White v. The Queen, 2003 DTC 1170, 2003 TCC 668 (Informal Procedure)

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Appeals heard together with the appeal of Shelagh White (2003-324(IT)I)

on September10, 2003, at Toronto, Ontario,

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JUDGMENT

          The appeals from assessments of tax made under the Income Tax Act for the 1997 and 1998 taxation years are dismissed.

Signed at Ottawa, Canada, this 17th day of September, 2003.

Bowie J.

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Appeal heard together with the appeals of Anthony J.E. White (2003-323(IT)I)

on September 10, 2003, at Toronto, Ontario,

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JUDGMENT

          The appeal from the assessment of tax made under the Income Tax Act for the 1997 taxation year is dismissed.

Signed at Ottawa, Canada, this 17th day of September, 2003.

Bowie J.

REASONS FOR JUDGMENT

Bowie J.

[1]      These are appeals by Mr. White from his reassessments for income tax for the years 1997 and 1998, and an appeal by Mrs. White from her reassessment for 1998. They were heard together under the informal procedure of the Court. Shelagh White's appeal is from the disallowance by the Minister of National Revenue of the spousal tax credit that she claimed in respect of her husband Anthony White for the 1998 taxation year. The reassessment of Mr. White raised his net income for the 1998 taxation year to an amount greater than the base amount of $5,918 for the spousal credit. The parties are all agreed that if Mr. White's appeals succeed then so must Mrs. White's, and if his appeals fail then so must hers. Mr. White's appeals are concerned with his claim that he is entitled to the benefit of certain foreign tax credits under subsection 126(1) of the Income Tax Act (the Act).

[2]      Mr. White is a Canadian resident. Some years ago he inherited certain shares of a number of Australian companies. Each year these companies declare and pay dividends to their shareholders, including Mr. White. These dividends are of three different types. First, there are what are called fully-franked dividends. These are paid from tax-paid earnings of the companies, and as well as receiving the amount of the dividend in cash, the shareholders receive what is called an imputation tax credit (ITC). Australian residents who pay taxes in that country may apply ITCs against their taxes payable. However, they are required to include not only the cash value of the dividend but also the value of the ITC in their income for purposes of the Australian income tax system. Second, there are partly-franked dividends. These are paid partly from tax-paid income, and the ITC that attaches to them is correspondingly less than that which attached to a fully franked dividend. Finally, there are un-franked dividends. These carry no ITC, and they are subject to a withholding tax upon payment to a shareholder who is not a resident of Australia. It is common ground that this withholding tax is a tax upon the shareholder, and that it is paid to the government of Australia by the recipient of the dividend.

[3]      As I understood Mr. White's evidence he received dividends of $700 in 1997 and $2,288 in 1998. Some part, but he could not say what part, was in the form of fully-franked dividends, some in the form of partly-franked dividends, and some part was un-franked. On the un-franked part he paid the withholding tax levied by Australia, but he was not able to say how much tax he paid, or on what portion of the total dividends he paid it. For this reason, he abandoned his claim for tax credits in respect of the withholding tax during the course of the hearing.[1]

[4]      The only issue remaining before me, therefore, is whether Mr. White is entitled to a foreign tax credit under section 126 of the Act in respect of the ITCs that attach to the fully and partially franked dividends. His position is that he is so entitled, because tax was paid to the Australian government by the companies that paid the dividends. The Respondent's position is that Mr. White has paid no tax to the Australian government, and so he cannot be entitled to a credit under section 126(1).

[5]      The relevant parts of sections 90 and 126(1) read:

90(1)     In computing the income for a taxation year of a taxpayer resident in Canada, there shall be included any amounts received by the taxpayer in the year as, on account or in lieu of payment of, or in satisfaction of, dividends on a share owned by the taxpayer of the capital stock of a corporation not resident in Canada.

126(1) A taxpayer who was resident in Canada at any time in a taxation year may deduct from the tax for the year otherwise payable under this Part by the taxpayer an amount equal to

(a)         such part of any non-business-income tax paid by the taxpayer for the year to the government of a country other than Canada (except, where the taxpayer is a corporation, any such tax or part thereof that may reasonably be regarded as having been paid by the taxpayer in respect of income from a share of the capital stock of a foreign affiliate of the taxpayer) as the taxpayer may claim,

...

[6]      There are two obstacles to success for Mr. White in these appeals. The first is that he admitted frankly in his evidence that he did not know and could not prove the amount of the tax paid by the Australian companies to the Australian government giving rise to the ITCs in question. He said that he had tried, but without success, to ascertain that amount from the revenue officials in Australia. So even if he were correct in his analysis of his legal entitlement to a tax credit, he could not succeed as he could not establish the amount of the credit to which he would be entitled.

[7]      There is a more fundamental obstacle to Mr. White's claim, however. Subsection 126(1) only entitles the Canadian taxpayer to a foreign tax credit in respect of tax paid by that Canadian resident taxpayer to a foreign government for the year in question. The tax for which Mr. White claims the credit was not paid by him, but by the Australian corporations that paid dividends to him. He admitted quite candidly when cross-examined that he had paid no tax to the government of Australia for the years in issue. It is true that Mr. White cannot utilize the ITC to which he would be entitled if he were an Australian resident and liable to pay tax to Australia. That makes his dividends less valuable to him than the same dividends are to an Australian resident shareholder, but it does not bring him within the clear words of subsection 126(1) of the Canadian Act. Even if he could prove the amounts that he claims, his claim would not succeed.

[8]      Mr. White's appeals must be dismissed, and as a consequence Mrs. White's appeal must also be dismissed.

Signed at Ottawa, Canada, this 17th day of September, 2003.

Bowie J.

CITATION:                                        2003TCC668

COURT FILE NO.:                             2003-323(IT)I and 2003-324(IT)I

STYLE OF CAUSE:                           Anthony J.E. White and Shelagh White and

Her Majesty the Queen

PLACE OF HEARING:                      Toronto, Ontario

DATE OF HEARING:                        September 10, 2003

REASONS FOR JUDGMENT BY:     The Honourable Justice E.A. Bowie

DATE OF JUDGMENT:                     September 17, 2003

APPEARANCES:

Agent for the Appellants:            Anthony J.E. White

Counsel for the Respondent:      Jason J. Wakely and Carol Calabrese

COUNSEL OF RECORD:

For the Appellant:

Name:                 --

Firm:                  --

For the Respondent:                  Morris Rosenberg

                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada