Cutlers Guild Ltd. v. The Queen, 81 DTC 5093, [1981] CTC 115 (FCTD)

Dube, J:—The basic issue in this action is whether or not the plaintiff in the taxation year 1972 was carrying on a business in a country other than Canada and thus not obligated to withhold the tax payable by a nonresident on interests paid to it by the resident plaintiff.

The plaintiff is a company incorporated under the laws of the Province of Ontario. It purchases silverware in the Orient and sells it in Canada. It is a Canadian affiliate of an American corporation, Imperial International Corporation (“IIC”), which ts itself an affiliate of another American corporation, International Knife. The plaintiff company maintains a warehouse and an office staff at Bramalea, Ontario. The directors of the plaintiff are also directors of IIC.

In order to pay for its purchases in the Orient the plaintiff gives its suppliers letters of credit (payable in American currency from the Bankers Trust Company of New York (“Bankers Trust”). These financing arrangements are made in New York by IIC as agent for the plaintiff. Bankers Trust, which at all material times dealt at arm’s length with the plaintiff, charges interest on a 90 day term loan basis. During the relevant taxation year the interest paid by the plaintiff amounted to $15,036. The Minister of National Revenue assessed the plaintiff a withholding tax of $2,255.40.

Under the provisions of section 215 of the new Income Tax Act a person who pays to a non-resident an amount on which an income tax is payable Shall withhold therefrom the amount of the tax payable forthwith and remit same to the Receiver General of Canada on behalf of the non-resident person.

Under section 212 every non-resident person shall pay an income tax of 25% on every amount in satisfaction of interest, with some exceptions. One of the exceptions falls under clause 212(1 )(b)(iii)(E). The relevant provisions read:

212.(1) 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 him as, on account or in lieu of payment of, or in satisfaction of,

(b) interest except

(iii) interest payable in a currency other than Canadian currency to a person with whom the payer is dealing at arm’s length, on

(E) any obligation entered into in the course of carrying on a business in a country other than Canada, to the extent that the interest payable on the obligation is deductible in computing the income of the payer under Part I from a business carried on by him in any such country,

(emphasis mine)

It is common ground that the plaintiff was carrying on a business and that it was dealing with Bankers Trust at arm’s length during the taxation year in question. It is also common ground that the interest payable on the obligation is deductible by the plaintiff in computing its income. The plaintiff has also established to my satisfaction that the interest was payable in American currency, whether the term “payable” is given a mandatory or permissive connotation.

There remains therefore for the plaintiff, if it wishes to benefit from the exception provided by the above clause (E), to show that it entered into the obligation to pay the interest in the course of carrying on a business in a country other than Canada. In other words, if the plaintiff can establish that it was carrying on a business in the United States, it had no obligation under the Act to withhold income tax on the interest which it paid to Bankers Trust during the relevant year.

The only witness heard at the trial was Werner George Lekisch presently professor of international business, and president of both the plaintiff and IIC during the relevant period. He explained how the development of the lines of wares, the importation, and the marketing of the merchandise were carried out from the head office of IIC in New York. He himself travelled abroad to make the purchases on behalf of the plaintiff as well as for IIC. The bookkeeping for both firms was maintained in New York. Sales in Canada were promoted by representatives of IIC who on some occasions travelled throughout Canada and on other occasions corresponded from New York with Canadian customers. At times, orders were sent by the Canadian customers directly to New York.

Most of the sales, however, were made in Canada, with some five percent to South America and Australia. The plaintiff did not sell to American clients. Such sales, presumably, were handled by the parent firm. IIC, however, arranged for showrooms in New York and Chicago where the plaintiff showed its wares to prospective Canadian buyers shopping there.

The main customers were the large Canadian department stores, such as Simpson-Sears, Eaton’s and The Bay. Lekisch would come from New York to develop programs for the catalogues of Canadian stores. Shipments to those stores came from the plaintiff’s warehouse at Bramalea, or were picked up directly at Canadian ports of entry upon their arrival from the Orient. There were some three to four employees on staff at the Bramalea office, with some four to twenty more in the warehouse engaged in packing, marking, labelling and arranging for transportation to customers.

The president himself was the key man for both companies, spending some two to three months a year in Europe and the Orient to shop and place orders. He would also arrange for the letters of credit with Bankers Trust. The plaintiff paid to IIC its pro rata contribution for such travels and New York administrative expenses. The Bramalea office was responsible for local records, invoices, trucking fees, movements of merchandise, utility bills, wages to local employees.

Counsel for the plaintiff invites the Court to conclude from those activities that the plaintiff’s obligation to Bankers Trust were entered into the course of carrying on a business in a country other than Canada.

Whether or not a taxpayer is carrying on a business in another country is a question of fact to be determined in each case. Courts have ruled that the place where sales, or contracts of sale, are effected is of substantial importance. However, the place of sale may not be the determining factor if there are other circumstances present that outweigh its importance. Firestone Tyre & Rubber Co Ltd v Lewellin (1957), 37 TC 111.

Another test emanating from the jurisprudence is “Where do the operations take place form which the profits arise?” Soliciting orders in one country may only be ancillary to the exercise of a trade in another country FL Smidth & Co v F Greenwood (1922), 8 TC 193. Certain authorities establish that activities and operations other than contracts for sale constitute the carrying on of a business, specially where these respective activities and operations produce or earn income. While income may be realized through sales, it may not arise entirely from that one activity or operation STJ in Wm Wrigley Jr Company Limited v Provincial Treasurer of Manitoba, [1947] CTC 304; confirmed by the Privy Council, [1949] CTC 377. Purchasing of merchandise in one country (ie Japan) with the view of trading in it elsewhere (Canada) does not, of course, constitute an exercise of the trade in the former country Grainger & Son v William Lane Gough, [1896] AC 325.

In my view, the purchase of goods in the Orient and the financing thereof in the United States, as well as in the general planning and accounting in New York, were preliminary and ancillary phases of the plaintiff’s business. President Lekisch wore two hats, as he found it convenient and profitable to act on behalf of both companies in his dealings abroad and at the New York head office. But one of the companies, the plaintiff, was carrying on a business in Canada. The bulk of its sales was to major Canadian department stores and other Canadian distributors, not to clients located in the United States. It is an Ontario corporation with home office at Bramalea and a distribution centre located there.

While the letters of credit in question—for which interest was paid—were obtained in New York and delivered to wholesalers in the Orient, any obligations deriving therefrom were not entered into the course of carrying on a business in the United States, but in the course of carrying on a business in Canada, the business of selling silverware to stores located in Canada. The very raison d’etre for the plaintiff was to carry on a business in this country.

For these reasons the appeal is dismissed with costs.