Date:
20021211
Docket:
2001-3210-IT-G
BETWEEN:
CARL
BEAME,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Beaubier,
J.T.C.C.
[1]
This appeal pursuant to the General Procedure was heard at
Toronto, Ontario on November 22, 2002. Sunny Ngan, who was
the accountant for the Appellant at all material times, was the
only witness.
[2]
Paragraphs 1 to 13 inclusive of the Notice of Appeal outline the
matters in dispute. They read:
1.
The Appellant's address is:
Waterloo House
Killarney Road
Mallow, Co. Cork
Ireland
2.
The Appellant appeals from a Notice of Assessment dated
June 16, 1999 issued by the Minister of National
Revenue (the "Minister") pursuant to the Income Tax
Act (Canada) the "Act" for the 1997 taxation
year.
I.
FACTS
3.
At all material times the Appellant has been a resident of
Ireland.
4.
The Appellant disposed of shares of 1169813 Ontario Inc. (the
"shares"), a Canadian private corporation, realizing a
capital gain in the amount of $8,250,824, and a taxable capital
gain of $6,188,117, during the 1997 year.
5.
The shares constituted "taxable capital property" as
defined in paragraph 115(1)(b) of the Act.
6.
The Appellant obtained a clearance certificate from the Minister
pursuant to section 116 of the Act, prior to the disposition of
the shares, issued upon the basis that the Canadian tax was 15%
($928,218) of the Appellant's taxable capital
gain.
7.
The Minister assessed by Notice of Assessment dated June 16, 1999
for the 1997 taxation year upon the changed basis that the
Appellant's Canadian tax was 15% ($1,237,623) of his entire
capital gain, rather than 15% of his taxable capital
gain.
8.
The Appellant objected to the Minister's assessment by Notice
of Objection dated August 6, 1999 upon the basis that the 15% tax
rate under Article VI(1) of the Canada-Ireland Tax Treaty
is applicable to his taxable capital gain of
$6,188,117.
9.
The Minister confirmed his assessment for the 1997 taxation
year by Notification of Confirmation dated June 7, 2001, upon the
basis that:
"non-resident withholding tax of 15% was assessed on
income of $8,250,824 under the provisions of paragraph I of
Article VI of the Canada-Ireland Income Tax
Treaty."
II.
ISSUE
10.
The issue is whether the 15% tax rate, on the Appellant's
income derived from sources in Canada, under Article VI(1)
of the Canada-Ireland Income Tax Treaty, is applicable to the
Appellant's taxable capital gain, or to his entire capital
gain.
III.
STATUTORY PROVISIONS RELIED ON
11.
The Appellant relies, inter alia, upon sections 2, 3, 38,
39, 40, 115 and 116 of the Income Tax Act, Articles II(3),
VI(1) and XVI(l) of the Canada-Ireland Tax Treaty and section 3
of the Income Tax Conventions Interpretation Act, RSC
1985, c. I-4.
IV.
REASONS THE APPELLANT INTENDS TO RELY ON
12.
The Appellant submits that the word "income" in
the Act and in Article VI(l) of the Canada-Ireland Tax Treaty
refers only to the Appellant's taxable capital gain rather
than to his entire capital gain.
V.
RELIEF SOUGHT
13.
The Appellant requests that the appeal be allowed with costs and
that the assessment be referred back to the Minister for
reassessment upon the basis that the 15% tax rate under Article
VI(l) of the Canada-Ireland Tax Treaty is applicable to his
taxable capital gain, rather than to his entire capital
gain.
[3]
Paragraphs 1, 2, 3, 5, 6, 7, 8 and 9 of the Notice of Appeal were
admitted by the Respondent. Paragraph 4 describes what the
Appellant did in fact in 1997. The remaining paragraphs describe
the position of the Appellant.
[4]
Paragraph 12 of the Notice of Appeal describes the problem. The
Appellant states that "income" in Article VI(1) of the
Canada-Ireland Income Tax Agreement (the "Agreement")
means "taxable income" as it is described under the
Income Tax Act ("Act"). The
Respondent states that meaning of "income" in Article
VI of the Agreement should be confined to the Agreement itself
and that it has a broad meaning.
[5]
The Appellant's accountant, Mr. Ngan, testified that he
applied for a Clearance Certificate from Revenue Canada on July
5, 1996 (Exhibit A-1, Tab 2). It was issued to him on the
basis described in paragraph 4 described in the Notice of Appeal,
on February 7, 1997 in return for a cheque payable to the
Receiver General for 15% of the taxable capital gain pursuant to
the Act. He calculated the capital gain to be $8,250,823
and the taxable capital gain to be $6,188,177.25. The Appellant
paid $928,218 as set out in the Certificate (Exhibit A-1,
Tab 5).
[6]
Because the Appellant had paid all of his tax as set out in the
Clearance Certificate, he was not in a hurry to file his income
tax return. It was dated October 5, 1998 and filed in November.
It set out the particulars already described (Exhibit A-1, Tab
6).
[7]
On June 16, 1999 the Appellant was issued a Notice of Assessment
which claimed a balance of tax, interest and a late filing
penalty with an unpaid balance of $287,049.29. It stated
"According to the Canada-Ireland Income Tax Agreement, the
reduced tax rate of 15% applies to the total capital gains."
(Exhibit A-1, Tab 7).
[8]
The Appellant filed a Notice of Objection on August 6, 1999
(Exhibit A-1, Tab 8).
[9]
On June 7, 2001, the assessment was confirmed (Exhibit A-1, Tab
15) but the penalty was waived. This appeal followed.
[10] The
Respondent's position and argument is confined to Article VI,
paragraph 1, of the Agreement which reads:
1.
The rate of Canadian tax on income (other than income from
carrying on business in Canada or from performing duties in
Canada) derived from sources within Canada by a resident of
Ireland shall not exceed 15 per cent.
[11]
Appellant's counsel argued that the word "income"
in Article VI is not confined to the Agreement. He then went on
through five arguments. However the first two arguments are the
essence of the Appellant's case. The first is that Article VI
lowers the rate payable, which is true. The second is that the
meaning of the word "income" is to be determined by
reference to subsection 117(2), sections 2 and 3 and
paragraph 115(1)(b) of the Act.
[12]
Respondent's counsel stated that the words of the Agreement
are to be read broadly and that it is not necessary to go into
the Act. The following passage from Gladden Estate v.
The Queen, 85 DTC 5188 was cited in support of the essence of
this argument:
The
case of The Queen v. Melford Developments,
81 DTC 5020 (F.C.A.) and 82 DTC 6281 (S.C.C.) is very
much in point. Both divisions of the Federal Court, as well as
the Supreme Court of Canada, held in favour of the taxpayers who
were originally assessed on the basis that they had failed to pay
non-resident's withholding tax on guarantee fees paid
to a German bank. They, in turn, argued that they were exempt
since industrial or commercial profits were exempted under the
provisions of the Canada -Germany Tax Convention of
1956 and on the grounds that the guarantee fees had to be
classified as such. The Minister argued that, pursuant to a 1974
enactment which provided that guarantee fees would be deemed
to be interest, a non -resident withholding tax
was payable. Section 3 of the Act adopting the
Canada-German Treaty is identical to Section 3, which I
have quoted supra, of the legislation adopting the
Canada-U.S. Treaty. Urie, J., of the Federal Court of
Appeal, had this to say regarding the inviolability of a tax
treaty (refer p. 5024 of the report):
The
paragraph (i.e. paragraph 5 of Article III which allowed Canada
to tax interest) does not enable Canada to declare that a kind of
income that was accorded exemption in the Convention as such
profits and is not specifically provided for in the Articles that
follow shall be taxable. Such a unilateral action would not be
possible, in my view, because it would be in violation of the
terms of a binding agreement freely entered into by sovereign
states. Such an agreement can only be varied or amended by
agreement of the parties not by the action of one party in
changing its tax laws by the enactment of a section such as
section 214(15) in 1974 some 18 years after the agreement
was entered into.
On
the same subject Estey, J., in the Supreme Court of Canada
remarked (see pp. 6285-6286 of the above mentioned
report):
... Laws
enacted by Canada to redefine taxation procedures and mechanisms
with reference to income not subjected to taxation by the
Agreement are not, in my view, incorporated in the expression
"laws in force" in Canada as employed by the Agreement.
To read this section otherwise would be to feed the argument of
the appellant, which in my view is without foundation in law,
that sub. (2) authorizes Canada or Germany to unilaterally amend
the tax Treaty from time to time as their domestic needs may
dictate.
It is
well to remind ourselves in analysing these statutes and the
subtended tax Agreement that the international Agreement does not
itself levy taxes but simply authorizes the contracting parties,
within the terms of the Agreement, to do so.
...
Obviously
it follows that s. 3 or any other part of the 1956 statute can be
repealed or amended. The question is not that, but whether the
collateral legislative action in connection with the Income Tax
Act has the effect of amending the 1956 statute. The
suggestion that it does have such an effect is startling. There
are twenty-six concluded and ten proposed tax conventions,
treaties or agreements between Canada and other nations of the
world. If the submission of the appellant is correct, these
agreements are all put in peril by any legislative action taken
by Parliament with reference to the revision of the Income Tax
Act. For this practical reason one finds it difficult to
conclude that Parliament has left its own handiwork of 1956 in
such inadvertent jeopardy. That is not to say that before the
1956 Act can be amended in substance it must be done by
Parliament in An Act entitled "An Act to Amend the Act of
1956". But neither is the converse true, that is that every
tax enactment, adopted for whatever purpose, might have the
affect [sic] of amending one or more bilateral or multilateral
tax conventions without any avowed purpose or intention so to
do.
There
is no doubt, in my view, that the effect of s. 3 is to make
the operation of any other law of Parliament, including the
Income Tax Act, subject to the terms of the 1956 Act and the
incorporated Agreement. The only exception to this result would
be where Parliament has expressly set out to amend the 1956
statute. Then, of course, there is no conflict between the 1956
Act and "any other law". This interpretation has the
necessary result of embodying in the Agreement, by reason of Art.
II(2), as definitions of the words not therein defined, the
meaning of those words at the time the Agreement was adopted.
Thus any legislative action taken for whatever reason which
results in a change of expansion of a definition of a term such
as "interest" does not prevail over the terms of the
1956 statute because of the necessary meaning of s. 3 thereof
...
What the
position of the appellant amounts to is an assertion that Canada
can simply amend the Agreement by the device of redefining the
term interests.
(emphasis
added)
The same result
was arrived at on the same basis in the case of The Queen v.
Associates Corporation of North America,
80 DTC 6140 (F.C.A). (Refer also: Doris Lillian
Gadsden v. M.N.R., 83 DTC 127.) The next issue involves the
interpretation which must be given to the words "sale or
exchange" in Article VIII of the Treaty.
[Treaty
interpretation]
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 insofar as the particular item under consideration is
concerned.
Article 31 of the Vienna
Convention on the Law of Treaties (1969) to which Canada
subscribed governs the general rule of interpretation to be
applied. Paragraph 1 of that Article reads as follows:
1. A treaty shall be
interpreted in good faith in accordance with the ordinary meaning
to be given to the terms of the treaty in their context and in
the light of its object and purpose.
[13] Article VI
of the Agreement fixes a rate of 15% on "income". It
does not go further and add the adjective "taxable" to
that word. Even when the Agreement was drafted and adopted in
1966 and 1967, that could have been inserted into the Agreement
by the parties. But it was not.
[14] The Court
accepts the Respondent's argument that the meaning of the
word "income" under the Agreement is to be interpreted
in a broad fashion, without reference to the Act. In
particular, the passage quoted from Gladden is adopted in
support of that argument.
[15] For this
reason, the appeal is dismissed.
[16] The
Respondent is awarded party and party costs.
Signed at Vancouver, British
Columbia, this 11th day of December, 2002.
J.T.C.C.COURT FILE
NO.:
2001-3210(IT)G
STYLE OF
CAUSE:
Carl Beame v. Her Majesty the Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
November 22, 2002
REASONS FOR
JUDGMENT BY: The Honourable Judge D. W.
Beaubier
DATE OF
JUDGMENT:
December 11, 2002
APPEARANCES:
Counsel
for the Appellant: Pierre Barsalou and Zoltan Ambrus
Counsel
for the
Respondent:
Marie Thérèse
Boris
COUNSEL OF
RECORD:
For the
Appellant:
Name:
Pierre Barsalou and Zoltan Ambrus
Firm:
Barsalou Lawson
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-3210(IT)G
BETWEEN:
CARL
BEAME,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on November 22, 2002 at Toronto, Ontario, by
the
Honourable Judge D. W. Beaubier
Appearances
Counsel
for the
Appellant:
Pierre Barsalou and Zoltan Ambrus
Counsel
for the
Respondent:
Marie Thérèse
Boris
JUDGMENT
The appeal from the assessment made under the Income Tax
Act for the 1997 taxation year is dismissed, with costs,
in accordance with the attached Reasons for Judgment.
Signed at Vancouver, British Columbia, this 11th day of December,
2002.
J.T.C.C.
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