Citation: 2011 TCC 476
Date: 20111025
Docket: 2009-1192(IT)G
BETWEEN:
RICHARD LEWIN_,
RE: THE J.J. HERBERT FAMILY TRUST # 1,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bédard J.
[1]
The J.J. Herbert
Family Trust # 1 (the “Trust”) was settled on June 3, 1991
under the laws of the Bahamas. At the time the Trust was settled,
William Abdalla, Jean‑Jacques Herbert and the appellant were
the trustees. Jean‑Jacques Herbert (the “Beneficiary”) was at
all relevant times a non‑resident of Canada. In 2001, the Trust received
a preferred share dividend in the amount of $2,200,003. On September 11,
2011, the trustees of the Trust adopted the following resolution
(the “Resolution”):
WHEREAS
The J.J. Herbert Family Trust No. 1 (the “Trust”) received a
dividend in an amount of $2,200,003 CDN in 2001; and
WHEREAS
the dividend was considered by the trustees to be on account of capital as it
relates to the distribution of all, or substantially all, the assets of the
payor; and
WHEREAS
the trustees hereby declare that the dividend of $2,200,003 CDN be paid to
Mr. Jean Jacques Herbert as capital beneficiary of the Trust and that
Mr. Jean Jacques Herbert shall have the right at any time to require
payment of the amount of the dividend by the Trust to himself at any time.
[2]
In its 2001 income tax
return, the Trust reported the preferred share dividend. However, the Trust
declared it as being payable to a beneficiary under paragraph 104(6)(b)
of the Income Tax Act (the “Act”). Therefore, the Trust did
not pay any Part I tax on the amount of the preferred share dividend in
2001. In its 2001 income tax return, the Trust calculated Part XIII tax
payable in the amount of $550,000.75, being the amount that had become payable
to a non‑resident beneficiary in the year. This Part XIII tax was
never withheld or remitted to the Receiver General. On January 12, 2002,
the appellant resigned as a trustee of the Trust. On January 18, 2002, the
Trust paid an amount of $2,206,042 to the Beneficiary.
The Issues
[3]
The issues are the
following:
a. As a result of the Resolution, was
the Trust liable for the Part XIII tax in 2001?
i. In other words, was the dividend amount
paid or credited — within the meaning of paragraph 212(1)(c)
of the Act — by the Trust to the Beneficiary in 2001?
b. Is the appellant liable for the
unpaid Part XIII tax that was never withheld or remitted by the Trust?
i. In other words, did the appellant
authorize or otherwise cause — within the meaning of subsection 227(5) of
the Act — the Trust to pay the dividend amount to the Beneficiary while
having direct or indirect influence over the disbursements, property or
business of the Trust?
Brief Answer
[4]
The appeal should be
allowed for the following reasons:
a. The Trust was not liable for
Part XIII tax in 2001 because the Resolution did not result in the dividend
amount being paid or credited to the Beneficiary in that year. It resulted
rather in the amount becoming payable. However, payable should not be held to
be equivalent to paid or credited.
b. The appellant should not be held
to be personally liable for the unremitted Part XIII tax because the
Resolution did not authorize that the dividend amount be paid. At the time the
amount was paid — in 2002 — the appellant was no longer a
trustee of the Trust and was not in a position to directly or indirectly cause
the amount to be paid to the Beneficiary.
The Respondent's Position
[5]
The respondent contends
that:
a. Part XIII
tax was payable by the Trust by virtue of paragraph 212(1)(c) of
the Act, and that, therefore,
b. the appellant was personally
liable for that tax amount by virtue of paragraphs 215(5) and 227(5) of
the Act.
[6]
Subsection 104(13)
of the Act applies to residents of Canada and requires that any amounts
that have become payable to a beneficiary during the taxation year be included
in the beneficiary’s income. Furthermore, when an amount becomes payable to a
beneficiary (resident or non-resident) during a particular taxation year, the
trust may deduct it from its income for the year. Subsection 104(24) of the Act provides that an amount is
not payable to a beneficiary unless either it was paid to the beneficiary
during the year or the beneficiary acquired the right to enforce its payment
during the year.
[7]
The respondent refers
to subsections 104(13) and 104(24) of the Act in arguing that the dividend
amount was payable to the Beneficiary during the 2001 taxation year. The appellant does not dispute this. In fact, the Trust filed its 2001
tax return on the basis that the amount had become payable to the Beneficiary
in 2001.
[8]
The respondent submits
that due to two facts, namely, (1) that the Trust had an obligation to pay the
amount, and (2) that the Resolution is [TRANSLATION] “more than a simple
accounting entry”, the conditions for the application of paragraph 212(1)(c)
of the Act have been met.
In other words, because of these two facts, the Resolution amounted to a
payment or credit.
[9]
Paragraph 212(1)(c) of the Act reads as
follows:
Every
non-resident person shall pay an income tax of 25% on every amount that a
person resident in Canada pays or credits, or is deemed by Part I to pay
or credit, to the non-resident person as, on account or in lieu of payment of,
or in satisfaction of,
. . .
(c) income
of or from an estate or a trust to the extent that the amount
(i) is
included in computing the income of the non-resident person under
subsection 104(13), except to the extent that the amount is deemed by
subsection 104(21) to be a taxable capital gain of the non-resident
person, or
(ii) can
reasonably be considered (having regard to all the circumstances including the
terms and conditions of the estate or trust arrangement) to be a distribution
of, or derived from, an amount received by the estate or trust as, on account
of, in lieu of payment of or in satisfaction of, a dividend on a share of the
capital stock of a corporation resident in Canada, other than a taxable
dividend;
(Emphasis
added.)
[10]
The respondent gives
two very specific meanings to the verbs “to pay” and “to credit”, as used
in the legislation.
[11]
According to the
respondent, “to pay” means to disburse an amount of money in fulfilment of
an obligation. In addition, the respondent contends that
“to credit” as used in subsection 212(1) of the Act refers to a
situation where a creditor has the right to enforce immediate payment of a sum
but grants the debtor deferral of the payment until some future date.
[12]
In support of this
interpretation of “to credit”, counsel for the respondent relies on Judge Rip's decision
in Wenger’s v. M.N.R. In that
case, Judge Rip was required to interpret the effect of import and sales
contracts between a Canadian company and a Soviet business entity. The issue
before Judge Rip was a question of fact. The overall issue in the case
involved determining the nature of payments made between the entities and
whether those payments constituted interest. Thus, Judge Rip needed to
determine the moment at which the Canadian company became the owner of the
imported goods. At that moment, interest would have begun to accumulate, since
payment for the goods was not made until later. It was in this context that Judge
Rip made the following comments with regard to sales made on “credit” at
paragraphs 71-73 (CarswellNat):
71 At
least two of the contracts produced declare the interest to be paid by the
purchaser is for "credit". The payment clauses in other contracts
produced refer to a period after the goods are withdrawn from consignment for
the goods to be "fully paid" and indicate an interest rate to accrue
until payment is "fully" made by the purchaser.
72 The
Shorter Oxford Dictionary on Historical Principals defines the word
"credit" as "... confidence in a buyer's ability and intention
to pay at some future time, for goods, etc., entrusted to him without present
payment".
73 The
word "credit" assumes that the grantor of the credit, the creditor,
is entitled to receive immediate payment but grants the debtor the right to pay
at some later date. A creditor may receive interest because of the relationship
he has with the debtor, such as vendor and purchaser. In general, a vendor is
entitled to interest on the unpaid purchase money until actual payment
(Volume 42, paragraph 200).
[13]
According to the
respondent, the fact that, in Wenger’s, Judge Rip reiterated his
interpretation of “credit” from Gillette Canada Inc. v. The Queen, lends credence to the
assertion that “to credit” for the purposes of subsection 212(1) of the Act
means the granting of a deferral of payments immediately due.
[14]
In Gillette, the
issue was whether a debt restructuring gave rise to an amount “paid or
credited” to a non‑resident. Judge Rip wrote:
13 .
. . If, on the other hand, an analysis of the facts with regard to subsection
212(13.1) leads to the conclusion that an actual payment or credit has occurred,
then other provisions of Part XIII, including paragraph 214(3)(a),
must be considered to determine whether the character of that payment or credit
requires a tax to be paid.
[15]
He then went on to
reproduce dictionary definitions of the word “credit” and adopted the
definition provided in Cie minière
Québec Cartier v. M.N.R. In that case, the verb “to credit” was interpreted, with respect to
subsection 212(1) of the Act, to mean that an amount has
been made “available to” or placed “at the disposal of” a non‑resident
beneficiary. Judge Rip continued, in Gillette:
16 The
definition of the word "credit", however, by its very name suggests a
creditor-debtor relationship. Funds or goods must either have been received by
the debtor or be available to the debtor with the understanding that the debtor
may defer immediate payment. An extension of a loan by a creditor to a debtor
comes within the meaning of the word "credit". The word "credit"
in paragraph 212(13.1)(b) refers to something more than a mere
accounting entry. . . .
. . .
26 I
agree with the respondent that the conversion of the Oral‑B debt to the
Gillette France debt constituted a payment. The conversion created a debt. As
part of the debt conversion the appellant delivered money's worth to the
Partnership in order to discharge its obligation. In any event, there was at
least a credit since on the conversion of the "Oral-B note" to the
Gillette France debt the appellant made available to the Partnership funds to
repay the note with the understanding that the repayment was deferred.
[16]
The respondent inferred
from these passages, particularly paragraph 16, that:
La notion de
« porte à son crédit » étend la portée de « paie » que l’on
retrouve à l’article 212 de la Loi de l’impôt sur le revenu. Le
paiement d’une somme implique l’exécution d’une obligation alors que le fait de
porter au crédit d’une personne présuppose qu’une personne (le créditeur) a
droit immédiatement à la somme, mais qu’elle consent, à la personne qui doit
effectuer le déboursement (le débiteur), à ce que la somme soit payée à un
moment futur.
[17]
To reiterate, according
to the respondent, “credits” in section 212 of the Act means the
act of a creditor in permitting a debtor to pay at a later date an amount due
immediately.
[18]
Applying this
definition to the facts herein, the respondent contends that the Resolution had
the effect of making the amount payable immediately. In the respondent’s view, the fact that
the Beneficiary consented to it being paid at a future date meant that the
amount was credited to the Beneficiary. Therefore, counsel concludes that as of
September 11, 2001 — the date of the Resolution — the amount was
credited to the Beneficiary and the conditions for the application of
subsection 212(1) of the Act were met.
[19]
The respondent
maintains that the appellant is personally liable for the unpaid Part XIII
tax of the Trust. In support of this position, counsel relies on
subsection 227(5) of the Act. That provision reads as follows:
Where a specified
person in relation to a particular person (in this
subsection referred to as the "payer") has any direct or indirect
influence over the disbursements, property, business or estate of the payer
and the specified person, alone or together with another person, authorizes or
otherwise causes a payment referred to in subsection 135(3), 135.1(7) or
153(1), or on or in respect of which tax is payable under Part XII.5 or
XIII, to be made by or on behalf of the payer, the specified person
. . .
(b) is
jointly and severally liable with the payer to pay to the Receiver General
(i) all
amounts payable by the payer because of any of subsections 135(3),
135.1(7),
153(1)
and 211.8(2)
and section 215
in respect of the payment, and
(ii) all
amounts payable under this Act by the payer
because of any failure to comply with any of those provisions in respect of the
payment; and . . . .
[20]
It is the respondent’s
position that the appellant had a direct or indirect influence over the
disbursements, property or business of the Trust and caused the amount to be
paid to the Beneficiary. Counsel contends that by adopting the Resolution the appellant caused
the amount to be paid. The respondent accordingly urges the Court to hold that
the appellant is liable for the unpaid Part XIII tax.
Analysis
[21]
The respondent’s
position is largely based on a misreading and misapplication of the provisions
in question. Specifically, the respondent is conflating the concepts of an
amount “payable” (within the meaning of subsection 104(13) of the Act)
and an amount paid or credited (within the meaning of subsection 212(1) of
the Act).
[22]
Additionally, the
respondent’s interpretation of the word “credited” is necessarily wrong since it
would lead to the absurd result that an amount is “credited” to a beneficiary
(by a trust) at the moment when the beneficiary “credits” the trust
by deferring payment of an allocated benefit. In other words, it leads to a
perfectly upside-down result.
[23]
Furthermore, because
the respondent’s position conflates the concepts of “payable” and “paid”, when
viewed in the light of paragraph 214(3)(f) of the Act, it
leads to an equally absurd interpretation of that provision, as I shall demonstrate
below.
[24]
The respondent rightly
asserts that the legal obligation to pay that was created by the Resolution was
unconditional. Article 1497 of the Civil Code of
Québec (the “CCQ”) explains the concept of a conditional
obligation:
An
obligation is conditional where it is made to depend upon a future and
uncertain event, either by suspending it until the event occurs or is certain
not to occur, or by making its extinction dependent on whether or not the event
occurs.
[25]
Baudouin explains
suspensive conditions in the following terms:
.
. . La condition suspensive fait dépendre la naissance de l’obligation de
l’arrivée de l’événement ou de la certitude qu’il ne se produira pas; elle
retarde donc la création du lien entre les parties (article 1497).. . .
[26]
The appellant pointed
to three conditions that prevented the immediate payment of the amount: (1) the
deposit of the treasury bills; (2) the redemption of the preferred shares; and (3)
the issuance of the certificate required by subsection 159(2) of the Act.
However, none of these uncertainties is of the sort that would render conditional
the legal obligation to pay the amount. If it were argued that they are legal
conditions, they would likely be in the nature of a “condition purement potestative”, that is, a condition which is not upheld
by the courts as a legally effective condition. As Baudouin explains, these kinds of
conditions are not valid in law:
614 –
Introduction - Toute condition doit, pour être valide, remplir
certaines exigences fixées par la loi. Elle ne doit pas engager le débiteur de
façon purement potestative, être impossible, ou encore pécher contre la loi ou
l’ordre public.
A. La
condition potestative
615 – Condition
purement potestative - La condition « casuelle »,
dont la réalisation dépend uniquement d’un événement extérieur, s’oppose à la
condition « potestative » (ou « facultative »), dont la
réalisation dépend de l’exercice discrétionnaire de la volonté d’une des
parties.
Il y a, à
première vue, antinomie complète entre l’élément d’imprévisibilité de la
condition et l’élément discrétionnaire de l’acte d’une des parties. On ne
saurait donc admettre comme valable la condition qui dépend, pour sa
réalisation, du seul acte de volonté du débiteur, c’est-à-dire de l’exercice de
son seul pouvoir discrétionnaire. La personne qui accepte d’exécuter une
obligation « si elle le veut » ne s’engage pas véritablement et
sérieusement, puisqu’elle a le pouvoir d’acquitter l’obligation selon son bon
vouloir ou son caprice. Cette condition est connue classiquement sous le nom de
condition purement potestative et entraîne la nullité de l’obligation qui en
dépend (article 1500).
[27]
Clearly, the kinds of
conditions invoked by the appellant would fall under the category of “conditions purement postestatives” since their fulfilment depends entirely
on the discretionary exercise of the will of one of the parties. That is, so
long as the appellant undertook the actions listed, the conditions would be
fulfilled. Even the third condition — the obtaining of the
certificate — depends solely on the will of the appellant since the Canada
Revenue Agency (“CRA”) has taken the position that it is not necessary to
obtain this certificate if the payer withholds sufficient funds to discharge
any debts owing to the CRA.
[28]
However, the above
analysis is moot. The respondent portrays the appellant as asserting that the
three conditions are legal conditions that prevent the Resolution from making
the amount payable, but this is a straw man version of the appellant’s real
argument. The appellant never argued that the three conditions set out above
render the obligation to pay the amount conditional in the sense referred to by
the CCQ, article 1497. Counsel for the appellant clarifies as
follows:
. . . L’appelant
n’a jamais prétendu et ne prétend toujours pas que l’obligation résultant de la
résolution du 11 septembre 2011 [sic] était « conditionnelle »
au sens des articles 1497 à 1507 du Code civil du Québec. Selon nous, l’Intimée
fait erreur et ne veut que semer la confusion en faisant de l’obligation créée
par la résolution une obligation dite « conditionnelle » sous
prétexte que la somme de 2 200 003 $ n’était pas « mise
à la disposition » de J.J. Herbert « inconditionnellement ».
[29]
Since there is no
genuine disagreement between the parties on this point, the Court should
conclude that the Resolution created an unconditional obligation on the part of
the Trust to pay the amount to the Beneficiary.
[30]
Since an amount payable
is defined in subsection 104(24) of the Act as including any amount
whose payment a beneficiary was entitled to enforce during the year, the
creation of an unconditional obligation to pay an amount of money is the
essence of an amount that has become payable under paragraph 104(13)(a)
of the Act. That being so, at the moment that the Resolution was passed
the amount became payable to the Beneficiary for the purposes of
paragraph 104(13)(a) of the Act.
[31]
The respondent placed a
great deal of emphasis and relied heavily on the decision in Wenger’s. She relied on
paragraphs 16 and 26 of that decision to argue that “credited” means the
creation of a debtor‑creditor situation where the creditor permits the
debtor to defer payment of the amount owed.
[32]
However, the facts in Wenger’s
are very dissimilar to the facts currently before the Court. The question
before Judge Rip related to the legal characterization of import/sale contracts
between a Canadian company and a Soviet entity. Because payment and delivery of
the goods were not concurrent, it was necessary for Judge Rip to determine if
certain amounts paid (over and above the actual purchase price) were in the
nature of “surcharges” or were actually interest paid on goods provided on
credit. Judge Rip therefore had to determine whether the sale of the goods was a
sale on “credit”. He did not have to determine the meaning of “credited” for
the purposes of subsection 212(1) of the Act.
[33]
The word “credit” in
the Wenger's context has a much different meaning than “credits” in the
phrase “pays or credits” in subsection 212(1) of the Act. In Wenger’s,
the term has the meaning of a loan or financing. On the other hand, in
subsection 212(1) of the Act, “credits” is paired with “pays” and
implies the fulfilment of an obligation.
[34]
The respondent gave too
broad an application to Wenger’s. That decision interpreted the noun
“credit” in a particular context, it cannot be seen as having defined the verb
form “credits” as used in subsection 212(1) of the Act.
[35]
The respondent relies
on the Gillette case to support her contention that a creditor‑debtor
relationship arises from the fact that an amount is “credited” for the purposes
of subsection 212(1) of the Act. In his decision, Judge Rip said
the following:
[16] The
definition of the word "credit", however, by its very name suggests a
creditor-debtor relationship. Funds or goods must either have been received by
the debtor or be available to the debtor with the understanding that the debtor
may defer immediate payment. An extension of a loan by a creditor to a debtor
comes within the meaning of the word "credit". The word
"credit" in paragraph 212(13.1)(b) refers to something more
than a mere accounting entry. . . .
[36]
Judge Rip was of
the opinion that the conversion of one debt instrument into another debt
instrument constituted a “credit” for the purposes of paragraph 212(13.1)(b)
of the Act. However, he did not state that every time a debtor-creditor
relationship is created an amount is “credited” for the purposes of
subsection 212(1) of the Act. In fact, the reason he felt that the
debt conversion constituted a credit was that the repayment of the original
loan followed by the issuance of another placed funds at the disposal of the
non-resident.
He wrote:
[26] I
agree with the respondent that the conversion of the Oral B debt to the
Gillette France debt constituted a payment. The conversion created a debt. As
part of the debt conversion the appellant delivered money’s worth to the
Partnership in order to discharge its obligation. In any event, there was
at least a credit since on the conversion of the “Oral B note” to the Gillette
France debt the appellant made available to the Partnership funds to repay the
note with the understanding that the repayment was deferred.
(Emphasis
added.)
[37]
This is, in fact, an
application of the definition of the verb “to credit” that this Court adopted
in Cie minière. It was therefore the fact that the Canadian resident permitted a novation
— which entailed the placing of funds at the disposal of the non-resident — that constituted a credit.
[38]
Moreover, Judge Rip expressly
accepted the definition of the verb “to credit’ from Cie minière, namely,
that an amount is “credited”
by someone (here, the trust) to someone else (here, a non-resident beneficiary)
if the former puts a sum of money at the latter's disposal. This
definition fits perfectly with the interpretation adopted by the CRA and with
the meaning that I propose at paragraph 50 below.
[39]
Furthermore, the
granting of credit in the sense in which it occurs in Wenger’s takes
place from the point of view of the creditor — or, in Wenger’s, of
the seller of the goods. As must always be the case, the creditor grants credit
to the debtor. However, in the context of subsection 212(1) of the Act,
the crediting takes place from the point of view of the debtor. It is the debtor —
i.e., the Trust — that pays or credits an amount to the creditor (the Beneficiary
of the Trust). This clearly implies that “credited” should be treated as a near
synonym of “paid” – that is, it refers to the fulfilment of the obligation to
pay the amount to the Beneficiary.
[40]
Thus, the two senses of
the word “credit” are incompatible. It is difficult to see how the respondent can
suggest that the noun “credit” as defined in Wenger’s should be treated
as synonymous with the verb “to credit” as used in subsection 212(1) of
the Act. With one the situation is seen from the point of view of the
creditor while with the other it is seen from the point of view of the debtor.
If the respondent’s argument and definition were to be accepted, the result
would be that the creditor of the Trust — that is, the Beneficiary —
would be the only entity or person in a position to credit the amount since it
is the creditor who must grant the debtor the right to defer payment. The beneficiary
would thus be determining, for the purposes of subsection 212(1) of the Act,
whether to credit the amount to himself. This is clearly an unintended and
absurd application of the provision. This reason is sufficient to reject the
respondent’s definition of “credited” as involving a situation where the
creditor has permitted a payment to be deferred.
[41]
However, there is yet
another reason for rejecting the respondent’s definition. That definition would
mean that an amount “payable” (under subsection 104(13) of the Act)
would always be an amount “credited” under subsection 212(1) of the Act.
The reason for this has to do with the definition of an amount payable in
104(24) of the Act. An amount payable includes any amount whose payment the
beneficiary was entitled to enforce. If the beneficiary could enforce payment
but did not, then (if we accept the respondent’s definition) the amount would
also have been “credited” to the Beneficiary. Thus amounts “payable” and
amounts “credited” would always be equivalent.
[42]
This conflation of
amounts “payable” and amounts “credited” is also troubling when one considers
the existence of paragraph 214(3)(f) of the Act. That
provision reads as follows:
Deemed payments -- For the
purposes of this Part,
. . .
(f) where
subsection 104(13)
would, if Part I were applicable, require any part of an amount payable by a trust in its taxation year to a
beneficiary to be included in computing the income of the non-resident person who is a
beneficiary of the trust, that part shall
be deemed to be an amount paid or
credited to that person as income of or
from the trust on the earlier
of
(i) the
day on which the amount was paid or
credited, and
(ii) the
day that is 90 days after the end of the taxation year
and not at
any subsequent time when the amount was actually
paid or credited;
[43]
The effect of
paragraph 214(3)(f) of the Act is therefore to deem a. amounts
payable to beneficiaries to be b. amounts paid or credited to
beneficiaries, once certain conditions are met. However, there is no point in
deeming these two types of amounts to be equivalent if they are already
equivalent on their own. To put it another way, if they were already equivalent
concepts then there would be no need to use different words to describe them.
They must therefore, of necessity, be different concepts that may be deemed to
be equivalent in certain circumstances. There is no reason to deem “b” to be
“b”. If the respondent’s definition were accepted, paragraph 214(3)(f)
of the Act would become futile.
[44]
The presumption against
useless legislative provisions is a long-standing principle of Canadian law. In
1949 the House of Lords said the following:
. . . it is
to be observed that though a Parliamentary enactment (like parliamentary
eloquence) is capable of saying the same thing twice over without adding
anything to what has already been said once, this repetition in the case of an
Act of Parliament is not to be assumed. When the legislature enacts a
particular phrase in a statute the presumption is that it is saying something
which has not been said immediately before. The rule that a meaning should, if
possible, be given to every word in the statute implies that, unless there is
good reason to the contrary, the words add something which would not be there
if the words were left out.
[45]
And Lamer C.J. of
the Supreme Court of Canada wrote in R v. Proulx:
. . . It is a well accepted
principle of statutory interpretation that no legislative provision should be
interpreted so as to render it mere surplusage. . . .
[46]
If this principle of
legislative interpretation endorsed by the Supreme Court is to be taken
seriously, it is difficult to see how this Court could endorse an
interpretation that would render paragraph 214(3)(f) of the Act
completely superfluous.
[47]
The McCarthy Tétrault Commentary states the following regarding
the function of paragraph 214(3)(f) of the Act:
Income from a Trust
(paras 214(3)(f) and (f.1))
Several provisions of
Part XIII deal with the imposition of non-resident withholding tax in respect
of income from a trust. See paragraph 212(1)(c)
and subsections 212(9), (10) and (11). Paragraph 214(3)(f) deals in particular with the determination of the time when
income from a trust is to be regarded as having been paid or credited to a
non-resident beneficiary. The provision states that where subsection 104(13)
would require an amount payable by a trust in a particular taxation year to be
included in computing the income of a non-resident beneficiary, the amount shall
be deemed paid or credited on the earlier of the day on which it actually was
paid or credited and 90 days after the end of the taxation year, and not
at any subsequent time when it was actually paid or credited. In effect, unless
the amount payable by the trust to the non-resident beneficiary has already
been paid, a 90‑day grace period is added to the end of the taxation year
in which the amount has become payable.
[48]
If the respondent’s
interpretation were accepted, this 90‑day grace period would be judicially
written out of the legislation.
[49]
The way in which the
provisions of the Act are structured suggests that the legislator
intended certain tax consequences to attach at the time of the creation of a
trust’s obligation to pay an amount to a beneficiary, and other tax
consequences to attach at the time that the obligation is actually discharged
and funds leave the trust (particularly in the case of non‑resident
beneficiaries). I would suggest that subsection 104(13) of the Act refers
to the point in time at which a trust incurs the obligation to pay a
beneficiary, while both the terms “pays” and “credits” in
subsection 212(1) of the Act refer to the moment when the
obligation is discharged — that is, when the trust essentially gives up
possession of the funds necessary to pay the obligation.
[50]
Paragraph 104(13)
of the Act attaches certain tax consequences to the creation of an
unconditional obligation on a trust to pay an amount to a beneficiary. These
include, among other things, the inclusion of the amount in the income of the
beneficiary and the ability to deduct from the trust’s income the amount that
has become payable during the year. Part I of the Act does not
create tax consequences that apply at the moment that the obligation is created
and different tax consequences that apply at the time that it is fulfilled.
Rather, it mandates both that the taxpayer include the amount payable in his
income and that the trust be permitted to deduct it from its income at the same
moment in time, that is, the moment at which the obligation to pay is created.
[51]
However, because Part I
deals with beneficiaries that are resident in Canada while Part XIII deals
with non-resident beneficiaries, the Minister must be assured of being able to
collect from the latter category of beneficiaries. Subsection 212(1) of
the Act therefore imposes a withholding tax on the (resident) trust at
the time that funds actually leave the country. Thus, subsection 104(13)
of the Act has consequences at the time the obligation is created, while
subsection 212(1) of the Act creates further consequences at the
time that it is fulfilled.
[52]
Even though she applied
it incorrectly to the facts of the case, the respondent recognized this
dualism, as shown by the following excerpt:
22. La
Résolution a eu pour effet de créer une obligation juridique de la Fiducie à
l’égard de J.J. Herbert. L’obligation se définit de la façon suivante :
Elle est le
lien de droit, existant entre deux ou plusieurs personnes, par lequel une
personne, appelée débiteur, est tenue envers une autre, appelée créancier,
d’exécuter une prestation consistant à faire ou à ne pas faire quelque chose,
sous peine d’une contrainte juridique.
23.
L’exécution de l’obligation se traduira par le paiement de la somme de
2 200 003 $ lorsque J.J. Herbert en aura choisi le moment.
Conséquemment, le 11 septembre 2001, la somme de
2 200 003 $ était à la disposition de J.J. Herbert.
[53]
The respondent recognizes
that the Resolution created an obligation on the Trust towards the Beneficiary.
However, it is curious that the respondent states only that payment of the
amount would constitute fulfilment of the obligation. Subsection 212(1) of
the Act refers to amounts either paid or credited; it therefore seems
odd for the respondent to omit amounts “credited” when referring to how the
obligation may be fulfilled. It would appear that the legislator envisaged two
ways in which the obligation to pay could be fulfilled and therefore result in
funds leaving the country and therefore create the need to impose
Part XIII tax: the amount could be either paid or credited to the
non-resident beneficiary.
[54]
The respondent is
referring to one but not the other method of fulfilling the obligation to pay
leads to confusion.
The respondent wishes to ascribe to the verb “to credit” in
subsection 212(1) of the Act a meaning relating to the creation
of an obligation. However, by placing the verb form “credits’ in the same
provision as “pays”, the legislator, it would appear, intended both terms to
refer to the fulfilment of the obligation.
[55]
On the other hand, the
courts have clearly stated that “credits” and “pays” are not synonyms. In the Berry case, M. J. Bonner of the Tax Review Board wrote the following on
the subject of section 212 of the Act:
The
arguments advanced on behalf of the appellant seem to have been based on the
unstated assumption that the word “credits” as used in section 212 of the Income
Tax Act means the same as the word “pays” as used in that section. As I
read that provision the words are used disjunctively and, in the absence of any
argument directed towards showing that the words “or credits” should be
regarded as surplusage and that the section should be read as restricted to the
imposition of tax on payments alone, I can find no reason for accepting the
unstated assumption.
[56]
However, the fact that
“credited” and “paid” are not synonyms does not mean that “credited” should
refer to the creation of the obligation. As I stated above, the respondent’s
argument ends up confusing the concepts of an amount “credited” and an amount
“payable”.
[57]
Interestingly, a more
appropriate interpretation of “credited” has already been advanced by the CRA,
and it is in fact its long-standing position:
5. The
words "credits" and "credited" cover any situation where a resident
of Canada or, in certain cases, a non-resident (see 8 below) has set aside and
made unconditionally available to the non-resident creditor an amount due to
the non-resident such as where
(a) a tenant or agent deposits rents in a
bank account on behalf of a non-resident landlord;
(b) a bank credits interest to the savings
account of a non-resident;
(c) an insurance or trust company deposits a
pension or annuity payment in the bank account of a non-resident; or
(d) the amount
due is applied by the resident (or deemed resident) against an amount owing by
the non-resident. . . .
[58]
It is likely that this
interpretation of “credited” is the correct one. The examples provided by the
CRA in its Information Circular are ones that refer to the fulfilment of the
obligation to pay. They are situations where sums of money have actually been put
aside or deposited in an account of the beneficiary. In those examples, the
funds have therefore been unconditionally placed at the disposal of the
beneficiary. Practically speaking, the beneficiary is in “possession” of the
funds.
[59]
These kinds of
practical considerations are of the same nature as the three unfulfilled
“conditions” enumerated by the appellant that prevented the payment of the
amount to the Beneficiary in 2001. Because the appellant was not actually in
possession of the necessary funds, those funds could not actually be paid or
credited to the Beneficiary until the treasury bills were cashed and the
preferred shares redeemed. Thus, the appellant is correct in pointing to the
taking of these steps as being necessary before the amount could have been paid
or credited.
[60]
Furthermore, the
examples provided by the CRA involve to situations where it is the debtor that
has credited the amounts to the creditor. As I decided above, this is the only
interpretation that does not lead to the absurd result of the beneficiary being
able to credit an amount to himself.
[61]
It is therefore my
contention that the Court should adopt the definition of “credited” suggested
by the CRA and interpret it as meaning: the unconditional placing of
funds — on a practical level — at the disposal of the Beneficiary in fulfilment
of the Trust’s obligation to pay. This definition is consistent with both the
scheme of the legislation and the leading case of Cie minière.
[62]
The respondent also argues
that subsection 227(5) of the Act applies to the appellant in view
of the fact that he authorized the payment of the amount. Counsel submits that
the Resolution “authorized or otherwise caused” the amount to be paid to the
Beneficiary. However, this is simply not tenable given the facts of the case.
The Resolution created the obligation on the part of the Trust to pay the
amount to the Beneficiary. It did not authorize its payment. It is not an
accurate statement to say that a resolution creating an obligation is the same
thing as a resolution authorizing the fulfilment of that obligation.
[63]
Therefore, even if the
Court accepted the respondent’s argument that the Resolution “credited” the
amount to the Beneficiary (which I am of the opinion is incorrect), the
Resolution clearly did not authorize the payment of the amount. Unfortunately
for the respondent’s position, subsection 227(5) of the Act attaches
liability for unremitted Part XIII tax only to trustees who authorized a
payment to a non‑resident beneficiary or otherwise caused such a payment
to be made. Unlike subsection 212(1) of the Act, which
applies to amounts paid or credited, subsection 227(5) of the Act
clearly states that it applies only to amounts paid.
[64]
The Latin maxim “expressio
unius est exclusio alterius”, also known as the principle of implied
exclusion, states that where the legislator causes a provision to apply to a
number of categories but fails to include one that could easily have been
included, one may infer that the legislator intended to exclude that category
from the application of the provision. As Noël J.A. of the Federal Court
of Appeal stated:
[96] The
rule is that the expression of one thing in a statute usually suggests the
exclusion of another (expressio unius est exclusion alterius). Pursuant
to this maxim, if a statute specifies one exception (or more) to a general
rule, other exceptions are not to be read in. The rationale is that the legislator has
turned its mind to the issue and provided for the exemptions which were
intended.
[65]
One should therefore
assume that the legislator intended subsection 227(5) of the Act to
exclude from its application situations where a trustee has credited an amount
to a non‑resident beneficiary. Subsection 227(5) of the Act applies
to trustees who directly or indirectly cause a payment to be made to a
non-resident beneficiary of a trust.
[66]
For these reasons, the
appeal is allowed with costs.
Signed at Ottawa, Canada, this 25th day of October 2011.
“Paul Bédard”
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