Crown Forest Industries Ltd. v. The Queen, 92 DTC 6305, [1992] 2 CTC 1 (FCTD)

Muldoon, J.:—Three actions tried at once raise the identical contentious issue between the parties for the plaintiff's 1987 taxation year (T-2344-90), for the plaintiff's 1988 taxation year (T-2342-90) and for the plaintiff's 1989 taxation year (T-2343-90).

The plaintiff, a British Columbia corporation engaged in the forestry business, in virtually identical, amended statements of claim, pleads:

2. Throughout 1988/89, the plaintiff rented certain barges from Norsk Pacific Steamship Company Ltd. ("Norsk"), which corporation is resident in the United States. Rental payments were made to Norsk.

3. The plaintiff duly withheld tax on these rental payments at the rate of 10%, in accordance with the provisions of Article XII, paragraph 2 of the Canada—U.S. Income Tax Convention 1980. [the Convention]

4. A Notice of Assessment for non-resident tax dated June 30, 1989, [in each case] assessed tax for the plaintiff's 1987/1988/1989 taxation year[s] for failure to remit Non- Resident Tax on the basis that the withholding tax on the rent payments referred to in paragraph 3 was 25%.

5. By Notice of Objection filed August 9, 1989 [in each case] with respect to the plaintiff's 1987/1988/1989 taxation year[s], the plaintiff duly objected to the assessments referred to in paragraph 4 above; however, by Notice of Confirmation dated July 11,1990, the Minister confirmed the Notice of Assessment for the plaintiff's 1987/1988/1989 taxation year[s].

The defendant, while not disagreeing entirely with what the plaintiff pleaded, asserts in the statement of defence:

8. He [the Deputy Attorney-General] relies inter alia, upon sections [sic] 81(1)(c), 212(1)(d) and 215(6) of the Income Tax Act [the Act] and upon the [Convention].

9. He submits that Norsk is not a resident of the United States and the [Convention] does not therefore apply.

10. He further submits that the appropriate withholding rate is accordingly 25% pursuant to section 212(1)(d) of the [Act].

Most helpfully, the parties through their respective counsel have tendered an agreed statement of facts, signed by said counsel, which was received as Exhibit 1. These are the pertinent passages:

2. Norsk Pacific Steamship Company Ltd. ("Norsk") is a company incorporated in the Bahamas in 1962.

3. In 1983, Fletcher Challenge Ltd. of New Zealand purchased the shares of the plaintiff and the shares of Norsk from Crown Zellerbach of San Francisco.

4. The name "Crown Zellerbach Canada Ltd." was then changed to Crown Forest Industries Ltd.

5. Fletcher Challenge of New Zealand also purchased the shares of Norsk . . . from Crown Zellerbach Corporation of San Francisco.

6. Since the time of its incorporation, Norsk's only office and place of business has been in the United States: from 1962 to 1984 in San Francisco and thereafter in Walnut Creek, a suburb of San Francisco.

7. Norsk has several subsidiary companies including one with an office in Vancouver, British Columbia through which the Canadian subsidiary operations are conducted.

8. At its office in Walnut Creek, Norsk leased approximately 3,200 sq. ft. and employed approximately 19 people and had a monthly payroll of approximately $75,000.

9. Norsk's income all arises from the international shipping business. The primary source of income arises from the transportation of newsprint internationally.

10. During 1987, 1988 and 1989, the years under appeal, the plaintiff rented barges from Norsk and paid rent to Norsk with respect thereto. The barges are registered in Canada and are operated by the plaintiff. The barges rented from Norsk are used by the plaintiff in Canada to transport wood chips to Canadian pulp mills and to transport chips and finished goods from Canada to the United States and occasionally to carry wood chips to Canada on their return voyage.

Tl. For each of the years under appeal the only income tax returns filed by Norsk with the United States Internal Revenue Service were on Form 1120F: “Income Tax Return of a Foreign Corporation” (Exhibits "A", "B" and "C" attached).

12. In each of the Returns marked Exhibits "A", "B", and"C" hereto Norsk has claimed the benefit of a U.S. exemption from U.S. federal income tax pursuant to Section 883 of the U.S. Internal Revenue Code because its income is derived from the operation of ships and Norsk is organized in the Bahamas which grants an equivalent exemption to United States corporations.

13. Norsk has never filed income tax returns in Canada, the Bahamas, or any country other than the United States.

14. The rental payments made by the plaintiff to Norsk are subject to a withholding tax of 25 per cent under Part XIII of the . . . Act . . . as being “a rent, royalty or similar payment".

15. Because of the exemption referred to in paragraph 12 above, Norsk did not pay tax on the rental payments for the years 1987, 1988 and 1989.

Insofar as the applicability of Part XIII of the Act is concerned there is no quarrel between the parties, that is to say, they have agreed that the rental payments made by the plaintiff to Norsk constitute "a rent, royalty or similar payment”, which could be subject to the 25 per cent withholding tax provided thereunder. The plaintiff, however, contends that it is spared the full levy of 25 per cent under paragraph 212(1)(d) of the Act, by virtue of the provisions of article XII(2) of the Convention. That provision of the Convention imposes a ceiling on the tax charged on such rentals or royalties of ten per cent, if the beneficial owner of such royalties be a resident of, in this instance, the U.S.A. Here is the basic issue in contention: is Norsk “a resident" of the U.S.A. in contemplation of the Convention?

The Convention, and two subsequent amending protocols are Schedule I and Schedules II and III referred to in and implemented by the Canada-United States Tax Convention Act, 1984, S.C. 1984, c. 20, 32-33 Elizabeth II. That statute provides:

3.(1) The Convention is approved and declared to have the force of law in Canada during such period as, by its terms, the Convention is in force.

(2) In the event of any inconsistency between the provisions of this Act, or the Convention, and the provisions of any other law, the provisions of this Act and the Convention prevail to the extent of the inconsistency.

It is apparent that if one were seeking to determine whether or not a corporation ("person" is the very word employed) would be a "resident" of Canada in contemplation of the Convention, one would not have to go beyond the Convention's own internal definition of" resident", because it must prevail over any inconsistent "provisions of any other law", according to subsection 3(2) of the tax convention legislation above recited. But that is not the determination to be made here. Here, as noted earlier, the question is correctly stated: Is Norsk “a resident” of the U.S.A. in contemplation of the Convention? Accordingly, as will be seen, the question compels a consideration of U.S. law in light of the Convention's definition of "resident" which is:

Article IV Residence

1. For the purposes of this Convention the term “resident of a Contracting State" [i.e., U.S.A.] means any person who, under the laws of that State, is liable to [income and/or capital] tax therein by reason of his domicile, residence, place of management, place of incorporation or any other criterion of a similar nature

[Emphasis added.]

The quest now becomes one of determining whether Norsk is liable to tax in the U.S.A. by reason of those criteria listed, or any other criterion of a similar nature.

Whether or not Norsk is liable to tax in the U.S.A., and if so, by reason of which criterion or criteria, is evidently a matter of U.S. law. One may, without great imprudence, start with what is written by L.H. Tribe in his American Constitutional Law (2nd ed.), The Foundation Press, Inc., 1988, at pages 225-26.

"‘ [T]he [Supreme] Court [of the U.S.A.] has declared that foreign policy, when implemented through presidentially negotiated treaties and executive agreements, does entail specific legal consequences.

A treaty negotiated and, with two thirds of the Senators present, ratified by the President, must be regarded in courts of justice as equivalent to an act of the legislature Foster v. Neilson, 27 U.S. (2 Pet.) 253, 314 (1829)(Marshall, C.J.). This conclusion had been said to derive from the language of the supremacy clause of article VI, 2: "This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the authority of the United States, shall be the supreme Law of the Land. . . .

The Supreme Court, treating acts of Congress and treaties as legal equivalents, has held that, when a conflict arises between a valid treaty and a valid act of Congress "the last expression of the sovereign will must control.“ Chae Chan Ping v. United States (The Chinese Exclusion Case) 130 U.S. 581 (1889), also Whitney v. Robertson 124 U.S. 190, 194 (1888).

So, it appears, and neither party here denies, that the Convention is to be regarded as the law of the U.S.A., it, presumably, having been regularly ratified according to U.S. constitutional imperative. At common law, in Canada, what means foreign law (i.e., U.S. law) is a question of fact, and must be proved through an expert witness, or else it is presumed to be the same as Canadian law. Hellens v. Densmore, [1957] S.C.R. 768, 10 D.L.R. (2d) 561, at pages 780-81 S.C.R., and Gray v. Kerslake, [1958] S.C.R. 3, 11 D.L.R. (2d) 225, at page 10 S.C.R., are authorities for that proposition. Two persons testified at trial here, in the role of expert witnesses knowledgeable in U.S. law, which, in this Court is a matter of fact, not law.

The plaintiff certified the written opinion, Exhibit 2, of one Paul M. Ginsburg, a lawyer of San Francisco, and called him to testify viva voce at trial. The defendant's counsel admitted Mr. Ginsburg's expertise in U.S. tax law. As with the defendant's expert witness, John M. Monahan, Mr. Ginsburg strayed a little over the line into the Court's province of interpreting the Convention, but, again as with Mr. Monahan's opinion, his is severable. Here are the pertinent passages of Mr. Ginsburg’s opinion:

Section 882 of the Internal Revenue Code of 1986 as Amended (" Code") provides, in substance, that a foreign corporation engaged in a trade or business within the United States shall be taxed in the same manner as a United States corporation on that portion of its taxable income which is effectively connected with the conduct of its U.S. trade or business.

A foreign corporation with an office and employees located within the United States that regularly carries on business activities from that office is deemed to be engaged in a U.S. trade or business for purposes of Section 882 of the Code. Accordingly, any income generated from that office is income effectively connected with the United States trade or business, for which the foreign corporation is liable to graduated corporate tax within the United States. Norsk is subject to United States taxation precisely because its place of management and principal place of business are located within the United States

We understand that in the years in question Norsk did not in fact pay United States income taxes on income effectively connected with its United States trade or business because that income was specially exempt under Section 883 of the Code, a provision that exempts from tax certain income derived from international shipping provided certain other requirements are satisfied. In our opinion, the fact that Norsk was entitled to the benefit of this Section 883 exemption does not alter the fact that its income was effectively connected with a U.S. trade or business, and therefor it is “liable to tax" in the United States by virtue of its effectively connected U.S. trade or business. [Exhibit 2, page 2]

Now, it does appear from the written and oral evidence that the parties' respective counsel and their expert witnesses all agree that in the U.S.A., Norsk is a foreign corporation. The effect of Mr. Ginsburg's oral testimony, in chief and under cross-examination, recorded on pages 29 to 44 of the trial transcript, is as follows. Norsk is liable to tax in the U.S.A. because it conducts a "trade or business which is effectively connected with the United States" (pages 29, 32). This latter expression is not identified in the Internal Revenue Code (hereinafter, the Code) but is determined by subjective factors according to common law (pages 43 and 44). The United States taxes foreign corporations on the basis of the continuous and continuing conduct of an active trade or business within the territorial jurisdiction of the U.S. and taxes the trade's or business” worldwide income “sourced” either within or outside of the U.S. (pages 29-30 and 34). The fact that the foreign corporation's head office and place of management are in the U.S. is one factor—a principal factor—in determining whether it carries on a trade or business in the U.S. (pages 31 and 32). Other factors in determining whether the foreign corporation (always Norsk herein) carries on a trade or business in the U.S. are: the extent of its activity therein; employment of individuals; use of resources; and the continuity over a period of time of the conduct of the business [pages 31, 32, 38-39, 40, 42, 43, 44].

Counsel for the plaintiff, before closing the plaintiff's case, tendered as Exhibit 3 all four pages of his examination of Abdul Mohamed for discovery. Mr. Mohamed simply adopted the views expressed by the defendant's counsel. The plaintiff's counsel referred to it in argument (page 94) thus:

The sole thrust of the examination for discovery, those four pages, is the assumption or the predication of the assessment based on the defendant's position that the determination of residence is a determination that is made external to the Treaty and it's our position that that simply is not the case, that the Treaty provides a complete definition.

That was an unduly risky gesture on counsel's part, for he surely did not wish to adopt as part of the plaintiffs case that which his adversary asserted, ratified on oath by Mr. Mohamed. The less said about Exhibit 3, the better, since its "thrust" is basically argumentation for the defendant which the defendant's counsel was quite capable of articulating for herself.

The plaintiff's counsel cited five treaties to the Court, those between Canada and Australia, India, New Zealand, Norway and Trinidad & Tobago. He did so, as he said, to demonstrate to the Court that, if it be the purpose evinced in the treaty to determine residence outside of the treaty, then the treaties provide that very basis of determination. Such comparison is hardly relevant. Treaty-making is not performed with nearly the same unique institutional continuity, nor complete control of contents, as is legislation-making. Therefore it seems to be not particularly logical or useful to impart a meaning to the expressions articulated in one treaty between Canada and one treaty partner from the meaning of the expressions articulated in another treaty with another partner whose legal, economic and political exigencies, not to emphasize its distinct treaty-negotiating personnel and techniques, may be quite distinct from the first. However, at base all the plaintiff really seeks to establish is the proposition that in each instance—and therefore in this instance—the treaty-makers in concluding their negotiations said what they meant, and must be held to mean what they said. The Court takes that proposition for granted in regard to the Convention while paying scant heed to other treaties.

The plaintiff's primary argument is that in determining residence one looks first to article IV.1 of the Convention exclusively. Article IV.1 sends one back into certain tax laws of the U.S.A., but there is no preliminary step of looking to the U.S. domestic law first, before regarding the Convention. Counsel argues that because Norsk which is incorporated in the Bahamas, carries on all of its business through its principal office by means of almost all of its employees in the U.S.A., it makes sense that it should be subject to U.S. tax laws and pay tax as a U.S. resident.

Thus, a foreign corporation, Norsk, is liable to income tax in the U.S.A. on the same basis as a domestic corporation—on income effectively connected with a trade or business which it carries on in the United States. Both Mr. Ginsburg and Mr. Monahan assert that principle, in writing and in oral testimony. Mr. Monahan was particularly clear in testimony recorded at pages 87 and 88 of the transcript, that Norsk conforms in all respects at least in regard to some of its income. Mr. Monahan opined that the very rental income on Norsk's barges, the trigger of this litigation, being foreign-source income, was not effectively connected with a trade or business Norsk carries on in the United States.

A prime criterion for determining whether Norsk carries on its trade or business in the United States is the fact that its head office and its place of management from which it regularly and continuously carries on such business are situated in the U.S.A. Now, whilst it is asserted by some that the republic to the south has frequently exhibited more tendencies to dominate than to trade or to compete in business, that country has not yet sought to tax foreign corporations at random, but only those with some connection with the U.S. In the case of Norsk, its connection is carrying on its business from its place of management situated in the U.S.A. and in generating income effectively connected with its business. The experts agree with that conclusion. That conclusion is, therefore, found to be a fact.

The plaintiff argues from this fact that Norsk is, in effect, economically domiciled in the U.S.A. and, on that ground alone, qualifies under article IV.1 of the Convention as a resident. That may be contrasted with the defendant's position which is that foreign corporations like Norsk are not even contemplated by the Convention, for one must already beinherently a resident—a domestic corporation—in order to be considered a "resident" within the meaning of article IV.1.

This argument is circular and barren. It is not necessary first to be a resident before a corporation may qualify as a resident under the treaty. Article IV.1 provides that resident means any person (désigne toute personne) and not just some specified category of corporation (undefined, of course) which is already specified to be a resident. So, if a corporation be liable to tax in the U.S.A. under its law, that corporation may be a "resident" with the Convention's meaning. It may be a resident, if liable to tax therein by reason of. . .domicile, residence, place of management, place of incorporation or any other criterion of a similar nature.

"By reason of” is a key expression which is, and appears to be, deliberately less narrowly specific than "on the strict basis of. . .”, or“ "with regard only to [those criteria] and none other”, or “literally and exclusively on the basis of. . .”, or some such like expression, for example. It seems highly improbable that, as the defendant contends, those who negotiated the Convention would have chosen criteria which would have been considered inapplicable as a standard for taxation in one of the two high contracting parties to the Convention. That is to say, the defendant contends that none of the criteria for determining who, or what corporation, is a" resident of a Contracting State” is a criterion for liability to tax in the U.S.A., unless the person or corporation be already a resident of the U.S.A. by some criterion extraneous to the Convention. Again, if the negotiators of the Convention meant to exclude foreign corporations in the U.S., like Norsk, from the status of resident of a Contracting State (i.e., the U.S.A.) one wonders why they simply did not write into the Convention exactly what they allegedly meant to say. These contentions make no sense, or they reflect ill on the competence of those who negotiated the Convention to say what they truly meant to say, as alleged by the defendant. Since their competence is not in issue, the Court must strive without doing violence to the words and concepts of the Convention, to interpret it so as to make good sense.

The expression ” by reason of [the stated factors], or any other criterion of a similar nature”, indicates no narrow, rigid, unthinking or literally exclusive consideration. First of all, “reason” is the chosen word in the Convention's article IV.1, and it, according to Black's Law Dictionary, (6th ed.), St. Paul, Minn.: West Publishing Co., 1990, denotes:

A faculty of the mind. . .which enables the possessor to deduce inferences from facts or from propositions.

[Emphasis added.]

The Oxford English Dictionary, (2nd ed.), Oxford: Clarendon Press, 1989, gives a definition, under "reason", of the very expression "by reason of" employed in the Convention, thus:

7. (Without article) a. by (or for) reason of, on account of, b. by reason (that) for the reason that, because

10.a. [reason] That intellectual power or faculty which is ordinarily employed in adapting thought or action to some end; the guiding principle of the human mind in the process of thinking.

Here, again, the presumably deliberate employment of the word and concept of "reason" surely does not ordain any slavishly mechanistic, unthinking application of the criteria of article IV.1 in their narrow, literal or exclusive senses, but rather a process of deducing inferences from the stated criteria so as to determine whether or not they apply directly or indirectly as the, or a, basis for liability to tax, which is agreed to be the generating of income effectively connected to the conduct of a trade or business in the U.S.A. Petit Larousse Illustré, 1984, and Harrap's New Standard French & English Dictionary lead precisely to the same interpretation of the equivalent expression "en raison de" employed in the French-language version of the Convention article IV.1.

Assuming that the negotiators of the Convention were not coy about, nor yet incompetent in saying what they meant, and in abstaining from saying what they did not mean, it appears then to be quite legitimate to give full rein to the expression "by reason of [the stated criteria] or any other criterion of a similar nature” in a rational purposeful sense. So indeed it has been held in jurisprudence. Strict interpretation of tax conventions has been repudiated in The Queen v. Cruikshank, [1977] C.T.C. 344, 77 D.T.C. 5226, at page 346 (D.T.C. 5227); Canadian Pacific Ltd. v. The Queen, [1976] C.T.C. 221, 76 D.T.C. 6120, at page 245 (D.T.C. 6134); and in Melford Developments v. The Queen, [1980] C.T.C. 141, 80 D.T.C. 6074, at page 143 (D.T.C. 6074). There is also” doctrine” so- called, or teaching to the effect that a liberal interpretation must be normally imparted to an exempting provision of an international taxation convention, as for example The Principles to be Applied in Interpreting Tax Treaties by David

A. Ward as stated at page 264 in the 1977 Canadian Tax Journal. The decisions above mentioned are all judgments of the Trial Division of this Court, as is that of Mr. Justice Addy in J.N. Gladden Estate v. The Queen, [1985] 1 C.T.C. 163, 85

D. T.C. 5188. He reviewed the cited jurisprudence and teaching. At page 166, Addy, J. is reported as having written:

Contrary to an ordinary taxing statute a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated in so far as the particular item under consideration is concerned.

Now, none of the cited jurisprudence or teaching means to say that one may impart such a liberal interpretation as to be quite loose and to make up interpretations which range beyond the convention's own expressed words. No. It is the very words as expressed in the convention to which a liberal interpretation is given. It therefore cannot be an interpretation which is unsupported by those words as so expressed.

Such must be the conclusion of this case. The reason for which Norsk's income is effectively connected with a trade or business which it actively conducts in the U.S.A., is because Norsk's place of management is located in the U.S.A. where it conducts its trade or business. The expression "place of management" found in article IV.1, conjures, on the facts of this case, another "criterion of a similar nature" [“tout autre critère de nature analogue"], and that is: place of trade or business. If it were logically necessary to resort to the general analogous alternative expressed in article IV.1 of the Convention one would say, as the Court now holds, Norsk is a "resident" of the U.S.A. within the meaning of article IV.1 of the Convention because it is liable to tax under U.S. law by reason of its place of management and/or by reason of its place of conducting its trade or business, which is in the U.S.A..

The sequence of deducing this obvious inference from the facts and law is short, and its reasoning presents no difficulty.

The plaintiff's appeal in each case is accordingly allowed, and the tax assessments for non-resident tax all dated June 30, 1989, for the plaintiff's 1987, 1988 and 1989 taxation years are to be vacated accordingly, and the plaintiff is permitted to recover judgment from the defendant for the plaintiff's party-and- party costs of, and incidental to, these cases, but with counsel fees allowed only on the basis of one-and-a-half counsels at trial if the plaintiff can persuade the taxing officer that the “one-half” counsel's attendance was necessary for the prosecution and presentation of the plaintiff's case at trial.

The plaintiff's solicitors and counsel shall prepare a draft judgment on legal- size paper to give effect to the foregoing conclusions and, after according the defendant's solicitors and counsel an opportunity to comment thereon, or to consent thereto, present that draft to the Court for consideration, all in accordance with Rule 337(2)(b).

Appeal allowed.