Joyal,
J.:—This
is
an
appeal
by
the
Crown
by
way
of
a
trial
de
novo
from
a
judgment
of
the
Tax
Court
of
Canada
delivered
on
April
14,
1986.
In
that
judgment,
the
learned
Chief
Judge
of
that
Court
had
ruled
that
an
assessment
issued
by
the
Crown
with
respect
to
a
certain
profit
or
gain
received
by
the
defendant
in
the
1980
taxation
year
was
unfounded
on
the
ground
that
such
profit
or
gain
was
not
taxable
in
Canada
pursuant
to
the
provisions
of
paragraph
2(3)(c)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act")
and
subsection
115(1)
of
the
Income
Tax
Act.
The
learned
Chief
Judge
found
that
as
to
the
nature
of
the
transaction
which
led
to
the
profit
or
gain,
as
to
the
non-resident
status
in
Canada
of
the
defendant
and
as
to
the
application
of
the
rules
set
out
in
the
Canada-
Switzerland
Tax
Convention,
S.C.
1976-77,
c.
29,
the
profit
or
gain
realized
by
the
defendant
being
taxable
in
Switzerland,
was
not
taxable
in
Canada.
The
facts:
As
is
so
frequently
the
case
in
controverted
tax
matters,
the
facts
are
not
seriously
in
dispute.
It
is
noted
in
this
regard
that
much
of
the
evidence
adduced
before
the
Tax
Court
of
Canada
was
filed
in
this
Court
and
forms
part
of
the
record.
The
defendant
is
a
Panamanian
company
incorporated
on
October
10,
1978.
It
was
incorporated
by
local
lawyers
and
its
domicile
was
stated
to
be
the
lawyers’
business
address.
It
provided
for
a
board
of
directors
of
not
less
than
three
nor
more
than
five
directors.
The
first
directors
were
listed
as
Pierfran-
cesco
Campana
of
Chiasso,
Switzerland
and
Felice
Cavadini
and
Battista
Ponti
of
Vacello,
Switzerland.
The
general
purposes
of
the
corporation
was
to
transact
and
carry
on
the
business
of
a
financial
and
investment
company.
Its
special
purpose,
according
to
the
evidence
of
its
president,
Mr.
Campana,
was
to
seek
to
protect,
or
to
recover
or
to
limit
the
losses
of
an
investment
by
some
156
investors
mostly
Italian,
in
Place
Crémazie,
a
commercial
complex
in
Montreal,
Quebec.
A
mortgage
held
by
Mirlaw
Investments
Ltd.
was
in
default
and
the
hypothecary
creditor
or
mortgagee
had
taken
an
action
in
dation
en
paiement
to
recover
the
property
involved.
The
formation
of
the
company
was
at
the
instance
of
the
investors’
action
through
two
Swiss
banks.
The
first
directors,
namely
Mr.
Campana,
a
lawyer
and
tax
consultant,
Mr.
Cavadini,
a
financial
advisor
and
Mr.
Ponti,
an
accountant,
had
no
equity
in
the
company
and
were
only
there
under
company
guise
to
work
out
a
deal
with
Mirlaw
Investments.
In
this
respect,
the
directors
were
also
assisted
by
Mr.
Michael
Rusko,
Q.C.,
who
acted
as
their
counsel
in
Montreal.
A
deal,
the
nature
of
which
is
not
on
its
face
clearly
definable,
was
concluded
between
the
defendant
and
Mirlaw
Investments
Ltd.
The
deal
was
originally
evidenced
in
a
memorandum
of
understanding
dated
February
1,
1979,
and
which
served
as
a
basis
for
a
more
formal
document
later
on.
This
memorandum
of
understanding
read
integrally
as
follows:
MEMORANDUM
D'UNE
RENCONTRE
AU
BUREAU
DE
MIRLAW
INVESTMENT
LTD.
EN
DATE
DU
1
FEVRIER,
1979
ENTRE:
M.
Cavadini
M.
N.
Levy
M.
A.
Lawee
M.
M.
Lawee
M.
A.
Lawi
M.
Michael
Rusko
Après
discussion
et
une
révision
générale
de
la
situation
de
Century
Plaza
Limitée,
un
principe
d’entente
est
intervenu
sujet
à
l'approbation
de
tous
les
partis
concernés.
Une
entente
globale
incorporant
les
items
suivants
sera
signée
entre
les
partis:
Paiement
des
taxes
municipales
1978-79:
Le
groupe
de
M.
Cavadini
paiera
les
taxes
municipales
évaluées
à
approximativement
$1,100,000
plus
intérêts
par
subrogation
mais
sujet
aux
premières
hypothèques
et
à
la
deuxième
hypothèque
de
Mirlaw
Investments
Ltd.
seulement.
Procédures
Légales:
Mirlaw
Investments
Ltd.
poursuivra
ses
procédures
légales
en
vertu
de
son
hypothèque
jusqu’a
jugement
final.
Si
toutefois
Mirlaw
Investments
Ltd.
se
fait
repayer
en
entier
son
hypothèque,
le
groupe
Cavadini
devra
être
repayé
les
taxes
plus
intérêts
qui
ont
été
payés
par
subrogation.
Titres
de
propriété:
Lors
de
l'obtention
du
jugement
final
de
Mirlaw
Investments
Ltd.,
et
le
transfert
des
titres
de
propriété
légale
à
Mirlaw
Investments
Ltée,
Mirlaw
Investments
Ltd.
s'engage
à
vendre
et
le
groupe
de
M.
Cavadini
s'engage
à
acheter
dans
les
soixante
(60)
jours
qui
suivront
la
date
de
l'obtention
du
jugement
final,
50%
des
propriétés
au
coût
de
Mirlaw
soit,
seulement
à
titre
indicatif
et
sujet
à
ajustement
pour
$5,500,000
établi
comme
suit:
Coût
de
la
propriété:
|
1
hypothèques
approx.
|
$6,000,000
|
|
2
hypothèque
Mirlaw
|
3,600,000
|
|
Taxes
payées
par
subrogation
|
1,100,000
|
|
Frais
divers
|
300,000
|
|
$11,000,000
|
Le
prix
de
$5,500,000
sera
payable
comme
suit:
|
$1,100,000
—
|
déjà
payé
pour
les
taxes
|
|
$1,400,000
—
|
comptant
lors
de
la
signature
du
transfert
des
titres
|
|
$3,000,000
—
|
en
assumant
les
premières
hypothèques
déjà
existantes
sur
|
|
les
propriétés
|
Si
pour
quelques
raisons
le
groupe
de
M.
Cavadini
ne
pourrait
pas
acheter
les
50%
des
propriétés
tel
que
prévu
ci-haut,
Mirlaw
Investments
Ltd.
gardera
les
titres
de
propriété
à
100%
et
remboursera
au
groupe
de
M.
Cavadini
les
montants
de
taxes
de
$1,100,000
payés
par
subrogation
sans
aucun
intérêt.
Il
est
entendu
que
Mirlaw
Investments
Ltd.
gardera
et
maintiendra
l'administration
des
immeubles
et
sera
rémunéré
en
conséquence.
Lors
du
transfert
des
Titres
de
propriété,
une
entente
sera
signée.
Cette
entente
devra
contenir
une
clause
déterminant
les
modalités
de
vente
et
d'achat
des
intérêts
entre
partenaires.
The
agreement
between
the
parties
provided
for
Mirlaw
Investments
Ltd.
to
grant
an
option
to
the
defendant
to
purchase
an
individual
50
per
cent
interest
in
whatever
rights
Mirlaw
might
acquire
in
the
Place
Crémazie
property.
The
consideration
for
that
option
was
a
payment
by
the
defendant
of
$250,000.
The
interest
to
be
acquired
by
the
defendant
was
on
the
basis
of
the
total
cost
to
Mirlaw
of
the
property.
A
couple
of
days
later,
that
agreement
was
amended
to
provide
the
defendant
with
an
option
to
buy
Mirlaw's
entire
interest
in
the
property,
with
the
proviso,
however,
that
at
Mirlaw’s
option,
the
whole
transaction
could
be
rescinded
upon
payment
to
the
defendant
of
the
sum
of
$250,000
together
of
course
with
a
refund
of
the
moneys
already
paid
in
by
the
defendant.
On
the
50
per
cent
option
deal,
a
detailed
proposal
dated
April
6,
1979
was
forwarded
by
Mirlaw
Investments
Ltd.
to
the
defendant.
This
proposal
read
as
follows:
April
6,
1979
Placrefid
Ltd.
via
Motta
18
CHIASSO,
Switzerland
Gentlemen:
We
refer
to
that
certain
action
(the
“
Litigation”)
presently
pending
before
the
Superior
Court
for
the
District
of
Montreal,
bearing
no.
500
05-017270-784
of
the
records
of
such
Court
and
relating
to
the
acquisition
by
dation-en-paiement
of
the
immoveable
property
(the
"Property")
described
in
such
action
and
which
was
hypothecated
in
favour
of
the
undersigned.
This
will
serve
to
confirm
our
agreement
and
undertaking
to
sell
to
you
an
undivided
50%
interest
in
whatever
rights
we
may
acquire
in
the
Property
in
the
event
of
and
upon
a
final
judgment
in
our
favour
pursuant
to
the
Litigation.
Our
obligations
hereunder
are
subject
to
the
following
conditions
each
of
which
shall
be
sine
qua
non
and
of
the
essence
hereof
without
the
fulfilment
of
which
our
obligations
would
not
have
been
contracted:
1.
The
purchase
price
for
such
interest
shall
be
50%
of
the
total
cost
to
us
of
the
Property
whether
such
cost
is
incurred
prior
or
subsequent
to
the
date
hereof.
Without
in
any
way
limiting
the
generality
of
the
foregoing,
such
cost
shall
include,
without
being
limited
to,
the
amount
of
our
hypothec
in
principal,
interest
and
accessories;
our
costs
and
expenses
of
administering
and
carrying
the
Property;
real
estate
taxes
paid
and
not
recovered
by
us
from
the
debtor;
management
and
administrative
costs
and
fees
not
recovered
by
us;
costs
and
fees
of
the
Litigation,
legal
and
notarial
expenses;
and
payments
to
any
prior
ranking
creditor.
2.
On
account
and
in
reduction
of
such
purchase
price
you
shall
have
paid
us
on
execution
of
this
letter
the
sum
of
ONE
HUNDRED
THOUSAND
DOLLARS
($100,000)
and
you
shall
pay
us
a
further
ONE
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($150,000)
on
or
before
Tuesday,
April
17,
1979.
3.
The
balance
of
the
purchase
price
shall
be
payable
in
cash
at
the
Closing
as
hereinafter
referred
to.
4.
The
Closing
shall
take
place
before
our
Notary,
at
your
expense,
within
ninety
(90)
days
of
Judgment
of
the
Superior
Court
in
our
favour.
5.
In
the
event
we
do
not
obtain
such
Judgment
in
our
favour,
or
in
the
event
such
Judgment
is
appealed
by
the
defendants
to
the
Court
of
Appeal,
or
in
the
event
of
any
default
by
you
hereunder,
this
agreement
shall
be
null
and
void
ipso
facto
without
recourse
on
either
side,
and
the
sum
of
TWO
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($250,000)
or
any
portion
thereof
as
is
received
by
us
from
you,
shall
be
refunded
to
you
forthwith
without
interest.
6.
The
sale
shall
be
made
by
us
without
any
warranty
on
our
parts
whatever
and
without
any
representation
on
our
part
as
to
our
rights
in
the
Property.
7.
As
additional
conditions
of
the
sale:
(a)
You
will
enter
into
and
maintain
in
force
a
Management
Agreement
for
the
Property
with
Canadian
Alpha
Lessors
Ltd.
(or
its
nominees)
on
terms
and
conditions
satisfactory
to
our
legal
counsel
at
his
sole
and
absolute
discretion,
and
at
a
fee
rate
generally
competitive
with
institutional
property
management
firms
operating
in
the
Montreal
area.
(b)
You
will
enter
into
and
maintain
in
force
an
agreement
regulating
the
joint
ownership
of
the
Property
on
terms
and
conditions
satisfactory
to
our
legal
counsel
at
his
sole
and
absolute
discretion
and
providing
inter
alia
for
payment
on
demand
by
the
co-owners
of
their
respective
portions
of
any
cash
deficiency
in
current
operations
of
the
Property
as,
when
and
to
the
extent
required,
and
in
the
event
of
default
by
any
co-owner,
at
the
option
of
the
non-defaulting
party,
the
acquisition
at
the
lower
of
the
cost
or
market
value
of
the
share
of
the
Property
of
such
defaulting
party;
the
equal
contribution
of
each
party
to
the
cost
of
any
agreed
renovation
or
conversion
of
the
whole
or
any
part
of
the
Property;
the
undertaking
of
each
party
to
enter
into
contracts,
deeds
or
documents
providing
for
any
financing
of
the
Property;
and
an
appropriate
buy-sell
provision.
8.
Our
undertaking
shall
be
conditional
upon
evidence
of
your
compliance
with
the
provisions
of
the
Foreign
Investment
Review
Act
to
the
extent
that
such
Act
is
applicable.
9.
Nothing
herein
contained
shall
be
deemed
to
oblige
us
to
obtain
judgment
or
to
settle
the
Litigation
and
our
failure
or
refusal
to
do
so
shall
not
result
in
any
recourse
by
you
against
us
other
than
the
recovery
of
all
sums
paid
by
you
to
us
pursuant
hereto.
10.
Time
shall
be
of
the
essence
hereof.
11.
The
parties
have
requested
that
this
agreement
and
all
other
documents
contemplated
hereby
be
drawn
up
in
English
to
the
extent
legally
permitted.
Les
parties
ont
exigé
que
cette
entente
et
tous
autres
documents
envisagés
soient
rédigés
en
anglais,
dans
la
mesure
où
la
Loi
permet.
Yours
very
truly,
MIRLAW
INVESTMENTS
LTD.
This
last
document
prompted
the
defendant
to
suggest
changes
to
its
terms
which
were
then
reflected
in
a
further
piece
of
writing
dated
April
9,
1979
submitted
by
Mirlaw
to
the
defendant.
Its
text
was
as
follows:
April
9,
1979
Placrefid
Ltd.
via
Motta
18
CHIASSO,
Switzerland
Gentlemen:
Further
to
our
letter
of
April
6,
1979,
you
have
requested
the
additional
option
of
acquiring
our
entire
interest
in
the
Property
(as
therein
defined).
This
will
serve
to
confirm
our
agreement
and
undertaking
to
sell
to
you
our
entire
interest
in
the
Property
on
the
following
conditions,
each
of
which
shall
be
sine
qua
non
and
of
the
essence
hereof,
without
the
fulfillment
of
which
our
obligations
would
not
have
been
contracted:
1.
Your
right
to
acquire
our
entire
interest
shall
be
exercised
by
written
notice
received
by
us
within
thirty
(30)
days
of
today,
that
is,
on
or
before
the
close
of
business
of
May
8,
1979.
2.
You
shall
have
paid
to
us
the
respective
sums
of
ONE
HUNDRED
THOUSAND
DOLLARS
($100,000)
and
ONE
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($150,000)
referred
to
in
paragraph
2
of
our
letter
of
April
6,
1979,
on
the
dates
therein
indicated.
3.
Contemporaneously
with
and
as
a
condition
of
such
notice,
you
shall
have
paid
all
arrears
of
real
estate
taxes
affecting
the
Property.
4.
In
the
event
such
notice
is
validly
given
the
sale
and
purchase
shall
occur
within
fifteen
(15)
days
after
the
Judgment
on
the
Litigation
becoming
final;
that
is,
within
forty-five
(45)
days
of
the
date
of
Judgment,
at
which
time
the
entire
purchase
price
shall
be
payable.
5.
The
purchase
price
shall
consist
of
the
total
cost
to
us
of
the
Property
whether
such
cost
is
incurred
prior
or
subsequent
to
the
date
hereof,
plus
the
sum
of
ONE
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($150,000.).
Without
in
any
way
limiting
the
generality
of
the
foregoing,
such
cost
shall
include,
without
being
limited
to,
the
amount
of
our
hypothec
in
principal,
interest
and
accessories;
our
costs
and
expenses
of
administering
and
carrying
the
Property;
real
estate
taxes
paid
and
not
recovered
by
us
from
the
debtor;
management
and
administrative
costs
and
fees
not
recovered
by
us;
costs
and
fees
of
the
Litigation;
legal
and
notarial
expenses;
and
payments
to
any
prior
ranking
creditor.
6.
Such
purchase
price
shall
be
payable
in
cash
at
the
execution
of
the
Deed
of
Sale,
credit
to
be
given
on
account
of
the
sum
of
TWO
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($250,000)
referred
to
in
paragraph
2
hereof.
7.
We
shall
have
the
right
at
any
time
prior
to
receipt
of
your
notice,
to
notify
you
in
writing
that
we
elect
to
cancel
the
rights
granted
you
in
our
letter
of
April
6,
1979
in
consideration
of
the
sum
of
TWO
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($250,000.).
Should
we
elect
to
so
notify
you,
you
shall
still
have
the
right
to
purchase
contained
herein,
provided
you
are
not
default
hereunder
and
provided
you
continue
to
fulfil
all
the
requirements
hereof,
but
your
rights
under
the
letter
of
April
6,
1979
shall
be
terminated
upon
payment
by
us
of
such
sum
of
TWO
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($250,000.).
In
such
event,
the
sum
of
TWO
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($250,000.)
or
any
portion
thereof
as
is
received
by
us
pursuant
to
paragraph
2
of
the
letter
of
April
6,
1979,
shall
be
applied
by
us
on
account
of
the
purchase
price
herein
contemplated
in
the
event
you
notify
us
pursuant
to
paragraph
1
hereof,
or
refunded
to
you
without
interest
in
the
event
you
do
not
so
notify
us.
8.
(a)
In
the
event
you
have
given
us
notice
pursuant
to
paragraph
1
hereof,
such
notice
shall
ipso
facto
cancel
and
terminate
your
rights
under
the
letter
of
April
6,
1979.
(b)
In
the
event
you
shall
have
given
us
notice
pursuant
to
paragraph
1
hereof
and
default
in
your
obligations
hereunder,
such
default
shall
ipso
facto
annul
and
terminate
your
rights
under
this
agreement.
(c)
In
the
event
no
notice
is
given
by
either
of
us
under
this
agreement,
this
agreement
shall
become
null
and
void
without
recourse
on
either
side
on
May
8,1979,
under
reserve
of
your
rights,
if
any,
in
virtue
of
the
letter
of
April
6,
1979.
(d)
In
the
event
the
Judgment
referred
to
herein
is
appealed
by
the
defendants
to
the
Court
of
Appeal,
this
agreement
shall
ipso
facto
be
null
and
void
without
recourse
on
either
side,
and
the
sum
of
TWO
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($250,000.),
or
any
portion
thereof
as
is
received
by
us
from
you
Shall
be
refunded
to
you
forthwith
without
interest.
9.
The
Sale
shall
be
made
by
us
without
any
warranty
on
our
part
whatever
and
without
any
representation
on
our
part
as
to
our
rights
in
the
Property.
10.
Our
undertaking
shall
be
conditional
upon
evidence
of
your
compliance
with
the
provisions
of
the
Foreign
Investment
Review
Act
to
the
extent
that
such
Act
is
applicable.
11.
Nothing
herein
contained
shall
be
deemed
to
oblige
us
to
obtain
judgment
or
to
settle
the
Litigation
and
our
failure
or
refusal
to
do
so
shall
not
result
in
any
recourse
by
you
against
us,
other
than
the
recovery
of
all
sums
paid
by
you
to
us
pursuant
hereto.
12.
Time
shall
be
of
the
essence
hereof.
13.
The
Parties
have
requested
that
your
agreement
and
all
other
documents
contemplated
hereby
be
drawn
up
in
English
to
the
extent
legally
permitted.
Les
parties
ont
exigé
que
cette
entente
et
tous
autres
documents
envisagés
soient
rédigés
en
anglais,
dans
la
mesure
Où
la
loi
permet.
Yours
very
truly,
MIRLAW
INVESTMENTS
LTD.
The
provisions
of
the
April
9
agreement,
with
minor
changes,
were
formally
accepted
by
the
defendant
on
April
17,
1989.
By
May
4,
1989,
however,
Mirlaw
changed
its
mind.
It
decided
to
rely
on
its
escape
clause
in
paragraph
7
of
that
agreement
and
elected
to
rescind
the
agreement
and
pay
a
fee,
or
indemnity
or
a
remuneration
of
$250,000
to
the
defendant.
Thereafter,
all
contractual
relationships
between
the
parties
came
to
an
end.
Eventually,
that
sum
was
paid
over
to
the
defendant
subject
to
a
dutiful
withholding
at
the
source
of
15
per
cent
on
account
of
federal
tax
and
10
per
cent
on
account
of
provincial
tax.
In
July
1990,
through
its
agent,
Mr.
Rusko,
the
defendant
filed
its
corporate
tax
return.
In
this
return,
it
claimed
a
refund
of
$37,500
being
the
amount
deducted
at
the
source
and
indicated
a
net
income
of
$225,000
after
charging
an
amount
of
$25,000
in
professional
fees.
The
defendant
took
the
position
that
the
amount
received
was
not
taxable
in
Canada
as
it
was
not
covered
by
the
charging
provisions
of
subsection
2(3)
of
the
Income
Tax
Act.
The
Crown
took
a
different
view.
In
July,
1981,
it
ruled
that
the
proceeds
were
taxable
in
Canada
as
a
capital
gain
and
taxed
one
half
of
it,
i.e.,
$112,500,
resulting
in
an
assessment
of
$41,000.48.
The
case
for
the
Crown:
It
is
a
given,
in
tax
appeals,
that
the
burden
rests
on
a
taxpayer
to
rebut
the
assumption
of
fact
on
which
a
tax
assessment
is
made.
In
the
Crown's
pleadings,
these
assumptions
were
listed
as
follows:
1.
The
amount
paid
by
Mirlaw
to
the
defendant
related
to
the
cancellation
of
an
option
to
purchase
an
immoveable
property,
namely
Place
Crémazie.
2.
The
country
of
residence
of
the
defendant
is
listed
in
its
tax
return
as
Panama.
3.
The
defendant's
business
involves
dealing
in
real
estate.
4.
The
above
option
agreement
for
which
the
defendant
agreed
to
pay
$250,000
to
Mirlaw
was
to
acquire
a
50%
undivided
interest
in
Place
Crémazie
and
paying
Mirlaw
therefore
50%
of
the
total
cost
to
Mirlaw
of
Place
Crémazie,
the
option
price
to
be
applied
on
account
of
the
purchase
price.
This
was
later
amended
by
the
grant
of
an
option
to
purchase
the
whole
of
the
real
estate.
5.
It
was
on
April
9,
1979,
by
judgment
rendered
in
Superior
Court,
that
Mirlaw
and
Genelcan
Realty
Ltd.
became
absolute
owners
of
Place
Crémazie
in
proportions
of
two-thirds
and
one-third
respectively.
6.
On
that
same
date,
Mirlaw
reserved
the
right
to
cancel
the
option
on
payment
of
$250,000
together
with
a
refund
of
the
deposit
money
paid
in.
7.
On
May
4,
1980,
Mirlaw
exercised
its
right
to
cancel
the
whole
deal
and
paid
the
defendant
the
amount
above
stipulated.
The
Crown
concluded
that,
as
a
non-resident,
the
defendant
disposed
of
taxable
Canadian
property
comprising
an
interest
in
Place
Crémazie
and
became
liable
to
tax
pursuant
to
paragraph
2(3)(c)
and
section
115
of
the
Act.
In
the
alternative,
said
the
Crown,
the
defendant
was
still
liable
to
tax
in
Canada
because
it
was
carrying
on
business
in
Canada,
in
which
case
paragraph
2(3)(b),
subparagraph
115(11)(a)(ii),
section
248
and
paragraph
253(b)
of
the
Act
would
apply.
Aware
that
the
defendant
had
alleged
that
it
was
a
Swiss
resident,
the
Crown
further
argued
that
the
Canada-Swiss
Tax
Convention
did
not
protect
the
defendant
because
the
nature
of
the
transaction
conducted
in
Canada
by
the
defendant
was
in
respect
of
real
or
immoveable
property.
Any
gain
or
profit
realized
therefrom
was
taxable
in
the
jurisdiction
where
the
property
was
located
and
Articles
VI
and
XII
1(1)
of
the
Tax
Convention
applied.
The
Crown
concluded
that
it
was
not
of
much
practical
importance
whether
such
gain
or
profit
constituted
a
capital
receipt
or
income;
the
Crown
was
nevertheless
entitled
to
keep
the
$37,500
which
had
already
been
remitted
to
it
by
Mirlaw
Investments
Ltd.
The
case
for
the
defendant:
The
case
for
the
defendant
rested
on
four
major
grounds.
1.
Notwithstanding
its
incorporation
in
Panama
and
what
might
be
termed
its
head
office
there,
the
defendant
was
nevertheless
a“
"tax
subject"
of
Switzerland.
The
majority
of
its
directors
were
Swiss
residents.
It
had
an
office
in
Chiasso
where
its
president
Mr.
Campana
conducted
its
business.
Its
meetings
had
taken
place
there
and
its
business
and
general
management
were
conducted
from
that
location.
The
defendant's
head
office
in
Panama
was
never
used
for
these
purposes,
nor
did
any
of
its
directors
ever
attend
personally
at
this
office.
2.
The
defendant's
business
establishment
in
Chiasso,
Switzerland,
was
the
kind
of
residence
which
brings
it
under
the
Swiss
tax
laws
as
that
kind
of
"residence"
is
interpreted
in
Switzerland.
3.
The
money
received
by
the
defendant,
whether
it
is
termed
an
indemnity
or
a
buy-out
or
monetary
consideration
to
cancel
whatever
rights
it
might
have
acquired
from
Mirlaw
Investments
Ltd.
came
out
of
a
single
transaction
involving
a
non-resident
of
Canada
and,
in
accordance
with
the
Tax
Convention,
does
not
attract
tax
liability.
4.
In
any
event,
whatever
the
transaction’s
classification
as
an
adventure
in
the
nature
of
trade
or
otherwise,
it
was
not
part
of
a
business
being
carried
on
in
Canada
within
the
terms
of
section
2
of
the
Income
Tax
Act.
The
findings
of
fact
and
law:
With
regards
to
the
evidence
before
me,
I
must
subscribe
to
the
findings
of
facts
of
the
learned
Chief
Judge
of
the
Tax
Court
of
Canada
on
the
essential
material
elements.
In
this
regard,
I
well
recognize
that
much
of
the
evidence
on
behalf
of
the
defendant
might
be
described
as
subjectively
self-serving,
but,
in
that
respect,
such
evidence
is
consistent
with
more
objective
evidence
and
is
therefore
entitled
to
greater
weight.
The
defendant
at
no
time
had
a
business
establishment
in
Canada
and
was
not
carrying
on
business
in
Canada.
For
that
matter
it
had
no
business
establishment
in
Panama,
its
incorporation
there
being,
for
some
purpose
or
other,
a
mere
flag
of
convenience.
In
my
view,
its
business
establishment
was
in
Chiasso,
Switzerland.
Its
directors
were
either
Swiss
citizens
or
Swiss
residents.
These
directors
were
taking
instructions
from
one
or
two
banks
acting
on
behalf
of
a
large
group
of
mostly
Italian
investors
who
had
found
them
selves
seriously
exposed
when
the
proprietor
of
Place
Crémazie,
namely
Century
Plaza
Inc.,
defaulted
on
its
mortgage
with
Mirlaw
Investments
Ltd.
The
defendant's
activities
in
Canada
in
1979
were
strictly
limited
to
its
negotiations
with
Mirlaw
Investments
Ltd.
in
an
attempt
to
salvage
what
it
could
for
the
investors.
It
had
no
office
in
Montreal
nor
anywhere
else
in
Canada.
Its
business
was
conducted
there
through
its
agent,
Mr.
Rusko
and
it
is
evident
that
Mr.
Rusko,
apart
from
his
invaluable
professional
assistance,
had
no
executive
mandate
to
act
or
bind
the
defendant
except
under
the
express
authority
and
control
of
its
directors.
It
will
be
noted
in
that
regard
that
all
written
communications
from
Mirlaw
Investments
Ltd.
were
addressed
to
the
defendant
at
its
Chiasso
office
in
Switzerland.
The
fact
that
they
might
have
been
delivered
to
Mr.
Rusko
at
his
Montreal
office
is
of
no
consequence.
On
matters
more
particularly
related
to
law
and
doctrine,
two
issues
arise,
namely
the
nature
of
the
transaction
between
the
defendant
and
Mirlaw
Investments
and
a
finding
as
to
whether
or
not
the
defendant
had
an
establishment
in
Switzerland
making
it
liable
to
Swiss
tax
laws.
On
the
first
issue,
I
fully
subscribe
to
the
reasoning
of
the
learned
Chief
Judge
of
the
Tax
Court
of
Canada
when,
in
referring
to
Mirlaw
Investments’
situation
at
the
relevant
time,
he
noted
as
follows,
at
pages
18-19
of
his
judgment:
The
reality,
in
my
opinion,
is
that
the
"entente"
which
resulted
from
the
negotiations
between
Mirlaw
and
the
appellant
and
outlined
in
correspondence
dated
April
6,
9
and
17,
1979
was
never
in
the
nature
of
an“
option”
in
respect
of
real
property,
as
implied
by
the
respondent
by
its
assessment,
and
furthermore,
could
never
be.
Legally,
Mirlaw
did
not
own
the
property
at
the
time
of
the
negotiations
but
merely
held
an
hypothec
on
same
and
also
had
instituted
an
action
to
be
declared
its
rightful
owner.
Until
it
was
declared
the
owner
of
the
property
by
a
judgment
of
a
competent
tribunal
it
had
no
proprietary
right
whatsoever
in
the
said
property
and,
therefore,
could
not
contractually
deal
with
it
in
any
manner
whatsoever.
Furthermore,
Mirlaw
was
not
even
obligated
to
pursue
its
litigation
regarding
the
property
and
its
failure
to
do
so
could
not
give
rise
to
a
recourse
against
it.
This
is
well
spelled
out
in
the
letters
of
April
6
and
9
paragraphs
9
and
11
respectively.
Without
any
rights
in
the
property,
Mirlaw
could
certainly
not
grant
what
the
respondent
referred
to
as
an
"option"
in
respect
to
it,
any
more
than
it
could
dispose
of
it,
and
the
appellant
on
its
part
could
not
acquire
any
interest
or
rights
in
the
said
property
irrespective
of
how
intense
its
negotiations
with
Mirlaw
were.
In
my
opinion
the
"entente"
between
the
parties
consisted
simply
of
an
undertaking
on
the
part
of
Mirlaw
to
cause
the
property
to
be
conveyed
to
the
appellant
in
the
event
that
it
became
the
owner.
It
created
a
personal
obligation
for
Mirlaw,
which
was
binding
until
May
8th,
1979,
and
as
long
as
the
appellant
did
not
default
on
its
own
commitment
under
the
said
"entente".
It
was
also
agreed
that
this
undertaking
would
lapse
if
Mirlaw
elected
to
terminate
the
"entente"
before
May
8th,1979,
which
was
effectively
done
by
Mirlaw.
In
essence,
whatever
right
the
defendant
acquired
through
its
"option"
it
was
not
a
jus
in
rem
which
would
have
entitled
the
defendant
to
specific
performance
in
the
event
of
default.
Mirlaw
was
a
second
hypothecary
creditor
and
it
is
noted
that
in
the
judgment
dated
April
9,
1979
in
the
Superior
Court
of
Montreal,
the
interest
of
Mirlaw
in
the
Place
Crémazie
property
was
shared
as
to
two-thirds
and
one-third
respectively
with
another
mortgagee,
namely
Genelcan
Realty
Ltd.
No
doubt,
the
several
documents
relating
to
the
transaction
are
not
without
confusion
or
ambiguity.
It
is
noted
for
example
in
the
April
6,
1979
letter
from
Mirlaw
Investments
that
the
defendant
is
to
get
“50%
interest
in
whatever
rights
in
the
Property”,
implying
that
at
that
time,
Mirlaw
had
no
definable
right
to
give.
There
is
also
a
clause
in
that
letter
which
stipulates
that
in
case
of
default,
there
shall
be
no
recourse
other
than
recovery
of
all
sums
paid.
In
the
April
9
letter
to
the
defendant,
Mirlaw
Investments
had
no
obligation
to
obtain
judgment.
There
were
further
provisions
with
respect
to
the
joint
ownership
of
the
property,
to
the
obligation
to
contribute
to
cash
deficiencies
in
the
operation
of
the
property,
to
payment
by
the
defendant
of
“all
arrears
in
taxes”,
all
contingent
upon
Mirlaw
becoming
owner.
There
are
other
inconsistencies
in
these
documents
which
cloud
the
issue
but
on
balance
there
are
sufficient
contingencies
as
to
what
the
defendant
was
in
fact
acquiring
that
I
should
find
no
cause
to
disturb
or
modify
the
findings
of
the
learned
Chief
Judge
in
any
respect.
These
findings
are
fully
in
accord
with
existing
jurisprudence
and
doctrine
referred
to
in
the
books
of
authorities.
On
the
second
issue,
namely
the
tax
liability
of
the
defendant
under
Swiss
laws,
I
should
refer
to
Crown
Exhibit
P-1
which
is
a
letter
from
Swiss
authorities
to
Revenue
Canada
dated
December
15,
1986.
This
letter
purported
to
inform
the
recipient
that
the
defendant
was
not
a
Swiss
corporation,
that
it
was
unknown
to
the
Swiss
authorities
and
that
it
was
nota
Swiss
resident
under
the
double
taxing
provisions
of
the
Canada-Switzerland
Tax
Convention.
As
could
be
expected,
the
Crown
relied
on
this
evidence
to
buttress
its
own
approach
to
the
issues.
At
the
trial
before
me,
however,
the
defendant
produced
a
much
earlier
letter
received
from
the
Swiss
authorities.
This
one,
as
Exhibit
D-4,
was
dated
March
31,
1981,
and
its
tenor
was
to
enquire
as
to
the
money
received
by
the
defendant
in
its
1979
Canadian
adventure
and
asking
for
particulars
of
its
establishment,
its
fiscal
residence
and
its
registered
office.
Naturally,
Crown
counsel
objected
to
this
evidence
as
it
had
not
been
disclosed
on
discovery
of
documents.
On
the
grounds
that
the
letter
of
March
31,
1981
had
only
been
recently
found
and
on
the
grounds
that
it
appeared
to
be
rebuttal
evidence
covered
by
subsection
494(8)
of
the
Rules
of
this
Court,
I
must
now
rule
that
the
evidence
is
admissible.
Together
with
the
1986
letter
from
Switzerland
filed
by
the
Crown,
however,
its
probative
value
is
not
necessarily
conclusive.
In
the
circumstances
of
the
defendant's
purported
tax
liability
under
Swiss
law,
expert
evidence
was
submitted
by
Mr.
Campana,
a
director
and
officer
of
the
defendant.
As
was
noted
in
the
Tax
Court
of
Canada,
such
evidence
is
subject
to
greater
scrutiny
but
in
the
absence
of
any
conflicting
evidence
addressed
by
the
Crown,
some
credibility
must
be
given
to
it.
Mr.
Campana's
evidence
was
to
the
effect
that
the
defendant,
under
Swiss
law,
had
a
business
establishment
in
Chiasso,
Switzerland,
and
therefore
subscribed
to
the
liability
requirements
as
well
under
Swiss
fiscal
laws
as
under
the
more
specific
provisions
of
the
Tax
Convention.
The
witness
also
produced
as
authority
an
article
by
Jean-Marc
Rivier
on
“Droit
Fiscal
Suisse—L'imposition
du
revenu
et
de
la
fortune",
Les
Éditions
Ides
et
Calendes,
Neuchâtel,
Suisse,
1980
where
at
page
78,
the
author
elaborates
on
the
criteria
to
determine
“le
siège
effectif
de
l'administration".
On
this
evidence,
and
on
the
findings
of
fact
which
I
have
previously
made,
I
must
conclude
that
the
"residence"
of
the
defendant
was
Switzerland.
On
that
basis,
therefore,
the
defendant
fell
within
the
definition
of
residence"
in
Article
IV.1
of
the
Tax
Convention
and
could
avail
itself
of
the
limitations
set
out
in
Article
VI
1.1
of
the
Convention.
Conclusion:
I
must
conclude
that
the
defendant's
benefit
or
gain
was
earned
or
received
as
a
non-resident
of
Canada
where
it
had
no
permanent
establishment.
I
must
also
conclude
that
the
transaction
in
which
it
entered
was
not
income
from
immoveable
property
which,
under
Article
VI
.1
of
the
Convention,
would
otherwise
be
taxed
in
Canada,
nor
was
it
a
capital
sum
represented
by
immoveable
property
which
also
would
be
subject
to
Canadian
tax
under
Article
XXI.1
It
follows
that
the
defendant's
tax
liability
cannot
be
founded
on
subsection
2(3)
and
section
115
of
the
Income
Tax
Act.
The
Crown's
appeal
is
accordingly
dismissed
and
the
assessment
referred
back
for
reassessment
in
accordance
with
these
reasons.
The
defendant
is
entitled
to
its
costs
but
no
expert
witness
fees
shall
be
taxable.
Appeal
dismissed.
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