Pratte, J:—The appellants are the executors of the late Haskel S Abed. They continue the appeal brought by Mr Abed from a judgment of the Trial Division which dismissed with costs his appeal from income tax assessments for the taxation years 1960 to 1964 and referred the assessments back to the Minister for reassessment so as to make certain corrections agreed to by the parties and give effect to the “Appellant’s right to agree to the application by the Minister of the provisions of section 858 of the Income Tax Act to the assessments for the years 1960 to 1964”. There is a cross-appeal by the respondent from that last part of that judgment giving to the appellant the right to agree to the application of section 85B of the Act.
The various questions to be decided on this appeal relate to the taxability, in the taxation years 1960 to 1964, of the profit realized by Mr Abed on the sales of two parcels of land situated in the outskirts of the City of Montreal, namely, lot 128 in the Parish of Pointe Claire and lot 278 in the Parish of Ste-Geneviève.
It is common ground that the assessments under attack are in error in two respects since, in making them, the Minister
(a) wrongly assumed that Mr Abed had a one-half interest in lot 128 while he, in fact, had only a one quarter interest; and
(b) failed, in determining the amount of the profit realized on the two sales in question, to deduct from gross profits all the expenses related thereto.
It follows, therefore, that even if all the appellants’ contentions were to be rejected, the assessments shall nevertheless be referred back to the Minister in order that those errors be corrected.
The appellants do not challenge that the profit realized by Mr Abed on the sales of lots 128 and 278 is income. They concede that he had purchased an interest in these two lots in order to resell it at a profit. The respondent, on the other hand, concedes that the Trial Judge was right in finding that Mr Abed, during the years under consideration, was a resident of the United States who did not have a residence in Canada.
The appellants’ contentions on the appeal and the cross-appeal are that the trial judge should have held
(1) that, as Mr Abed was a resident of the United States who had no residence in Canada, the profits that he realized on the sales of lots 128 and 278 were either not taxable under articles I and III of the Canada-US Reciprocal Tax Convention or, at the very least, taxable at a maximum rate of 15% under article XI of that Convention; and
(2) that, in any event, no part of the profit realized on the sale of lot 278 was taxable in the years 1960 to 1964 since that sale took place in 1959 and since the record does not show that Mr Abed ever elected to take advantage of the provisions of paragraph 858(1)(d) of the Act.
In order to understand these issues, it is necessary to know the circumstances that resulted in the assessments here under attack.
Mr Haskel S Abed came from Iraq where he owned and operated a General Motors car agency. In 1948, he left Iraq with his family, spent some time in England, and, in 1950, settled in New Rochelle, New York, where he bought a house where he resided until 1964. The Abeds were not complete strangers in New Rochelle since Mrs Abed’s two brothers, Saleh and Gourdji Masri, as well as her sister and her husband, Frank Iny, had also settled there. While he resided in New Rochelle, Mr Abed seems to have had very little, if any, business activity in the United States. He continued to operate his car business in Iraq and, for that purpose, spent considerable time away from home, mostly in England and Iraq. His activities in the United States seem to have been limited to investing in blue chip securities. Mr Abed also came frequently to Montreal both for family and business reasons. His mother and his two brothers, Albert, a real estate broker, and Sassoon, all lived in Montreal. Mr Abed’s business activities in Montreal were numerous, they took three forms: first, he purchased and sold land in the Montreal area in association with the two Masris and Frank Iny, his three brothers-in-law from New Rochelle; second, he purchased and sold land in the same area in association with other persons, mainly his Montreal relatives; third, he was one of the main shareholders of two Montreal companies that built and managed apartment houses and he was also interested in a Montreal real estate company. Of these facets of Mr Abed’s business activities in Montreal, only the first two need retain our attention.
Mr Abed’s business association with the Masris and Frank Iny apparently Started in 1954 when the four of them purchased lot 128 in the Parish of Pointe Claire for the price of $170,000. They sold it for $913,000 in May 1960. This is one of the two transactions that led to the assessments here in question. In two other instances, in 1955 and 1957, Mr Abed, acting in association with the same persons, purchased land in Pointe Clare which was later sold at a profit. In all those transactions, including the purchase and sale of lot 128, Mr Abed does not seem to have played an active role. He apparently relied entirely on his brother-in-law, Saleh Masri, who negotiated alone the purchase and sale of those properties and administered them from his New York office. As I have already mentioned, Mr Abed also purchased land in Montreal in association with other persons. He did this on seven occasions from 1955 to 1963. One of them, on September 24, 1957, he purchased lot 278 of the Parish of Ste-Geneviève which he sold at a profit on March 17, 1959. That is the second transaction which is at the basis of the assessments under attack.
All those purchases of land, in association with the Masris and other persons, were made for the purpose of making a profit; the purchase and sale by Mr Abed of lots 128 and 278 were clearly not isolated adventures in the nature of trade. In my view, there is ample support in the evidence for the finding of the trial judge that, during the years here in question, Mr Abed was in effect carrying on business in Canada within the meaning of paragraph 2(2)(b) of the Income Tax Act.
I now turn to the various arguments put forward by Mr Vineberg on behalf of the appellants. As I have already indicated, those arguments are founded on the Tax Convention between Canada and the United States and on section 858 of the Act.
I — The Canada-US Reciprocal Tax Convention.
The appellants’ first argument is based on article I of the Convention which, according to Mr Vineberg, must be interpreted as providing that a resident of the United States who has no permanent establishment in Canada cannot be taxed in Canada on his commercial and industrial profits. As Mr Abed was a resident of the United States and did not have a permanent establishment in Canada, it follows, following Mr Vineberg, that he could not be taxed in Canada on the profit that he realized on the sales of lots 128 and 278.
Article I of the Convention must be read with subparagraphs 3(b) and (c) of the Protocol:
Canada-US Reciprocal Tax Convention
Art I [Industrial and commercial profits.] 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 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.
Protocol
3. As used in this Convention:
(b) the term “enterprise” includes every form of undertaking, whether carried on by an individual, partnership, corporation or any other entity;
(c) the term “enterprise of one of the contracting States” means, as the case may be, “United States enterprise” or “Canadian enterprise”;
When all these provisions are read together, it is clear, in my view, that article I I does not exempt from taxation in Canada all the commercial and industrial profits realized by United States residents who do not have a permanent establishment in Canada. In order to be exempt from Canadian taxation under article I, a profit realized by a resident of the United States must be such that it can be considered as the profit of an enterprise or undertaking carried on in the United States. It follows that the resident of the United States who carries on business in Canada is not entitled to invoke the protection of article I of the Convention if he does not carry on an undertaking in the United States. It also follows, in my view, that article I of the Convention affords no protection to the United States resident who carries on at the same time an undertaking in the United States and a business in Canada, unless his Canadian business activities be so related to his United States undertaking as to be considered as part of that undertaking.
In the present case, the trial judge found that the profits realized by Mr Abed on the sales of lots 128 and 278 could not be attributed to an enterprise carried on by him in the United States and that, as a consequence, those profits were not exempt from taxation under article I. This finding is, in my opinion, unassailable since the evidence does not show that Mr Abed’s business activities in Canada were in any way related to an undertaking carried on by him in the United States. This conclusion is not weakened by the fact that the Trial Division decided differently in the case of G R Masri v MNR, [1973] CTC 448; 73 DTC 5367, where it had to consider the taxability of the profit realized on the sale of lot 128 by Gourdji Masri, one of Mr Abed’s associates. In that case, the Trial Division held that Mr Masri was carrying on an undertaking in the United States and that the profit he had realized on the sale of lot 128 could be considered as a profit of that undertaking. I am not certain that I would have reached the same conclusion if I had had to decide that case. However, this does not matter. The issue to be resolved in this case is different: it is the taxability of the profits realized by Mr Abed who, contrary to his associates and brother-in-law, never had any business activities in the United States.
The second argument advanced on behalf of the appellants is based on article VIII of the Convention. That article reads as follows:
Art VIII [Gains from sale of capital assets.] Gains derived in one of the contracting States from the sale or exchange of capital assets by a resident or a corporation or other entity of the other contracting State shall be exempt from taxation in the former State, provided such resident or corporation or other entity has no permanent establishment in the former State.
The appellants’ argument is expressed in the following terms in their factum:
30. A further argument is invoked under Article VIII of the Convention. A resident of the USA is not subject to tax on capital gains in Canada provided such resident has no permanent establishment here. It is acknowledged that, by virtue of the extended definition of “business”, the assessment does not purport to treat the gain as being on capital but only on income account. However, this extended definition only came into operation in 1949 under which the adoption of the term “adventure or concern in the nature of trade” substantially enlarged the ambit of the kinds of transactions the profit from which were subject to income tax (MNR v James A Taylor, [1956] CTC 189 at p 210). At the time of the adoption of the present Convention in 1942, both Canada and the United States understood that the type of transaction presently under consideration was on capital account. In the United States in the taxation years under review, the gains were still considered to be capital gains. It is not open to one of the parties to the Convention to change its meaning by a unilateral act through changing the meaning of the expression “capital assets” as it was adopted in 1942 and as it continued to apply in the taxation years under review.
The answer to that argument, in my opinion, is that article VIII applies to “gains derived . . . from the sale... of capital assets” and that the meaning of that phrase, in Canadian law, has not changed since the date of the Convention. The fact that the expression “business” is now defined so as to include “an adventure or concern in the nature of trade” is irrelevant since, in this case, the purchase and sale of lots 128 and 278 were not isolated transactions but part of the carrying on of a business.
The appellants’ third argument is that, in any event, under paragraph 1 of article XI of the Convention, the rate of tax could not exceed 15%. Paragraph 1 of article XI reads thus:
Art Xi [Withholding rates.] 1. The rate of income tax imposed by one of the contracting States, in respect of income (other than earned income) derived from sources therein, upon individuals residing in, or corporations organized under the laws of, the other contracting State, and not having a permanent establishment in the former State, shall not exceed 15 percent for each taxable year.
In my opinion, article XI has no application in this case. It provides for a maximum rate of income tax of 15% in respect of income other than earned income. While it may be difficult to give a precise definition of the phrase “earned income”, I am of opinion that it certainly includes the income derived from commercial transactions like those here in question.
II — Section 858 of the Act
In order to understand the last argument submitted on behalf of the appellants, it is first necessary to have in mind some of the provisions contained in section 858 of the Income Tax Act:
Sec 858
(1) In computing the income of a taxpayer for a taxation year,
(b) every amount receivable in respect of property sold ... in the course of business in the year shall be included notwithstanding that the amount is not receivable until a subsequent year. . .
(d) where an amount has been included in computing the taxpayer’s income from the business for the year or for a previous year in respect of property sold in the course of the business and that amount or a part thereof is not receivable,
(ii) where the property sold is land, until a day that is after the end of the taxation year,
(e) there shall be included the amounts deducted under paragraphs (c), (d) and (da) in computing the income of the taxpayer for the immediately preceding year.
It is also necessary, at this stage, to mention certain facts to which I have not yet made reference:
1. The assessments here in question are for the taxation years 1960 to 1964 inclusive. Lot 278 was not sold by Mr Abed during any one of those years. It was sold in 1959 for a price which was payable in part in the years 1960 to 1963 inclusive. As to lot 128, it was sold in 1960 for a price payable in part in each one of the years 1960 to 1965.
2. In those circumstances, it is clear that Mr Abed, in making his income tax returns for 1959 and 1960, could have elected to include the whole profit realized on the sales of the two lots in his income for the year in which each lot had been sold. Or, at his option, he could have chosen to take advantage of the reserve provisions of section 858. However, Mr Abed who was not a Canadian resident did not make any income tax returns for those years. The Minister nevertheless assessed him for the years 1960 to 1964 inclusive, as he was entitled to do under subsection 46(6)*; the record does not disclose if or how Mr Abed was assessed for the year 1959.
3. During the argument before the Trial Division, counsel for Mr Abed submitted that the assessments under attack were irregular in that Mr Abed had never elected to take advantage of the reserve provisions of section 858. That submission was then made for the first time; it was not even alluded to in the pleadings and had not been made before the Tax Appeal Board.
It is in response to that argument of Mr Vineberg that the trial judge expressed the view that Mr Abed had not had the opportunity to choose whether or not to take advantage of the reserve provisions of section 858. In order to give him that opportunity, the learned judge decided to refer the assessments back to the Minister for reassessment “under reserve of appellant’s right to agree to the application by the Minister of the provisions of section 858 of the Income Tax Act to the assessments for the years 1960 to 1964”.
There is, in my opinion, an error in that part of the judgment under appeal. It is not correct to say that Mr Abed did not have the opportunity to choose whether or not to take advantage of the reserve provisions of section 858. After he had been assessed as if he had elected to take advantage of those provisions, nothing prevented him from expressing his disagreement with that assumption. Moreover, the court could not, in my view, render a judgment which could, for certain of the years under consideration, result in a higher assessment than the assessment under attack. The Trial Division, therefore, should not have reserved to Mr Abed the right to agree to the application of the reserve provisions of section 858. However, this is not the end of the matter. For each one of the years under consideration, the Trial Division had to determine whether the amount of the assessment was excessive. Mr Abed’s income tax for the years 1960 to 1964 was assessed on the basis that his income for each one of those years included part of the profit realized on the sales of lots 128 and 278. Mr Vineberg, as I understood him, did not quarrel with the inclusion in each one of those years of part of the profit arising from the sale of lot 128 in 1960 (provided that profit was otherwise found to be taxable). His argument was that no part of the profit realized on the sale of lot 278, in 1959, could be included in Mr Abed’s income for the subsequent years. That contention is, in my view, well founded. The whole of the profit made in 1959 on the sale of lot 278 could have been taxed in 1959; if it had, it could not be taxed in the subsequent years. The record does not show how Mr Abed’s income tax was assessed for the year 1959; it does not even disclose that there was an assessment for that year. It follows, in my view, that no part of the profit made in 1959 could be included in Mr Abed’s income for the subsequent years. The fact the Mr Abed did not raise that argument before the Tax Appeal Board and in the pleadings in the Trial Division is, in my view, irrelevant.
For these reasons, I would allow the appeal in part, dismiss the crossappeal and substitute the following judgment for the judgment of the Trial Division:
The appeal is allowed in part and the assessments are referred back to the Minister for reassessment on the basis:
(a) that Mr Abed had only a % interest in lot 128 in the Parish of Pointe Claire;
(b) that, in determining the profit realized by Mr Abed on the sale of lot 128 in the Parish of Pointe Claire, there should be deducted from gross profits all expenses related thereto; and
(c) that no part of the profit realized by Mr Abed on the sale, in 1959, of lot 278 in the Parish of Ste-Geneviève is to be included in Mr Abed’s income for the subsequent years.
As the amount of the profit derived from the sale of lot 278 is minimal compared with the profit derived from the sale of lot 128, I would, in spite of the partial success of the appellants, grant the respondent her costs in this Court and in the Trial Division.
Le Dain, J:—I agree that the appeal and the cross-appeal should be disposed of in the manner proposed by my brother Pratte and for the reasons given by him. It is a matter of particular concern that the profit earned by Mr Abed on the sale of Lot 128 should be treated differently, in so far as the Canada-US Tax Convention is concerned, from that earned by his associates in the transaction. But I agree that the facts, as disclosed by the findings in G R Masri v MNR, [1973] FC 848; [1973] CTC 448; 73 DTC 5367, (by which the parties agreed to be bound) and by the evidence in this case, do not support a conclusion that Mr Abed was carrying on a United States enterprise within the meaning of the Convention. The fact that he left the management of the transactions in which he was involved with the Masris to Saleh Masri did not make their enterprise his enterprise.
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