Hertel v. MNR, 93 DTC 721, [1993] 2 CTC 2050 (TCC)

Sobier, T.C.C.J.:—The appellant appeals from the assessment by the respondent with respect to his 1984 taxation year, whereby the respondent maintained that the appellant realized capital gains of $1,916,760 and earned business income of $109,624, both of which were not reported. The capital gains are alleged to have arisen from the sale of shares of Hico Hydronics International Corporation (” Hico"), and the business income is alleged to have its source in services rendered by the appellant to Eurocana Hightech Research and Development (Canada) Ltd. ("Eurocana Canada").

This appeal involves the interpretation and application of the Canada-West Germany Income Tax Agreement (the "treaty") and revolves around whether the appellant is a resident of Canada, West Germany, or both countries.

The provisions of article 4 of the treaty dealing with residence read as follows:

ARTICLE 4

Resident

1. For the purposes of this agreement, the term “resident of a contracting state” means any person who, under the laws of that state, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. But this term does not include any person who is liable to tax in that state in respect only of income from sources in that state or capital situated therein.

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both contracting states, his status shall be determined as follows:

(a) he shall be deemed to be a resident of the state in which he has a permanent home available to him; if he has a permanent home available to him in both states, he shall be deemed to be a resident of the state with which his personal and economic relations are closer (centre of vital interests) ;

(b) if the state in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either state, he shall be deemed to be a resident of the state in which he has an habitual abode:

(c) if he has an habitual abode in both states or in neither of them, he shall be deemed to be a resident of the state of which he is a national;

(d) if he is a national of both states or of neither of them, the competent authorities of the contracting states shall settle the question by mutual agreement.

3. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both contracting states, the competent authorities of the contracting states shall endeavour to settle its status by mutual agreement.

Counsel for the appellant conceded that the appellant was a Canadian resident, but claims that the appellant was also a resident of West Germany. In order to avail himself of the provisions of paragraph 2 of article 4 of the treaty, the appellant must establish that he was also a resident of West Germany as well as a resident of Canada.

The evidence indicated that the appellant paid income tax to the West German government, but not whether that government taxed him on what is casually referred to as his "world income”, as required under paragraph 1 of article 4.

At the close of the hearing of this appeal, counsel for both parties agreed that the issue of whether the appellant was being taxed on his world income would be established by information to be provided by the appropriate West German authorities. However, it was later agreed that the German tax assessments, which were tendered at the hearing, would be translated to determine this question. This has been done. I will not comment on the written submissions dealing with some facts set out in the translation, except to say that for our purposes, the appellant was liable for “unlimited tax liability” in West Germany. Accordingly the appellant was liable to the West German taxing authorities on his "world income” and therefore we must go to paragraph 2 of article 4 in order to determine his status.

Facts

The appellant was born in Germany in 1942 and emigrated to Canada in 1959 when he was seventeen years of age. He continues to hold landed immigrant status, but has never become a Canadian citizen. He still possesses a West German passport and remains a citizen of that state. The appellant initially worked in Canada for the German electrical giant Robert Bosch as an apprentice, and in 1964 became a salesman of Telefunken products in the Calgary area. He married in Calgary in 1970 and at the end of that year he returned to West Germany with his wife, bought a home in the Black Forest area and lived there for approximately 20 years.

It was while he was living in West Germany that the appellant learned of the possibilities of profit in dealing in Canadian silver dollars. The silver dollars had an exchange rate in excess of the normal rate and the difference would be profit since he paid face value for the coins in Canada. His business grew to the extent that the appellant was dealing in Canadian silver dollars with over 150 German banks. The appellant would travel to Canada as many as 15 times per year to buy coins.

It was his evidence that he purchased a home in Calgary, where he intended to live at a later date. However, he rented this home and stated that he has never lived there. In 1979, he purchased a condominium in Kelowna, B.C., and his wife also purchased a condominium there. One of the condominiums was rented and the other was used by the appellant and his family from time to time. They would spend summer and other school vacations there.

From the time the appellant returned to West Germany, he involved himself in his community. A child of the marriage was born and attended school there from 1977 until 1989 or 1990. In addition the appellant’s stepson lived with the appellant and his wife in West Germany where he was educated until 1978, when he began his apprenticeship as a chef.

Counsel for the respondent introduced documents, such as declarations and affidavits, where the appellant indicated that he was a resident of Canada. This of course adds nothing in itself, since the appellant has admitted that he was a Canadian resident. However, the Canadian connection will be important if the appellant establishes that he was also a West German resident since then one must look to the treaty to determine his status. Therefore, what must be determined is whether he was also a resident of West Germany.

Based on the evidence which is discussed below, I find that the appellant was also a resident of West Germany.

The appellant had a home in each country. Therefore, I am obliged to look at the other tests set out in subparagraph 2(a) of article 4 of the treaty, i.e., if he has a permanent home available to him in both states, he shall be deemed to be a resident of the state with which his personal and economic relations are closer (centre of vital interests).

In determining his centre of vital interests, it is not enough to simply weigh or count the number of factors or connections on each side. The depth of the roots of one's centre of vital interests is more important than their number.

While the appellant had bank accounts, credit cards, real property, a driver's license, acquaintances, insurance policies, telephone listings, among other things in Canada, his connections with West Germany, were not only more numerous, they were deeper. He lived with his wife, child and step-child in West Germany. During the period in question, his children attended schools there. The appellant's business was selling coins to German banks. After his coin-buying trips to Canada, he returned to his family in West Germany. He was involved in his community there. The only relative he had in Canada was his brother, whereas the remainder of his family and that of his wife were in Germany.

He was a member of the board of directors of his local soccer club and was heavily involved in that activity. He was also a member of a tennis club, a chess club and a card-playing club, all in Germany. He was appointed an honorary director of his local bank. His ties to the church were in Germany, not in Canada. During the period of time before he moved his family to Canada, that is prior to the taxation year in question, 1984, his involvement with Canada was business trips to purchase coins for resale in Germany and vacations here when his children were out of school. He remained a German national throughout and is one to this day. While he had friends and family in Germany, he had acquaintances in Canada.

The preponderance of evidence leaves no doubt that he was also a resident of West Germany and based on the connections, not only in number but in depth, I find his centre of vital interests was West Germany.

Having established this, the appellant is entitled to be treated as a resident of West Germany, for the purposes of the treaty and in particular paragraph 5 of article 13. The capital gains issue will be resolved in his favour. I need not go into detail of how the alleged capital gains arose.

Despite the fact that his alleged income was received from Eurocana Canada, the only evidence on this issue came through the appellant's evidence at the trial as well as a translation of two documents. These were two invoices dated March 31, 1984 and December 31, 1984, in the amount of $60,124 CDN and $49,500 CDN respectively. These invoices were rendered by Eurocana, which was the appellant's sole proprietorship in Germany, to Eurocana Canada. It appears from these invoices and from the evidence that they were "as reimbursement of expenses" for the months from February to August 1984 and September to December 1984.

The appellant maintains that he had spent the amounts on behalf of Eurocana Canada for research and development in Germany and in France, and that he was merely being reimbursed for out of pocket expenses. There is no evidence to the contrary. Accordingly, I find that the appellant did not earn income from Eurocana Canada in 1984.

The appeal is allowed, with costs, and the matter referred back to the Minister of National Revenue, for reconsideration and reassessment on the basis that the appellant is entitled to be treated as a resident of West Germany for the purpose of the treaty and that he earned no income from Eurocana Canada in 1984.

Appeal allowed.