Hugessen,
J.A.:—We
are
all
of
the
view
that
the
learned
trial
judge
reached
the
correct
conclusion.
Briefly
put,
the
appellant
taxpayer's
contention
is
based
on
an
interpretation
of
the
last
sentence
of
paragraph
1
of
Article
III
of
the
Canada-U.S.
Tax
Convention
(S.C.
7
George
VI
c.
21
as
amended
by
14
George
VI
c.
27).
In
the
determination
of
the
net
industrial
and
Commercial
profits
of
the
permanent
establishment
there
shall
be
allowed
as
deductions
all
expenses,
wherever
incurred,
reasonably
allocable
to
the
permanent
establishment,
including
executive
and
general
administrative
expenses
so
allocable.
By
the
terms
of
the
implementing
legislation
the
provisions
of
the
Convention
prevail
over
domestic
legislation
in
the
event
of
inconsistency.
The
appellant
says
that
the
quoted
sentence
allows
it,
in
the
calculation
of
the
profits
of
its
Canadian
establishment,
to
deduct
“all
expenses"
that
is
to
say
all
those
which
are
reasonably
deductible
in
accordance
with
generally
accepted
accounting
principles,
even
though
such
deductions
may
not
be
permitted
under
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act").
Specifically
the
appellant
seeks
to
deduct
as
expenses,
for
the
1974
taxation
year,
royalty
payments
made
to
a
provincial
government;
the
deduction
of
such
expenses
after
May
6,
1974,
would
be
contrary
to
the
terms
of
paragraph
18(1)(m)
of
the
Act.
18.
(1)
In
computing
the
income
of
a
taxpayer
from
a
business
or
property
no
deduction
shall
be
made
in
respect
of
(m)
any
amount
(other
than
a
prescribed
amount)
paid
or
payable
by
virtue
of
an
obligation
imposed
by
statute
or
a
contractual
obligation
substituted
for
an
obligation
imposed
by
statute
to
(i)
Her
Majesty
in
right
of
Canada
or
a
province,
(ii)
an
agent
of
Her
Majesty
in
right
of
Canada
or
a
province,
or
(iii)
a
Corporation,
commission
or
association
that
is
controlled
by
Her
Majesty
in
right
of
Canada
or
a
province
or
by
an
agent
of
Her
Majesty
in
right
of
Canada
or
a
province
as
a
royalty,
tax
(other
than
a
tax
or
portion
thereof
that
may
reasonably
be
considered
to
be
a
municipal
or
school
tax),
lease
rental
or
bonus
or
as
an
amount,
however
described,
that
may
reasonably
be
regarded
as
being
in
lieu
of
any
such
amount,
and
that
may
reasonably
be
regarded
as
being
in
relation
to
(iv)
the
acquisition,
development
or
ownership
of
a
Canadian
resource
property,
or
(v)
the
production
in
Canada
of
(A)
petroleum,
natural
gas
or
related
hydrocarbons
from
a
natural
accumulation
of
petroleum
or
natural
gas
in
Canada
(other
than
a
mineral
resource)
or
from
an
oil
or
gas
well
in
Canada,
(B)
metal
or
minerals
(other
than
iron
or
petroleum
or
related
hydrocarbons)
from
a
mineral
resource
in
Canada
to
any
stage
that
is
not
beyond
the
prime
metal
stage
or
its
equivalent,
(C)
iron
from
a
mineral
resource
in
Canada
to
any
stage
that
is
not
beyond
the
pellet
stage
or
its
equivalent,
or
(D)
petroleum
or
related
hydrocarbons
from
tar
sands
from
a
mineral
resource
in
Canada
to
any
stage
that
is
not
beyond
the
crude
oil
stage
or
its
equivalent;
We
do
not
agree.
The
sentence
of
the
Convention
relied
upon
by
the
appellant
was
added
in
1950
(see
S.C.
14
George
VI
c.
27).
It
must
be
read
in
context
and
conformably
to
the
purpose
and
intent
of
the
Convention
as
a
whole.
Articles
I
and
III
in
their
entirety,
and
as
amended,
read:
ARTICLE
I
An
enterprise
of
one
of
the
contracting
States
is
not
subject
to
taxation
by
the
other
contracting
State
in
respect
of
its
industrial
and
commercial
profits
except
in
respect
of
such
profits
allocable
in
accordance
with
the
Articles
of
this
Convention
to
its
permanent
establishment
in
the
latter
State.
No
account
shall
be
taken
in
determining
the
tax
in
one
of
the
contracting
States,
of
the
mere
purchase
of
merchandise
effected
therein
by
an
enterprise
of
the
other
State.
ARTICLE
III
1.
If
an
enterprise
of
one
of
the
contracting
States
has
a
permanent
establishment
in
the
other
State,
there
shall
be
attributed
to
such
permanent
establishment
the
net
industrial
and
commercial
profit
which
it
might
be
expected
to
derive
if
it
were
an
independent
enterprise
engaged
in
the
same
or
similar
activities
under
the
same
or
similar
conditions.
Such
net
profit
will,
in
principle,
be
determined
on
the
basis
of
the
separate
accounts
pertaining
to
such
establishment.
In
the
determination
of
the
net
industrial
and
commercial
profits
of
the
permanent
establishment
there
shall
be
allowed
as
deductions
all
expenses,
wherever
incurred,
reasonably
allocable
to
the
permanent
establishment,
including
executive
and
general
administrative
expenses
so
allocable.
2.
The
competent
authority
of
the
taxing
State
may,
when
necessary,
in
execution
of
paragraph
1
of
this
Article,
rectify
the
accounts
produced,
notably
to
correct
errors
and
omissions
or
to
re-establish
the
prices
or
remunerations
entered
in
the
books
at
the
value
which
would
prevail
between
independent
persons
dealing
at
arm's
length.
3.
If
(a)
an
establishment
does
not
produce
an
accounting
showing
its
own
operations,
or
(b)
the
accounting
produced
does
not
correspond
to
the
normal
usages
of
the
trade
in
the
country
where
the
establishment
is
situated,
or
(c)
the
rectifications
provided
for
in
paragraph
2
of
this
article
cannot
be
effected
the
competent
authority
of
the
taxing
State
may
determine
the
net
industrial
and
commercial
profit
by
applying
such
methods
or
formulae
to
the
operations
of
the
establishment
as
may
be
fair
and
reasonable.
4.
To
facilitate
the
determination
of
industrial
and
commercial
profits
allocable
to
the
permanent
establishment,
the
competent
authorities
of
the
contracting
States
may
consult
together
with
a
view
to
the
adoption
of
uniform
rules
of
allocation
of
such
profits.
In
the
determination
of
the
net
industrial
and
commercial
profits
of
the
permanent
establishment
there
shall
be
allowed
as
deductions
all
expenses,
wherever
incurred,
reasonably
allocable
to
the
permanent
establishment,
including
executive
and
general
administrative
expenses
so
allocable.
It
is
quite
clear
that
the
purpose
of
the
Convention
is
to
avoid
double
taxation
of
enterprises
doing
business
in
the
two
countries
and,
to
that
end,
to
provide
for
the
equitable
allocation
of
the
profits
of
such
enterprises
as
between
the
two
contracting
powers.
That
purpose
appears
most
clearly
from
the
preambles
both
to
the
original
Convention
and
to
the
amending
Convention
of
1950.
[1942]
The
Government
of
Canada
and
the
Government
of
the
United
States
of
America,
being
desirous
of
further
promoting
the
flow
of
commerce
between
the
two
countries,
of
avoiding
double
taxation
and
of
preventing
fiscal
evasion
in
the
case
of
income
taxes,
have
decided
to
conclude
a
Convention.
.
.
.
[1950]
The
Government
of
Canada
and
the
Government
of
the
United
States
of
America,
being
desirous
of
modifying
and
supplementing
in
certain
respects
the
Convention
and
accompanying
Protocol
for
the
avoidance
of
double
taxation
and
the
prevention
of
fiscal
evasion
in
the
case
of
income
taxes,
signed
at
Washington
on
March
4,
1942,
have
decided
to
conclude
a
supplementary
Convention
for
that
purpose..
.
.
The
purpose
of
the
sentence
added
to
paragraph
1
of
article
III
by
the
amending
Convention
of
1950
is
stated
even
more
specifically,
and
the
amendment
itself
is
put
in
context,
in
the
Presidential
Message
to
the
U.S.
Senate
seeking
that
body's
ratification
of
the
Convention.
Subparagraph
(a)
of
article
I
would
amend
paragraph
1
of
article
III
of
the
convention
of
1942
by
adding
a
new
sentence
relating
to
the
determination
of
the
net
industrial
and
commercial
profits
of
the
permanent
establishment.
Article
III
of
the
existing
convention
lays
down
certain
fundamental
principles
affecting
the
allocation
of
business
income.
During
the
years
of
administering
that
convention
numerous
adjustments
have
been
made
under
the
provisions
of
article
III,
with
settlements
satisfactory
to
the
Governments
and
to
the
taxpayers.
In
practice,
during
all
this
time,
reasonable
deductions
have
been
allowed
by
Canada,
in
determining
business
income,
for
head
office
expenses
incurred
in
the
United
States
for
or
on
behalf
of
a
Canadian
subsidiary
or
a
Canadian
branch.
The
new
sentence
gives
formal
recognition
to
that
practice.
[Emphasis
added.]
Clearly
that
purpose
was
not,
as
the
appellant
would
have
us
believe,
to
create
for
enterprises
doing
business
and
having
permanent
establishments
in
both
countries
a
separate
and
different
system
of
taxation
from
that
prevailing
for
taxpayers
doing
business
in
only
one
or
other
of
them.
The
interpretation
adopted
by
the
learned
trial
judge
gives
effect
to
the
purpose
of
the
parties
to
the
Convention
and
does
no
violence
to
the
language
used
by
them.
The
interpretation
proposed
by
the
appellant,
on
the
other
hand,
would
have
the
effect
of
giving
a
U.S.
taxpayer
with
a
permanent
establishment
in
Canada
a
more
favourable
tax
treatment
than
its
Canadian
competitor
engaged
in
the
same
business
in
this
country.
Such
a
result
would
not
be
in
accordance
with
the
policy
expressed
in
the
preamble
to
the
Convention
and
indeed
would
be
contrary
to
it.
It
would
take
much
clearer
language
than
a
simple
reference
to“
all
expenses"
to
bring
it
about.
The
appeal
will
be
dismissed
with
costs.
Appeal
dismissed.
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