Endres v. R., 98 DTC 1101, [1998] 1 CTC 2259 (TCC)

Beaubier T.C.J. :

These appeals were heard together on common evidence by consent of the parties at Halifax, Nova Scotia on September 22 and 23, 1997, pursuant to the General Procedure. The Appellants testified and called Nola Godding as a witness. The Respondent called Dr. Andrew Watson, Catherine McAskill, Catherine McCarthy, R.N., and Stephen Peters.

At issue is whether the Appellants were residents of Canada in 1988 and 1989. If Henry Endres is found to be resident in Canada it is his position that he should not be taxed on investments in the United States which are in his wife Louise Endres’ name.

Henry Endres was born in Germany in 1935. Louise was born in Berwick, Nova Scotia in 1950. Henry emigrated from Germany to Vancouver, British Columbia in 1955. He worked and studied in British Columbia and then worked in Alberta until about 1963 when his employer transferred him to Nova Scotia. There he finished his university degree at Dalhousie University in Halifax while he worked at Annapolis Valley Peat Moss Co. Ltd. (“A.V.P.M.”) in which his employer had large shareholdings. In October, 1967 Henry began a process of buying up A.V.P.M. shares. By the end of 1980, he and his family owned A.V.P.M.

Henry married and divorced without children. He married Louise in 1971. They have two children, Tanya, born in 1968, and Kyle, born in 1971. At the time of their marriage, Henry and Louise were living in the Berwick-Wolfville area of Nova Scotia. The evidence is also clear that they worked their way up from struggling to make a living to their present positions of considerable wealth. They are a very handsome couple. They made remarkable financial progress together in what is essentially a rural area of Canada that has been settled for hundreds of years by people of British stock.

In 1972 A.V.P.M. and Henry purchased all of the shares except two of Gulf Island Peat Moss Co. Ltd. (“G.I.”). Thereafter, G.I. was controlled by A.V.P.M. and sold its peat moss through A.V.P.M. In 1983 the last two shares of G.I. were purchased by Henry and Louise.

In 1979 Henry and Louise incorporated H.H.E. Holdings Limited (“H.H.E.”) for estate freezing purposes.

A.V.P.M. was, and remains, in the business of mining peat moss, processing it and selling it. 90% of its sales were, and are, in the U.S. and Japan. In 1979 peat moss and bark compost began to be mixed commercially in the industry to produce a lower grade product. In 1979 Henry and others incorporated Pro Gro Products Inc. (“Pro Gro”) in Elizabeth City, North Carolina, United States of America. The other two chief investors were Coenraad (father) and Christian (son) (“Chris”) Alblas. Chris became the manager of the new bark processing and peat moss mixing plant that Pro Gro built under Henry’s supervision in Elizabeth City. By the end of 1991, the Endres family owned all of Pro Gro.

In 1983 Gro Bark Inc. (“Gro Bark”) was formed. By 1992 Shawn Delaney owned 5% and the Endres family owned all of the other shares of Gro Bark.

When Henry and Louise married in 1971 they lived with their two children in a four suite apartment that Henry owns. Then they lived in Wolfville for a year where Louise operated a rooming house while Henry worked at A.V.P.M. near Berwick. Subsequently they rented a home for a year near Berwick. Then they built their house on an acreage on Cranberry Road, R.R. 1, Berwick near A.V.P.M. At their new house they built a small barn, with a hayloft above. They kept two horses in this barn. They also had three dogs and a number of cats. Eventually they sold the horses and converted the hayloft to a small apartment which served as a guesthouse. In the early 1970’s Louise began to be employed by A.V.P.M. doing errands, entertaining some customers and doing small office duties.

In the summer of 1985 a secretary at Pro Gro in Elizabeth City called Henry in Nova Scotia and stated that things were not quite right. In August there was a fire at the plant that caused $60,000 to $70,000 damage. Chris Alblas would not allow the insurance company to see Pro Gro’s books. The insurance agent phoned Henry who told him to go in on Monday. Henry phoned Chris and told him about this. On Sunday a fire destroyed Pro Gro’s office. Henry went to Elizabeth City. The records later proved that Chris’ brother-in-law had been overbilling Pro Gro and that its inventory was inflated. In October, Henry and Louise bought a house in Elizabeth City. They began $50,000 of renovations to the house which took several months. In January, 1986 Henry fired Chris Alblas. Coenraad Alblas had died in late 1985. Henry never saw Chris after January, 1986. Henry took over the management of Pro Gro and his family acquired Alblas’ shares in Pro Gro. He also began to monitor the management of Gro Bark.

By then, A.V.P.M. and G.I. had experienced management in place. The Endres stayed in Nova Scotia until Kyle finished his year in high school in 1986. In the fall they loaded their furniture, dogs, cats and Kyle and moved to Elizabeth City where Henry had been living since the fire at Pro Gro.

They listed the house (but not the “barn’’) for sale for $189,000 and also rented it to four young women who worked in the area. H.H.E. began the process of selling the 46 foot schooner, Sebrim, which was finally sold to a Connecticut man in 1987. Henry cancelled his yacht club membership in Nova Scotia after he sold the schooner. He retained a $15.00 per year membership in the Schooner Association. Henry purchased a 300 SL Mercedes Benz in Germany in 1986 and imported it directly to North Carolina. In 1987 he purchased a new 45 foot yacht “Pendragon” in North Carolina and joined the Kaspetang Sailing Club in Elizabeth City. Henry believes he obtained a North Carolina driver’s licence in 1986, but he may have done it in 1989. Louise obtained her North Carolina driver’s licence in February, 1987.

Tanya spent the 1986-87 year as an au pair in Europe. Nola Godding visited the Endres in Elizabeth City in April, 1987. She described their renovated old home as gracious and appropriately furnished. Henry returned to Berwick for short business visits on occasion. The family spent the summer of 1987 living in the sparsely furnished barn in Berwick. The house was still leased and remained listed but unsold. In the fall the family returned to Elizabeth City - Kyle to high school and Tanya to East Carolina University where she completed her degree four years later. After high school, Kyle went to Albemarle College for a year and then spent four years at Appalachian State University.

Henry and Louise guaranteed Pro Gro’s loan of almost $1,000,000 U.S. at Wachovia Bank & Trust Company in Elizabeth City. Henry guaranteed Gro Bark’s loan for $500,000 U.S. at South Carolina National Bank. By this time they had no personal guarantees outstanding for the Canadian corporations.

When Henry went to North Carolina in August of 1985 it was to prevent being wiped out by the disaster there. He was frank to say that he hoped to put the companies into shape and sell them and that he would sell the U.S. and/or Canadian companies today for the right price. Today that price is in the tens of millions of dollars. The companies are high-tech, high-profit leaders in their fields. Henry also said that his life is planned around business. His history - young in Germany, emigrating to British Columbia, moving with his job to Alberta, moving with his job to Nova Scotia, acquiring A.V.P.M., developing its international sales by frequent trips to the U.S.A, and Japan, starting up a new form of business in North Carolina, moving to North Carolina to save it and then develop the business and then integrate the Canadian peat moss operation into it - all confirm the truth of this. He is a modern international businessman.

Louise testified that she had one friend in Berwick. The rest were acquaintances. She is believed. Her premarital life in rural Nova Scotia with Henry, an immigrant, her rooming house operation, the business, her animals, living on an acreage, and their remarkable and evident financial success which became evident with the new acreage house and Sebrim, all would isolate her from the local community. Her only sister was in Alberta when they moved in 1986. She never joined the S.P.C.A. until she moved to North Carolina. She said, and the Court believes, that to her the schooner was work-cleaning it, readying it and preparing food; its social life was the dance after race week. When Louise testified that she was prepared for a new life and expected to stay in North Carolina forever and was happy to move when she left Berwick for Elizabeth City in the fall of 1986, the Court believed her. She knew what she was going to. She had helped choose the house in 1985. She followed up on her expectations. She lived in town. She made friends. She joined the S.P.C.A., helped the reading disabled and the couple participated in the local Board of Commerce. The family began skiing in the United States. In 1990 they purchased a ski residence in Steamboat Springs, Colorado.

The house near Berwick cost them $170,000 to build. They listed it for $189,000 for about two years. It did not sell. They had hoped to sell it to a Michelin executive. Catherine McCarthy described it in detail and said that it is well above the standard of other houses in the area. It is a large, well- built, luxury home with a “European flair”. She rented it for $600 per month and less. The Endres received one very low offer to buy it. They still own the house. When they moved in 1986 they left the kitchen furnishings and some other furniture in it. The barn suite was left fully furnished with modest furniture. Some clothing and other effects were stored in a 10' by 10' locked room in the house; eventually that appears to have included a large painting left behind by an artist who did not pay his rent during his tenancy of the house. They also left a 1969 Cutlas convertible which they had purchased second hand and restored when Tanya was in high school. They sold it a few years later.

Henry and Louise spent their summers in Nova Scotia while Kyle was in high school. Louise’s parents were both alive then. Her mother is still alive. Louise’s sister moved back to Berwick two years ago. They did not sell their Canadian investments. They kept their Canadian bank accounts and credit cards and obtained new bank accounts and credit cards in Elizabeth City. They did not change their addresses. A.V.P.M.’s staff forwarded their mail, received the rents and exercised powers of attorney with their brokers in Canada. Two of three authorized at A.V.P.M. sign company cheques.

Henry and Louise filed Canadian income tax returns in 1988 and 1989 for their Canadian income. In 1988 and 1989 they also filed joint income tax returns in the United States, as residents, for their world income. They were prepared by Mr. Peters who was then employed by Peat Marwick Thorne in Halifax. Their incomes then were such that they could easily afford the house in Berwick as a summer cottage. In the early years after they moved to Elizabeth City, the barn constituted a summer cottage and Henry stayed there when he came to Nova Scotia in the warm months. However it is not well heated. During his business visits in the winter, he stayed with Louise’s parents. When the house did not sell and they had problems over four years with three of their four tenants, the house became their cottage. Because it has hot water heating it always had to be heated and that bill was paid through A.V.P.M. for security’s sake. Catherine McCarthy verified the Endres’ testimony that they rented the house out through the summers when they could. Catherine was offered to continue renting the house through the summer of 1990 at a higher rent or renting the barn at a lower rent. She moved from the house to the barn and the Endres family stayed in the house that summer.

When the family entered the United States in the fall of 1986 they did so under Henry’s E(l) visa. It allowed Henry to enter as an investor. In 1988 Henry and Louise travelled to Montreal to apply for their Green Cards so that they could be employed in the United States and in turn their corporations there, which were still doing poorly, could receive “S” status. The Green Cards were granted. Louise’s is dated 03/01/89. Henry’s is dated 03/21/89. With that they became resident aliens entitled to work in the United States.

Respondent’s counsel laid great emphasis on the E(l) visa as an indication of non-residence in the United States. However, it is common knowledge that many people from around the world are illegally residing in Canada and the United States without any visa or other legal status. The visa is a small factor, given the other factors in evidence in this case.

Henry continued to acquire peat moss sources in Prince Edward Island after the move to Elizabeth City. In 1989 he formed Northern Peat Company Ltd. which purchased a large peat moss bog. In 1990 he formed Wellington Peat Moss Company which leased another peat moss bog. All of this and A.V.P.M. required Henry to visit Canada frequently. Catherine McCarthy testified that he was in Nova Scotia for two weeks in November, 1989, for one or two weeks in February, 1990 and for two weeks in May, 1990. Henry and the family were also in Nova Scotia each summer while Henry attended to A.V.P.M. business. In addition, for years he made two sales trips each year to Japan, attended several peat moss shows throughout the United States and occasionally attended the Canadian industry’s annual meetings. Henry was also involved in occasional negotiations with firms that wanted to buy the Canadian or the U.S. corporations.

In both 1988 and 1989 Henry declared Canadian Family Allowance receipts in his Canadian income tax return. They also have Nova Scotia M.S.I. cards. These are the provincial health insurance cards issued by Nova Scotia to its residents for public health insurance. Dr. Watson, an officer of M.S.I., testified that they are issued based on periodic declarations of residency in Nova Scotia. At the same time the Endres had health insurance in North Carolina. Henry did not use his Nova Scotia card in 1988 or 1989. Louise used hers three times in 1988 and 1989.

These appeals come about as a consequence of the Appellants’ failure to obtain a satisfactory resolution to their application for competent authority consideration under the Canada-United States Income Tax Convention, 1980. Paragraph 30 of Information Circular 71-17R4 reads:

30, If a taxpayer is not satisfied with a settlement negotiated by the competent authorities, the taxpayer can reject the settlement, in which event the competent authorities will consider the issue closed, and will advise the taxpayer accordingly. In these circumstances, taxpayers still have the right to proceed, assuming they have filed valid notices of objection, through the appeal process, to the courts on technical aspect(s) of the adjustment.

The appeals were issued pursuant to paragraph 165(7)(a) of the Income Tax Act. Appellants’ counsel drew the Court’s attention to the Canada-United States Income Convention Act, 1984, Chapter 20, S.C. 1984, subsection 3(2) which reads:

(2) In the event of any inconsistency between the provisions of this Act, or the Convention, and the provisions of any other law, the provisions of this Act and the Convention shall prevail to the extent of the inconsistency.

Appellants’ counsel argued on the basis of this that Article IV, paragraph 2 of the Convention applies if the Appellants are found to be residents of both Canada and the United States. Article IV, paragraphs 1 and 2, of the Canada-United States Income Tax Convention (1980) reads:

1. For the purposes of this Convention, the term “resident” of a Contracting State means any person that, under the laws of that State, is liable to tax therein by reason of that person’s domicile, residence, citizenship, 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 derived by the estate or trust is liable to tax in that State, either in its hands or in the hands of its beneficiaries. For the purposes of this paragraph, an individual who is not a resident of Canada under this paragraph and who is a United States citizen or an alien admitted to the United States for permanent residence (a “green card” holder) is a resident of the United States only if the individual has a substantial presence, permanent home or habitual abode in the United States, and that individual’s personal and economic relations are closer to the United States than to any third State. The term “resident” of a Contracting State is understood to include:

(a) The Government of that State or a political subdivision or local authority thereof or any agency or instrumentality of any such government, subdivision or authority, and

(b) (i) A trust, organization or other arrangement that is operated exclusively to administer or provide pension, retirement or employee benefits; and

(ii) A not-for-profit organization that was constituted in that State and that is, by reason of its nature as such, generally exempt from income taxation in that State.

2. Where by reason of the provisions of paragraph I an individual is a resident of both Contracting States, then his status shall be determined as follows:

(a) He shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);

(b) If the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;

(c) If he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen;

and

(d) If he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

In the Court’s view both Appellants were residents of the United States in 1988 and 1989. Their permanent home was in Elizabeth City, whereas the house in Nova Scotia was leased for the major part of each year with minimal furniture in it. The “barn” was merely a summer place. Their major business interests, business income and their major business covenants for loans were in North Carolina. Their children were in school in North Carolina. 90% of their Canadian corporations’ sales were in the United States. Louise’s social life was there. Henry’s business life was there. Their recreational life of yachting and skiing was in the United States. They were not residents of Canada in 1988 and 1989.

It is noted that both Appellants declared their residence for M.S.I. purposes as Canada in 1988 and 1989. Moreover, until they received their Green Cards, they were not formally recognized by the United States as having residency there, although it taxed them as residents. Due to these factors, it is useful to review the tests applicable under the Canada-United States Income Tax Convention (1980), Article IV, subparagraph 2(a). Their permanent home in both 1988 and 1989 was in Elizabeth City, North Carolina. The home at Berwick was rented out from time to time in 1988 and 1989. The barn was not capable of being resided in during the winter. They moved to their home at Elizabeth City in 1986 and it is where they lived in 1987 and throughout 1988 and 1989. It was fully furnished. The children were being educated in North Carolina. Elizabeth City was where Henry’s business life was conducted. It was where Louise’s social and household life was conducted and it was the centre from which their yachting and skiing were conducted. Upon the evidence taken as a whole, the Court finds that they physically occupied their home in Elizabeth City, North Carolina for more than seven months each calendar year in 1987, 1988 and 1989. Their economic interests were approximately equal in the United States and Canada. Their business activities of sales, management and operations, and liabilities were centred in the United States and in North Carolina. These were the portions that required the most time. Their personal interests in their family, recreation, friends and social life were closer to Elizabeth City and to North Carolina.

Both Appellants had their permanent home available to them at all times in Elizabeth City, North Carolina. Moreover, their personal and economic relations were closer to Elizabeth City, North Carolina than to Berwick, Nova Scotia. Elizabeth City, North Carolina was the centre of their vital interests.

Both Appellants were residents of the United States of America during 1988 and 1989. They were not residents of Canada in 1988 and 1989.

The appeals are allowed.

Each Appellant is awarded a full set of party and party costs throughout, except for the hearing itself which occurred on September 22 and 23, 1.997 in Halifax. One set of party and party costs is allowed for the hearing itself.

Appeal allowed.