Citation: 2011TCC220
Date: 20110421
Docket: 2008-2315(IT)G
BETWEEN:
4145356 CANADA LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1]
The issue in this
Appeal is whether the Appellant is entitled, in determining its tax payable for
2003 under the Income Tax Act (the “Act”), to a foreign tax
credit in the amount of $3,199,601 either pursuant to subsection 126(2) of the Act
or paragraph 2 of Article XXIV of the Canada - United States Tax Convention.
[2]
At the conclusion of
the Respondent’s case, the Respondent sought to read into evidence, pursuant to subparagraph 100(1) of the Tax
Court of Canada Rules (General Procedure) (the “Rules”), excerpts from the examination for discovery of Donovan Flynn, the
nominee of the Appellant. The Appellant objected to the Respondent reading in
several portions of the excerpts.
[3]
Subparagraph 100(1) of
the Rules provides as follows:
100. (1) At the hearing, a party may read into
evidence as part of that party's own case, after that party has adduced all of
that party’s other evidence in chief, any part of the evidence given on the
examination for discovery of
(a) the adverse party,
or
(b) a person examined
for discovery on behalf of or in place of, or in addition to the adverse party,
unless the judge directs otherwise,
if the evidence is otherwise admissible, whether the
party or person has already given evidence or not.
As I had stated previously in relation to the Motion
made by the Respondent to exclude portions of the excerpts from the examination for discovery of Simmin Hirji,
the nominee of the Respondent, that the Appellant wanted to read-in, it seems to me that the qualification “if
the evidence is otherwise admissible” is an important qualification to
the introduction of the discovery evidence.
[4]
The Ontario Court of Appeal in R. v. Dupuis, 23 O.R. (3d) 608, [1995] O.J. No. 1481 stated that:
[22] It
has been repeatedly held that the hallmark of admissibility is relevance. In R.
v. Fields (1986), 56 O.R. (2d) 213 at p. 228, 28 C.C.C. (3d) 353, this
court put it this way:
It is trite law that any evidence to be adduced at
trial must meet the legal criteria for its admissibility, of which the sine qua
non is its relevance. As stated by the Supreme Court of Canada in Cloutier
v. The Queen (1979), 48 C.C.C. (2d) 1 at p. 28, 99 D.L.R. (3d) 577,
[1979] 2 S.C.R. 709, "[t]he general rule as to the admissibility of
evidence is that it must be relevant."
[5]
Both parties submitted
written arguments in relation to the main issue in this Appeal (whether the
Appellant is entitled to a foreign tax credit) and in relation to the proposed
discovery read-ins. The Appellant’s objections to the discovery read-ins are
based on relevance and the parole evidence rule. Since the hearing is now
concluded I do not propose to deal separately with the admissibility of the
discovery read-ins but rather to address the issue if and when a particular
matter addressed in the excerpt would be relevant to an issue that is to be
decided. Matters that are addressed in the discovery read-ins that are not
relevant to any issue to be decided are not admissible.
[6]
The Appellant is
indirectly a subsidiary of the Royal Bank of Canada.
The Appellant acquired, on September 5, 2003, 400 million limited partnership
units in Crown Point Investments LP (“Crown Point”), a limited partnership
formed under the laws of Delaware, for $400 million. The general partner
(Gaskell Management LLC) and the other limited partner (Altier LLC) of Crown Point were indirectly subsidiaries of Bank of America.
Under the laws of Delaware, Crown Point was a separate
legal entity.
[7]
Under the Purchase and
Sale Agreement between the Appellant and Altier, the Appellant had the right to
require Altier to repurchase the limited partnership units, inter alia,
on any Period End Date after September 15, 2004 and under the limited
partnership agreement Gaskell had the right to acquire the limited partnership
units held by the Appellant, inter alia, on any Period End Date after
September 15, 2004.
[8]
Following the
acquisition of the limited partnership units by the Appellant, the partners of Crown Point (with the number of limited partnership units held by
each and the contributed capital of each partner) were as follows:
|
Partners
|
Number of Limited Partnership Units
|
Contributed Capital
|
Percentage of Contributed Capital
|
|
Appellant
|
400,000,000
|
$400,000,000
|
24.7678%
|
|
Altier
|
1,200,000,000
|
$1,200,000,000
|
74.3034%
|
|
Gaskell (General Partner)
|
0
|
$15,000,000
|
0.92829%
|
|
Total:
|
|
$1,615,000,000
|
100.00%
|
[9]
Crown Point made a loan of approximately $1.6 billion
to Mecklenburg Park, Inc., which was also a subsidiary of Bank of America.
Mainly as a result of the income earned in relation to this loan the taxable
income of Crown Point was US $28,730,507.
[10]
Crown Point filed an “Entity Classification Election”
(Form 8832) under U.S. Treasury Regulation §301.7701-3 to be “classified as an
association taxable as a corporation”. As a result, for U.S. federal tax
purposes, Crown Point was taxable as a corporation and paid taxes in the U.S.
in the amount of US $10,055,677 (Cdn $13,233,379). Crown Point was not included as part of
the Bank of America group in its consolidated U.S.
income tax return.
[11]
In filing its tax
return under the Act, the Appellant reported income of $9,377,496 (which
was only from the one source – Crown Point) and claimed a foreign tax credit in
the amount of $3,199,601 (which was the least of the three amounts that the
Appellant determined pursuant to subsection 126(2) of the Act). Based on
a 24.7678% interest in Crown
Point, if the income of Crown
Point were determined for the purposes of the Act, this would mean that
the income of Crown Point (before taxes) would be $37,861,642).
[12]
The Appellant also
entered into swap transactions to hedge against currency and interest rate risks.
[13]
For U.S. tax purposes, the investment by the Appellant of $400,000,000
was treated as a loan to Altier and the payments made by Crown Point to the Appellant were treated as deductible interest
payments by Altier. It appears that the amount distributed to the Appellant by Crown Point was $9,377,496 - $3,277,617
= $6,099,879. Therefore it would appear that Altier, for the purposes
of determining its U.S. federal taxes payable, was entitled to claim a
deduction of $6,099,879 (or some amount close to this amount). As a result, assuming that the income of
Altier was taxed in the U.S. at the same rate as the income of Crown Point and
that Altier claimed the deduction, Altier received a reduction in its taxes
payable equal to the taxes paid by Crown Point on $6,099,879 (or some amount close to this amount) of its income.
[14]
The issue in this
appeal is whether the Appellant is entitled to claim a foreign tax credit
pursuant to subsection 126(2) of the Act in determining the amount of
tax payable under the Act for its 2003 taxation year. Subsection 126(2) of
the Act provides in part that:
(2) Where a taxpayer who was resident in Canada at any time in a
taxation year carried on business in the year in a country other than Canada, the taxpayer may deduct from the
tax for the year otherwise payable under this Part by the taxpayer an amount
not exceeding the least of
(a) such part of the total of the business-income tax paid by
the taxpayer for the year in respect of businesses carried on by the
taxpayer in that country and the taxpayer's unused foreign tax credits in
respect of that country for the 10 taxation years immediately preceding and the
3 taxation years immediately following the year as the taxpayer may claim,
(emphasis added)
[15]
The only issue in this
case in relation to section 126 of the Act is whether the Appellant
paid $3,277,617 as business income tax to the U.S. government. The Respondent acknowledged that the
amount paid by Crown Point ($13,233,379) to the U.S. government was a tax. However, it is the position of
the Respondent that the Appellant did not pay what the Appellant claims was its
share of this amount ($3,277,617).
[16]
It is the position of
the Respondent that in order for the Appellant to have paid the tax the
Appellant must be the person who was liable to pay the tax. The Respondent
referred to a number of cases. The issue in Re Eurig Estate, [1998] 2 S.C.R.
565, was whether a particular levy imposed by the province of Ontario
for grants of letters probate was a fee or a tax. Justice Major, writing
on behalf of the majority of the Justices of the Supreme Court of Canada stated
that:
15 Whether
a levy is a tax or a fee was considered in Lawson, supra. Duff J. for
the majority concluded that the levy in question was a tax because it was: (1)
enforceable by law; (2) imposed under the authority of the legislature; (3)
levied by a public body; and (4) intended for a public purpose.
[17]
While this case clearly
confirms that the amount paid by Crown
Point to the U.S. government was a tax, it does not assist in
determining whether, for the purposes of subsection 126(2) of the Act, a
person must be liable for the tax in order to find that the person paid the
tax.
[18]
The respondent also
referred to the case of The Queen v. The Bank of Nova Scotia, [1982] 1 F.C.
311. Justice Heald, on behalf
of the Federal Court of Appeal, described the issue as follows:
2 The
issue in the appeal is whether, for purposes of paragraph 126(2)(a) of the Income
Tax Act, R.S.C. 1952, c. 148, as amended, and Article 21(2) of the
Canada-United Kingdom Income Tax Agreement *, the U.K. income tax
which was imposed on the respondent in respect of the income from its branches
in the U.K. for the 1972 taxation year should be translated into Canadian
funds:
(a)
at the weighted average rate of exchange prevailing in the 1972 taxation
year as contended by the respondent and accepted by the learned Trial Judge, or
(b)
at the rate of exchange prevailing on January 1, 1974 when the U.K.
income tax was paid, as contended by the appellant.
* denotes a footnote reference that was in the original text but which
has not been included.
[19]
Justice Heald also made
the following comments:
3 …
It is my opinion that the respondent's liability for U.K. income taxes for the
1972 taxation year arose in 1972 since that is the year when the income
creating the liability was earned, even though by U.K. law, the tax was not
required to be paid until some 14 months later. I consider that the liability
for the U.K. tax attached to the respondent at fiscal year end, namely, October
31, 1972.
… In my view, Parliament clearly intended, in enacting
paragraph 126(2)(a) to relieve against double taxation by providing for a tax
credit based on the amount of tax payable for a taxation year, by a Canadian
resident, on income earned in a foreign country in that taxation year,
regardless of when, by the law of that foreign country, the foreign tax was
required to be paid.
[20]
This case dealt with a
timing issue with respect to the calculation of the amount of the foreign tax
credit. The taxpayer’s foreign tax credit in that case was determined based on
the weighted average rate of exchange for 1972 and the taxpayer was entitled to
the credit payable for 1972 even though the taxpayer did not pay the U.K. tax until 1974. This case does not stand for the
proposition that in order to claim the foreign tax credit the Appellant must be
the person who was liable to pay the foreign tax.
[21]
The Respondent also
referred to the decision of the Court of Appeal for Ontario
in Sentinel Hill No. 29 Limited Partnership et al. v. Attorney
General of Canada, 2008 ONCA 132. While this case does deal with a limited
partnership, it does not deal with section 126 of the Act and does not
assist in determining whether for the purposes of section 126 of the Act
the Appellant could be considered to only have paid the tax if the Appellant
was also liable for the tax.
[22]
In White v. The
Queen, 2003 TCC 668, 2003 DTC 1170, [2004] 1 C.T.C. 2581, Mr. White was
claiming that he should be permitted to claim a foreign tax credit in relation
to certain imputation tax credits that attached to dividends that he had
received from an Australian company. Australian residents could apply the
imputation tax credits against taxes payable to the Australian government.
Justice Bowie stated as follows:
7 There
is a more fundamental obstacle to Mr. White's claim, however. Subsection 126(1)
only entitles the Canadian taxpayer to a foreign tax credit in respect of tax
paid by that Canadian resident taxpayer to a foreign government for the year in
question. The tax for which Mr. White claims the credit was not paid by him,
but by the Australian corporations that paid dividends to him. He admitted
quite candidly when cross-examined that he had paid no tax to the government of
Australia for the years in issue.
[23]
In this case there is
no such admission by the Appellant. The issue in this case is whether the Appellant
paid the tax to the U.S. government. In White there were two
separate persons who could, depending on where they were resident or the source
of income, have a potential liability for taxes under the Act – the
Australian company and Mr. White. In this case, since Crown Point was a limited
partnership for the purposes of the Act, there is only one person who
could have any potential liability for taxes under the Act in relation
to the income earned by Crown
Point and that person was the
Appellant. The decision in White does not assist
in determining whether, in dealing with a limited partner of a partnership, the
limited partner should be considered to have paid taxes to the U.S. government
imposed on that limited partnership that has, for the purposes of the
Internal Revenue Code, elected to be classified as a corporation and
taxed as such.
[24]
The Appellant referred
to the decision of the Supreme Court of Canada in United Parcel Service
Canada Ltd. v. The Queen, [2009] 1 S.C.R. 657, as support for its
argument that the Appellant could be considered to have paid a tax for the
purposes of section 126 of the Act, even though that person was not liable
to pay such tax. The issue in that case was whether United Parcel Service
Canada Ltd. was entitled to $2,900,858 in GST that had been paid in error.
Subsection 261(1) of the Excise Tax Act provides as follows:
261. (1) Where a person has paid an amount
(a) as or on account of, or
(b) that was taken into account as,
tax, net tax, penalty, interest or other obligation under this Part
in circumstances where the amount was not payable or remittable by the person,
whether the amount was paid by mistake or otherwise, the Minister shall,
subject to subsections (2) and (3), pay a rebate of that amount to the person.
[25]
Justice Rothstein,
writing on behalf of the Supreme Court of Canada, stated as follows:
16 However,
the Minister says that s. 261(1) cannot be interpreted in a contextual vacuum.
The Minister's first argument is that UPS was not the person who paid the
amount on account of GST. He says UPS as customs broker acted as an agent for
the consignees and that it was the consignees who were liable to pay the GST
and not UPS. The Minister says that, for the purposes of s. 261(1), the person
who "has paid an amount" is the person who has the legal liability to
pay, not the person who simply transmitted the money to the Minister.
17 I
cannot agree. This argument would impose an inquiry into liability for payment
instead of actual payment where no such inquiry is mandated by the statute. It
may well be that it was the consignees of UPS who had the liability to pay the
GST on the imported goods. But that does not detract from the fact that in
actuality it was UPS -- and UPS alone -- who paid and was out of pocket for the
GST. At first blush, the words "or other obligation" in s.
261(1) might be thought to import the notion of liability to pay. However, the
words "other obligation" must be read in the context of the provision
as a whole. Section 261(1) applies where a person pays an amount as or on
account of "tax, net tax, penalty, [or] interest". These terms refer
to categories of amounts that are to be paid as or on account of obligations
established by the Excise Tax Act. In this context, "other
obligation" simply refers to an obligation under Part IX of the Excise
Tax Act that is not specifically enumerated in s. 261(1). Actual
liability is not relevant in this context since there is no liability to pay
tax that was paid in error. If the Minister's argument were correct, a
stranger who mistakenly paid GST on goods imported by someone else (perhaps
because the names of two importers were similar) could not obtain a rebate. It
cannot have been the intention of Parliament that persons who were not liable
for GST but paid GST in error could not obtain a rebate.
(emphasis
added)
[26]
Since that case dealt
with GST that was paid in error (and hence there would be no liability to pay
the amount that was paid in error), this case is also not directly relevant in
determining whether, for the purposes of section 126 of the Act, a
person who has paid the tax must be the same person who was liable for the tax.
[27]
The Respondent argued
that section 126 should be read in isolation and in particular should be read
independently of section 96 of the Act. The Supreme Court of Canada in The Queen v. Canada Trustco
Mortgage Company, 2005 SCC 54, 2005 DTC 5523 (Eng.), [2005] 5 C.T.C. 215,
340 N.R. 1, 259 D.L.R. (4th) 193, [2005] 2 S.C.R. 601, stated that:
10 It has been long established as a matter of statutory
interpretation that “the words of an Act are to be read in their entire context
and in their grammatical and ordinary sense harmoniously with the scheme of the
Act, the object of the Act, and the intention of Parliament”: see 65302
British Columbia Ltd. v. R., [1999] 3 S.C.R. 804 (S.C.C.), at para. 50. The
interpretation of a statutory provision must be made according to a textual,
contextual and purposive analysis to find a meaning that is harmonious with the
Act as a whole. When the words of a provision are precise and unequivocal, the
ordinary meaning of the words play a dominant role in the interpretive process.
On the other hand, where the words can support more than one reasonable
meaning, the ordinary meaning of the words plays a lesser role. The relative
effects of ordinary meaning, context and purpose on the interpretive process
may vary, but in all cases the court must seek to read the provisions of an Act
as a harmonious whole.
[28]
It seems to me that
interpreting the words “paid by the taxpayer” in subsection 126(2) of the Act
without regard to the other provisions of the Act and in particular
without regard to the provisions of section 96 of the Act would be
contrary to the approach to be taken in interpreting statutory language as set
out by the Supreme Court of Canada. The word used in subsection 126(2) of the Act
is “paid”. There is no reference in this subsection to the liability for the
payment and no requirement in this subsection that the person who has paid the
tax be the same person who has the liability for the tax. It seems to that to
read a requirement for liability into this section (or to not do so) I would be
required to determine whether the liability for the payment would be required
based on a reading of the Act “as a harmonious whole”. A person could
have paid an amount without necessarily having the liability to pay such
amount. Therefore the word “paid” can support more than one meaning – paid even
if there is no liability (as submitted by the Appellant) or paid only if the
payor has the corresponding liability to make the payment (as submitted by the
Respondent).
[29]
Subsection 126(2) of
the Act itself provides some assistance in determining how the word
“paid” should be interpreted for the purposes of this subsection of the Act.
It creates a direct link between the
foreign tax credit that may be claimed and the amount of foreign sourced
business income. This
subsection provides as follows:
(2) Where a taxpayer who was resident in Canada at any time in a taxation year carried on business in the year in a
country other than Canada, the
taxpayer may deduct from the tax for the year otherwise payable under this Part
by the taxpayer an amount not exceeding the least of
(a) such part of the total of the business-income tax paid by the
taxpayer for the year in respect of businesses carried on by the taxpayer in
that country and the taxpayer's unused foreign tax credits in respect of that
country for the 10 taxation years immediately preceding and the 3 taxation years
immediately following the year as the taxpayer may claim,
(b) the amount determined under subsection (2.1) for the year in
respect of businesses carried on by the taxpayer in that country, and
(c) the amount by which
(i) the tax for the year otherwise payable under this Part by the
taxpayer
exceeds
(ii) the amount or the total of amounts, as the case may be,
deducted under subsection (1) by the taxpayer from the tax for the year
otherwise payable under this Part.
[30]
Subsection 126(2.1) of
the Act provides that:
(2.1) For the purposes of paragraph (2)(b), the amount
determined under this subsection for a year in respect of businesses carried on
by a taxpayer in a country other than Canada is the total of
(a) that proportion of the tax for the year otherwise
payable under this Part by the taxpayer that
(i) the amount, if any, by which the total of the
taxpayer's qualifying incomes exceeds the total of the taxpayer's qualifying
losses
(A) for the year, if the taxpayer is resident in Canada throughout the year, and
(B) for the part of the year throughout which the taxpayer is
resident in Canada, if the
taxpayer is non-resident at any time in the year,
from businesses carried on by the taxpayer in that country
is of
(ii) the total of
(A) the amount, if any, by which
(I) if the taxpayer is resident in Canada throughout the year, the taxpayer's income for the year computed
without reference to paragraph 20(1)(ww), and
(II) if the taxpayer is non-resident at any time in the year, the
amount determined under paragraph 114(a) in respect of the taxpayer for the
year
exceeds
(III) the total of all amounts each of which is an amount deducted
under section 110.6 or paragraph 111(1)(b), or deductible under any of
paragraphs 110(1)(d) to (d.3), (f), (g) and (j) and sections 112 and 113, in
computing the taxpayer's taxable income for the year, and
(B) the amount, if any, added under section 110.5 in computing the
taxpayer's taxable income for the year, and
(b) that proportion of the amount, if any, added under subsection
120(1) to the tax for the year otherwise payable under this Part by the
taxpayer that
(i) the amount determined under subparagraph (a)(i) in respect of
the country
is of
(ii) the amount, if any, by which,
(A) where section 114 does not apply to the taxpayer in respect of
the year, the taxpayer's income for the year, and
(B) where section 114 applies to the taxpayer in respect of the
year, the total of the taxpayer's income for the period or periods referred to
in paragraph 114(a) and the amount that would be determined under paragraph
114(b) in respect of the taxpayer for the year if subsection 115(1) were read
without reference to paragraphs 115(1)(d) to (f)
exceeds
(C) the taxpayer's income earned in the year in a province (within
the meaning assigned by subsection 120(4)).
[31]
The amount that any
taxpayer may claim as a foreign tax credit under subsection 126(2) of the Act
is limited to the least of three amounts. One of these amounts is the
amount of foreign tax paid in respect of the business carried on by the
taxpayer in the foreign country. The second amount is determined in accordance
with the provisions of subsection 126(2.1) of the Act which amount
requires a determination of the taxpayer’s qualifying incomes. “Qualifying
incomes” is defined in subsection 126(7) of the Act which provides that:
“qualifying incomes” of a taxpayer from sources in a country means
incomes from sources in the country, determined in accordance with subsection
(9);
[32]
Subsection 126(9) of
the Act provides that:
(9) The qualifying incomes and qualifying losses for a
taxation year of a taxpayer from sources in a country shall be determined
(a) without reference to
(i) any portion of income that was deductible under subparagraph
110(1)(f)(i) in computing the taxpayer's taxable income,
(ii) for the purpose of subparagraph 126(1)(b)(i), any portion of
income in respect of which an amount was deducted under section 110.6 in
computing the taxpayer's income, or
(iii) any income or loss from a source in the country if any income
of the taxpayer from the source would be tax-exempt income; and
(b) as if the total of all amounts each of which is that portion of
an amount deducted under subsection 66(4), 66.21(4), 66.7(2) or 66.7(2.3) in
computing those qualifying incomes and qualifying losses for the year that
applies to those sources were the greater of
(i) the total of all amounts each of which is that portion of an
amount deducted under subsection 66(4), 66.21(4), 66.7(2) or 66.7(2.3) in
computing the taxpayer's income for the year that applies to those sources, and
(ii) the total of
(A) the portion of the maximum amount that would be deductible under
subsection 66(4) in computing the taxpayer's income for the year that applies
to those sources if the amount determined under subparagraph 66(4)(b)(ii) for
the taxpayer in respect of the year were equal to the amount, if any, by which
the total of
(I) the taxpayer's foreign resource income (within the meaning
assigned by subsection 66.21(1)) for the year in respect of the country,
determined as if the taxpayer had claimed the maximum amounts deductible for
the year under subsections 66.7(2) and (2.3), and
(II) all amounts each of which would have been an amount included in
computing the taxpayer's income for the year under subsection 59(1) in respect
of a disposition of a foreign resource property in respect of the country,
determined as if each amount determined under subparagraph 59(1)(b)(ii) were
nil,
exceeds
(III) the total of all amounts each of which is a portion of an
amount (other than a portion that results in a reduction of the amount
otherwise determined under subclause (I)) that applies to those sources and
that would be deducted under subsection 66.7(2) in computing the taxpayer's
income for the year if the maximum amounts deductible for the year under that
subsection were deducted,
(B) the maximum amount that would be deductible under subsection
66.21(4) in respect of those sources in computing the taxpayer's income for the
year if
(I) the amount deducted under subsection 66(4) in respect of those
sources in computing the taxpayer's income for the year were the amount
determined under clause (A),
(II) the amounts deducted under subsections 66.7(2) and (2.3) in
respect of those sources in computing the taxpayer's income for the year were
the maximum amounts deductible under those subsections,
(III) for the purposes of the definition “cumulative foreign
resource expense” in subsection 66.21(1), the total of the amounts designated
under subparagraph 59(1)(b)(ii) for the year in respect of dispositions by the
taxpayer of foreign resource properties in respect of the country in the year
were the maximum total that could be so designated without any reduction in the
maximum amount that would be determined under clause (A) in respect of the
taxpayer for the year in respect of the country if no assumption had been made
under subclause (A)(II) in respect of designations made under subparagraph
59(1)(b)(ii), and
(IV) the amount determined under paragraph 66.21(4)(b) were nil, and
(C) the total of all amounts each of which is the maximum amount,
applicable to one of those sources, that is deductible under subsection 66.7(2)
or (2.3) in computing the taxpayer's income for the year.
[33]
In this case none of
the adjustments as provided in subsection 126(9) of the Act are applicable
and therefore the qualifying incomes of the Appellant will be its income from
the sources in the United States which is its income as a limited partner in Crown Point. In this
particular case since the Appellant’s only source of income was its share of
the income of Crown Point and since none of the adjustments contemplated by
paragraph 126(2.1)(a) of the Act are applicable, the amount
determined under paragraph 126(2)(b) of the Act will be the same
whether the Appellant’s income was $9,377,496 or approximately $6 million as
the same amount would be used for both the numerator (subparagraph 126(2.1)(a)(i)
of the Act) and the denominator (subparagraph 126(2.1)(a)(ii) of
the Act). However, since one of the limiting amounts in subsection
126(2) of the Act is based on the income of the Appellant (or any other
taxpayer) there is a direct link between the foreign tax credit that may be
claimed and the amount of foreign sourced business income.
[34]
Section 96 of the Act
provides that a partnership (which would include a limited partnership)
determines its income as if it were a separate person and allocates to each partner,
that partner’s share of such income. Income tax is not imposed at the partnership
level but rather at the partner level. Subsection 96(1) of the Act
provides, in part, as follows:
96. (1) Where a taxpayer is a member of a partnership, the
taxpayer's income, non-capital loss, net capital loss, restricted farm loss and
farm loss, if any, for a taxation year, or the taxpayer's taxable income earned
in Canada for a taxation year, as the case may be, shall be computed as if
(a) the partnership were a separate person resident in Canada;
(b) the taxation year of the partnership were its fiscal period;
(c) each partnership activity (including the ownership of property)
were carried on by the partnership as a separate person, and a computation were
made of the amount of
(i) each taxable capital gain and allowable capital loss of the
partnership from the disposition of property, and
(ii) each income and loss of the partnership from each other source
or from sources in a particular place,
for each taxation year of the partnership;
…
(f) the amount of the income of the partnership for a taxation year
from any source or from sources in a particular place were the income of the
taxpayer from that source or from sources in that particular place, as the case
may be, for the taxation year of the taxpayer in which the partnership's
taxation year ends, to the extent of the taxpayer's share thereof; and
…
[35]
There was no suggestion
in this case that Crown Point was not a partnership for the purposes of
the Act. The Appellant, in determining its income for the year from the
partnership, was required to compute the income of Crown Point as if Crown Point were a separate person resident in Canada. Therefore its income was to be determined in
accordance with the Act, not in accordance with any rules that may be
applicable in determining income for the purposes of the Internal Revenue
Code. In this case, under the governing legislation of Delaware, Crown
Point was a separate legal
entity. Therefore Crown Point was already a separate person. However it
seems to me that the Appellant’s share of the income of Crown Point is still to
be determined in accordance with the provisions of section 96 of the Act
even though Crown Point is a separate legal entity under Delaware law. There is no distinction in section 96 of the Act
between general partnerships and limited partnerships nor is there any
distinction between limited partnerships which, under the laws under which the
limited partnership were formed, are separate legal entities and those that are
not separate legal entities.
[36]
In The Queen v. Robinson,
[1998] 2 F.C. 569, Justice Stone, writing
on behalf of the Federal Court of Appeal, stated that:
13 That
the income of a partnership receives particular treatment under various
provisions of the Income Tax Act is a point well made by L. R. Hepburn,
Limited Partnerships (Scarborough, Carswell, 1992), at page 5-3:
The basic principles for the taxation of income,
transactions between the partners and the partnership, and transactions
involving partnership interests apply equally to both general and limited
partnerships and their partners. The fact that the liability of certain
partners may be limited does not alter the manner in which partnership income
is taxed . . . .
Although a partnership itself is not a taxpaying
entity, the income (or loss) from the partnership activities is determined at
the partnership level as if it were a separate person. Such income (or loss), whether
or not actually distributed, is taxed on an annual basis in the hands of the
members of the partnership according to their share. Income from the partnership
generally retains its characteristics as to source and nature in the hands of
the partners.
[37]
Therefore the
Appellant’s share of the income of Crown Point does not
depend on whether the partnership is a general partnership or a limited partnership.
It also seems to me that it should not depend on whether or not the limited
partnership is a person under the domestic laws under which the partnership is
formed. The Appellant is required to include in its income for the purposes of
the Act (which would include for the purposes of subsection 126(2) of
the Act) its share of the income of Crown Point even though Crown Point is a separate legal entity under the laws of Delaware. The status of Crown Point as a separate legal entity
under the laws of Delaware does not affect the treatment of Crown Point as a limited partnership for the purposes of the Act
and therefore does not affect the determination of the amount or the source of
income to be reported by the Appellant. Since the income of the Appellant is
its share of the income of Crown Point (from the same sources of income), in
determining whether the Appellant paid foreign taxes in relation to this
income, the amount of foreign taxes paid by the Appellant should be its share
of the foreign taxes paid by Crown Point in relation to that same income, even
though Crown Point is a separate legal entity under the laws of Delaware. The
Appellant would bear the economic burden of such taxes as such taxes would have
to be deducted from the amount that could be distributed to the Appellant.
[38]
It seems to me that, in
this case, if the Appellant’s share of the income of Crown Point for the
purposes of the Act was $9,377,496 (as alleged by the Appellant) then
the Appellant would have paid $3,277,617 in taxes to the U.S. government for the purpose of the Act. If the
Appellant’s share of the income of Crown Point was approximately $6 million (which was the amount that the Appellant
received), as alleged by the
Respondent, then it seems to me that the Appellant would not have paid
$3,277,617 in taxes to the U.S. government for the purpose of the Act.
[39]
The Respondent’s
position, as stated in the written argument submitted by counsel for the
Respondent is that:
… the Appellant was not entitled to a 25% share of the profits
realized by Crown Point L.P. It was entitled to a fixed return of no
more than 4.7303% per annum on the amount it advanced to Altier.
[40]
The tax consequences to
the Appellant are to be determined in accordance with the provisions of the Act,
not in accordance with the provisions of the Internal Revenue Code and U.S. tax law. While for U.S.
tax law purposes the transactions were recharacterized as a loan from the
Appellant to Altier, for the purposes of the Act, the tax consequences
to the Appellant are to be determined on the basis that the Appellant was a
limited partner of Crown Point. During the opening statement at the
commencement of the hearing Mr. Bourgeois (counsel for the Respondent)
stated that:
… The Minister assessed on the basis that that was of the correct
view, that the appellant's entitlement to profits was 25 percent of the pre‑tax
profits of Crown Point LP. We've pled an alternative fact. We've stated that
that is not a proper interpretation of the partnership agreement because the
only way the Appellant can share in the profits of Crown Point LP is through
the distributions that are spelled out very clearly in the partnership
agreement that say regardless of how many profits, regardless of whether or not
the U.S. tax rate falls down to 10 percent, the only money that you can make,
the only return that you can make as a limited partner is 4.7303 percent of the
amount that you invested, which is $400 million. We're not re‑characterizing
the transaction as a loan. It is partnership agreement we're
interpreting.
(emphasis added)
[41]
The reference in the
Respondent’s written argument to a fixed return “on the amount it advanced
to Altier” suggests that the Respondent is attempting to recharacterize the
transaction as a loan. The word “advanced” and referring to “Altier” certainly
suggest this. Interpreting the partnership agreement would require language
such as a fixed return on its investment in Crown Point not on the amount it advanced to Altier (a different
person). It is not appropriate for counsel for the Respondent to clearly state
at the commencement of a hearing that the Respondent is not recharacterizing
the transaction as a loan but use language in its written arguments submitted
at the conclusion of the hearing that suggest that it is attempting to
recharacterize the transaction. The fact that this language may have been the
language used in the Reply does not justify repeating it in the closing
argument following a very clear statement at the commencement of the hearing
that the Respondent was not recharacterizing the transaction.
[42]
In any event, Justice
McLachlin (as she then was) in Shell Canada Ltd. v. The Queen, [1999] 3 S.C.R. 622, writing on behalf of the Supreme Court of Canada, stated that:
39 This
Court has repeatedly held that courts must be sensitive to the economic
realities of a particular transaction, rather than being bound to what first
appears to be its legal form: Bronfman Trust, supra, at pp. 52-53, per
Dickson C.J.; Tennant, supra, at para. 26, per Iacobucci J. But there
are at least two caveats to this rule. First, this Court has never held that
the economic realities of a situation can be used to recharacterize a
taxpayer's bona fide legal relationships. To the contrary, we have held that,
absent a specific provision of the Act to the contrary or a finding that they
are a sham, the taxpayer's legal relationships must be respected in tax cases.
Recharacterization is only permissible if the label attached by the taxpayer to
the particular transaction does not properly reflect its actual legal effect: Continental
Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298, at para. 21, per
Bastarache J.
40 Second,
it is well established in this Court's tax jurisprudence that a searching
inquiry for either the "economic realities" of a particular
transaction or the general object and spirit of the provision at issue can
never supplant a court's duty to apply an unambiguous provision of the Act to a
taxpayer's transaction. Where the provision at issue is clear and unambiguous,
its terms must simply be applied: Continental Bank, supra, at para. 51,
per Bastarache J.; Tennant, supra, at para. 16, per Iacobucci J.; Canada
v. Antosko, [1994] 2 S.C.R. 312, at pp. 326‑-27 and 330, per
Iacobucci J.; Friesen v. Canada, [1995] 3 S.C.R. 103, at para. 11, per
Major J.; Alberta (Treasury Branches) v. M.N.R., [1996] 1 S.C.R.
963, at para. 15, per Cory J.
…
45 However,
this Court has made it clear in more recent decisions that, absent a specific
provision to the contrary, it is not the courts' role to prevent taxpayers from
relying on the sophisticated structure of their transactions, arranged in such
a way that the particular provisions of the Act are met, on the basis that it
would be inequitable to those taxpayers who have not chosen to structure their
transactions that way. This issue was specifically addressed by this Court in Duha
Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795, at
para. 88, per Iacobucci J. See also Neuman v. M.N.R., [1998] 1 S.C.R.
770, at para. 63, per Iacobucci J. The courts' role is to interpret and apply
the Act as it was adopted by Parliament. Obiter statements in earlier cases
that might be said to support a broader and less certain interpretive principle
have therefore been overtaken by our developing tax jurisprudence. Unless the
Act provides otherwise, a taxpayer is entitled to be taxed based on what it
actually did, not based on what it could have done, and certainly not based on
what a less sophisticated taxpayer might have done.
46 Inquiring
into the “economic realities” of a particular situation, instead of simply
applying clear and unambiguous provisions of the Act to the taxpayer's legal
transactions, has an unfortunate practical effect. This approach wrongly
invites a rule that where there are two ways to structure a transaction with
the same economic effect, the court must have regard only to the one without
tax advantages. With respect, this approach fails to give appropriate weight to
the jurisprudence of this Court providing that, in the absence of a specific
statutory bar to the contrary, taxpayers are entitled to structure their
affairs in a manner that reduces the tax payable: Stubart, supra, at p.
540, per Wilson J., and at p. 557, per Estey J.; Hickman Motors Ltd. v.
Canada, [1997] 2 S.C.R. 336, at para. 8, per McLachlin J.; Duha, supra,
at para. 88, per Iacobucci J.; Neuman, supra, at para. 63, per Iacobucci
J. An unrestricted application of an "economic effects" approach
does indirectly what this Court has consistently held Parliament did not intend
the Act to do directly.
[43]
There was no suggestion
that the limited partnership was a sham or that it did not reflect the legal
relationship of the Appellant to other partners of the limited partnership and
therefore the limited partnership is to be respected for the purposes of the Act.
Rephrasing the position of the Respondent to reflect the limited partnership
relationship would result in the position of the Respondent being restated to
read as follows:
the Appellant was entitled to a fixed
return of no more than 4.7303% per annum of its investment in the limited
partnership or 4.7303% of $400 million.
Since it acquired its limited partnership units on
September 5, 2003, for the year ending December 31, 2003, this would yield
4.7303% of $400 million x 118 days / 365 days = $6,116,991. There seems little doubt that the
Appellant’s entitlement to receive cash from Crown Point was fixed, however,
section 96 of the Act requires a determination of the Appellant’s share
of the profit of Crown Point, not a determination of the Appellant’s
share of the cash that it is entitled to receive.
[44]
The Appellant, for the
purposes of the Act, would include in its income, its share of the income
of Crown Point, not the amount distributed to the
Appellant. Section 5.1 of the Crown Point Investments LP Amended and Restated
Agreement of Limited Partnership provides as follows:
Section 5.1 Units
(a) Ownership rights in USLP are reflected in units
(each, a “Unit”), as recorded in the Register. Each Unit, subject to Section
6.4 and to the obligation of Gaskell under Section 5.3(b) and Section
9.6 to pay or reimburse certain Partnership expenses, has equal rights with
every other Unit with respect to sharing of Net Profit and Net Loss and with
respect to distributions (including pro rata sharing, based on Contributed
Capital, of Net Profit and Net Loss) except as provided in Section 6
with respect to distributions and except that, until and unless a Special Permitted
Investment is made:
(i) each Limited Partner’s share of Net Profit
for a particular Fiscal Year is an amount equal to the lesser of: (x) such Partner’s
pro rata share (according to its Contributed Capital) of Net Profit
(computed without reference to the Additional Net Profit) and (y) the result
obtained when:
1. the total of the cash distributed to such Limited
Partner during such Fiscal Year (or received within fifteen (15) days after the
end of such Fiscal Year but being on account of such Fiscal Year) pursuant to Section
6.1 or Section 6.2(d),
is divided by:
2. an amount arrived at by subtracting the Applicable
Tax Rate (stated as a decimal amount) from one (1),
(it being acknowledged that, subject to any variation
arising from the difference between Adjusted Fiscal Periods and Fiscal Periods,
such Fiscal Year cash distributions represent such Limited Partner’s share of
the Net Profit of USLP calculated above, net of the U.S. federal income tax
attributable thereto up to a maximum rate of 35%); and
(ii) Gaskell’s share of the Net Profit for a particular Fiscal
Year is the excess of Net Profit for such Fiscal Year over the aggregate of the
Limited Partners’ shares of the Net Profit determined pursuant to clause (i)
above.
Before any Special Permitted Investment is made, this Agreement
shall be amended, with the consent of all the Partners, to reflect the formula
to be used to calculate each Partner’s share of the Net Profit with respect to
such Special Permitted Investment.
(b) Any profit, income, expense or loss arising
from marking the Coupon Swap to market shall for financial accounting purposes be
allocated to Gaskell.
(c) The Units of USLP will be represented by
certificates in the form set forth in Exhibit E (including the legend on
the certificates set out thereon).
[45]
The following was added
to paragraph 5.1(a) by Amendment No. 1 dated as of September 5, 2003:
Whenever a Limited Partner (such as InvestCo) is subject to Canadian
federal income tax (a “Canadian Partner”), in addition to the allocation
of Net Profit set forth in this Section 5.1(a) and notwithstanding
anything else contained in this Agreement, each Partner’s share of the income
or loss (determined for the purposes of the Income Tax Act
(Canada)) of USLP will equal the amount determined in accordance with this Section
5.1(a), computed as if the references in this section to Net Profit and Net
Loss were read as references to income or loss, respectively, of USLP for
purposes of the Income Tax Act (Canada) (except that any income, expense
or loss arising from marking the Coupon Swap and Volatility Swap to market
shall be allocated to Gaskell for Canadian tax purposes). Notwithstanding the
foregoing, Gaskell shall not be required, on behalf of USLP or any Canadian
Partner to compute the taxable income or taxable capital of USLP for Canadian
federal or provincial income or capital tax purposes.
[46]
This amendment confirms
that the Appellant’s share of the income of Crown Point (determined for the purposes of the Act) is its share (computed
under paragraph 5.1(a) of the agreement) of the income of Crown Point as determined for the purposes of the Act.
[47]
Using the amounts
determined or estimated above and using 35% as the Applicable Tax Rate, the following would be amounts determined
for x and y for the Appellant:
x = 24.7678% x $37,861,642 = $9,377,496
y = $6,099,879
/ (1 – 0.35) = $9,384,429
[48]
Since the exact amount
that was distributed to the Appellant is not clear, the amount for y could vary
slightly if the Appellant actually received more or less than $6,099,879.
However it seems to me that the provisions of section 5.1 (as amended) are
clear and unambiguous and that the application of this provision results in the
Appellant’s share of net profit for the purposes of the Act
being $9,377,496 which was the amount that it reported on its tax return.
[49]
The Respondent placed
significant emphasis on the fact that the amount that the Appellant was
entitled to receive from Crown
Point was only $6 million.
However for the purposes of section 96 of the Act the issue is what was
the Appellant’s share of the income of the partnership (which as a result of
the provisions of section 9 of the Act would mean its share of the
profit of Crown Point) not what amount was distributed to the
Appellant. The fact that the amount distributed to the Appellant (and the
amount to which the Appellant had a right to receive) was less than its share
of the profit is a reflection of the fact that Crown Point had a liability to
pay taxes to the U.S. government on its income as a result of filing the
election to be classified as a corporation. The cash required to pay this
liability would simply not be available for distribution.
[50]
John P. Steines, Jr.,
an expert called by the Respondent, stated in his report as follows:
6.5 Crown Point’s election to be treated as a
corporation for U.S. tax
purposes applied for all U.S.
tax purposes.
U.S. tax law employs a
classical corporate tax system, which treats corporations and shareholders as
separate taxpayers and taxes each independently on corporate income, the
corporation when the income is earned and shareholders when the income is
distributed as a dividend.
Section 11(a) of the Internal Revenue Code imposed tax on Crown Point
by providing that “A tax is hereby imposed for each taxable year on the taxable
income of every corporation.”
(emphasis added)
[51]
Therefore it is clear
that Crown Point had a liability to pay taxes to the U.S.
government as a result of filing the election to be classified as a
corporation. The fact that Crown
Point would not have had this
liability if it would not have filed this election is irrelevant. The tax
consequences under the Act (which are the tax consequences that are the
subject of this Appeal) are to be determined based on what the parties actually
did, not on what they might or could have done.
[52]
In The Queen v. Bronfman
Trust, [1987] 1 S.C.R. 32, 36 D.L.R.
(4th) 197 then Chief Justice
Dickson writing on behalf of the Supreme Court of Canada, stated as follows:
41 Before
concluding, I wish to address one final argument raised by counsel for the
Trust. It was submitted -- and the Crown generously conceded -- that the Trust
would have obtained an interest deduction if it had sold assets to make the
capital allocation and borrowed to replace them. Accordingly, it is argued, the
Trust ought not to be precluded from an interest deduction merely because it
achieved the same effect without the formalities of a sale, and repurchase of
assets. It would be a sufficient answer to this submission to point to the
principle that the courts must deal with what the taxpayer actually did,
and not what he might have done: Matheson v. The Queen,
74 D.T.C. 6176 (F.C.T.D.), per Mahoney J. at p. 6179.
(emphasis added)
[53]
In Shell Canada Ltd.,
above, Justice McLachlin (as she then was) writing on behalf of the Supreme
Court of Canada, stated that:
45 …
Unless the Act provides otherwise, a taxpayer is entitled to be taxed based on
what it actually did, not based on what it could have done, and certainly not
based on what a less sophisticated taxpayer might have done.
[54]
Therefore the Appellant
is to be taxed under the Act based on what actually occurred, not on
what would have occurred if the election to classify Crown Point as a corporation had not been filed. Equally whether the Bank of
America group (of which the Appellant was not a part) would have been in the
same position with respect to the liability of this group for taxes to the U.S.
government whether Crown Point would have filed the election to be classified
as a corporation for U.S. tax purposes or not is irrelevant in determining the
tax consequences to the Appellant under the Act.
[55]
As well, whether the
Appellant (assuming that Altier would agree) would have received the same
amount of cash if it had lent $400,000,000 to Altier at an interest rate of
4.7303% is irrelevant. This is not the transaction that the Appellant entered
into. The Appellant did not lend money to Altier. The Appellant acquired units
in the limited partnership, Crown
Point. The tax consequences
to the Appellant are to be determined based on this transaction, not on what
they would have been if the Appellant would have lent money to Altier.
[56]
In this case Crown Point did file the election to be classified as a
corporation foe U.S. tax purposes and therefore did incur a liability for U.S. taxes in the amount of $13,233,379 (US $10,055,677).
It seems to me that the amount distributed to the Appellant simply reflects a reduction
in the amount that would be available for distribution as a result of the U.S. taxes paid by Crown Point. The amount available for distribution would be as follows:
|
Income of Crown Point before
taxes:
|
$37,861,642
|
|
Taxes Paid to the U.S. government by Crown Point:
|
$13,233,379
|
|
Amount available for distribution to partners:
|
$24,628,263
|
[57]
It seems to me that
since Crown Point had the liability to pay the U.S. taxes in
the amount of $13,233,379 that Crown
Point would only have had
$24,628,263 available to distribute to its partners. It would not have had
$37,861,642 available to distribute to its partners. The fact that Altier may
have been able to reduce its tax liability to the U.S.
government by claiming an interest deduction in relation to the payments made
to the Appellant does not provide Crown Point with any additional cash as Crown Point is a different person. Altier is not the Appellant
and neither Crown Point nor the Appellant have any interest in
Altier. Altier is the other limited partner of Crown Point.
[58]
Therefore the fact that
the Appellant was only entitled to receive 24.7678% of $24,628,263 (or
$6,099,879) is simply a reflection of the fact that Crown Point only had $24,628,263 to distribute to its partners.
[59]
During closing argument
counsel for the Respondent simply stated that the taxes paid by Crown Point to the U.S. government would be deductible by Crown Point in determining its income for the purposes of the Act
without citing any authority for this statement. Counsel for the Respondent did
not raise the deductibility of the taxes paid to the U.S.
government in determining the profit of Crown Point until I had asked Counsel
what the Respondent’s position was in relation to the amount of profit of Crown Point (which would be the profit to be shared as prescribed
by section 96 of the Act). In relation to the discussion of the amount
of profit, counsel stated that he did not agree that the profit was the amount
determined before the taxes paid to the U.S.
government were taken into account but rather that the profit was to be
determined by deducting the amount paid to the U.S. government by Crown Point for income taxes.
[60]
Subsection 18(1)(a) of
the Act provides that:
18. (1) In computing the income of a taxpayer from a business
or property no deduction shall be made in respect of
(a) an outlay or expense except to the extent that it was made or
incurred by the taxpayer for the purpose of gaining or producing income from
the business or property;
[61]
It seems to me that
income taxes paid to the U.S. government as a result of earning income would
not be made or incurred for the purpose of gaining or producing
income but would be incurred as a result of gaining or producing income.
[62]
In Inland Revenue
Commissioners v. Dowdall, O’Mahoney & Co. Ld., [1952] A.C. 401
(H.L.), Lord Oaksey stated that:
On the first question I am of opinion that taxes such as those now
in question, namely, income tax, corporation profits tax and excess profits
tax, are not according to the authorities wholly and exclusively laid out for
the purposes of the company’s trade in the United
Kingdom. Taxes such as these are not paid for the
purpose of earning the profits of the trade: they are the application of those
profits when made and not the less so that they are exacted by a dominion or a
foreign government. No clear distinction in point of principle was suggested to
your Lordships between such taxes imposed by the United
Kingdom government and those imposed by dominion or
foreign governments.
[63]
Robert Couzin in his
paper “The Foreign Tax Credit” presented at the 1976 Canadian Tax Foundation’s
annual conference, stated as follows:
There is an important exception to this rule. Once profit or income
has been ascertained, the destination of that profit or the charge which has
been made on it by previous agreement or otherwise is immaterial. An
application or appropriation of profits is not deductible in computing profit. On
this basis, the courts have repeatedly held that taxes which are an application
of income are not expenses properly deductible in computing income, be those
taxes provincial or foreign.* The foreign tax credit was conceived to allow as
a deduction from Canadian tax precisely those foreign taxes the deductibility
of which from income is denied by the cases.
* denotes a footnote reference that was in the original text but
which has not been included. The footnote includes references to various cases.
[64]
Therefore, if the
foreign income taxes paid to the government of the United States were to be deductible in determining the profit of Crown Point for the purposes of the Act a specific
provision to permit the deduction of such taxes would have to be found in the Act.
[65]
The Respondent referred
to the definitions of “business income tax” and “non-business income tax” in
its written argument. These expressions are defined in subsection 126(7) of the
Act which provides that:
(7) In this section,
“business-income tax” paid by a taxpayer for a taxation year in
respect of businesses carried on by the taxpayer in a country other than Canada
(in this definition referred to as the “business country”) 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 a country other than Canada that
can reasonably be regarded as tax in respect of the income of the taxpayer from
a business carried on by the taxpayer in the business country, but does not
include a tax, or the portion of a tax, that can reasonably be regarded as
relating to an amount that
(a) any other person or partnership has received or is
entitled to receive from that government, or
(b) was deductible under subparagraph 110(1)(f)(i) in
computing the taxpayer's taxable income for the year;
…
“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
(a) was not included in computing the taxpayer's
business-income tax for the year in respect of any business carried on by the
taxpayer in any country other than Canada,
(b) was not deductible by virtue of subsection 20(11) in
computing the taxpayer's income for the year, and
(c) was not deducted by virtue of subsection 20(12) in
computing the taxpayer's income for the year,
but does not include a tax, or the portion of a tax,
(c.1) that is in respect of an amount deducted because of
subsection 104(22.3) in computing the taxpayer's business-income tax,
(d) that would not have been payable had the taxpayer not
been a citizen of that country and that cannot reasonably be regarded as
attributable to income from a source outside Canada,
(e) that may reasonably be regarded as relating to an amount
that any other person or partnership has received or is entitled to receive
from that government,
(f) that, where the taxpayer deducted an amount under
subsection 122.3(1) from the taxpayer's tax otherwise payable under this Part
for the year, may reasonably be regarded as attributable to the taxpayer's
income from employment to the extent of the lesser of the amounts determined in
respect thereof under paragraphs 122.3(1)(c) and (d) for the
year,
(g) that can reasonably be attributed to a taxable capital
gain or a portion thereof in respect of which the taxpayer or a spouse or
common-law partner of the taxpayer has claimed a deduction under section 110.6,
(h) that may reasonably be regarded as attributable to any
amount received or receivable by the taxpayer in respect of a loan for the
period in the year during which it was an eligible loan (within the meaning
assigned by subsection 33.1(1)), or
(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;
[66]
It seems clear that the
taxes that were paid to the U.S. government were paid in respect of the income
of the business carried on by Crown
Point. It is the position of
the Respondent that these taxes were paid by Crown Point. The taxes paid would clearly be
“business-income taxes” and, as a result of the provisions of paragraph (a)
of the definition of “non-business-income tax” would not be “non‑business-income
tax”. There is no discretion for a taxpayer to decide to include the amount in
one definition or the other as would be the case if the definition of
“business-income tax” were to provide that it was such portion of the tax
otherwise described therein that the taxpayer elected to include in determining
“business-income tax”.
[67]
That the tax paid would
be “business-income tax” is relevant because the deduction available pursuant
to subsection 20(12) of the Act is only for “non-business income tax”. If
a tax is a “business-income tax” the taxpayer is entitled to a tax credit
(under section 126) not a deduction in computing income. Since Crown Point is a partnership for the purposes of the Act,
it is not taxable under the Act in relation to its business income and
therefore cannot claim the tax credit. If the Appellant cannot claim the
credit, then no one will be able to claim the tax credit under the Act.
[68]
As a result it seems
clear to me that the taxes paid by Crown Point to the U.S.
government would not be deductible in determining the profit of Crown Point. Therefore if the Appellant’s share of the profit,
for the purposes of the Act, was approximately $6 million (as stated by
the Respondent), then the remaining profit ($38 million - $6 million = $32
million) would have to be allocated to the other partners. The Respondent did
not provide any submissions on how the remaining profit would be allocated.
Assuming that Altier (which held three times as many units as the Appellant),
would be allocated three times the amount of profit as the Appellant, this
would mean that the profit of $38 million would be allocated among the partners
as follows:
|
Partners
|
Contributed Capital
|
Percentage of Contributed Capital
|
Income
(Millions)
|
Percentage of Income
|
|
Appellant
|
$400,000,000
|
24.7678%
|
$6
|
15.789%
|
|
Altier
|
$1,200,000,000
|
74.3034%
|
$18
|
47.368%
|
|
Gaskell (General Partner)
|
$15,000,000
|
0.92829%
|
$14
|
36.842%
|
|
Total:
|
$1,615,000,000
|
100.00%
|
$38
|
100.00%
|
[69]
The percentage of
income would be significantly different from the percentage of contributed
capital. Crown Point earned its income as a result of the
deployment of its capital. This is not a partnership that earned its income as
a result of services provided or goods sold. Its only source of income was
income earned in relation to its capital that was loaned or invested. A
reasonable allocation of income would therefore reflect the amounts of contributed
capital attributable to its partners. Clearly this allocation of income for
this partnership is not a reasonable allocation of income. The position of the
Respondent that the Appellant’s share of the profit of Crown Point was approximately $6 million is untenable.
[70]
Since it seems clear to
me that the Appellant’s share of the profit of Crown Point was $9,377,496, this is the amount that the Appellant would be
required to include in its income for the purposes of the Act. It also
seems to me that the Appellant should be considered to have paid the taxes to
the U.S. government that were paid in relation to
this amount. No other person would be reporting this income for the purposes of
the Act. Crown Point, as a partnership, is not taxable in Canada on this income – its Canadian resident partners are
taxable under the Act. If the Appellant is not treated as having paid
these taxes to the U.S. government, then the Appellant would be taxable in Canada on income of $9,377,496, which is the same income
that would already have been taxed in the U.S.
As a member of the partnership, the source of income of the Appellant is the
same source of income as that of the partnership, Crown Point. The income of Crown Point (which was essentially the income related
to the Mecklenburg loan) is, as a result of the provisions of
paragraph 96(1)(f) of the Act, income of the Appellant from the
same source to the extent of the Appellant’s share thereof. This would result
in double taxation of the same income if the Appellant is not entitled to claim
a foreign tax credit for taxes paid by Crown Point in relation to this income. It seems to me that the purpose of section
126 is to avoid double taxation of the same income and therefore to fulfill
this purpose, the Appellant should be treated as having paid the taxes to the U.S.
government that were paid in relation to its income.
[71]
That a partner of a
partnership should be entitled to claim its share of the foreign taxes paid by
such partnership is consistent with the position on this matter as stated by
Revenue Canada (now the Canada Revenue Agency) in its Interpretation Bulletin
IT-183 dated October 28, 1974 (which was replaced after the taxation year in
issue by Interpretation Bulletin IT-270R3 dated November 25, 2004).
Interpretation Bulletin IT-183 – Foreign Tax Credit – Member of a Partnership
stated as follows:
For the purposes of section 126 of the Act each member (individual,
corporation or trust) of a partnership includes in his or her incomes from businesses
carried on by him or her in a foreign country and from other sources in that
country his or her share of the partnership's income from those sources in that
country. Also, each member's business-income tax and non-business-income tax in
respect of a foreign country is considered to include his or her share thereof
paid by the partnership.
[72]
This is also reflected
in the Interpretation Bulletin IT-270R3 – Foreign Tax Credit, which replaced IT-183.
In paragraph 2 of IT-270R3, in describing the limitation based on the foreign
taxes paid, it is stated that:
…
The first amount, FTP(BIT), means (in this bulletin) the foreign
tax paid-but restricted to business-income tax. More specifically, FTP(BIT)
is such part as the taxpayer may claim of the total “business-income tax” (as
defined in subsection 126(7)) paid by the taxpayer for the year in respect of
businesses carried on by the taxpayer in the foreign business country (including
the taxpayer's share, if any, of any such tax paid by a partnership), …
(emphasis added)
[73]
As a result the
Appellant is entitled to a foreign tax credit pursuant to subsection 126(2) of
the Act in the amount of $3,199,601. Since I have determined that the
Appellant is entitled to claim this credit pursuant to subsection 126(2) of the
Act, and since the arguments related to the Canada – United States
Tax Convention were raised as alternative arguments if the Appellant was
not entitled to the foreign tax credit pursuant to subsection 126(2) of the Act
it is not necessary to consider the arguments related to the Convention
and these will not be addressed.
[74]
Since, in my opinion,
it is not necessary to review the discovery evidence that the Respondent was
seeking to introduce in order to determine whether the Appellant should be
considered to have paid $3,277,617 in
foreign taxes, the Appellant’s
motion to exclude the portions of the discovery read-ins identified by the
Appellant is granted as such portions are not relevant.
[75]
There is a proposed
amendment to section 126 that could affect whether the Appellant may be
entitled to a foreign tax credit in this situation for taxation years ending
after March 4, 2010. In the Technical Notes of September 2010, it is stated
that:
New subsections 126(4.11) to (4.13) and the amendments to the definitions
“business-income tax” and “non-business-income tax” in subsection 126(7) apply
to income or profits tax paid for taxation years of a taxpayer that end after
March 4, 2010. However, there are transitional rules for taxation years that
end on or before August 27, 2010.
[76]
These proposed
amendments do not apply to this appeal.
[77]
During the hearing the
parties called the following expert witnesses:
For the Appellant:
Walter C. Tuthill (a lawyer practicing in Delaware)
Daniel S. Kleinberger (a law professor
teaching at William Mitchell College of Law in St. Paul Minnesota)
H. David Rosenbloom (a lawyer and a
professor teaching at New York University School of Law)
For the Respondent
John H. Small (a lawyer
practicing in Delaware)
John P. Steines, Jr. (a lawyer and a
professor teaching at New York University School of Law)
[78]
Various questions
pertaining to the laws of Delaware and the interpretation of the limited
partnership agreement under the laws of Delaware were posed to the expert witnesses. However in this appeal, the issue
was the interpretation of the word “paid” for the purposes of subsection 126(2)
of the Act with respect to a limited partnership and its Canadian
limited partner. This is not a question of Delaware law but is a question of Canadian law. The testimony of the expert
witnesses was of little assistance in determining the issue that was to be
decided in this appeal.
[79]
As a result, the appeal
is allowed, with costs, and the assessment is referred back to the Minister for
reconsideration and reassessment on the basis that the Appellant is entitled,
in determining its tax payable for 2003 under the Act, to a foreign tax
credit in the amount of $3,199,601 pursuant to subsection 126(2) of the Act.
Signed at Ottawa, Canada, this 21st day of April, 2011.
“Wyman W. Webb”
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