CIBC v. The Queen, 95 DTC 5367, [1995] 2 CTC 51 (FCTD)

Simpson J.:-On December 16, 1982, Revenue Canada assessed the Canadian Imperial Bank of Commerce (the ”CIBC”) in the amount of $243,440.69 pursuant to section 153 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the ’’Act”). The assessment related to source deductions which were payable in October 1982 in respect of wages which had been paid to the employees of Drew Sawmills Ltd. in September 1982. This is the CIBC’s appeal from that assessment.

Background

Drew Sawmills Ltd. (the ’’company") was a private British Columbia company. Its principal shareholders were Edgar Drew and Rae Fujikawa. Mr. Drew was the president and a director and, by mid- 1981, he was also the general manager. Mr. Fujikawa was the vice- president and the only other director. He also served as the general manager of the company’s forestry operations.

Mr. Drew started the business in 1951 with a small logging and sawmill operation on his father’s ranch. By 1981, the business had greatly expanded and was located at Malakwa near Revelstoke in the interior of B.C. There the company operated two sawmills and two planermills. In addition, the company held permits from the B.C. Government which entitled it to conduct logging operations. Those operations provided the logs which were cut and processed at the company’s mills.

The company’s capital and operating loans were provided by two different banks. In the 1970s, the company undertook significant capital investments. It built a specialty state-of-the-art cedar sawmill, it purchased and significantly upgraded a second sawmill and it built a new planermill. These projects were financed with capital loans provided by the Canadian Commercial Bank (the "CCB"). On the other hand, operations were financed by the CIBC. The company’s operating line of credit had grown from $1.5 million in 1978 to $6 million in July 1981. The CIBC secured this loan with a general assignment of accounts receivable, security on inventory under section 178 of the Bank Act and personal guarantees from the principal shareholders.

The late 1970s had been "boom" years in the forestry business. The company had been well managed by Messrs Drew and Fujikawa and, by the end of the decade, the company was very profitable.

The difficult period; December 1981 -September 1982

Unfortunately, the solid wood sector of the forestry industry entered a downturn in the early 19803. The year 1982 was the industry’s worst year since World War II. By then, the industry was in total disarray. Interest rates soared to 24 per cent, and housing starts dropped. Lumber prices also dropped and sales and inventory values declined. In November 1981, the company’s external accountants reported dramatic losses exceeding $3 million (the "unexpected losses"). This figure shocked the CIBC because the company’s forecasts in August 1981 had projected only a modest loss of $55,000. However, by November 1981, the company was losing $600,000 per month and it had become apparent that it required an increase in its operating loan. It had not paid its suppliers and trade creditors for some months and their arrears were in the order of $4 million.

As the company was a large and valued customer, the CIBC handled its account through its corporate banking office in Vancouver. The CIBC’s branch in Salmon Arm actually operated the company’s account but all decisions about its operation and any refinancings were made either in Vancouver or at the CIBC’s head office in Toronto. The evidence disclosed that, in December 1981, the CIBC was willing to continue to support the company. However, it was not prepared to risk a repetition of the "unexpected losses" and therefore insisted that a method be found to ensure that it would receive timely and accurate reports about the company’s financial position.

To this end, the CIBC wanted to place a representative at the company. Mr. Humphries, the company’s solicitor, suggested Mr. Garth Langford for the role. Mr. Drew and the CIBC agreed. Accordingly, Mr. Langford was approached by Mr. Humphries and, after considering the company’s position and preparing two initial reports, Mr. Langford agreed to serve as the CIBC’s monitor at the company. Mr. Langford signed a letter of appointment in February 1982.

Mr. Langford was highly qualified to serve as the CIBC’s monitor both because he was well acquainted with the company’s business and because he was held in high regard by Mr. Drew. Mr. Drew testified that Mr. Langford had an excellent reputation and that he was honest, credible and hardworking. In his early years in business, Mr. Langford had practiced as a chartered accountant. In 1971, he left public practice to join a client’s business. That business was Downie Street Sawmills which he joined as an officer, director and shareholder. By 1979, when the business was sold on favourable terms, he had become its president and was also the general manager responsible for all operations. Downie Street Sawmills was located in Revelstoke and, like the company, it held cutting permits and conducted sawmill operations. Although Mr. Langford and Mr. Drew were not social friends, they were well acquainted in the business context. Their companies were not competitors and they therefore exchanged financial and operating information. Mr. Langford testified that he had a high regard for the company and for the management skills of Messrs Drew and Fujikawa.

The issues

Broadly stated, the issues which will be dispositive of this matter are:

1. What role did Mr. Langford play at the company in his capacity as monitor for the CIBC?

2. Was Mr. Langford’s role such that he could be deemed to be a trustee under section 153 of the Income Tax Act?

Mr. Langford's role

The documentary evidence adduced at trial makes it clear that, after December 1981, the CIBC would not have increased the company’s operating loan without installing a monitor at the company. As well, further increases in the company’s operating loan in the period prior to the closing of the sawmills in September 1982 depended on Mr. Langford’s continued participation as monitor. In his letter to Mr. Drew of February 10, 1982, Mr. Brown, who was the regional manager of the CIBC’s corporate banking department in Vancouver, listed a series of 19 understandings which were the underpinning of the company’s continuing credit arrangements. They included:

(6) the monitor will provide the bank with weekly reports.

(18) it is understood that the bank’s support is subject to the participation of Garth Langford as the banks’s monitor.

The letter of February 10, 1982 also set out a list of matters which required immediate attention. They included as item (f) a requirement that “the management of the company in conjunction with the bank’s monitor will immediately undertake a full review of the company’s operations with a view to introducing all reasonable economies in its operations, which will involve the analysis of all controllable overhead expenses including reductions in wages, salary remunerations and personnel complement". The letter then concluded in these terms "it is expressly understood that the arrangement is subject to immediate cancellation and continuation is dependent entirely upon continued satisfactory advices from the monitor, G.L. Langford".

Mr. Langford’s letter of appointment as monitor was dated February 5, 1982. It was also written by Mr. Brown of the CIBC and it formally confirmed Mr. Langford’s engagement "...as the bank’s monitor relating to the financial matters and day to day operation of Drew Sawmills Ltd.". Among his other duties, Mr. Langford was required to immediately set in place a system to authorize payment of all funds and within ten days to Outline his progress concerning expansion of the sales organization. This letter also asked for weekly cash flow and inventory level reports and for lists of issued cheques. On a monthly basis, Mr. Langford was to provide lists of receivables, payables and inventory, a profit and loss statement and progress reports about the principals’ efforts to sell the company as a going concern. The letter mentioned that he might require signing authority as a joint signatory of cheques with Mr. Drew and indicated that the CIBC relied on him to put in place whatever controls he saw necessary. These letters, of February 5 and 10, 1982, indicate to me that Mr. Langford was to be involved in both decision making and reporting functions.

Because the size of the company’s operating loan was disproportionate to its net worth, approvals for credit increases were required from the CIBC’s head office in Toronto. Accordingly, a series of documents in the form of status memoranda and applications for increased credit (the "internal correspondence") flowed between the vice-president and regional general manager for the CIBC in B.C. ("Mr. Lewis") and the vice-chairman and president of the CIBC in Toronto. Mr. Brown, testified on behalf of the CIBC. He reported to Mr. Lewis in Vancouver. Mr. Brown reviewed and signed or initialled the internal correspondence which was prepared in Vancouver. I have concluded that, in the period from February 5, 1982 to August 1982, the CIBC in Vancouver employed language in the internal correspondence which could have led a reader at head office to believe that Mr. Langford alone was directing the overall operations of the company. For example, the internal correspondence stated:

-...controls which will be imposed through the close supervision of our Monitor and ourselves over the company *s operations. [1]

—We have given consideration to placing the company into receivership but there is no doubt in our mind at this juncture that the monitor has more expertise in the field than any receiver we might appoint and, as such, our present posture in this account still appears to be the most practical. [2]

—Improvement has been under Langford's direction.... [3]

—We seem at the point however where weekly continued improvement is difficult for the monitor to sustain.... [4]

-To date we have been satisfied with his direction and the attendant results. [5]

-In reviewing matters with Langford, he continues firm in his opinion, which would seem to be borne out by his successful management of the operation during this past six months.... [6]

—On the positive side, under Langford’s management, the company has operated through an extremely unsettled and difficult period when our position has shown improvement. [7]

[Emphasis added.]

It was also clear that the CCB believed that Mr. Langford was to manage the company’s cash assets. On February 4, 1982, the CCB wrote to Mr. Brown at the CIBC and agreed to accept a moratorium of principal and interest payable by the company to the CCB until June 30, 1982 on the basis that, among other things, "A monitor, namely Mr. Garth Langford, will be appointed and paid for the CIBC to manage the company’s cash assets and to advise and implement any efficiencies possible in the operations”.

Based on the documentary evidence, there is no doubt that the monitor was imposed on the company as a condition of continuing CIBC support and that, if the monitor had resigned or reported unfavourably, the CIBC would have considered cancelling the company’s credit facility. Revenue Canada takes the position that these documents accurately describe the role Mr. Langford played and that he therefore had significant and substantial control of the company’s overall operations. The CIBC on the other hand submitted that the oral testimony provided a more reliable description of Mr. Langford’s role.

The CIBC called Mr. Langford and Mr. Brown as witnesses. Mr. Drew and Mr. Jim Walker, who was the company’s comptroller after mid- June 1982, testified for Revenue Canada. Although there were some differences in emphasis, there was little disagreement between the witnesses about the role actually played by Mr. Langford as the CIBC’s monitor in the period from February 5, 1982 to September 22, 1982, when the company’s sawmills closed.

Based on all the evidence, I have concluded that the CIBC had the following objectives in appointing a monitor and that these were known to Mr. Langford, to Mr. Drew and to the other members of the company’s management. Firstly, the CIBC wanted timely reports on the company’s receivables, payables, inventory levels and profits and losses. Secondly, the CIBC wanted the monitor to ensure that trade creditors were only paid current amounts due and that the company did not bow to pressure from creditors to pay their arrears. Thirdly, the CIBC asked Mr. Langford to assist Messrs Drew and Fujikawa in their efforts to sell the company. Fourthly and finally, the CIBC expected the monitor to help the company increase its lumber sales and introduce efficiencies so that the CIBC’s credit facility could be operated within acceptable accounts receivable and inventory margins. I will deal with each of the monitor’s responsibilities in turn.

Reporting

Prior to his appointment, Mr. Langford prepared two reports in which he advised the CIBC, on the basis of his forecasts and budgets, that the best course of action was to keep the mills operating at full capacity. He suggested that the mills, with some additional financing, would be able to meet current operating expenses. Accordingly, the bank advanced additional sums in 1982. All the witnesses agreed that these advances were to be used to build log inventories so that there would be a sufficient inventory of logs to keep the mills operating at full capacity during the spring break-up period when logging was impossible. It was understood that, while suppliers could be kept current and their positions would not further deteriorate, the company had no money to pay arrears.

During his service as monitor in the period from February 5 to September 22, 1982, Mr. Langford provided the CIBC with 20 numbered reports which were addressed to the attention of Mr. Brown at the CIBC. In addition, a six-month report was prepared for the period to June 18, 1982 and was sent to the CIBC in early July 1982. As well, a final report was submitted dated December 3, 1982. These reports were reviewed by Mr. Drew before they were sent to the CIBC but a revision was only needed on one occasion.

The reports were written in narrative form and typically dealt with developments at the company under headings such as markets, cash flow, expense reductions, disbursements, sale of company and logging and mill operations. After a fire, which occurred in April 1982, the reports also mentioned the associated insurance claim. The reports averaged approximately three pages in length. However, report no. 9 in April 1982, was much longer than average because it contained eight recommendations about correcting customer dissatisfaction with the company’s lumber grading procedures. This problem had been identified during customer visits.

In his six-month report of July 1982, Mr. Langford stated "I have no reservations that this company is an economic unit, that its operations are well managed and that it has the earning capacity to restore financial stability if it can survive the present disastrous state of the economy”. [8] This view of the company’s management was shared by the CIBC. It is noteworthy that the CIBC had complete confidence in the abilities of Messrs Drew and Fujikawa to manage their sawmill and logging operations. The CIBC’s only concerns related to the reliability of the company’s financial forecasts and timely reporting.

Mr. Langford testified that he served as the CIBC’s "eyes and ears" at the company and that he attended weekly management meetings so that he could be fully informed. Indeed, management meetings were scheduled to suit his convenience. The reports indicate, and Mr. Drew agreed, that Mr. Langford took his responsibilities seriously and that he kept up to date on all facets of the company’s operations. He routinely spent three days each week at the company’s facilities at Malakwa.

Trade payables

As mentioned, it was understood by all the witnesses that a fundamental condition of the CIBC’s extension of additional credit in early 1982 was that the payment of arrears to trade creditors would be suspended. Mr. Langford was charged with ensuring that this condition was met. As part of his responsibility to ensure that creditors worked only on a current basis, Mr. Langford attended meetings with creditors to explain his role as monitor and the terms of the CIBC’s financing in the hope that the creditors would continue to deal with the company on a current basis.

Mr. Langford testified that, when he became monitor, the matter of paying only current accounts was discussed at a management meeting called by Mr. Drew and it was agreed that Mr. Drew would give prior approval to all payments. However, this system failed twice in its first two weeks. The failures occurred, because Mr. Grinnell, who was the comptroller at the time, sent out cheques to pay creditors’ arrears without Mr. Drew’s permission. These events were serious violations of the company’s arrangements with the CIBC and it became clear that Mr. Grinnell could not be relied on to seek Mr. Drew’s prior approval.

Accordingly, it was Mr. Langford’s evidence that Mr. Drew asked him to take cheque signing authority so that no company cheques on the general account could be negotiated without his signature. Mr. Langford was reluctant. He had made it clear at the time he signed his appointment letter of February 5, 1982, that he did not want signing authority at the company and his view had not changed. However, he recognized the urgency of the situation and agreed. Although Mr. Drew could not recall whether he suggested that Mr. Langford sign the cheques or whether it was a CIBC suggestion, Mr. Drew was clear that he wanted Mr. Langford to sign so that no more creditors’ arrears would be paid. Mr. Langford testified that he agreed to sign the cheques as a personal favour to Mr. Drew and that the CIBC was not involved. I accept this evidence. There was no need for the CIBC’s involvement. Its letter of February 5, 1982 had effectively preapproved Mr. Langford as a signatory.

After, Mr. Langford began approving cheques. Mr. Drew testified that neither he nor Mr. Fujikawa signed any further cheques. From that time forward, the company’s cheques were handled by the comptroller and Mr. Langford. Mr. Walker testified that, when he was comptroller, he presented cheques for current payables and that they were signed by Mr. Langford without question. Mr. Langford’s evidence was that he did not decide what current expenditures were required or which current expenditures should be paid each week. He approved all cheques for such expenditures although there appears to have been a time when he deferred signing any cheques for one week. He testified that his authority was only intended to prevent the payments of creditors’ arrears. It was not to control or second guess current expenditures.

The company operated three bank accounts. One was a general account and it was this account for which Mr. Langford had signing authority. There were also two payroll accounts, one for salaried employees and one for hourly employees. At payroll time, two cheques would be drawn on the general account reflecting the net payroll for each employee group. Mr. Langford would sign those cheques and the money would then be deposited into the two payroll accounts. Thereafter, cheques for individual employees would be generated by computer and drawn on the payroll accounts. Mr. Langford did not sign the individual payroll cheques.

The company was required to remit source deductions on the 15th day of each month following a payroll payment and the company routinely made the required remittance. While Mr. Langford was monitor, he signed cheques drawn on the general account which paid the source deductions. In September 1982, (the "payment date") Mr. Langford signed the two payroll cheques drawn on the general account which allowed the payroll to be issued. However, by mid-October when the cheque for source deductions relating to that payroll would normally have been signed, Mr. Langford’s duties had ceased. He approved no cheques after the sawmills closed on September 22, 1982. However, some cheques were issued after the closure for specific purposes with the CIBC’s express approval. Although it appears that the October source deduction cheque was prepared, it was never signed by anyone at the company and was never presented to the CIBC for approval.

The sale of the company

It became clear by April 1982 that there were no interested purchasers for the company. With Mr. Drew and other company managers, Mr. Langford attended meetings arranged by Mr. Drew with the B.C. Minister and Deputy Minister of Forests to secure their undertaking to cooperate in the transfer of licences if a sale occurred and to try and obtain permits for logging near Malakwa. Mr. Drew’s evidence was that in these meetings everyone, including Mr. Langford, talked a good deal as most of the participants knew one another quite well. With respect to a possible sale, Mr. Drew testified that Mr. Langford introduced one prospective purchaser who looked at the company and met with Mr. Langford with Mr. Drew’s consent. Mr. Langford testified that Mr. Drew met alone with five or six other potential purchasers whom he identified without Mr. Langford’s assistance.

Increased sales and reduced costs

In these areas, the company took active steps and Mr. Langford participated in virtually all meetings where such matters were discussed. Mr. Drew described Mr. Langford as being involved in the work of the company in all aspects and noted that he worked hard, had many ideas and made numerous suggestions in management meetings dealing with logging, milling and sales matters. He also made suggestions on issues such as cost cutting, efficiencies and significant expenditures. According to Mr. Drew, Mr. Langford’s ideas and others’ ideas were tabled and everyone worked as a group to reach the best decision. Mr. Drew testified that he made the final decisions.

Mr. Langford, on the other hand, said he kept a low profile in meetings and only offered suggestions when they were requested. Whatever his demeanour, I have concluded that his advice was sought regularly and that his suggestions were welcomed, valued and frequently followed. This was the case with the management reorganization. However, Mr. Langford also noted that his suggestions were sometimes ignored and he gave examples. His suggestions about staff changes were ignored. He considered that cuts in the forestry staff were excessive and yet the accounting staff, in his view, was not sufficiently reduced. His suggestions about changing contractors’ hours and eliminating double planing of lumber were also ignored and he considered these to be significant and important matters. In addition, both Mr. Langford and Mr. Drew had concerns about the sales manager’s plan to introduce a new product to solve a customer problem. Yet the product was launched and it was a success. Mr. Langford testified that he did not press his opinions and did not report these matters to the CIBC. He said that, in general he was ’’mighty impressed" with the company’s management.

There was only one occasion when Mr. Langford reported to the CIBC about the company’s refusal to accept his advice. He wanted the company to sue a customer because he felt that it had acted fraudulently by taking delivery of a product when it knew it was about to go bankrupt and would be unable to pay. Mr. Langford tried to convince the bank to pressure the company to sue, but the bank refused to become involved.

Mr. Langford also attended meetings with representatives of the Federal Department of Industry, Trade and Commerce when it appeared that they might offer the company assistance. As well, after the fire at the mill in April 1982, Mr. Drew testified that Mr. Langford helped deal with the related problems. He worked with Messrs Fujikawa and Walker. Mr. Langford apparently identified a supplier and, with the CIBC, worked out a financial arrangement to secure a supply of logs to replace those destroyed in the fire.

At one point the company organized management visits to customers over a two-week period. Mr. Langford joined the trip during the first week because Mr. Drew could not attend. However, Mr. Drew participated without Mr. Langford during the second week.

Finally, Mr. Langford was involved in the decision to close the sawmills on September 22, 1982. It is clear from his evidence and from Mr. Drew’s testimony that Mr. Langford and others made recommendations and that Mr. Drew alone made the decision to shut down his sawmills.

Mr. Langford’s role-Conclusion

Mr. Langford and Mr. Brown for the CIBC testified that Mr. Langford did not have and, in spite of the language used in the documents and in some of the internal correspondence, was not intended to have a manage- ment role. Mr. Langford went further and stated that, during his discussion with Mr. Brown on February 5, 1982, he expressed concern that the company might fail and that he did not want his name and reputation associated with a failure. He was particularly sensitive because he knew personally and had dealt with many of the company’s creditors and suppliers before he sold Downie Street Mills. His evidence was clear that, had he been asked to play a management role, he would not have agreed.

I accept his evidence. However, it is my conclusion that events overtook Mr. Langford and his initial intentions. In my view he became an integral and influential part of the senior management team at the company. All important decisions were made at management meetings and no significant decisions were made or activities undertaken without his input and/or participation. However, it is also clear that, in this role, he was neither absolutely nor substantially controlling the company’s operations. That role was at all times played by Mr. Drew.

The fact that Mr. Drew did not sign cheques and that Mr. Langford had signing authority at first blush makes it appear that Mr. Langford controlled the company’s finances. However, this conclusion ignores reality. The cheques written on the general account to pay for the company’s expenses were for ordinary amounts consistent with the cost of ongoing operations. If they were for unusual expenses, the evidence disclosed that such matters would have been discussed at management meetings. Mr. Langford’s role was played out at management and other meetings. He did not exercise additional control by reason of his cheque signing authority. I am satisfied that, once he recognized an amount as a current payable as opposed to trade creditors’ arrears, he essentially gave it a "rubber stamp" approval. He at no time controlled the company’s expenditures through his signing authority. What he may have done from time to time was influence such expenditures at management meetings. The simple fact that he enforced the CIBC’s and the company’s policy of not paying creditors’ arrears did not give him control of the company’s finances.

I reject the Crown’s suggestion that, because the company had to accept the monitor to obtain a life saving loan, the monitor can automatically be deemed to have had full control of the company. This suggestion assumes that a monitor such as Mr. Langford would be able to impose his wishes on the company because he could threaten the company with bank action against the company if his wishes weren’t followed. This kind of "in terrorem reign" might, if proved, give a monitor de facto control of the management of a company but the evidence does not justify such a finding in this case. This is so particularly because the evidence was clear that both the CIBC and Mr. Langford had the highest regard for the management abilities of Messrs Drew and Fujikawa. There was clearly no need to replace them or to impose a monitor’s wishes on management issues. Mr. Langford’s suggestions were welcomed but not necessarily accepted even though, on occasion, Mr. Drew felt they were delivered in the form of directions. Further, on the one occasion when Mr. Langford tried to elicit the bank’s help to pressure the company to commence a lawsuit which he felt was important, the bank did not become involved.

Accordingly, I have concluded that the evidence does not support the assumption relied on by the Minister of National Revenue in paragraph 3(c) of its statement of defence. There, it is pleaded that the CIBC, by engaging Mr. Langford as monitor, "...took over the administration management and control..." of the company. In my view, this did not occur.

Section 153 of the Income Tax Act

Section 153 (the "section") provides in the material parts as follows: 153(1) Any person paying at any time in a taxation year

(a) salary or wages or other remuneration...

shall deduct or withhold therefrom such amount as may be determined in accordance with prescribed rules and shall, at such time as may be prescribed, remit that amount to the Receiver General on account of the payee’s tax for the year under this Part or Part XI.3, as the case may be.

153(1.3) For the purposes of subsection (1), where a trustee who is administering, managing, distributing, winding up, controlling or otherwise dealing with the property, business, estate or income of another person authorizes or otherwise causes a payment referred to in subsection (1) to be made on behalf of that other person, the trustee shall be deemed to be a person making the payment and the trustee and that other person shall be jointly and severally liable in respect of the amount required under that subsection to be deducted or withheld and to be remitted on account of the payment.

153(1.4) In subsection (1.3), "trustee" includes a liquidator, receiver, receiver-manager, trustee in bankruptcy, assignee, executor, administrator, sequestrator

or any other person performing a function similar to that performed by any such person.

[Emphasis added.]

The first question to be addressed is whether, by reason of the role played by Mr. Langford, the CIBC as a secured creditor can be deemed to be a trustee for the purposes of section 153. This would be so if, although he lacked a formal appointment, Mr. Langford performed a function similar to that performed by a receiver or a receiver-manager. I have stated the issue in this fashion because the Crown conceded that only these two offices are relevant for the analysis in this case.

The CIBC proposed an aid to the interpretation of section 153. It is a document entitled Budget Plan, February 27, 1995 (the "plan"). Annex 6 to the plan is entitled Tax Measures: Supplementary Information and Notices of Ways and Means Motions. It includes a Notice of Ways and Means Motion to amend the Income Tax Act, the Canada Pension Plan and the Unemployment Insurance Act (the "motion"). At item 26 the motion provides that section 153 is to be amended to, among other things,

...extend the class of persons to whom the joint and several liability applies to include interim receivers, secured creditors and agents of persons in that class.

[Emphasis added.]

The CIBC argues that this statement of government intention makes it clear that, at the moment, secured creditors cannot be liable for source deductions as deemed trustees under section 153 because it is recognized that a legislative amendment is required to make them liable.

If legislation had been enacted I would have considered it with the motion and would have treated both documents as interpretive aids. In my view, section 45 of the Interpretation Act, R.S.C. c. I-21 would not apply because I would have had before me both an amendment and external evidence in the form of the motion that Parliament did intend to change the law. [9]

However, in the absence of a legislative amendment, I am not prepared to consider the text of the motion. It would be premature to do so at this stage. Legislation may never be drafted and may never become law. Accordingly, I have disregarded the motion in my deliberations and have relied only on my findings of fact and the relevant authorities.

In recent years, the Tax Court of Canada has twice dealt with the application of section 153. In Plaskett and Associates Ltd. v. M.N.R., [1991] 1 C.T.C. 2162, 91 D.T.C. 162 (an appeal is pending), the question was whether an interim receiver who was appointed to take possession of a car dealership and control its receipts and disbursements performed a function similar to that of a liquidator, receiver, receiver-manager, trustee in bankruptcy, assignee, executor, administrator or a sequestrator (collectively the "enumerated offices").

In that case the interim receiver was instructed not to interfere with the carrying on of the debtor’s business. For that reason, he did not make business decisions. He could not hire or fire employees and he could not dispose of the company’s assets. The Court noted (at page 165) that, in all the enumerated offices, the office holder is "...either vested with the property and assets of the debtor; is empowered to exclude the debtor from running the business; is empowered to take possession of the assets to the exclusion of the debtor; or is empowered to sell the assets of the debtor and to pay the proceeds to the creditor for whom he is acting or for the benefit of all creditors as in the case of a trustee in bankruptcy". On this basis the Court concluded that the interim receiver did not perform functions similar to those performed in the enumerated offices and could therefore not be viewed as a trustee pursuant to section 153. This analysis applies in this case as Mr. Langford did not perform a role at the payment date which was analogous to roles performed by those in the enumerated offices.

In Toronto Dominion Bank v. Canada, [1994] 2 C.T.C. 2615, 94 D.T.C. 1261, the question was whether the bank could be considered a trustee under subsection 153(1.4) of the Act by reason of its own conduct. In that case a different approach was taken. It was alleged that the bank closely controlled the customer’s account and independently made decisions about the customer’s business and that those facts created a fiduciary relationship between the bank and its customer. It was acknowledged that the customer’s property and assets did not vest in the bank, that it could not exclude the customer from its business, and that it did not administer the customer’s property. However, counsel argued that a fiduciary relationship had been created and that that was sufficient to qualify the bank as a trustee under section 153.

The Tax Court noted in that case (at page 1268) that Parliament’s intention in enacting subsection 153(1.4) was "...to make the definition of ‘trustee’ as broad as possible to ensure that any person with substantial control of the affairs of another person be required to deduct withholding tax". The Court declined to find a fiduciary relationship between the bank and the customer on the basis that the facts did not indicate a degree of control by the bank of the customers’ business which would reasonably justify an expectation that the bank would act in the customers’ interest. The Court did indicate in obiter dicta that, had it found a fiduciary relationship, that fact alone would have been sufficient to identify the bank as a trustee as that term is used in section 153.

For the CIBC to be deemed a trustee under section 153 using the rationale in the Toronto-Dominion case, Mr. Langford must have exercised primary responsibility for the major aspects of the company’s business such that he could be described as a fiduciary at the payment date. I have not found the necessary degree of control on the evidence before me.

For all these reasons, I have concluded that the CIBC is not a trustee within the meaning of section 153 and is not liable to be assessed for source deductions which were unpaid by the company in October 1982. The plaintiffs action is therefore successful.

Appeal allowed.

Her Majesty The Queen v. Crown Forest Industries

[Indexed as: Crown Forest Industries Ltd. v. Canada]

Supreme Court of Canada (L’Heureux-Dubé, Sopinka, Gonthier, Cory, McLachlin, lacobucci, Major, J.), on appeal from a decision of the Federal Court of Appeal reported at [1994] 1 C.T.C. 174, June 22, 1995 (Court File No. 23940).

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63)-212(l)(d)-Schedule to Canada-United states Income Tax Convention

In the 1987, 1988 and 1989 taxation years, the taxpayer paid rent to N Ltd. for the use of certain barges. These barges were used to transport wood chips to pulp mills, and goods from those mills to markets in Canada and the United States. N Ltd. was incorporated in the Bahamas in 1962 but its only office and place of business was in the United States, in the San Francisco area, where it employed approximately 19 people. N Ltd.’s primary source of income arose from the transportation of newsprint internationally. Both N Ltd. and the taxpayer were owned by the same New Zealand corporation. For the years in issue, the only income tax returns filed by N Ltd. with the U.S. Internal Revenue Service were entitled "Income Tax Return of a Foreign Corporation" (Form 1120F); however, N Ltd. never filed income tax returns in Canada, the Bahamas, or any country other than the United States. In the relevant taxation years, N Ltd. paid no U.S. tax on the barge rental payments, claiming an exemption to which it was entitled as an international shipping company under section 883 of the U.S. Internal Revenue Code. The taxpayer withheld 10 per cent tax on the rental payments, on the footing that N Ltd. was a "resident of a contracting state" under the Canada-United States Income Tax Convention (1980). The Minister assessed on the basis that the taxpayer was required to pay withholding tax of 25 per cent since N Ltd. was not a "resident of a contracting state". Article IV of the Convention provided that a person was a ‘resident of a contracting state" if it was "liable to tax therein by reason of its domicile, residence, place of management, place of incorporation or any other criterion of a similar nature". The issue was whether N Ltd. was a "resident of a contracting state" within the meaning of Article IV. The Federal Court-Trial Division and the Federal Court of Appeal both held that N Ltd. was a "resident of a contracting state". The Crown appealed to the Supreme Court of Canada.

HELD:

The basis of N Ltd.’s liability for taxation in the United States emanated from the fact that it conducted a trade or business which was effectively connected with the United States and had income arising from that business which was also effectively connected with the United States. Although the fact that its "place of management" was located in the United States was one factor contributing to the finding that its trade or business was connected with the United States, the veritable lynch-pin of N Ltd.’s U.S. tax liability was the "engaged in a trade or business" criterion, not the “place of management" criterion. Furthermore, "engaged in a business in the U.S." was not a criterion of a nature similar to the enumerated grounds in Article IV. The most similar element among the enumerated criteria was that, standing alone, they would each constitute a basis on which states generally impose full tax liability on world-wide income. However, tax liability for the income effectively connected to a business engaged in the U.S., pursuant to section 882 of the Internal Revenue Code, amounted simply to source liability. Consequently, the "engaged in a business in the U.S." criterion was not of a similar nature to the enumerated grounds since it was but a basis for source taxation. Moreover, when one analyzed the intention of the drafters of the Convention, it was clear that they did not envision that N Ltd. ought to benefit from the preferential tax treatment accorded to residents. Since the application of the Convention was to be limited to taxpayers bearing full tax liability on their world-wide income in one of the contracting states, N Ltd. could not benefit from the Convention since it was only liable to tax on a limited amount of income that was "sourced" to one of the contracting states. Finally, if N Ltd. were allowed to benefit from the Convention, such action would lead to the avoidance of tax on the rental income because the liability for tax asserted by the Canadian authorities would be reduced notwithstanding that the United States chose not to impose any tax thereon or did not even have the jurisdiction therefor. Appeal allowed.

lan S. MacGregor, Q.C., and Al Meghji for the appellant.

Warren J.A. Mitchell, Q.C., and Karen R. Sharlow for the respondent.

Cases referred to:

Gladden Estate (J.N.) v. The Queen, [1985] 1 C.T.C. 163, 85 D.T.C. 5188; Canada (A.G.) v. Ward, [1993] 2 S.C.R. 689;

Bacardi Corp, of America v. Domenech, 311 U.S. 150 (1940); U.S. v. Stuart, 489 U.S. 353 (1989);

Utah Mines Ltd. v. The Queen, [1992] 1 C.T.C. 306, 92 D.T.C. 6194; Hunter Douglas Ltd. v. The Queen, [1979] C.T.C. 424, 79 D.T.C. 5340; Thiel v. Federal Commission of Taxation, 90 A.T.C. 4717;

Thomson v. Thomson, [1994] 3 S.C.R. 551;

Sumitomo Shoji America, Inc. v. Avagliano, 457 U.S. 176 (1982).

Iacobucci J.:-This appeal raises issues regarding the interpretation of international tax treaties.

The more specific question is whether Norsk Pacific Steamship Company Limited ("Norsk") is a ’’resident of a contracting state"-in this case the United States-within the meaning of Article IV of the Convention Between Canada and the United States of America with respect to Taxes on Income and on Capital (hereinafter the Canada-United States Income Tax Convention (1980)) (enacted in law in Canada by the Canada-United States Income Tax Convention Act, 1984, S.C. 1984, c. 20). If it is, the amount of non-resident tax imposed by Canada on Norsk and required to be withheld by Crown Forest Industries Limited ("Crown Forest") from the rent paid by it to Norsk for the lease of several maritime barges would be reduced by virtue of Article XII.2 of the Convention from 25 per cent to 10 per cent. Article IV provides that a "resident of a contracting state" is "any person [or entity] who, under the laws of that state, is liable to tax therein by reason of...domicile, residence, place of management, place of incorporation or any other criterion of a similar nature".

For the reasons that follow, I would allow the appeal with the result that Crown Forest is to pay 25 per cent withholding tax to Canada.

I. Background

In the 1987, 1988 and 1989 taxation years, Crown Forest paid rent to Norsk for the use of certain barges. These barges were used to transport wood chips to pulp mills, and goods from those mills to markets in Canada and the U.S. Norsk was incorporated in the Bahamas in 1962 but its only office and place of business has been in the U.S., in the San Francisco area. At this office it, at all relevant times, employed approximately 19 people with a monthly payroll of about US$75,000. Both Norsk and Crown Forest are owned by the same New Zealand corporation, Fletcher Challenge Limited.

For each of the years under review, the only income tax returns filed by Norsk with the U.S. Internal Revenue Service were entitled "Income Tax Return of a Foreign Corporation" (Form 1120F); however, Norsk has never filed income tax returns in Canada, the Bahamas, or any country other than the U.S. To this end, Norsk is a foreign corporation for U.S. income tax purposes. Its primary source of income arises from the transportation of newsprint internationally.

In the relevant taxation years, Norsk paid no U.S. tax on the barge rental payments, claiming an exemption to which it was entitled as an international shipping company under section 883 of the U.S. Internal Revenue Code. This exemption accrued to Norsk owing to the fact that it had been incorporated in the Bahamas; given that the Bahamas has, in its income tax legislation, accorded a similar tax exemption to companies incorporated in the U.S., these dual exemptions are reciprocal.

Crown Forest withheld ten per cent tax on the rental payments, on the footing that Norsk was a "resident of a contracting state" for the purposes of the Canada-U.S. Income Tax Convention (1980). For residents, the usual 25 per cent rate of withholding tax paid by non-residents (pursuant to subsection 212(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") is reduced to ten per cent by virtue of Article XII of the Convention. Although the Minister of National Revenue ("Minister") reassessed Crown Forest at 25 per cent, this finding was quashed by Muldoon J. of the Federal Court-Trial Division who found Norsk to be a resident of a contracting party (the U.S.). Muldoon J.’s decision was upheld by the Federal Court of Appeal, Décary J. dissenting. The Minister appeals to this Court and is supported by the intervener, the government of the U.S., neither of which wishes Norsk to be considered a "resident" under the Convention.

II. Relevant statutory and international convention provisions

Canada-U.S. Income Tax Convention (1980)

Article IV ...

1. For the purposes of this Convention, 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, place of incorporation or any other criterion of a similar nature, but in the case of an estate or trust, only to the extent that income is derived by such estate or trust is liable to tax in that state, either in its hands or in the hands of its beneficiaries.

Article XII ...

1. Royalties arising in a contracting state and paid to a resident of the other contracting state may be taxed in that other state.

2. However, such royalties may also be taxed in the contracting state in which they arise, and according to the laws of that state; but a resident of the other contracting state is the beneficial owner of such royalties, the tax so charged shall not exceed ten per cent of the gross amount of the royalties.

Income Tax Act

212(1) Every non-resident person shall pay an income tax of 25 per cent on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to him as, on account or in lieu of payment of, or in satisfaction of,

(d) rent, royalty or similar payment....
U.S. Internal Revenue Code, 1986 864.	(c)
(i) For the purposes of this title—
(4) ...

(B) Income, gain, or loss from sources without the U.S. shall be treated as effectively connected with the conduct of a trade or business within the U.S. by a nonresident alien individual or a foreign corporation if such person has an office or other fixed place of business within the United States to which such income, gain, or loss is attributable and such income, gain, or loss-

(i) consists of rents or royalties for the use of or for the privilege of using intangible property described in section 862(a)(4) derived in the active conduct of such trade or business,

(ii) consists of dividends or interest, and either is derived in the active conduct of a banking, financing, or similar business within the United States or is received by a corporation the principal business of which is trading in stocks or securities for its own account; or

(iii) is derived from the sale or exchange (outside the United states) through such office or other fixed place of business of personal property described in section 1221(1), except that this clause shall not apply if the property is sold or exchanged for use, consumption, or disposition outside the U.S. and an office or other fixed place of business of the taxpayer in a foreign country participated materially in such sale.

882.

(a)...

(1) A foreign corporation engaged in trade or business within the United States during the taxable year shall be taxable...on its taxable income which is effectively connected with the conduct of a trade or business within the United States.

(2) In determining taxable income for purposes of paragraph (1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United states.

883.

(a) The following items shall not be included in gross income of a foreign corporation, and shall be exempt from taxation under this subtitle:

(1) Gross income derived by a corporation organized in a foreign country from the international operation of a ship or ships if such foreign country grants an equivalent exemption to corporations organized in the United States.

III. Judgments below

A. Federal Court-Trial Division, [1992] 2 C.T.C. 1, 92 D.T.C. 6305, per Muldoon J.

Muldoon J. allowed Crown Forest’s appeal from the Minister’s tax assessment, holding that Norsk fit the definition of "resident of a contracting state” in Article IV. 1 of the Convention.

To determine whether Norsk was a ’’resident" of the U.S. for the purposes of the Convention, Muldoon J. queried whether Norsk was liable to tax in that state by reason of the criteria listed in Article IV, or by reason of any criterion of a similar nature. He stated that the answer was a matter of U.S. law.

Muldoon J. referred at page 4 (D.T.C. 6308) to expert opinion asserting that Norsk is liable to tax in the U.S. because it conducts a "trade or business which is effectively connected with the U.S." and that the fact that its head office and place of management are in the U.S. constitutes a principal factor determining whether it carries on a trade or business in the U.S. He found, at page 8 (D.T.C. 6310), that ”[t]he reason for which Norsk’s income is effectively connected with a trade or business which it actively conducts in the U.S.A., is because Norsk’s place of management is located in the U.S.A. where it conducts its trade or business". Having characterized "place of trade or business" as an "other criterion of a similar nature" for the purposes of Article IV. 1 of the Convention, Muldoon J. then Stated, at page 8 (D.T.C. 6311), that:

If it were logically necessary to resort to the general analogous alternative expressed in Article IV. 1 of the Convention one would say, as the Court now holds: Norsk is a "resident” of the U.S.A. within the meaning of Article IV. 1 of the Convention because it is liable to tax under U.S. law by reason of its place of management and/or by reason of its place of conducting its trade or business....

Muldoon J. questioned why, if the negotiators of the Convention meant to exclude foreign corporations in the U.S. (such as Norsk) from the status of "resident of a contracting state", they simply did not write into the Convention exactly what they supposedly meant to say.

B. Federal Court of Appeal, [1994] 1 C.T.C. 174, 94 D.T.C. 6107

(i) Per Heald J.A. (majority)

The Federal Court of Appeal dismissed the Crown’s appeal. Heald J.A., writing for himself and McDonald J.A., rejected the argument that Muldoon J. had erred in his findings of fact. In fact, he affirmed that Norsk’s liability for U.S. tax arises because the trade or business which it conducts is effectively connected with the U.S. and not because its place of management is located in the U.S. Having stated at page 178 (D.T.C. 6112) that "[t]he issue is not the general application of U.S. tax law but its application to Norsk in particular", Heald J.A. said that Muldoon J.’s factual finding "was reasonably open to him on this record" and that ”...[i]n any event, by no stretch of the imagination, can it be said that the trial judge made a palpable or overriding error in the findings of fact which he made".

In considering whether the factual finding that Norsk’s place of management is a prime factor in its liability to tax in the U.S. is sufficient to bring Norsk within Article IV. 1, Heald J.A. rejected four submissions forwarded by the Crown.

First, the Crown had argued that, since foreign corporations are not generally liable to tax in the U.S. on the basis of their place of management, Norsk cannot be found liable on this basis. In response, Heald J.A. ruled at page 178 (D.T.C. 6112) that this contention "...fails to take into account the particular circumstances which make Norsk liable....[and] begs the very question that must be determined by this Court".

Second, it was argued that the inclusion of the phrase "or a criterion of a similar nature" in Article IV. 1 indicates a common ground for liability under that article, specifically, liability to tax on a world-wide basis, and that Norsk is not liable on this basis. Heald J.A. noted, however, that only domestic corporations are liable to tax on their world-wide income. Referring to the Crown’s interpretation of Article IV. 1 he reasoned, at page 179 (D.T.C. 6113), inter alia'.

Were this the intention of the contracting states, such a result could have been achieved simply by stipulating that only domestic corporations subject to tax on 100 per cent of their world-wide income are residents for the purposes of the Convention.

The third submission advanced by the Crown was that Muldoon J.’s finding that tax liability caused by the conduct of a business effectively connected with the U.S. is similar in nature to the tax liability caused by the place of management was tantamount to an amendment to the Convention. Heald J.A. dismissed this claim; he relied at page 179 (D.T.C. 6113) upon a passage from Muldoon J.’s judgment that "indicates that Norsk’s liability to tax in the U.S. is by reason of its place of management, and that the trial judge would find Norsk to be liable by reason of a criterion of a similar nature only if it were ‘logically necessary”’.

Lastly, it was argued that the interpretation given to Article IV. 1 by the trial judge would lead to anomalous results. One example given was that, upon the taxpayer’s interpretation, a foreign corporation engaged in trade or business in the U.S. could earn $100 of effectively connected income (taxable in the U.S.) and $1,000,000 of foreign source income (not taxable in the U.S.) and, yet, the foreign corporation would entirely escape tax liability in respect of that foreign source income. Heald J.A.’s response was as follows: rejecting the "world-wide income" test as the only basis for tax liability does not mean that any corporation with U.S. source income is liable to tax in the U.S., and, thereby, automatically becomes a U.S. resident under the Convention.

(ii) Décary J.A. (dissenting)

Décary J.A. dissented on two grounds. First, he differed from Heald J.A. by concluding that at page 181 (D.T.C. 6115) ”[t]he reason for which Norsk is liable to tax in the U.S. is not because its place of management is located in the U.S., but because the trade or business it conducts is effectively connected with the U.S., that connection being established, amongst various factors, by Norsk’s place of management".

Second, referring to the grounds enumerated in Article IV. 1, Décary J.A. concluded at pages 181-82 (D.T.C. 6115) that:

The parties obviously intended to set out very specific criteria, the common element of all of them being that each was in itself and standing alone a basis for taxation, that each was easily, readily and objectively identifiable and that each could be related to a tangible location. Any criterion "of a similar nature" must...satisfy these common elements.

Remarking that the basis for Norsk’s U.S. tax liability possesses none of these common elements, Décary J.A. went on at page 182 (D.T.C. 6115) to hold that:

To say that the fact that the place of management is a factor in determining the very reason of Norsk’s liability to tax (i.e., conducting a business...), renders Norsk liable to tax by reason of its place of management, is to transform a factor used in assessing a tax liability that does not fall under Article IV, into one of the four criteria recognized by the article.

IV. Issue on appeal

Is Norsk a resident of one of the contracting parties to the Canada-U.S. Income Tax Convention (1980) pursuant to the following definition in Article IV thereof:

1. For the purposes of this Convention, 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, place of incorporation or any other criterion of a similar nature...?

V. Analysis

In interpreting a treaty, the paramount goal is to find the meaning of the words in question. This process involves looking to the language used and the intentions of the parties. Both upon the plain language reading of Article IV and through an interpretation of the goals and purposes of the Canada-U.S. Income Tax Convention (1980), I reach the same destination: to allow the appeal.

A. The plain language

At this stage of the analysis, the primary question to ask is why Norsk is liable to pay tax in the U.S. If its liability is rooted in the fact that "it is engaged in a trade or business effectively connected with the U.S.", then it would seem that Norsk is not a "resident" of the U.S. under Article IV since "engaged in a trade or business" is not listed as a factor to trigger residency under that article. The only way residency could be found in such a situation would be to determine "engaged in a trade or business" to be a "similar criterion" under Article IV. On the other hand, if Norsk’s tax liability in the U.S. emanates from the fact that its "place of management" is in the U.S., then it would appear, prima facie, that Norsk could satisfy the residency requirements under Article IV, since "place of management" is a sufficient condition of residence.

Article IV states that the term "resident" means "any person who, under the laws of [the contracting party in question], is liable to tax therein by reason of...domicile, residence, place of management, place of incorporation or any other criterion of a similar nature". The courts below found Norsk’s place of residence to be in the U.S. At first blush, this seemingly disposes of the matter since such a finding appears to be sufficient to warrant a determination that Norsk is in fact a resident under the Convention.

Nevertheless, there is one important caveat. Under Article IV it must be shown that the liability to taxation operates by reason of one of the listed grounds. This connotes the existence of some sort of causal connection or, in the least, some relationship of proximity. In my opinion, the fact that Norsk’s place of management is in the U.S. is not causally or even proximately connected to the basis of Norsk’s tax liability in the U.S. Quite the contrary: in my mind, the reason why Norsk was liable to taxation in the U.S. was because of the income flowing from the business or trade it conducted that was connected to the U.S.

I am supported in this conclusion by Muldoon J.’s summary at pages 4-5 (D.T.C. 6308) of the findings of Ginsburg, the expert witnesses called by Crown Forest to testify:

Norsk is liable to tax in the U.S.A. because it conducts a "trade or business which is effectively connected with the United states".... This latter expression is not identified in the Internal Revenue Code..but is determined by subjective factors according to common law.... The U.S. taxes foreign corporations on the basis of the continuous and continuing conduct of an active trade or business within the territorial jurisdiction of the U.S. and taxes the trade’s or business’ world-wide income "sourced" either within or outside of the U.S.... The fact that the foreign corporation’s head office and place of management are in the U.S. are one factor-a principal factor-in determining whether it carries on a trade or business in the U.S....

In fact, Ginsburg specifically testified (at page 4 (D.T.C. 6308)):

In our opinion, the fact that Norsk was entitled to the benefit of this section 883 exemption does not alter the fact that its income was effectively connected with a U.S. trade or business, and therefore it is "liable to tax" in the U.S. by virtue of its effectively connected U.S. trade or business.

[Emphasis added. ]

Norsk’s tax liability thus derived from section 882 of the Internal Revenue Code which provides that a foreign corporation (such as Norsk) engaged in a trade or business within the U.S. shall be taxed in the same manner as a U.S. corporation only on that portion of its taxable income which is effectively connected with the conduct of its U.S. trade or business.

In this respect, for a foreign corporation to be liable, under American law, to taxation in the U.S. it must meet two conditions: (1) it must be ’’engaged in trade or business in the U.S.", and (2) it must have income which is ’’effectively connected" to that trade or business. Clearly, a foreign corporation may have source income which is not effectively connected to its American operations; in that case, the U.S. would not have the jurisdiction to tax such income.

The place of management is only one factor in the determination of whether the first condition mentioned above is met. To this end, ascertaining that Norsk is a resident under the Convention because its place of management is in the U.S. erroneously amounts to elevating a factor used in determining its tax liability into the actual grounds for that tax liability. Place of management is one step removed from the true and immediate basis for tax liability.

I further note that, in the determination of whether a company is "engaged in a trade or a business in the U.S.’’, other factors may also be considered along with "place of management". These are all analogous to "place of management" and include, but are not limited to: the extent of the activity within the country whose residence is claimed, the location of books and records, the location of the head office, the nationalities of the persons employed, the use of resources, the continuing conduct of the business over a period of time, and the location of the principal place of business. I find it somewhat perverse to have all of these criteria individually elevated to actual grounds for tax liability; nevertheless, such a result logically flows from ascribing such a status to "place of management".

With respect, both Muldoon J. and Heald J.A. unfortunately conflated "place of management" and "engaged in business" and consequently introduced a degree of circularity into their reasons. For example, Muldoon J. explicitly found, at page 6 (D.T.C. 6309), that Norsk is liable to tax in the U.S. on income connected with a trade or business which it carries on in the U.S. and that both of the experts agreed, in principle, with this conclusion. The fact that Norsk’s place of management was in the U.S. was determined to be a "prime criterion" for determining whether Norsk was Carrying on a trade or business in the U.S. Nevertheless, after arriving at these conclusions, Muldoon J. then went on to find that "place of management", even standing alone, could ground Norsk’s U.S. tax liability and hence deem it a U.S. resident under the Convention.

In my view, the majority of the Federal Court of Appeal took an even more troublesome approach. It noted, at page 176 (D.T.C. 6111), that Norsk is liable to tax on that portion of its income which is effectively connected with the conduct of its U.S. trade or business but that, in making this finding, various factors are to be considered including: the head office location, the place of management, the extent of the activity within the U.S., the employment of individuals, the use of resources, and the continuity of the conduct of the business over a period of time.

In fact, the place of management criterion was found not to be a factor which in itself would determine the corporation’s income to be effectively connected with the conduct of its U.S. trade or business. Yet, despite arriving at these conclusions, the Court of Appeal at page 177 (D.T.C. 6112) still found it not unreasonable to conclude, as did the trial judge, that ”[t]he reason for which Norsk’s income is effectively connected with a trade or business which it actively conducts in the U.S.A., is because Norsk’s place of management is located in the U.S.A. where it conducts its trade or business". The majority of the Court of Appeal then further found that Norsk benefitted from residency status under Article IV because its place of management was in the U.S. However, the point of the matter is that the finding that Norsk’s place of management is a prime factor in its liability to tax in the U.S. does not mean that its U.S. tax liability operates by reason of its place of management in the U.S.

This inconsistency was observed by Décary J.A. in dissent. Décary J.A. correctly noted that a foreign corporation is not liable for tax in the U.S. by reason solely of its domicile, of its residence or of its place of management. Décary J.A. also found, at page 181 (D.T.C. 6115), that the trial judge had erred in determining that Norsk was liable to tax in the U.S. by reason of its place of management:

The reason for which Norsk is liable to tax in the U.S. is not because its place of management is located in the United States, but because the trade or business it conducts is effectively connected with the United States, that connection being established, amongst various factors, by Norsk’s place of management. The nuance is of major significance: liability to tax derives from Norsk’s trade or business, not from Norsk’s place of management which, in itself, does not make Norsk liable to tax in the United States.

To say that the fact that the place of management is a factor in determining the very reason of Norsk’s liability of tax (i.e., conducting a business...), renders Norsk liable to tax by reason of its place of management, is to transform a factor used in assessing a tax liability that does not fall under Article IV, into one of the four criteria recognized by the article. Had the contracting states intended to qualify as residents foreign corporations liable to tax by reason of the conduct of their business, it would have been very easy to add another criterion such as conduct of business or place of business.

This analysis has been echoed in the academic literature. For example, Michael Edwardes-Ker writes, in a case-comment on the Federal Court-Trial Division judgment (The International Tax Treaties Service, at page 10.5007):

Muldoon J. seems to have assumed that because Norsk had a place of management in the U.S., it was liable to tax as a resident (i.e., full tax liability). This is not the case; ’’place of management” is not a criterion for full tax liability in the U.S. Norsk was liable to U.S. tax because it had a U.S. trade or business. The fact that this business included a place of management was simply a factor in establishing that a U.S. trade or business existed....

[Emphasis added, except ”as a resident”.]

Out of this web of nuance flow, in my opinion, two conclusions: Norsk conducted a trade or business connected to the U.S. and Norsk’s place of management was in the U.S. Both of these findings of fact appear fully reasonable; however, the veritable lynch-pin of Norsk’s U.S. tax liability is the "engaged in a trade or business" criterion, not the "place of management". While the courts below were correct that Norsk’s place of management was a factor relevant to its American tax liability, they erred when they concluded that the legal basis of Norsk’s tax liability was the fact that its place of management was in the U.S. In other words, the courts below erred in interpreting the expression "by reason of" as found in the Convention.

The respondent argues that this Court should not interfere with the findings, allegedly of fact, of the trial judge. It is further submitted that an appellate court should normally only overturn a trial judge’s finding of fact if there is evidence of palpable or overriding error.

I agree with this latter submission. However, at issue in this appeal are not factual findings, but the trial judge’s interpretation of the Convention, this being a conclusion as to law or, in the least, mixed law and fact, and, hence, properly reviewable by an appellate court. I further note that the expert testimony was clear that the legal basis for Norsk’s tax liability was the "engaged in a business in the U.S." criterion. Therefore, it is proper to revisit the legal conclusions of the trial and Federal Court of Appeal judges and clearly find, as did Décary J.A. in dissent, that Norsk’s U.S. tax liability as a foreign corporation arose by reason of the fact it derived some income which was effectively connected to the U.S. from a business in which it was engaged in the U.S. Although the barge income itself may not have been "effectively connected" to the U.S., Norsk did have other sources of income that appear to be so connected.

Nevertheless, the analysis does not end here. Should the respondent successfully demonstrate that "engaged in a business in the U.S." is a criterion of a nature similar to the enumerated grounds, then Norsk will be deemed to be a resident under the Convention.

I agree with the appellant that the most similar element among the enumerated criteria is that, standing alone, they would each constitute a basis on which states generally impose full tax liability on world-wide income: Klaus Vogel on Double Taxation Conventions (1991), at pages 154-59; Joseph Isenbergh, International Taxation: U.S. Taxation of Foreign Taxpayers and Foreign Income, Vol. I (1990), at pages 326-27. In this respect, the criteria for determining residence in Article IV. 1 involve more than simply being liable to taxation on some portion of income (source liability); they entail being subject to as comprehensive a tax liability as is imposed by a state. In the U.S. and Canada, such comprehensive taxation is taxation on world-wide income. However, tax liability for the income effectively connected to a business engaged in the U.S., pursuant to section 882 of the Internal Revenue Code, amounts simply to source liability. Consequently, the "engaged in a business in the U.S." criterion is not of a similar nature to the enumerated grounds since it is but a basis for source taxation. In sum, I endorse the following excerpt of the judgement of Décary J.A. (at page 181 (D.T.C. 6115)):

To say that Norsk, which is not liable to tax by reason of its place of management, is liable to tax by reason of a criterion of a similar nature because its place of management is one of the factors to be considered in determining the very reason of its liability to tax, i.e., the conduct of a business...is to beg the question and try to enter through a door that has already been closed.

B. What was the intention of the drafters of the Convention?

On a direct application of Article IV, I hold that Norsk is not a "resident". This conclusion is confirmed when undertaken with an eye to the intentions of the drafters of the Convention and to the goals of international taxation treaties. In other words, I do not believe that Norsk should be considered a resident under Article IV of the Convention nor that the designers of the Convention would have envisioned that it ought to benefit from the preferential tax treatment accorded to residents.

Reviewing the intentions of the drafters of a taxation convention is a very important element in delineating the scope of the application of that treaty. As noted by Addy J. in Gladden Estate (J.N.) v. The Queen, [1985] 1 C.T.C. 163, 85 D.T.C. 5188 (F.C.T.D.), at pages 166-67 (D.T.C. 5191):

Contrary to an ordinary taxing statute a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated in so far as the particular item under consideration is concerned. [Emphasis added.]

See David A. Ward, "Principles to be Applied in Interpreting Tax Treaties" (1977), 25 Can. Tax J. 264; see also the methodology used by this Court in Canada (A.G.) v. Ward, [1993] 2 S.C.R. 689, at pages 713-16 (albeit not within the context of taxation, but refugee determination). A similar position underpins American jurisprudence. In Bacardi Corp. of America v. Domenech, 311 U.S. 150 (1940), the Supreme Court of the U.S. held at page 163 that a treaty should generally be ”...construe[d]...liberally...to give effect to the purpose which animates it”. See also U.S. v. Stuart, 489 U.S. 353 (1989), at page 368, per Brennan J. (delivering the opinion of the Court).

Clearly, the purpose of the Convention has significant relevance to how its provisions are to be interpreted. I agree with the intervener Government of the United States’ submission that, in ascertaining these goals and intentions, a court may refer to extrinsic materials which form part of the legal context (these include accepted model conventions and official commentaries thereon) without the need first to find an ambiguity before turning to such materials.

I accept the appellant and intervener’s submission that, since the application of the Convention is to be limited to taxpayers bearing full tax liability in one of the contracting parties, then Norsk cannot benefit from the Convention and is consequently not to be characterized as a resident under Article IV(1). As shall become apparent in the discussion infra, the courts below departed from the historical raison d'etre of international tax treaties when proposing that the Canada-U.S. Income Tax Convention (1980), covers taxpayers liable only to source taxation in one of the contracting parties.

At this point in the analysis, it is important to take a step backwards and isolate exactly whom the Convention was intended to benefit. The target group are Canadians working in the U.S. (or vice versa) and Canadian companies operating in the U.S. (again, or vice versa). It was deemed important, in order to promote international trade between Canada and the U.S., to spare such individuals and corporations double taxation (consequently promoting the equitable allocation of profits of enterprises doing business in both countries): see Preamble to the Convention; see also Utah Mines Ltd. v. The Queen, [1992] 1 C.T.C. 306, 92 D.T.C. 6194 (F.C.A.), and U.S. Senate (Foreign Relations Committee), Tax Convention and Proposed Protocols with Canada, at page 2: "The principal purposes of the proposed income tax treaty between the U.S. and Canada are to reduce or eliminate double taxation of income earned by citizens and residents of either country from sources within the other country, and to prevent avoidance or evasion of income taxes of the two countries". An ancillary goal would also be to mitigate the administrative complexities occasioned by having to file simultaneously income tax returns in two uncoordinated taxation systems.

I note that states have the jurisdiction to tax income arising from all commercial transactions, whether these be domestic or international in nature. Where money flows from a domestic to a foreign party, and the income received by the foreign party is outside the jurisdiction of the state, the state exercises its jurisdiction over the transaction by requiring the domestic party to withhold a certain amount from the foreign party. This amount is what is termed a ’’withholding tax"; it is this type of tax that constitutes the subject matter of the appeal at bar. Withholding taxes creates immediate problems, since it gives rise to the possibility that the taxpayer shall be vulnerable to double taxation on all foreign transactions. The root of this double liability emanates from the fact that, upon one transaction, a withholding tax may be imposed by the payor’s government and, at the same time, an income tax may be imposed by the recipient’s government. So, theoretically, international transactions could be subject to twice the tax exposure of domestic transactions. This, in turn, creates a potential deterrent to foreign trade and transboundary transactions.

In the case at bar, I underscore that there is no need to prevent double taxation because the U.S. has declined to tax Norsk’s revenue. Although this does not affect Norsk’s tax liability, the effect is still that Norsk is not required to pay any tax in the U.S. by virtue of the section 883(a) exemption, this exemption arising by virtue of a reciprocal arrangement between the U.S. and the Bahamas, where Norsk is incorporated. Further, it is unclear whether the specific rental income at issue is even, independent of the exemption, subject to taxation in the U.S. because, pursuant to section 864(c)(4) of the Internal Revenue Code, it might not be considered to be effectively connected with the conduct of Norsk’s American trade or business. Allowing Norsk to benefit from the Convention in this case would actually lead to the avoidance of tax on the rental income because the liability for tax asserted by the Canadian authorities would be reduced notwithstanding that the U.S. chooses not to impose any tax thereon or does not even have the jurisdiction therefor.

The goal of the Convention is not to permit companies incorporated in a third party country (the Bahamas) to benefit from a reduced tax liability on source income merely by virtue of dealing with a Canadian company through an office situated in the U.S. As far as I can see it, if there were any tax convention that Norsk would be able to benefit from, it is that concluded between the U.S. and the Bahamas. There is no reason to assume that, in the context of this case, Canada entered into a treaty with the U.S. with a view to ceding its taxing authority to a jurisdiction that is a stranger to the Convention, namely the Bahamas. As mentioned earlier, the reason Norsk benefitted from the section 883 U.S. Internal Revenue Code tax exemption was because it was incorporated in the Bahamas which grants an equivalent exemption to U.S. corporations. It seems to me that both Norsk and the respondent are seeking to minimize their tax liability by picking and choosing the international tax regimes most immediately beneficial to them. Although there is nothing improper with such behaviour, I certainly believe that it is not to be encouraged or promoted by judicial interpretation of existing agreements.

Nor do I believe it to have been within the intentions of the drafters of the Convention to permit a corporation (such as Norsk) who is liable for tax on a limited amount that is "sourced" to one of the contracting states-in this case only on income that is effectively connected to the U.S.-to avail itself of the benefits of the Convention even in respect of income which is not so connected and in respect of which the U.S. has no interest. Naturally, were Norsk to be a domestic corporation, it could properly benefit from the Convention since it would be subject to double taxation on the rental income in the U.S. (by virtue of its residency) as well as in Canada (by virtue of the "source" principle).

The appellant submits that adopting the respondent’s understanding of Article IV would lead to anomalous results and sets forth the following example:

Assume that...a foreign corporation is engaged in a trade or business in the U.S. and earns $100 of "effectively connected income" (which is taxable in the U.S.) and $1,000,000 of foreign source "non-connected income" (assume income from Canada) which is not taxable in the United States.

Pursuant to the respondent’s interpretation, [this corporation] would be considered to be a resident of the U.S. within the meaning of Article IV because it is liable to tax in the U.S. on the $100. It would therefore be able to benefit from the Convention is respect of the $1,000,000 even though the U.S. declines to tax that income. It is submitted that this was not intended by the contracting States, and that it would encourage enterprises to "treaty shop" by routing their income through a particular state in order to avail themselves of benefits that were designed to be given only to residents of the contracting states.

[Emphasis in original.]

But the shortcomings to the respondent’s interpretation go beyond the scenarios envisioned by the appellant. In fact, under the respondent’s interpretation, a foreign corporation whose place of management is in the U.S. would be a resident of the U.S. for purposes of the Convention notwithstanding that such a corporation may not have any effectively connected income to the U.S. and hence no U.S. tax liability at all. I find this possibility to be highly undesirable. "Treaty shopping" might be encouraged in which enterprises could route their income through particular states in order to avail themselves of benefits that were designed to be given only to residents of the contracting states. This result would be patently contrary to the basis on which Canada ceded its jurisdiction to tax as the source country, namely that the U.S. as the resident country would tax the income. On this point, see also Richard G. Tremblay, "Crown Forest-Tax Treaty Interpretation Bonanza" (1994), 4 Can. Current Tax C41.

The respondent replies by submitting that it is the appellant’s interpretation of Article IV that would give rise to anomalous results. Most notably:

...if a United Kingdom corporation, the sole business of which for 50 years has been operating a Wyoming ranch, receives some passive income from Canada, it would not be considered a resident of the U.S. under the appellant’s interpretation simply because of its historic place of incorporation, even though all of its economic connections are with the United States.

I find this scenario far less troubling than the one proposed by the appellants. In the above situation, the mere incorporation of a company in the U.S. to which the passive income from Canada would flow would permit the taxpayer to benefit from the Convention.

I now turn to another set of extrinsic materials, other international taxation conventions and general models thereof, in order to help illustrate and illuminate the intentions of the parties to the Canada-U.S. Income Tax Convention (1980). Articles 31 and 32 of the Vienna Convention on the Law of Treaties (Can. T.S. 1980 No. 37) indicate that reference may be made to these types of extrinsic materials when interpreting international documents such as taxation conventions; see also Hunter Douglas Ltd. v. The Queen, [1979] C.T.C. 424, 79 D.T.C. 5340, (F.C.T.D.), at page 430 (D.T.C. 5344-45), and Thiel v. Federal Commission of Taxation, 90 A.T.C. 4717 (H. C. Aus.), at page 4722.

Of high persuasive value in terms of defining the parameters of the Canada-U.S. Income Tax Convention (1980) is the OECD Model Double Taxation Convention on Income and Capital (1963, re-enacted in 1977): Arnold and Edgar, eds., Materials on Canadian Income Tax (9th ed. 1990), at page 208. As noted by the Court of Appeal, it served as the basis for the Canada-U.S. Income Tax Convention (1980) and also has world-wide recognition as a basic document of reference in the negotiation, application and interpretation of multilateral or bilateral tax conventions. Article 4 of the OECD Convention reads as follows:

1. For the purposes of this Convention, 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.

[Emphasis added.]

The underscored sentence does not form part of Article IV of the Canada-U.S. Income Tax Convention (1980). Nevertheless, as I will discuss below, I reject the respondent’s argument (accepted by Heald J.A.) that the failure to reproduce the second line of the OECD Model Convention residency definition in Article IV of the Canada-U.S. Income Tax Convention (1980) indicates a desire to permit even those only liable for source income to qualify as residents under the Canada-U.S. Income Tax Convention (1980). Consequently, I do not find that this omission indicates that the intention of the drafters of the Convention was to permit entities such as Norsk to benefit from ’’residency’’ status.

The commentaries to the OECD Model Convention as well as academic sources indicate that generally the domestic laws of the contracting states employ residence to apply on "full-tax liability": paragraphs 3 and 8 to the commentary to Article IV; Nathan Boidman, L. Frank Chopin and Alan

W. Granwell, "Tax Effects for Canadians of the New U.S. Code and Treaty Residency Rules (Part Two)" (1985), 14 Tax Mgmt. Inti. J. 183, at pages 184-85. So, too, does the American Law Institute, Federal Income Tax Project-International Aspects of U.S. Income Taxation II-Proposals on U.S. Income Tax Treaties, at pages 127-28:

Under prevailing practice, a country entering into an income tax treaty extends the benefits of the treaty to a person or entity that is a ’’resident of (the other) contracting state". "Residence", in turn, is defined in terms of taxing jurisdiction. A person or entity is considered resident in a country if that country asserts an unlimited right to tax his or its income-that is, a right based upon the taxpayer’s personal connection with the country (as opposed to the source of the income or other income- or asset- related factors). The test of residence requires that the person or entity claiming treaty benefits be "fully taxable" in the residence country, in the sense of being fully subject to its plenary taxing jurisdiction.

Full tax liability is not satisfied in a case where an entity is liable to tax in a jurisdiction only on a part of its income.

The authority for the proposition that only those who are liable to tax on their world-wide income can be justifiably considered residents for the purposes of international taxation conventions is found in the first sentence in Article 4 of the OECD Model Convention and the absence of the second sentence in the Canada-U.S. Income Tax Convention (1980) does not detract therefrom. This is because the second sentence is relevant to a situation in which a person is considered a resident under domestic law but where that person, by reason of a special privilege, nevertheless is not subject to tax on the basis of world-wide income. Paragraph 8 of the commentary to Article 4 of the OECD Model Convention addresses this point:

In accordance with the provisions of the second sentence of paragraph 1, however, a person is not to be considered a "resident of a contracting state" in the sense of the Convention if, although not domiciled in that state, he is considered to be a resident according to the domestic laws but is subject only to a taxation limited to the income from sources in that state or to capital situated in that state. That situation exists in some states in relation to individuals, e.g., in the case of a foreign diplomatic and consular staff serving in their territory.

In support of its submission that the second sentence of the OECD Model Convention Article 4 was omitted from Article IV of the Canada-U.S. Income Tax Convention (1980) because it simply was not required in the context of the Canadian and U.S. taxation systems, the appellant relies upon B.P. Dwyer and J.C. Ross ("Canada-Recent Cases Concerning Withholding Tax" (1992), 19 Tax Planning International Rev. 28 (a case-comment on the Federal Court-Trial Division decision)). At page 33 and footnote 19 of this comment, these authors conclude:

The Court’s approach implies that a person taxed by a particular country solely on a source basis can be considered to be a resident of that country for treaty basis. This was apparently not Canada’s view when it subscribed without reservation to the portion of the commentary to the OECD Model Treaty that equates the "state of residence" with the state that imposes comprehensive tax liability....

It may be questioned whether the omission of the second sentence of the residence definition in the Canada-U.S. treaty makes this agreement substantially different from the OECD Model, on the facts of Crown Forest. There is no indication in the commentary to the OECD Model Treaty that the addition of the second sentence, which was not found in the 1963 OECD Model, was intended to affect the position of a person not viewed as a resident by the domestic law of the taxing state.... The 1977 Commentary and later OECD reports make it clear that the change was intended to address the position of a person viewed as a resident by the domestic law of the taxing state (e.g., by reason of an attachment such as residence or place of management) but who, by reason of special privilege (diplomatic personnel, base companies) was not subject to world-wide taxation by the state. Canada did not need a provision like the second sentence, because its legislation generally does not include such source-taxation privileges.

I would also refer to Victor Peters, ’’Resident (Article 4)", Special Seminar on Analysis of Canada's Tax Conventions and Comparison to the OECD Model Double Taxation Convention (1979). Mr. Peters concludes at page 49 that "in virtually any case in which [one] might wish to qualify for some sort of tax relief pursuant to a provision of the Model Treaty, [one] will first have to be able to qualify thereunder as a resident of at least one of the contracting states".

Had this second sentence been included in the Canada-U.S. Income Tax Convention (1980) it would only have applied to exclude from the definition of a resident a domestic corporation if it were only subject to sourcebased taxation in the U.S. Since (as shall be further discussed infra) under U.S. law all domestic corporations are taxed on world-wide income, the second sentence was simply not required in the Convention.

The OECD Model Convention is not the only international agreement worthy of consideration as an extrinsic material. I also draw from the UN Model Convention. Article IV of this convention does not contain the "second sentence" but, in the commentary thereto, recognizes that, in order for a person to be a resident of a contracting state, that person must be liable to tax in that state on world-wide income. See also the Income Tax Treaty between the People's Republic of China and the United States, 1986. In this connection, I find persuasive the submission that only those corporations that are liable to taxation for the full amount of their worldwide income meet the definition of "resident" in the Canada-U.S. Income Tax Convention (1980). This appears to me to be the intention of the contracting parties.

Moreover, as noted by La Forest J. in Thomson v. Thomson, [1994] 3 S.C.R. 551, at page 578:

It would be odd if in construing an international treaty to which the legislature has attempted to give effect, the treaty were not interpreted in the manner in which the state parties to the treaty must have intended.

This is also the view in American jurisprudence. The Supreme Court of the United States, in Sumitomo Shoji America, Inc. v. Avagliano, 457 US. 176 (1982), at pages 184-85, held that "[although not conclusive, the meaning attributed to treaty provisions by the Government agencies charged with their negotiation and enforcement is entitled to great weight".

I am sensitive to the fact that limiting residence to those taxed only on world-wide income effectively narrows the benefits of the Convention (in so far as American companies are concerned) only to entities actually incorporated in the U.S. After all, "foreign corporations" (i.e., those not incorporated in the U.S.) remain liable only for their U.S. source income. This was a concern of Heald J.A., at page 179 (D.T.C. 6113). For my part, I see nothing fundamentally unjust with the situation where, owing to the nature of U.S. tax legislation, the Convention would be limited to those who actually incorporated in the U.S. (i.e., those who are actually American residents). After all, why should entities not regarded as "residents" by a contracting state be regarded as residents of that state for the purposes of the Convention? Article I of the Convention specifically states that it is generally applicable to persons who are "residents of one or both of the contracting states"; see also the Technical Explanation of the U.S.- Canada Income Tax Convention, 1980 which, with respect to Article IV, notes: "Article IV provides a detailed definition of the term ‘resident of a contracting state’. The definition begins with a person’s liability to tax as a resident under the respective taxation laws of the contracting states". I do not really see anything "tautological" (as alleged by the respondent) about grounding residency under the Convention in actual residency in one of the contracting parties according to that party’s domestic legislation. As noted by the appellant, the Convention was not intended to allow entities to achieve a higher status of residence under its terms than would be available at domestic law.

The intervener makes several informative submissions that support the conclusion that it was expressly intended by the U.S. to have residence under the Convention determined (for its part) only by place of incorporation. It is noted that Article 4(1) of the OECD Model Convention does not contain "place of incorporation" as grounds for residence. However, recognizing that "place of incorporation" is the only criterion that has any relevance to the determination of world-wide tax liability under U.S. law, the U.S. entered a reservation to Article 4(1) for the right to use "place of incorporation" as an indicator of residence. However, in order to preserve overall conformity with the OECD Model Convention, the decision was taken not to remove the other OECD criteria from Article IV(1). Nevertheless, the term "place ofincorporation" is the only term in Article IV(1) that governs the determination of the residence of a corporation in the U.S. for purposes of its tax conventions.

It is for this reason that the Trial judge’s rhetorical conclusion, at page 8 (D.T.C. 6310), (”...if the negotiators of the Convention meant to exclude foreign corporations in the U.S., like Norsk, from the status of resident of a contracting state (i.e., the U.S.A.) one wonders why they simply did not write into the Convention exactly what they allegedly meant to say”) must be rejected. The extrinsic materials reveal that such explicit "writing-in" was simply not necessary. This analysis helps further rebut the respondent’s other submission that, since in its tax treaties with other nations the U.S has chosen to utilize more restrictive language in terms of the definition of resident, the intention of the U.S. in its agreement with Canada was not to limit the benefit of the Convention solely to those liable to taxation on world-wide income.

In sum, the intentions of the drafters of the Convention and the other extrinsic materials demonstrate that Norsk is not a resident under the Convention.

VI. Conclusions and disposition

My conclusions may be summarized as follows:

1. The basis of Norsk’s liability for taxation in the U.S. emanates from the fact that it conducts a trade or business which is effectively connected with the U.S. and has income arising from that business which is also effectively connected with the U.S. Although the fact that its "place of management" is located in the U.S. is one factor contributing to the finding that its trade or business is connected with the U.S., it does not constitute the basis for Norsk’s tax liability in the first place. A factual proposition which merely informs domestic tax liability cannot constitute a residency criterion under the Convention.

2. As such, the only way for Norsk to benefit from residency status under the Convention is if source taxation on a business effectively connected with the contracting party constitutes a criterion similar to the other enumerated criteria in Article IV (residence, place of management, place of incorporation, domicile). It is not similar, since all of the other criteria constitute grounds for taxation on world-wide income, not just source income.

3. The parties to the Convention intended only that persons who were resident in one of the contracting states and liable to tax in one of the contracting states on their "world-wide income" be considered "residents" for purposes of the Convention.

4. Norsk is thus not a "resident" of the U.S. for the purposes of Article IV of the Canada-U.S. Income Tax Convention (1980).

As a result, the courts below erred in limiting Crown Forest’s nonresident withholding tax to ten per cent instead of 25 per cent. Consequently, I would allow the appeal with costs throughout, set aside the judgment of the Federal Court of Appeal, and in substitution therefor restore the Minister’s assessment of 25 per cent withholding tax required of Crown Forest on rental payments to Norsk for the taxation years in question.

Appeal allowed.