Pullman v. The Queen, 83 DTC 5080, [1983] CTC 52 (FCTD)

Dubé, J:—The plaintiff, a resident of Switzerland, appeals the assessments for his 1971 and 1972 taxation years including the total sums of $1,116,712.10 and $934,691.04 respectively as income from a “money lending business carried on by him in Canada”.

The plaintiff was born in 1901 in Russia and immigrated to Canada with his family at the age of seven. During his adolescent years he moved to the United States where he joined the American Army in the First World War and became a naturalized American citizen in 1943. In 1948 he returned to Canada and became a naturalized Canadian citizen in 1954. In 1960 he moved to Switzerland, became a resident there and married a Swiss lady in 1962. They now both live in Lausanne, Switzerland and share another home at Monte Carlo, Monaco.

In the course of his early life he accumulated considerable wealth, first in bakery and then in automobile accessories in the United States and later on in the stock market, real estate and money lending in Canada, personally and through Pullman Holdings Limited.

In 1970 he was approached in Switzerland by a broker by the name of Joseph Burnett who used to be a partner of Sam Gotfrid, a lawyer with whom the plaintiff did business in Toronto. Mr Burnett was aware that the plaintiff had funds available for investments in mortgages. Both men reached an understanding whereby Mr Burnett would inform the plaintiff of loan transactions, as they arose, and offer him participation in those loans if he so desired. The plaintiff entered into 52 such separate transactions involving some 708 entries*. [1] Not all the loan transactions were carried out in Canada. In fact, about 60% of the loans were made to American borrowers in the United States and Puerto Rico. There was also one loan to a borrower in London, England.

Following the visit of Mr Burnett in Switzerland the plaintiff opened a second bank account known as “J P #2” with the Bank of Commerce, City Hall Branch, Toronto. The plaintiff give Mr Burnett a power of attorney to complete the loan transactions through that bank account, that is to withdraw funds from, and to deposit funds into, the bank account on behalf of the plaintiff.

Both Messrs Pullman and Burnett testified at the trial. They were the only witnesses. According to their evidence, the plaintiff never solicited loans and never held himself out to the public as being ready to lend money. Mr Burnett was actively and heavily engaged in the financing of building projects such as shopping centres, food stores, convalescent homes, office buildings, etc. At the time of closing, where there appeared to be a need for bridge financing, Mr Burnett would call the plaintiff in Switzerland (or other prospective money lenders) and acquaint him with all the essential elements of the transaction. The plaintiff had full confidence in Mr Burnett and still does. He would assess the situation and decide whether to accept or to reject participation in the transaction. Both parties would negotiate, mostly on the telephone, the interest or the fee to be charged by the plaintiff. The latter was not acquainted with the commission earned by Mr Burnett.

Apart from interest, the plaintiff would also earn “commitment fees” and “stand-by fees”. Commitment fees were additional sums in compensation for risky loans. Stand-by fees were sums paid to the plaintiff for agreeing to make sums available on a stand-by basis, if and when required. The three types of income, that is interest, stand-by and commitment fees are considered by the Minister as income.

The plaintiff was not the only source of funding available to Mr Burnett. The latter could and would turn to several other money lenders. His financing brokerage business is quite considerable, involving millions of dollars and a large staff in Toronto.

The plaintiff himself has no office and no pied à terre in Canada. He does have some family in this country which he visits from time to time. He keeps the bank accounts aforementioned. A record of his loan transactions with Mr Burnett was kept by one of Mr Burnett’s several Canadian companies, Kelburn Management Limited, which managed the bookkeeping for all of Mr Burnett’s transactions. Most of the loan transactions involving the plaintiff were conducted through another Burnett company, Ruthbern Holdings Limited. Many of the transactions were not negotiated and closed from Mr Burnett’s offices in Toronto but from the borrowers’ places of business in Canada, the United States, Puerto Rico and the United Kingdom. It usually was from those places that Mr Burnett would make last minute telephone calls to money lenders, including the plaintiff in Switzerland, in order to complete the bridge financing and close the deals.

The central issue to be resolved here is whether all these interests, or stand-by, or commitment fees, totalling over two million dollars, earned by the plaintiff are to be included in his income under Part I of the Income Tax Act, as income earned by a non-resident carrying on a business in Canada, or whether some portion of it — from the Canadian loans — should be subject to non-resident withholding tax under Part XIII of the Income Tax Act (Part VIII of the old Income Tax Act), and the balance — from foreign loans

— not taxable at all in Canada. The plaintiff admits that the interest and fees paid to him by Canadian residents is subject to the withholding tax, but claims that he was not carrying on a business in Canada, and therefore should not be included under Part I of the Income Tax Act.

In its defence the Minister assumed that the plaintiff was not a resident of Canada, but that he earned the amounts aforementioned “from a money lending business carried on by him in Canada, which amounts were earned with respect of the following transactions”. Then follow a list of 351 transactions for the year 1971 and a list of 357 transactions for the year 1972. The Minister also assumed that the plaintiff was at all material times a Canadian citizen who maintains bank accounts in Toronto, including one entitled John Pullman #2, in respect of which he has given full power of attorney to Joseph Burnett whom he authorized “to act as his agent in conducting his business of money lending in Canada”. The Minister also assumed that the various amounts of commission were paid or deposited into the bank account by Joseph Burnett, Kelburn Management Limited, Ruthbern Holdings Limited and other companies controlled by Joseph Burnett.

In their evidence both the plaintiff and Mr Burnett denied the existence of any agency relationship between them. Their denial, however, does not settle the point as the existence of an agency is a conclusion of law. The evidence indicates, however, as already mentioned, that Mr Burnett was under no obligation to bring any particular transactions to the attention of the plaintiff, nor to invite him to participate. Mr Burnett could have obtained his funding somewhere else, and often did. On his part the plaintiff was under no obligation to accept. He could reject and in fact did on occasions. Mr Burnett did not necessarily inform the plaintiff as to the commission he was receiving. There was no umbrella agreement, written or oral, binding the two parties to any number, or amount, or volume of transactions. It seems that any other broker from Canada, or elsewhere, could have contacted the plaintiff and made him an offer which he would have assessed and accepted or refused. In that sense, Mr Burnett was no more an agent of the plaintiff than any other broker seeking funding to close a deal. According to his own evidence, which stands uncontradicted, the plaintiff relied on Burnett because he had confidence in him. Their relationship was profitable to both men.

The term “agent” is very wide and nebulous. “No word is more commonly and constantly abused than agent”*. [2] An agent is one who acts for somebody else. In that very broad sense, Mr Burnett on many occasions acted on behalf of the plaintiff, such as for the withdrawing or the depositing of sums in the bank account under the power of attorney. It appears, however, from the evidence that Mr Burnett held no overall exclusive agency and no general power to bind the plaintiff. Whatever agency existed was very limited and specific in its naturet. [3]

The issue to be determined here is not whether there existed an agency between the two, but whether the plaintiff carried on a money lending business in Canada during the relevant period. The question would be an easy one to answer if the plaintiff had been physically present in Canada with an office there, soliciting business from Canadian borrowers, and lending money directly to them. In the case at bar, however, the plaintiff’s only links to Canada were the phone calls from Mr Burnett — those that originated from Canada — the bank accounts in Toronto, the power of attorney to Mr Burnett, the accounting kept by Mr Burnett through Kelburn Management Limited. Are those links sufficient to constitute “the carrying on of a money lending business in Canada”?

Undoubtedly, the plaintiff was carrying on a business. The frequency, intensity and volume of his money lending activities lead to the obvious con- clusion that he was in the money lending business. He “habitually or systematically exercised” that business^:. [4] All the fees received in connection with the loans, be they interest, commitment fees, or stand-by fees, are income earned from the money lending business exercised by the plaintiff. All these transactions and earnings are consistent with the background, knowledge, experience and previous activities of the plaintiff, but, was he carrying on a business in Canada?

In a 1981 decision, Cutlers Guild v The Queen, [1981] CTC 115; 81 DTC 5093, I had the occasion to review the tests used to determine whether a taxpayer is carrying on a business in another country. While the issue there was the business of selling silverware, still the following excerpt (at page 5) might be of some assistance in the case at bar:

Whether or not a taxpayer is carrying on a business in another country is a question of fact to be determined in each case. Courts have ruled that the place where sales, or contracts of sale, are effected is of substantial importance. However, the place of sale may not be the determining factor if there are other circumstances present that outweigh its importance.

Another test emanating from the jurisprudence is “Where do the operations take place from which the profits arise?”. Soliciting orders in one country may only be ancillary to the exercise of a trade in another country. Certain authorities establish that activities and operations other than contracts for sale constitute the carrying on of a business, specially where these respective activities and operations produce or earn income. While income may be realized through sales, it may not be realized entirely from that one activity or operation. Purchasing of merchandise in one country (ie Japan) with the view of trading in it elsewhere (Canada) does not, of course, constitute an exercise of the trade in the former country.

In Winfried Loeck v The Queen, [1978] CTC 528; 78 DTC 6368, Mahoney, J of this Court had to determine whether a non-resident taxpayer who was purchasing and selling investment properties in Canada was carrying on business in this country. This resident of Germany invested in a number of Canadian properties. In 1971 he realized a profit of some $50,000 on the sale of an apartment building in St Catharines, Ontario, and in 1972 a profit of some $70,000 on the sale of two farms just outside the city. In both these transactions he invested jointly with a fellow German who had taken up residence in Canada. The resident negotiated the transactions and managed the taxpayer’s various Canadian investments. The taxpayer would inspect the investments and opportunities for further investment when he visited Canada on holidays. The accountant prepared their accounts on the basis that the two were partners, while the resident was receiving a management salary. Mahoney, J held that the taxpayer was actively engaged in the business of buying, operating and selling real estate interests in Canada either in partnership with or through the agency of the resident. The business could not be said to be part of a West German enterprise and thus exempt from Canadian taxation under the Canada-Germany Income Tax Agreement Act.

I find the Canadian presence much stronger in the Loeck case than in the case at bar. After all, Loeck and a Canadian resident, acting in some type of partnership, were buying and selling real estate in Canada. In the case before me, the plaintiff is not actively buying or selling anything in Canada. He participates from abroad in the bridge financing of projects which may be located in the United States, or other countries, as well as in Canada, through a Canadian broker. The plaintiff himself performed no act in Canada, whereas Loeck did, directly and through a managing partner, both involved in Canadian real estate.

An older case before the House of Lords, Grainger and Son v Gough, [1896] AC 325, deals with the question of carrying on business in the United Kingdom. A French wine merchant used an English firm as its sole agent to obtain orders to be transmitted to their principal for acceptance. The principal would forward the wine directly to the customers at their expense and risk. Accordingly, no contracts were made in England and the only activity there was that of the agent seeking orders. It was held that the French wine merchant was not exercising a trade in the United Kingdom. Lord Herschell said this at 335:

In the first place, I think there is a broad distinction between trading with a country and carrying on a trade within a country. Many merchants and manufacturers export their goods to all parts of the world, yet I would not suppose anyone would dream of saying that they exercise or carry on their trade in every country where their goods find customers.

Similarly, in the present case the plaintiff cannot really be said to be carrying on a business in Canada. The basic administrative decisions, the acceptance or rejection of financing opportunities, were executed outside Canada. The only Canadian ingredients in the transactions, namely the bank account, the power of attorney and the book-keeping, were ancillary and merely for the purpose of convenience. Loaning money to Canadians (or Americans, Puerto Ricans and Britishers) does not by itself constitute the exercise of a business in Canada, whether the transactions are numerous, complex or otherwise. That type of transaction is dealt with under Part XIII of the Act and subject to a withholding tax.

The Deputy Attorney General relies also on section 253(b) of the Act which reads as follows:

253. Where, in a taxation year, a non-resident person

(a) . ..

(b) solicited orders or offered anything for sale in Canada through an agent or servant whether the contract or transaction was to be completed inside or outside Canada or partly in and partly outside Canada,

he shall be deemed, for the purposes of this Act, to have been carrying on business in Canada in the year.

In my view, it cannot be said that the plaintiff was soliciting orders or offering anything for sale in Canada through an agent, or servant, or otherwise. The plaintiff did not solicit orders in Canada and did not have to. He remained in Switzerland and was solicited there by a broker offering him participation in money lending activities. neither can it be said that loans can be offered for sale*. [5]

Even if I were to accept that Parliament intended money lending to be included under subsection 253(b), which I do not, surely that provision could not be extended to include loans made in other countries than Canada — the bulk of the loans made by the plaintiff.

I therefore allow the appeal with costs and order the assessments to be referred back to the Minister for reassessment on the basis that the Canadian interest and commission receipts are subject to withholding tax under Part VIII of the old Act or Part XIII of the new Act, as the case may be. None of the other amounts assessed are taxable in this country.