Date: 20090429
Docket: T-1899-07
Citation: 2009 FC 434
Ottawa, Ontario, April 29,
2009
PRESENT: The Honourable Madam Justice Simpson
BETWEEN:
ROBERT M.O. MORRIS and
NEVILLE LEROY SMITH
TRUSTEES OF THE RCI TRUST
Applicants
and
MINISTER
OF NATIONAL REVENUE
Respondent
REASONS FOR JUDGMENT AND
JUDGMENT
[1]
The
Applicants are the Trustees of the RCI Trust. They say that the tax treaty
between Canada and Barbados
exempts the trust from paying capital gains tax in Canada on the
disposition of the shares of RCI Environment Inc. because the RCI Trust
is resident in Barbados.
BACKGROUND
[2]
The Agreement between Canada and Barbados for
the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With
Respect to Taxes on Income and on Capital was enacted in Canada by the Canada-Barbados
Income Tax Agreement Act, 1980 S.C. 1980-81-82-83, c. 44, Schedule IX (the Treaty).
[3]
The
Treaty applies to “persons” who are residents of one or both of the contracting
states and in Article III, paragraph 1(c), the term “person” is defined to
include a trust. The term resident is defined in Article IV, paragraph 1, in
the following terms:
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1. For the purposes of this Agreement,
the term “resident of a Contracting State” means any person who, under the
law of that State, is liable to taxation therein by reason of his domicile,
residence, place of management or any other criterion of a similar nature.
The terms “resident of Canada” and “resident of Barbados” shall be construed accordingly.
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1. Au sens du présent Accord,
l’expression « résident d’un État contractant » désigne toute
personne qui, en vertu de la législation dudit État, est assujettie à l’impôt
dans cet État en raison de son domicile, de sa résidence, de son siège de
direction ou de tout autre critère de nature analogue, et les expressions
« résident du Canada » et « résident de la Barbade » ont
le sens correspondant.
|
[4]
Paragraph
3 of Article IV also deals with residency. It states:
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3. Where by reason of the provisions of
paragraph 1, a person other than an individual is a resident of both
Contracting States, then the competent authorities of the Contracting States
shall by mutual agreement endeavour to settle the question and to determine
the mode of application of this Agreement to such person.
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3. Lorsque, selon la
disposition du paragraphe 1, une personne autre qu’une personne physique est
considérée comme résident de chacun des États contractants, les autorités
compétentes des États contractants s’efforceront d’un commun accord de trancher
la question et de déterminer les modalités d’application du présent Accord à
ladite personne.
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[5]
The
Applicants say that the RCI Trust is only resident in Barbados and that Article IV,
paragraph 3, has no application in this case. They rely on the following facts:
1.
The
Trust was settled under the laws of Barbados;
2.
The
trustees are citizens of and are residents of Barbados;
3.
The
Trust’s business office is in Barbados and it has one employee;
4.
The
Trust files tax returns in Barbados;
5.
The
Trust’s accountants are in Barbados.
[6]
The
disposition of taxable Canadian property which generated the gains at issue in
this case followed rather convoluted trust and corporate transactions which
appear to have been undertaken by a Quebec businessman by the name of Lucien Rémillard
for the purpose of estate and related tax planning.
[7]
The
plan appears to have been initiated on February 28, 1995 when North West
Investments settled a trust in the Cayman Islands called the North West Trust (the Cayman
Trust). The party behind North West Investments is unknown but the beneficiaries
of the Cayman Trust are the children and remoter issue of
Lucien Rémillard, together with their spouses, widows and widowers and
their remoter issue. Lucien Rémillard’s children are Maxime and
Julien Rémillard. They are both residents of Canada (the Rémillard
Children).
[8]
Two
years later, in 1997, two companies were formed under the Canada Business
Corporations Act, R.S., 1985, c. C-44, s. 1; 1994, c. 24, s. 1(F) (CBCA). They were RCI
Environment Inc. and Centre de Transbordement et de Valorisation Nord-Sud Inc. These waste disposal
management companies (the Waste Companies) were wholly owned by a Montreal
lawyer named Paul Biron in trust for a trust to be settled under the law
of Barbados. He held one hundred shares in each company and each share was
valued at $1 for a total of $200. Lucien Rémillard was the sole director
of each company.
[9]
On
July 9, 2002, North West Investments settled a second trust – this time in
Barbados. It is called the RCI
Trust (the Barbados Trust). Its beneficiary is the Cayman Trust.
[10]
On
the same day (July 9, 2002), Maître Biron conveyed the shares of the Waste
Companies to the Barbados Trust for $200.
[11]
On
January 31, 2006, the Waste Companies were amalgamated under the CBCA (the
Amalgamation) and continued as RCI Environment Inc. (RCI). On Amalgamation, the
two hundred outstanding shares of the Waste Companies were cancelled and two
hundred shares of RCI were issued and valued at $200.
[12]
On
May 5, 2006, the Barbados Trust agreed to sell its two hundred shares of
RCI for $145,000,000. The effective date of the sale was May 31, 2006 and the purchase
price is to be paid by December 31, 2011. The purchaser is a company
called Les Investissements Historia Inc. (Historia). It is incorporated under
the CBCA and one of its shareholders and its sole officer and director is
Lucien Rémillard. This share purchase agreement of May 31, 2006 will
be referred to as the “Transaction”.
[13]
To
summarize, the facts in evidence disclose that Lucien Rémillard was the sole director of the Waste Companies and is the sole director of
RCI and Historia.
[14]
The
Information Circular which applied to section 116 of the Income Tax Act,
S.C. 1985, c. 1 (5th Supp.) (the Act), at the time of the Transaction bore the
number 72-17R5 and was entitled “Procedures concerning the disposition of
taxable Canadian property by non-residents of Canada – Section 116” (the Circular).
[15]
Paragraph
1 of the Circular provided the following general information:
1.
Under Section 116, non-resident vendors (from now on referred to as vendors)
who dispose of certain taxable Canadian property (see item 2 below) have to
notify the Canada Revenue Agency (CRA) about the disposition either before they
dispose of the property or within ten days after the disposition. When the CRA
has received either an amount to cover the tax on any gain the vendor may
realize upon the disposition of property, or appropriate security for the tax,
the CRA will issue a certificate of compliance to the vendor. A copy of the
certificate is also sent to the purchaser. If the purchaser does not receive
such certificate, the purchaser is required to remit a specified amount to the
Receiver General for Canada and is entitled to deduct the amount
from the purchase price. Any payments or security provided by the vendor and/or
purchaser will be credited to the vendor’s account. A final settlement of tax
will be made when the vendor’s income tax return for the year is assessed.
[16]
Paragraph
7 of the Circular provided detail about the required documentation and showed
that payment or security must be received before a certificate would issue.
7.
A vendor should use the appropriate authorized form to notify the CRA about a
section 116 disposition. The forms outline the procedures to follow for
reporting the transaction, calculating the gain or loss, income, recapture or
terminal loss, and making the required payment on account of tax. The vendor
must also provide all required information and documentation as described in
the “Supporting Document List” attached to the authorized form. This
information is essential to the issuance of the certificate in a timely manner.
The notification form must be signed by the vendor. […]
[17]
However,
paragraph 25 of the Circular dealt with tax treaty exemptions in slightly different
terms in that it appears that a request for an exemption did not require
payment of the gain or security therefor.
25.
Section 116 does not provide for treaty exempt status. However, the CRA
allows vendors to claim an exemption under a specific tax treaty at the time
they file the notification of disposition. Vendors must state the
applicable Article (paragraph) of the particular treaty that Canada has with their country of residence. To expedite the
processing of the exemption, the necessary documentation to support the claim
should be submitted along with the request. The documentation must be based on
the particular tax treaty under which the exemption is claimed, and would
include items such as proof of residency, or proof that the gain has been or
will be reported in the vendor’s country of residence. Tax officials in some
countries may supply the necessary certification required to claim the
exemption. Refer to the Supporting Document List in the instructions to forms
T2062 and T2062A for a complete list of the required documentation. [my
emphasis]
[18]
Paragraph
28 of the Circular also dealt with tax treaty exemptions and it said:
28.
The granting of exemptions at the time of notification of disposition is
discretionary. The vendor must provide documents to support the proceeds of
disposition and the adjusted cost base of the property. The certificate of
compliance will indicate that the disposition is treaty exempt. However, the
certificate of compliance will be issued only when all other outstanding debts
of the vendor with the CRA has been satisfied. [my emphasis]
[19]
It
therefore appears from the Circular that the certificate of compliance (the
Certificate) was intended to be the vehicle which notified vendors that an exemption
was granted.
[20]
The
Circular also made it clear that, when a treaty exemption was sought, the
proceeds of disposition and adjusted cost base of the property were to be
established.
[21]
Paragraphs
39 and 40 of the Circular describe the issuance of the Certificate:
39.
The CRA will issue the certificate of compliance at the earliest possible date
once the necessary information and supporting documentation have been received
and validated, and acceptable payment or security has been received.
40.
A copy of the certificate of compliance will be issued to both the vendor and
the purchaser. The certificate protects the purchaser from any further tax
liability in respect of the particular notice filed for that particular
disposition. The vendor’s final tax liability in respect of the particular
notice will be determined when the vendor files a tax return, as is required
under the Act, for the year the disposition took place.
THE SECTION 116 REQUEST
[22]
By
letter dated May 4, 2006 from solicitors in Markham, Ontario (the Letter),
the Barbados Trust advised Revenue Canada of the Transaction and enclosed Form
T-2062 which constituted a request by the Barbados Trust for a Certificate for
the Transaction under section 116 of the Act.
[23]
The
Letter did not clearly seek an exemption from the capital gains tax based on the Treaty.
However, it mentioned that the vendor was the Barbados Trust and documents were
included which showed that the Barbados Trust was claiming an exemption under a
tax convention.
[24]
As
well, the form itself showed that although the gain was $145,000,000 less $200,
the taxable capital
gain was
$0. No payment or security was included with the Letter and neither has since
been provided. If tax had been reported as payable, the amount would have been
25% of $144,999,800 or $36,249,950.
THE APPLICANTS’ POSITION
[25]
The Applicants’
initial submission is that section 116 does not apply to the shares of RCI.
They say the shares are treaty exempt property because they are being sold by
the Barbados Trust which is resident in Barbados. The Applicants, in the alternative, say that
the Barbados Trust has fulfilled all the requirements of section 116 of the Act
and is forthwith entitled to a Certificate showing exempt status under the
Treaty. In particular, the Applicants deny that the Respondent has any
discretion when a treaty exemption is sought and say that the statement to that
effect in the Circular is wrong.
THE RESPONDENT’S POSITION
[26]
The
Respondent says that the issuance of a Certificate confirming a treaty
exemption is a matter of ministerial discretion and that the onus is on the
Barbados Trust to satisfy the Minister of National Revenue that the Treaty
applies to the Transaction.
[27]
The Respondent
also says that this may be a case of dual residency and that Article IV,
paragraph 3, of the Treaty may apply. Even though the Respondent acknowledges
that the Barbados Trust is a resident of Barbados, the Respondent suggests that the Transaction
may not be at arms length. Section 94 of the Act may deem the Barbados Trust to
be a resident of Canada because its
beneficiaries once removed, namely the Rémillard Children, are Canadian
residents.
[28]
The
Respondent is also concerned that it has no evidence to support the sale price
of $145,000,000 as the fair market value of the RCI shares at the time of the Transaction. Although the Applicants suggested that the
Respondent contact Capital Environment Resources Inc. to confirm that it had
been negotiating with the Barbados Trust to purchase the RCI shares for a
comparable sum, there is no evidence about whether that contact was made.
Finally, the Respondent is concerned about: the $200 valuation of the estimated adjusted cost base for the RCI shares in the
Applicants’ section 116 Certificate application; the identity of Maître
Biron’s client; and the fact that no tax was paid on the disposition in 2000
when Maître Biron conveyed the shares of the Waste Companies to the Barbados
Trust for $200.
[29]
The
Respondent has contacted Maître Biron but he has refused to volunteer any
information about his retainer or his client.
[30]
The
Respondent says that because it has not received all the information it requires
to deal with these issues it is entitled to take the position that it is not
satisfied that the Treaty applies and that it can, in its discretion, refuse to
issue the Certificate until it is so satisfied.
[31]
The
Applicants reply that they were not appointed as trustees until 2002 and have
no information about Maître Biron’s client or the value of the shares of the
Waste Companies when they were incorporated in 1997.
[32]
The
Applicants also note that by September 12, 2007, they had sent the
Respondent all the relevant documentation required by the Circular’s supporting
document list. They say that the Respondent is already auditing the Barbados
Trust and, according to a letter of June 11, 2007 from
Mr. Marc Lemyre, the Respondent also now appears to be auditing the
Transaction. The Applicants note that during the audits, the Respondent will be
entitled to secure the outstanding information from knowledgeable parties.
DISCUSSION
[33]
Section
116 of the Act predates the Treaty. Section 94 of the Act, an anti-avoidance
provision dealing with deemed residence, also predates the Treaty.
[34]
If
those sections of the Act had been intended to apply notwithstanding the
Treaty, I would have expected the Treaty to deal expressly with the interaction
between its provisions and the requirement for a Certificate and the
possibility of deemed residence.
[35]
In
the absence of such provisions, I have concluded that the Treaty is paramount
and that decisions about residence and treaty exempt property are to be based
solely on the language of the Treaty.
[36]
Against
this background the issues are:
1. Where is the Barbados
Trust resident?
2. What is the taxing authority?
3. What is the import of
section 116 and the Circular?
4. What, if any, is an
appropriate remedy for the Applicants?
1. Residence
[37]
The
Respondent acknowledges that the Barbados Trust is prima facie a
resident of Barbados. Based on the facts
described above, it meets the physical criteria associated with actual
residence of the kind described in Article IV, paragraph 1, of the Treaty which
speaks of “domicile”, “place of management” and “criterion of a similar
nature”. In my view, similar criteria would include other aspects of actual
physical presence and not more esoteric concepts such as deemed residence.
[38]
The
question is whether Article 3 of the Treaty allows me to conclude that the
Barbados Trust is also a resident of Canada. In my view, such a conclusion is not open to
me on the facts of this case because Article IV, paragraph 3, limits the
assessment to the provisions of paragraph 1 of the Treaty. This means that a
funding of dual residence must be based on actual physical factors and there
are no such factors linking the Barbados Trust to Canada. Accordingly, the
Barbados Trust is only resident in Barbados.
2. The Taxing
Authority
[39]
Article
XIV of the Treaty deals with gains from the alienation of property. Paragraph 4
provides that:
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4. Gains from the alienation of any property, other than
those mentioned in paragraphs 1, 2 and 3 may be taxed only in the Contracting State of which the alienator is a
resident
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4. Les gains provenant de
l’aliénation de tous biens autres que ceux qui sont mentionnés aux
paragraphes 1, 2 et 3 ne sont imposables que dans l’État contractant dont le
cédant est un résident.
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[40]
The
Respondent made no submissions to the effect that paragraphs 1, 2 or 3 applied.
Accordingly, Barbados is the taxing
authority. It did not tax capital gains at the time of the Transaction.
3. Section 116
and the Circular
[41]
In
my view, when no tax is owing because of a tax treaty, the Respondent should
not use section 116 of the Act to accomplish enforcement and collection
objectives, however worthy. It appears that, using the Circular, the Respondent
has purported to extend its powers under section 116 beyond those contemplated
by the section. Section 116 of the Act makes no reference to exemptions under
tax treaties.
[42]
I am
supported in this view by the fact that pending amendments to the Act
introduced in 2007 make it clear that section 116 does not apply to treaty
exempt property.
4. Remedy
[43]
In
my view, the Applicants are entitled to a binding ruling from the Respondent
about whether the RCI shares are treaty exempt property, accepting that the
Barbados Trust is a resident only of Barbados.
JUDGMENT
THIS COURT ORDERS AND
ADJUDGES that on or before June 30,
2009, the
Respondent is to provide the Applicants with a written decision in accordance
with these reasons, indicating whether or not the RCI shares are treaty exempt
property under the Treaty.
“Sandra
J. Simpson”
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