) deals with is with the inter-corporate
transfer of losses which [is] a completely different thing than if you're
looking at what you're taxing a permanent establishment. You're dealing with
the inter-corporate losses of the enterprise, if you want, of the corporation
within which the permanent establishment is found.
[59]
The respondent
therefore submits that Article 22(2) of the Treaty does not discriminate
against the appellant because the losses being claimed are not losses resulting
from its own business activities carried on through a PE, but are intercorporate
losses. The respondent quoted the same excerpt from the OECD Commentary as that
quoted by the appellant as well as the following paragraph added to the 2008
version of the OECD Commentary, which provides a more detailed explanation of
the loss carry-forward and carry-back that should be available to PEs.
As clearly stated in subparagraph c) above,
the equal treatment principle of paragraph 3 [of Article 24, Model Convention] only
applies to the taxation of the permanent establishment's own activities. That
principle, therefore, is restricted to a comparison between the rules governing
the taxation of the permanent establishment's own activities and those
applicable to similar business activities carried on by an independent resident
enterprise. It does not extend to rules that take account of the relationship
between an enterprise and other enterprises (e.g. rules that allow
consolidation, transfer of losses . . . ) since the
latter rules do not focus on the taxation of an enterprise's own business activities
similar to those of the permanent establishment but, instead, on the taxation
of a resident enterprise as part of a group of associated enterprises. Such
rules will often operate to ensure or facilitate tax compliance and
administration within a domestic group. It therefore follows that the equal
treatment principle has no application.
[60]
The respondent
therefore submits that subsection 88(1.1) of the Act falls outside the
scope of Article 22(2) of the Canada-UK Treaty. The respondent concludes by
arguing that even if the appellant falls within the comparison groups, and I
quote from page 123 of the transcript:
. . . article 22.2 [22(2)] would still not
assist the Appellant because the Appellant here is not being treated less
favourably than an enterprise of Canada carrying on the same activities which
is what the treatment is guaranteed by 22.2 [22(2)]. Canadian corporations, as
I mentioned earlier, are not entitled to access non-capital losses of
non-resident subsidiaries [that have a PE in Canada] and this is precisely what the Appellant is trying to do, access
the losses of SEI which is non-resident.
(pages
123-24 of transcript)
Analysis
[61]
Paragraph 2 of Article
22 of the Canada-UK Treaty provides as follows:
Non-Discrimination
The taxation on a permanent establishment which an enterprise of a
Contracting State has in the
other Contracting State shall
not be less favourably levied in that other State than the taxation levied on
enterprises of that other State carrying on the same activities. . . .
[62]
That paragraph
prohibits discrimination based on permanent establishment status. The words
"enterprise of the other Contracting State" are defined in subparagraph
1(e) of Article 3 of the Canada-UK Treaty as meaning "an enterprise
carried on by a resident of the other Contracting State".
[63]
The OECD Commentary on
Article 24(3) of the Model Convention, which is practically identical to
Article 22(2) of the Canada-UK Treaty specifies that:
Strictly speaking, the type of discrimination which this paragraph
is designed to end is discrimination based not on nationality but on actual
situs of an enterprise. It therefore affects without distinction, and
irrespective of their nationality, all residents of a Contracting State who have a permanent establishment in
the other Contracting State.
(OECD
Commentary of the Model Tax Convention
– July 17, 2008, page 291,
par. 33)
[64]
Author Brian Arnold
seems to follow the same line of thought in his Tax Paper No. 90 (supra),
at pages 37–38, where he explains the operation of Article 24(4) (now
Article 24(3)) of the Model Tax Convention and its interaction with Article
24(1).
Unlike article 24(1), article 24(4) prohibits discrimination based
on residence; nationality is irrelevant. A business carried on in country A by
a resident of country B (whether or not a citizen of country A) through a
permanent establishment located in country A must not be treated less
favourably than the same business carried on in country A by a resident of
country A. . . .
. . .
There is no same circumstances requirement under the permanent
establishment provision, as there is in the nationality provision. Instead, the comparison of tax burdens must be made between the
permanent establishment of a non-resident and the same business activities
carried on by a resident. The reason for the difference is that a permanent
establishment is obviously in different circumstances than a domestic
enterprise, since a permanent establishment is not a separate entity but only a
branch, a part of a foreign enterprise. There is no guidance in article 24 or
in the commentary as to how to determine what are the same activities.
Another difference between the nationality and permanent
establishment provisions is that the nationality provision prohibits other or
more burdensome taxation, whereas the permanent establishment provision
prohibits less favourable taxation. Consequently,
with respect to a permanent establishment, a country is entitled to impose
different tax rules from those imposed on residents (that is, "other"
taxation is not precluded) as long as the result is not less favourable.
. . .
The relationship between articles 24(1) and (4) of the OECD model
treaty with respect to corporations is troublesome. A corporation established
under the laws of a state is a national of that state for purposes of article
24(1), even if it is resident elsewhere. Although the corporation is not
considered to be a national of the state in which it is resident for purposes
of article 24(1), it is entitled to the protection of article 24(4) as a
resident of that state. This interpretation suggests that where a corporation
is both incorporated and resident in the same country and carries on business
through a permanent establishment in the treaty partner, both articles 24(1)
and (4) apply. The commentary, however, implicitly indicates that a permanent
establishment cannot be in the same circumstances as a domestic enterprise.
Therefore, article 24(1) does not apply to foreign corporations with permanent
establishments; it applies only to foreign corporations deriving income from a
country but not having a permanent establishment there.
(Emphasis
added.)
[65]
The OECD Commentary, at
page 293, paragraph 40 and in particular paragraph 40(c), addresses the
issue of loss carry-forward or carry-back in general, but does not address the matter
of the transfer of loss deductions from a wound-up subsidiary to a parent
corporation, as is allowed by subsection 88(1.1) of the Act. The
Commentary does mention, though, that in the case of a PE, it is the loss from
the PE's own business activities that would qualify for a carry-forward or carry-back:
c) Permanent establishments should also have the
option that is available in most countries to resident enterprises of carrying
forward or backward a loss brought out at the close of an accounting period
within a certain period of time . . . It is hardly necessary to specify that in
the case of permanent establishments it is the loss on their own business
activities, as shown in the separate accounts for these activities, which will
qualify for such carry-forward.
. . .
41. As clearly stated in subparagraph c) above, the equal treatment
principle of paragraph 3 only applies to the taxation of the permanent
establishment's own activities. The principle, therefore, is restricted to a
comparison between the rules governing the taxation of the permanent
establishment's own activities and those applicable to similar business
activities carried on by an independent resident enterprise. It does not extend
to rules that take account of the relationship between an enterprise and other
enterprise (e.g. rules that allow consolidation, transfer of losses or tax-free
transfers of property between companies under common ownership) since the latter
rules do not focus on the taxation of an enterprise's own business activities
similar to those of the permanent establishment but, instead, on the taxation
of a resident enterprise as part of a group of associated enterprises.
[66]
The above Commentary
seems to be in line with the provisions found in paragraphs 1 to 3 of Article 7
of the Canada-UK Treaty, which deals with business profits of a permanent
establishment. Paragraphs 1 to 3 read as follows:
BUSINESS PROFITS
1. The profits
of an enterprise of a Contracting State shall be taxable only in that State unless
the enterprise carries on business in the other Contracting State through a permanent establishment situated
therein. If the enterprise carries on or has carried on business as aforesaid,
the profits of the enterprise may be taxed in the other State but only so much
of them as is attributable to that permanent establishment.
2.
Subject to
the provisions of paragraph 3, where an enterprise of a Contracting State
carries on business in the other Contracting State through a permanent
establishment situated therein, there shall be attributed to that permanent
establishment profits which it might be expected to make if it were a distinct
and separate enterprise engaged in the same or similar activities under the
same or similar conditions and dealing wholly independently with the enterprise
of which it is a permanent establishment.
3.
In the determination of the
profits of a permanent establishment situated in a Contracting State, there
shall be allowed as deductions expenses of the enterprise (other than expenses
which would not be deductible under the law of that State if the permanent
establishment were a separate enterprise) which are incurred for the purposes
of the permanent establishment including executive and general administrative
expenses, whether incurred in the State in which the permanent establishment is
situated or elsewhere.
[67]
Paragraph 2 of Article
7 of the Canada-UK Treaty provides that the profits attributable to a PE are
the profits which it might be expected to make if it were a distinct and
separate enterprise dealing wholly independently with the enterprise of which
it is a PE. Paragraph 3 of Article 7 specifies that the deductions available to
a PE are expenses of the enterprise which are incurred for the purposes of the
PE. Article 7 does not specifically deal with the deduction of losses, but it
would seem logical to infer and conclude that the only loss deductions possible
in determining the profits of the PE are those with respect to losses that would
be attributable to the PE if it were dealing wholly independently with the
enterprise of which it is a PE. This is what I believe the parties intended to
agree to in Article 7.
[68]
That being said, the
appellant, in this fact situation, is seeking, in calculating the taxable
income earned by its PE, to deduct losses that do not result from its PE's own
activities in Canada, and such a deduction is not allowed under Article 7 of
the Canada-UK Treaty. The respondent's refusal to allow the deduction does not
violate the non-discrimination provision of Article 22(2) of the Canada-UK
Treaty.
[69]
Although I do find the
appellant's arguments to be logical and in line with the spirit of the Act in
terms of what is allowed as deductions for losses, I cannot ignore Article 7 of
the Canada-UK Treaty or the OECD Commentary that suggests that the equal
treatment principle only applies to the taxation of the PE's own activities. It
does not therefore extend to provisions that take into account the relationship
between an enterprise and other enterprises and that allow the transfer of
losses.
[70]
I agree with the
respondent that the appellant is not being treated less favourably in these
circumstances than a Canadian enterprise carrying on the same activities and wanting
to deduct non-capital losses of non-resident subsidiaries that have a PE in Canada, which is what the appellant is trying to do.
[71]
The appeal is dismissed
with costs.
Signed at Ottawa, Canada, this 14th
day of January 2011.
"François Angers"
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