Date:
20070921
Docket:
A-217-06
Citation: 2007 FCA 302
CORAM: NOËL
J.A.
SEXTON J.A.
PELLETIER
J.A.
BETWEEN:
GULFMARK OFFSHORE
N.S. LIMITED
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
REASONS FOR
JUDGMENT
NOËL J.A.
[1]
This
is an appeal from a decision of Miller J. of the Tax Court of Canada,
confirming in part the reassessment issued with respect to Gulf Offshore N.S.
limited’s (“GONS”) 1999 taxation year on the basis that GONS was carrying on
business in Canada through a permanent establishment. By the same decision,
Miller J. confirmed the Minister of National Revenue’s (the “Minister”) disallowance
of GONS’ interest expenses, but referred the reassessment back to the Minister
for reassessment on the basis that GONS was entitled to deduct its salary and
travel expenses, as claimed.
[2]
GONS
maintains that the Tax Court Judge committed a variety of errors in holding
that it was carrying on business in Canada in 1999, through a
permanent establishment. In the alternative, GONS contends that the interest
expenses, which it claimed, were properly allocated to its permanent
establishment, and that the Tax Court Judge erred in refusing to allow this
deduction.
RELEVANT FACTS
[3]
The
appellant, GONS, is an offshore transportation corporation, resident in the United
Kingdom.
[4]
In
1999, the appellant owned and operated a fleet of 27 supply vessels, one of
which was the M.V. Highland Pride (the “Highland Pride”). The Highland Pride
was built in 1992, at a cost of
£ 12,000,000.00, specifically to carry pipe on deck for use in the laying of
pipeline offshore. The appellant borrowed £ 11,000,000.00, pursuant to a
ten-year term loan, to finance its construction (Reasons, para. 3).
[5]
In
1998, the parent company, Gulfmark Offshore Inc., consolidated all the debts of
its subsidiaries (including GONS) in order to obtain a better financing rate.
As part of this refinancing arrangement, GONS borrowed approximately £ 37,000,000
from Gulfmark Offshore Inc. The money borrowed was for the construction of new
ships in addition to the refinancing of GONS’ outstanding debts (Reasons, paras.
12 and 13).
[6]
In
1998, the appellant entered into a Charter Party Agreement with Allseas Canada
Limited (“Allseas”) to provide a ship, the Highland Pride, for transportation
of pipes and other supplies (materials, equipment, marine gas oil), in Canadian
coastal waters. The charter price was £ 21,500 per day, excluding fuel and
import duties.
[7]
In
addition to supplying the ship, GONS supplied the master, crew and an engineer.
GONS subcontracted the crew for the Highland Pride from a related non-resident
company, Guernsey Ship Limited and an arm’s length Canadian resident company.
[8]
In
conformity with the Charter Agreement, the Highland Pride worked for 88 days in
1999 transporting pipe joints and other material from Nova Scotia to the
installation area offshore Nova Scotia, that is between
Country Harbor and Sable Island. During this
time, Allseas furnished all instructions and sailing directions and the Master
and the Engineer of the Highland Pride kept full and correct logs of the
vessel’s whereabouts. GONS maintained daily contact with the ship (Reasons,
para. 20).
[9]
GONS
filed an income tax return for the year under appeal, claiming an exemption
under article 8 of the Canada-UK Tax Convention (the “Treaty”) and
seeking a refund of the withholding tax it had paid. On that occasion, GONS submitted
an income and expense statement in British pounds setting out salary and travel
expenses in the amount of £ 169,793 and interest expenses in the amount of £
194,876.
[10]
This
interest expense ($461,856.00 when converted into Canadian dollars) represented
22.93% of the interest expense incurred by GONS’ for its worldwide operations
during the 88 days that the Highland Pride operated in Canada. This
percentage was determined by taking the Highland Pride’s revenue for the 88-day
period and dividing it by GONS’ revenue from all its vessels for the same
period (Reasons, para. 13).
[11]
The
Minister assessed GONS as a non-resident corporation carrying on business in Canada within the
meaning of section 248 of the Act relying on article 27A of the Treaty. In
computing the income subject to tax in Canada, the
Minister denied the appellant one-half of its deductions for salaries and
travel expenses and all of its interest-financing charges.
[12]
GONS
appealed to the Tax Court of Canada. As previously noted, Miller J. held that
GONS was carrying on business through a permanent establishment (as per article
27A of the Treaty) and so, was liable to pay income tax in Canada on the income
earned through its permanent establishment. He further held that GONS had not
discharged of the onus of demonstrating that the interest expense claimed was
properly allocated to its permanent establishment in Canada. However,
Miller J. allowed the half portion of the deduction of salaries and travel
expenses, which the Minister had disallowed.
TAX COURT DECISION
[13]
The
Tax Court Judge identified the issues before him as whether GONS was carrying
on a business through a permanent establishment within the meaning of the
Treaty and if so, whether the salary, travel and interest expenses claimed were
deductible in computing GONS’ income derived from the permanent establishment
during the relevant period.
[14]
The
Tax Court Judge found that GONS carried on business in Canada (based on
the ordinary meaning of the term) for the 88 days. As the business was carried
on in connection with exploration and exploitation of the sea bed, the
underlying activities came within article 27A of the Treaty. Consequently, GONS
was liable to pay tax on income earned as a result of these activities. In so
holding, the Tax Court Judge rejected GONS’ contention that it had entered into
a passive or bare boat lease and that Allseas operated the Highland Pride
during the relevant period. Specifically, the Tax Court Judge found that GONS
was carrying on the activity of operating a ship, supplying the crew and
transporting pipes, supplies and personnel to an offshore sight. Further, GONS’
head office was in daily contact with the ship and there was no evidence that
Allseas’ personnel ever boarded the ship (Reasons, paras. 17-20).
[15]
The
Tax Court Judge went on to find that salary and travel expenses were deductible
but the interest expenses were not. He noted that the taxable income of a
business carried on through a permanent establishment is to be calculated as if
the establishment was a separate business and recognized that given the number
of vessels that GONS operates, it was necessary to apportion salary and travel
costs. The Tax Court Judge found that GONS’ use of the standard costing method
was an acceptable method for apportioning such costs (Reasons, para. 22).
[16]
However,
with respect to interest expenses, the Tax Court Judge held that GONS had
failed to show what portion, if any, of the interest paid under the
consolidated loan was used to finance the operation of the Highland Pride
during the period in issue (Reasons, para. 25).
ALLEGED ERRORS IN THE
DECISION UNDER APPEAL
[17]
With
respect to the first issue identified by the Tax Court Judge, the appellant
alleges that the Tax Court Judge failed to construe the Treaty liberally with a
view to implementing the intention of the parties and the policy of the Treaty,
referring to the Vienna Convention on the Law of Treaties, 23 May 1969,
1155 U.N.T.S. 33, arts. 31-33 (the “Vienna Convention”). In
particular, the appellant submits that the Tax Court Judge defined the term
“activity” in a manner that required literally no action on its part. According
to the appellant, this goes against the purpose of the Treaty, which is to
provide relief against double taxation. In this respect, the appellant
maintains that the foreign tax credit to which it is entitled under U.K. tax laws
will not fully compensate it for the taxes assessed in Canada.
[18]
The
appellant further alleges that the Tax Court Judge made a series of overriding
and palpable errors in concluding that GONS rather than Allseas operated the
Highland Pride during the 88 days that the Highland Pride was in Canadian
waters.
[19]
With
respect to the interest expenses, the appellant maintains that the amounts
claimed were computed in accordance with well-accepted business and accounting principles.
The method used provides a reasonable basis for the allocation of these
expenses amongst the 27 vessels and it was for the Minister to establish that
it did not provide an accurate picture of the income (Candarel Limited v.
Her Majesty the Queen [1998] 1 S.C.R. 147, (“Candarel”).
ANALYSIS AND DECISION
[20]
Dealing with the first issue, it is
apparent from the wording of article 27A that this provision was added to the
Treaty in order to deem persons working in the sea bed exploration and
exploitation industry to be carrying on business through a permanent
establishment in circumstances where they would not otherwise be caught by the
definition of permanent establishment under the Treaty.
[21]
As
applied to the facts at hand, article 27A of the Treaty makes any U.K. resident,
carrying on activities in Canada in connection with the exploration and
exploitation of the sea bed, subsoil and natural resources for more than 30
days, liable to Canadian taxation as if it were carrying on a business through
a permanent establishment. The appellant alleges that it was not “carrying on
activities” but rather was passively involved as a result of having leased the
ship to Allseas; a lease that was equivalent to a bareboat charter. The
appellant conceded before the Tax Court Judge that if it was “carrying on
activities”, those activities were connected with the exploration and
exploitation of the seabed, subsoil and natural resources. Consequently, the
only issue in this appeal is whether the Tax Court Judge could properly hold
that GONS was “carrying on activities” pursuant to article 27A of the Treaty.
[22]
There is no definition of what constitutes
“carrying on activities” within the meaning of article 27A of the Treaty. The
appellant argues that the Tax Court Judge gave a literal interpretation of the
term “carrying on activities”, which was not in keeping with the legislative
intent and the intention of the parties to the Treaty. However, as the
respondent suggests, there is no reason why the relevant words of the Treaty should
not be given their ordinary meaning, as the Tax Court Judge did (Reference is
made to article 31(1)(a) of the Vienna Convention). I can detect no
error in the Tax Court Judge’s understanding of the relevant words of the
Treaty.
[23]
Nor do I
accept that the Tax Court Judge made an overriding or palpable error in his
appreciation of the evidence. As the Tax Court Judge found, the appellant did
not enter into a bareboat lease with Allseas. A bareboat lease is one whereby a
ship is supplied without a crew.
[24]
The fact
that Allseas obtained the costal trading license, gave sailing instructions to
the captain and determined which supplies were transported on the ship is not
inconsistent with the Tax Court Judge’s finding that GONS was operating the
Highland Pride. In my view, the fact that GONS supplied the crew, was in daily
contact with the ship, had the captain keep logs of the ship’s whereabouts and
was responsible for maintaining the ship throughout provides ample support for
the Tax Court Judge’s conclusion that GONS was operating the ship.
[25]
The
appellant has identified no reviewable error with respect to the Tax Court
Judge’s conclusion that GONS carried on activities in Canada, pursuant to article 27A of the Treaty.
[26]
Turning
to the second issue, I agree with Counsel for the Minister that no question of
law arises with respect to the computation of profit proposed by the appellant
in this appeal (Candarel, supra). The issue in this case is an
evidentiary one, pertaining to the interest expense incurred by the appellant
that properly relates to the Highland Pride.
[27]
A
Candarel type of issue could have arisen if the appellant had shown that
its interest expense under the consolidated loan could be viewed as a general
overhead expense benefiting all 27 ships. In such a case, the interest expense
would have to be allocated on some basis, and it may be that, absent a better
suggestion by the Minister, the method proposed by the appellant would have to
be found appropriate.
[28]
However,
not only was this demonstration not made, but the record shows that the
consolidated loan was used to finance a new ship (not “ships” as the Tax Court
Judge said at para. 12 of this reasons), and the appellant was unable to
identify the portion of the loan that was put to that use (Cross-examination of
Mr. Guthrie, Appeal Book, Vol. II, at p. 321).
[29]
Consequently,
I can find no error in the Tax Court Judge’s conclusion that GONS did not meet
the evidentiary burden of showing that its proposed method for apportioning the
interest expenses was acceptable for establishing the expenses of the Highland
Pride as a separate business.
[30]
I
would dismiss the appeal with costs.
“Marc
Noël”
“I
agree
J. Edgar Sexton J.A.”
“I
agree
J.D. Denis Pelletier J.A.”
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