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Citation: 2004TCC199
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Date: 20040304
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Docket: 2003-1851(IT)I
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BETWEEN:
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PHILIP A. MEYER,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Hershfield,
J.
[1] The
Appellant was a resident of Canada at all relevant times. He was a citizen
of both the United States and Canada and filed
income tax returns in both jurisdictions in respect of his 2001 taxation year.
[2] As
a resident of Canada the Appellant is subject to tax on his
income earned anywhere in the world subject to limitations and restrictions agreed
to by Canada in applicable tax treaties with foreign
jurisdictions. As well, section 126 of the Income Tax Act of Canada (the "Act") provides credits for
foreign taxes paid to foreign jurisdictions on foreign source income.
[3] Aside
from some nominal Canadian source investment income reported only in Canada,
the Appellant had only two sources of income in the subject year: U.S. employment income of $57,180.00 (US) and U.S. sourced pension income of $43,000.00 (US). The income inclusion amounts including the
currency conversion rate used (1.5748) are not in dispute. That is, it is
acknowledged that the Appellant had $90,047.00 (CDN) of U.S. source wages and
$67,716.00 (CDN) in U.S. sourced pension income.
[4] Having
filed an income tax return in the United States
respecting such income and having paid tax in the United States on such income,
the Appellant claimed a credit for U.S. taxes paid
against his Canadian tax liability attributable to such income pursuant to
section 126 of the Act. The Canada Customs and Revenue Agency
("CCRA") denied a portion of the credit claimed on the basis that the
U.S. tax paid on the U.S. source pension income exceeded the tax allowed under the Canada-U.S.
Income Tax Convention (the "Treaty"). Article XXVIII of the Treaty
would limit the tax that the U.S. can impose on a resident of Canada to 15% of periodic pension payments arising in the U.S. There is no dispute that the pension income in this
case is subject to such limit imposed by such article of the Treaty.
[5] The
issue in this appeal, then, as raised by the Appellant, is whether the
Appellant is entitled to a credit under section 126 of the Act for tax
actually paid in the U.S. notwithstanding that the tax that ought to have been
imposed by the U.S. under the Treaty was less.
[6] The
Appellant filed a joint form 1040 return in the U.S. with his wife. Such return does not state that the Appellant was not a
resident of the U.S. nor does it state that he was a Canadian
resident although the address on the return is a Canadian address. Further, the
U.S. return does not include any forms, schedules or
returns (prescribed or otherwise) pertaining to non-resident Treaty claims.
Indeed, nothing in the return (except the address) would signal a Treaty issue.
As such it seems, and I accept on the evidence, that the Appellant was assessed
tax in the U.S. without regard to the Treaty as if he
were a U.S. resident on his U.S. reported income which was, as stated,
his U.S. source pension and his U.S. employment
income. That is, Article XXVIII of the Treaty has not been applied by the U.S. and the Appellant maintains that it is not his
responsibility to seek U.S. compliance with the Treaty. The
Appellant, in effect, asserts that section 126 of the Act and
paragraph 2 of Article XXIV of the Treaty permit the full credit as claimed and
that it is incumbent on the Respondent to seek payment from the U.S. of the
excess U.S. taxes paid by him on his U.S. pension source income or to take
steps on his behalf to ensure that the U.S. applies the Treaty rate to the U.S.
source of pension income.
[7] Before
referring to the text of the relevant provisions of the Act and the
Treaty, it might be helpful to review the mechanics applied by the CCRA in
determining that the rate of tax applied by the U.S. on the Appellant's U.S.
source pension income was in excess of the 15% permitted by the Treaty.
[8] In
calculating the reduction of the credit, the CCRA has attributed the U.S. tax payable to each income source. The attribution
of the tax liability to each source is fairly straightforward since the
allowable deductions in computing taxable income in the U.S. were non-source deductions. This enabled the CCRA
to allocate the tax paid in the U.S. pro rata
as between the pension source income and the employment source income on the
basis of relative gross amounts reported.
Following this approach it was determined that the tax paid on the U.S. source pension income was $12,118.00 (CDN) compared
to the $10,157.00 (CDN) that would be payable if the maximum Treaty rate of 15%
had been applied.
[9] I
accept that if the Appellant had identified a Treaty issue when filing U.S.
returns and claimed the benefit of the Treaty in respect of his pension income,
that the U.S. tax liability would have been reduced.
It is also safe to conclude, I believe, that the reduction in U.S. tax would at
least equal the amount determined by the CCRA although ultimately it seems that
the correct U.S. tax can only be absolutely determined by subjecting the
Appellant's U.S. position to the appropriate U.S. filing and assessment regimes
which has not been done and which the Appellant refused to do. In any event, I have not been asked to
determine the correct U.S. tax liability in this case. It is
sufficient, in terms of framing the issue before me, that I am satisfied that
the U.S. taxes paid in this case were in excess of the applicable Treaty rate
and that the amount disallowed by the CCRA as a credit, was not greater than
such excess. However, that said, it must be acknowledged that there is no
statutory basis for the attribution theory being applied by the CCRA.
[10] Indeed, the Appellant takes issue with this method of attributing U.S. tax liability as between his two sources of income
and argues that he should be given the benefit of any imprecision in these
matters. For example, the Appellant urges me to assume that the rate of tax on
the pension income was in fact 15% and that the rate of tax on the employment
income was that rate required to effect the actual tax imposed on the aggregate
amount. Indeed, the Appellant has produced evidence that his pension receipts
were subject to a 15% withholding tax which was remitted to the U.S. Treasury.
The Appellant argues that such remittance demonstrates that the tax paid in
respect of the U.S. source pensions was only such 15%
amount. The Respondent argues that such withholding and remittance identifies
an amount of money credited in the U.S. against U.S. tax liability but does not itself fix the liability
in respect of any particular source of income. I agree with the Respondent on
this point. The withholding and remittance is on account of an estimated
or presumed tax liability. If
the liability proves to be in excess of the amounts withheld or remitted based
on the filing approach adopted by the taxpayer and accepted by the taxing
authority, the difference must be made up by the taxpayer. In this case the
return filed and accepted in the U.S. put all U.S. source income in the same basket and tax was determined on that basis. It
is not possible to say that a particular source of income enjoyed one bracket
(or rate) of tax or another when it is the aggregate amount from all sources
that dictated the effective rate of tax. Once determined, it is the effective
rate of tax on the aggregate income that determines the actual rate of tax on
each component comprising that aggregate.
[11] Regardless of the rate of tax paid in the U.S. and whether a lower rate ought to have been applied, the Appellant did
pay U.S. tax in excess of the amount of the
credit allowed by the Respondent. Does the Act not simply allow a credit
for taxes actually paid to a foreign jurisdiction? Does the Treaty not
allow the credit on a similar basis? Can it be argued that an excessive payment
is not a "tax"?
[12] Consider section 126 of the Act. Editing out all portions of
that subsection that have no relevance to this case, the subsection reads as
follows:
126. (1) A taxpayer who was
resident in Canada at any time in a taxation year may deduct from the tax for
the year otherwise payable under this Part by the taxpayer an amount equal to
(a) such
part of any non-business-income tax paid by the taxpayer for the year to
the government of a country other than Canada . . . as the taxpayer may claim
(emphasis added)
not exceeding, however,
(b) that
proportion of the tax for the year otherwise payable under this Part by the
taxpayer that
(i) . . .
the total of the taxpayer's qualifying incomes . . .
is of
(ii) the total of
(A) the amount, if any,
by which,
(I) . . .
(II) . . . the total of
the taxpayer's income for the period . . .
exceeds
(III) . . . an amount
deducted by the taxpayer under . . .paragraph 110(1)(f) . . .; and
(B) . . .
[13] There is no dispute that all the incomes in the case at bar are "qualifying
incomes" for the purposes of subparagraph (b)(i) above. The
Respondent denies, however, that all the tax paid by the Appellant in the U.S. was "non‑business‑income
tax". Only the "non-business-income tax" is creditable under
paragraph (a) above. The Respondent relies on the definition of
"non‑business‑income tax" in subsection 126(7) of the Act
which the Respondent asserts would reduce the tax recognized as paid by the
Appellant in the U.S. for the purposes of the credit by the
amount referred to in paragraph (i) of that definition. Paragraph (i)
of the definition of "non-business-income tax" reads as follows:
"non-business-income tax"
paid by a taxpayer for a taxation year to the government of a country other
than Canada means, subject to subsections (4.1) and (4.2), the portion of
any income or profits tax paid by the taxpayer for the year to the government
of that country that
. . .
but does not include a
tax, or portion of a tax, . . .
(i) that
can reasonably be regarded as relating to an amount that was deductible under
subparagraph 110(1)(f)(i) in computing the taxpayer's taxable
income for the year.
[14] Subparagraph 110(1)(f)(i) of the Act reads as follows:
(i) an amount exempt
from income tax in Canada because of a provision contained in a tax convention
or agreement with another country that has the force of law in Canada.
(emphasis added)
[15] At trial Respondent's counsel urged me to find that allowing a credit
for taxes paid to a foreign jurisdiction can reasonably be regarded as relating
to an amount exempt from tax because of the Treaty. It is a strange notion to
think of a credit as an exemption from tax.
Further with or without the Treaty, the credit is afforded by subsection 126(1)
so it cannot be said that it is an exemption because of the Treaty.
Assuming then that paragraph 126(7)(i) does not apply to reduce the
Appellant's "non-business-income tax", the amount of the credit in
this case under paragraph 126(7)(a) would simply be the amount of U.S. income tax paid by the Appellant which was
$28,209.00 (CDN). This amount is reduced if the amount calculated under
paragraph (b) of subsection 126(7) is a lower amount. The amount
calculated in paragraph (b) is the proportion of the Canadian tax
otherwise payable that the taxpayer's qualifying incomes is of the taxpayer's
total income for the year less amounts deducted under paragraph 110(1)(f).
Applying this formula on the same basis referred to above, the proportion referred to would be
one-to-one so that the paragraph 126(1)(b) amount would be the Canadian
tax payable which was $27,210.00. In fact this is what the Appellant claimed.
[16] Having cautioned Respondent's counsel that his argument was not
persuasive, I allowed him to make a written submission to better explain the CCRA's
position. The relevant part of his submission reads as follows:
14. The Preamble
of the definition of "non-business-income tax" clearly requires
payment of an "income or profits tax".
15. Caselaw
regarding what constitutes a tax for purposes of "non-business-income
tax" was reviewed by the Tax Court in Yates v. The Queen, 2001 DTC
761 (T.C.C.). In Paragraphs 15-21 Justice Campbell illustrates that an
essential component of a tax is that payment is not voluntary but rather
compulsory.
16. In Kempe v.
R. [2001] 1 C.T.C. 2060 (T.C.C.) Judge Hamlyn relied upon the Supreme Court
of Canada decision in Lawson v. Interior Fruit Committee (1930), [1931]
S.C.R. 357 (S.C.C.) to find that a German church tax was a compulsory
obligation and therefore a tax for purposes of the foreign tax credit.
Specifically, Judge Hamlyn stated:
A tax is a levy,
enforceable by law imposed under the authority of a legislature, imposed by a
public body and levied for a public purpose.
17. In Yates,
Justice Campbell also relies upon Canada (Attorney General) v. British Columbia (Registrar of Titles of
Vancouver Land Registration District), [1934] 4 D.L.R. 764 (B.C.C.A.) as
dictating that the "essentials" of a tax must meet two tests:
The tests are (1) it
must be enforceable by law; (2) imposed by a public body under legislative
authority and for a public purpose. In addition "compulsion is an
essential feature" (Halifax v. Nova Scotia Car Works (1914), 18
D.L.R. 649, at p. 652).
Shawinigan Water &
Power Co. (1953),
53 DTC 1036 (Can. Ex. Ct.).
18. Justice
Campbell also relies upon the Black's Law Dictionary definition of a tax:
[20] Black's Law
Dictionary defines "tax" as follows:
A charge by the
government on the income of an individual, corporation, or trust, as well as on
the value of an estate or gift or property. The objective in assessing the tax
is to generate revenue to be used for the needs of the public.
A pecuniary burden laid
upon individuals or property to support the government, and is a payment
exacted by legislative authority. Essential characteristics of a tax are that
it is not a voluntary payment or donation, but an enforced contribution,
exacted pursuant to legislative authority.
19. In the case at
bar it is common ground that because of the Treaty Benefit the Appellant was
only required to pay 15% tax to the United States on his U.S. source pension income.
20. The amount
paid to the U.S.
taxing authority in excess of the 15% was apparently a mistake.
21. A mistaken
excessive payment cannot be a tax. It lacks the necessary element of compulsion
– the source of the overpayment was not the U.S. taxing authority but rather the
Appellant himself.
22. Moreover, the
excessive payment should be refundable. Admittedly, there is no evidence
supporting this contention. However, there is also no evidence before the Court
that the U.S. would be unwilling to
refund the excessive payment once properly informed of the mistake.
23. If the
Appellant has missed the limitation period and cannot receive a refund due to
inaction on his part, that does not make the initial mistaken payment
compulsory.
24. For these
reasons the excessive payment by the Appellant was not a tax and therefore
cannot be included in the definition of "non‑business‑income
tax".
[17] The Appellant submitted a response to the Respondent's submission. He
denies that he did not advise the U.S. of his Canadian
residence status and submitted a letter, not introduced at trial, that he
asserts was sufficient advice to the IRS of such status. He asserts that the letter
was a cover letter enclosed with his U.S. tax return. The
letter states that he is a U.S. citizen living in Canada and required to pay tax in Canada. He refers to
Article XXIV, paragraph 4(b), of the Treaty (referring to U.S. citizens
resident in Canada) and requests a review of the issue of a
U.S. tax credit for Canadian taxes paid. The letter
makes no reference to a review of any U.S. tax reductions (as opposed to
U.S. tax credits) available under the Treaty. Even
accepting this letter as evidence, to which the Respondent might properly
object, I cannot accept that it is a notice of his claiming a tax rate benefit
under the Treaty or even a review of such entitlement. The Respondent's
position that the U.S. tax paid constitutes a voluntary tax is
not undermined by the review sought in the letter. The burden of proof is on
the Appellant to show that there was, having regard to his circumstances, a
liability for the amount paid as a tax payable. That might be established, prima
facie, by an assessment of a return as filed where the return as filed
included the information necessary to draw that inference. That is not the case
here.
[18] The Appellant also urges me in his submission to accept a literal
construction of the words "tax paid" used in the provisions of the Act
cited above. This begs the question as to the meaning of the word
"tax". Clearly something was "paid". That it was intended
to be paid as a "tax", that it was erroneously believed to be a
"tax" owing and that it was calculated on a return determining
"tax" payable, do not make it a "tax". The question
remains, was it a compulsory amount required to be paid? If not, the
authorities suggest it is not a "tax".
[19] The Appellant also referred me to an exchange of information Article
in the Treaty but the reference appears incorrect. I suspect the reference was
intended to be to Article XXVI which I shall deal with later in these Reasons.
[20] While I have some reservations in accepting the notion that the CCRA
can determine if a foreign tax paid is a voluntary payment and therefore not a
"tax", on the facts of this case, based on the authorities cited by
the Respondent, I accept that the amount in dispute was not a "tax"
paid to the foreign jurisdiction in question. That is not to say however that
all voluntary payments are not a "tax". For example, that one might
not claim discretionary deductions and voluntarily increase the tax in a
foreign jurisdiction would not entitle the CCRA to deny a credit on that basis.
Nor should the CCRA dictate any foreign filing position on a resident taxpayer.
However, where the resident taxpayer has approached his foreign filing position
without regard to providing the information necessary to determine the tax
payable, such as not submitting required forms or return information to claim a
Treaty entitlement, and has refused to correct the error or establish that it
was not in error, the resultant overpayment can be regarded as an amount paid
other than as a "tax".
[21] I would add that my reservations in accepting the notion that the CCRA
can determine if a foreign tax paid is a voluntary payment and therefore not a
"tax", are also rooted in the Treaty. Article XXIV, paragraph 2 of
the Treaty provides as follows:
2. In the case of Canada, subject to the provisions
of paragraphs 4, 5 and 6, double taxation shall be avoided as follows:
(a) Subject to the
provisions of the law of Canada regarding the deduction from tax payable in
Canada of tax paid in a territory outside Canada and to any subsequent
modification of those provisions (which shall not affect the general principle
hereof)
(i) Income tax paid
or accrued to the United States on profits, income or gains arising in the United States, and (emphasis added)
. . .
shall be deducted from any Canadian
tax payable in respect of such profits, income
or gains; . . .
In contrast, paragraph 1 of that Article, addressing the case of the
United States, provides that the credit is limited to "the appropriate
amount of income tax paid or accrued to Canada". One might argue then that Canada saw fit not to provide such safeguard against the allowance of a credit
for "inappropriate" taxes paid to the United States. On the other hand, the Canadian drafters of the
Treaty would be allowed to rely on jurisprudence or opinions that would confirm
that an amount paid gratuitously without basis under the laws of the foreign
jurisdiction would not be a "tax" and to thereby choose not to
embrace language in the Treaty that is as dangerously wide as the language the
United States chose to embrace in respect of crediting foreign taxes paid by
its residents.
[22] With that said, I wish to emphasize that it is always open to the
taxpayer to bring evidence that the foreign tax paid was not gratuitously paid
without basis under the laws of the foreign jurisdiction. That is a question
this Court can determine but the onus is on the taxpayer. The Appellant chose
to ignore that onus and simply wanted the CCRA to work it out with the U.S.
Treasury or Internal Revenue Service and leave him out of it. This is not an
acceptable position in my view. That is, while the language of section 126
does not ultimately permit the CCRA to deny a credit because it has reason
to believe that the foreign tax has been erroneously calculated under the
laws of that foreign jurisdiction or is limited by provisions of the tax Treaty
between that jurisdiction and Canada, nothing prevents it from taking that
position and putting the onus on the taxpayer to show that such belief is not
well-founded. In any event Article XVIII, paragraph 2(a), expressly
provides that the U.S. cannot charge a tax in excess of 15% in respect of
pensions received from the U.S. by a Canadian resident. Article XXIX,
paragraph 3, provides that this limitation applies to citizens of the U.S. An excess amount paid then is not a
"tax".
[23] In arguing that Canada and the U.S. should work this out between them and leave him out of it, the Appellant
has by the nature of his argument effectively referred me to Article XXVI
of the Treaty. In general terms this Article permits taxpayers to request that
the competent authority of the Contracting State of which he is a resident resolve by agreement with the other Contracting
State a justifiable assertion that the actions
of a Contracting State will result in taxation not in
accordance with the provisions of the Treaty. The question under that Article
is whether the CCRA ought to have caused the competent authority to seek an
agreement with the U.S. to determine the appropriate U.S. tax
liability and Canadian foreign tax credits in respect of the Appellant's U.S. source income before assessing him and denying the
credit in excess of the agreed tax limit under the Treaty.
[24] I do not believe that the Appellant can take this position. Ignoring
that he has not made a written request to the competent authority (other than
the implicit request suggested by his appeal), it would be open to the
competent authority to refuse the request on the basis that it was not
justified. Implicitly I might assume that that is what has occurred. While my
jurisdiction to consider a "justification" issue is limited at best,
I note that the Respondent's decision not to use the competent authority
provision of the Treaty to seek an agreement in the Appellant's case with the U.S. is readily justified. The Appellant has made no
attempt to at least claim his entitlement under the Treaty. Whether intentional
or not, his approach is to allow the U.S. Treasury a greater amount of
"tax" than it has agreed to exact under the Treaty and to then seek a
credit for that excess amount voluntarily paid in the U.S. against his Canadian
tax liability. By not claiming the benefit of the Treaty in favour of himself
as a Canadian resident, the Appellant has gifted the United States Treasury a
fiscal advantage that it agreed in the Treaty not to have. In self-assessing
systems, it is incumbent on taxpayers to file on the basis prescribed by their
circumstances. That requires the Appellant in this case to establish that he
filed in the U.S. as required to ensure the benefit of
rate limitations under the Treaty. This has not been established. If this were
established and the U.S. tax was assessed without benefit under
the Treaty, the Appellant could then have sought to invoke the provisions of
Article XXVI of the Treaty. To impose the competent authority provision of the
Treaty, in the circumstances of this case, prior to fulfilling this
requirement, would not be justified in my view.
[25] Lastly I note that the Respondent might have relied on paragraph 4(a)
of Article XXIV of the Treaty which expressly limits the credit that Canada is required to allow a U.S. citizen resident in Canada to the rates specified in the Treaty. This
provision lends some support to the Respondent's construction of the credit provisions
in both the Act and the Treaty.
[26] Accordingly, the appeal is dismissed.
Signed at Ottawa, Canada, this 4th day of March 2004.
Hershfield,
J.
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