Citation: 2008TCC158
Date: 20080317
Docket: 2007-3078(IT)I
BETWEEN:
ANTHONY MARCHAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1] The issue in this case is whether the Appellant is
entitled to a deduction, under subsection 126(1) of the Income Tax Act ("Act")
in computing his tax liability under the Act for 2005, for certain
amounts withheld from his proceeds of disposition of shares of The Boeing Company
(“Boeing”).
[2] The Appellant is an accountant. He was employed by Boeing Toronto
Limited, which is a wholly owned subsidiary of Boeing, and he worked in Toronto. As
part of the terms of the Appellant's employment he received stock options for
the shares of Boeing. In 2005, he exercised a portion of those options and then
sold 190 shares of Boeing back to Boeing.
[3] The Appellant did not pay for the options. The Appellant submitted a
data summary sheet showing the sale of Boeing shares. The following table
summarizes the information related to the acquisition and disposition of the
shares:
|
Exercise Date
|
Apr. 27, 2005
|
Apr. 27, 2005
|
Aug. 9, 2005
|
Total
|
|
Quantity
(1):
|
120
|
40
|
30
|
190
|
|
Grant
price (USD)(2):
|
$34.58
|
$40.28
|
$40.28
|
|
|
Cost
(1) x (2) (USD):
|
$4,149.60
|
$1,611.20
|
$1,208.40
|
$6,969.20
|
|
Sale
Price (USD):
|
$59.97
|
$59.97
|
$57.10
|
|
|
Gross
Proceeds (USD):
|
$7,196.40
|
$2,398.80
|
$2,013.00
|
$11,608.20
|
|
Gross
Proceeds (Cdn):
|
$8,971.03
|
$2,990.34
|
$2,444.18
|
$14,405.55
|
|
Commissions
/ Fees (Cdn)
|
$25.32
|
$6.35
|
$30.46
|
$62.13
|
|
Net
Proceeds (Cdn):
|
$8,945.71
|
$2,983.99
|
$2,413.72
|
$14,343.42
|
|
Cost
(Cdn):
|
$5,172.89
|
$2,008.52
|
$1,467.24
|
$8,648.65
|
|
Tax
Withheld (Cdn):
|
$2,504.81
|
$835.52
|
$675.84
|
$4,016.17
|
|
Cheque
(Cdn):
|
$1,268.01
|
$139.95
|
$270.64
|
$1,678.60
|
[4] I conclude that the exercise price for the shares was paid by the
Appellant when the option was exercised, as the grant price was deducted from
the gross proceeds that would otherwise have been payable to the Appellant on
the sale of the shares. The total amount of the three cheques paid to the
Appellant for the 190 shares was US$1,352.34 which would be CAN$1,678.60.
[5] The following table illustrates the capital gain, taxable capital gain
and amount withheld as a percentage of the net proceeds and taxable capital
gain:
|
Exercise
Date
|
Apr.
27, 2005
|
Apr.
27, 2005
|
Aug.
9, 2005
|
Total
|
|
Quantity:
|
120
|
40
|
30
|
190
|
|
Gross Proceeds (Cdn):
|
$8,971.03
|
$2,990.34
|
$2,444.18
|
$14,405.55
|
|
Commissions / Fees (Cdn)
|
$25.32
|
$6.35
|
$30.46
|
$62.13
|
|
Net Proceeds (Cdn):
|
$8,945.71
|
$2,983.99
|
$2,413.72
|
$14,343.42
|
|
Cost (ACB) (Cdn):
|
$5,172.89
|
$2,008.52
|
$1,467.24
|
$8,648.65
|
|
Capital Gain (Cdn):
|
$3,772.82
|
$975.47
|
$946.48
|
$5,694.77
|
|
Taxable capital gain (Cdn):
|
$1,886.41
|
$487.73
|
$473.24
|
$2,847.38
|
|
Tax Withheld (Cdn):
|
$2,504.81
|
$835.52
|
$675.84
|
$4,016.17
|
|
Tax Withheld as a percentage
of the Net Proceeds:
|
28%
|
28%
|
28%
|
28%
|
|
Tax withheld as a percentage
of the capital gain:
|
66%
|
86%
|
71%
|
71%
|
[6] When the Appellant filed his income tax return for 2005 he reported a
capital gain of $5,695 and a taxable capital gain of $2,847. The Respondent
agrees with these amounts. The only dispute relates to the deduction of
$4,016.17 that the Appellant claimed pursuant to subsection 126(1) of the Act
in determining his tax liability. This was the amount withheld by the brokerage
firm that handled the sale transaction for the Boeing shares.
[7] The Appellant also stated that his total qualifying incomes for the
purposes of subparagraph 126(1)(b)(i) of the Act were $14,343 in 2005.
This amount is equal to the net proceeds stated above. However while the
Appellant included this amount in calculating his qualifying incomes, he did
not include this amount in determining his income for the purposes of subparagraph
126(1)(b)(ii) of the Act. The only amount related to the Boeing shares
that was included by the Appellant in his income for the purposes of
subparagraph 126(1)(b)(ii) of the Act was $2,847 – the amount of the
taxable capital gain.
[8] Subsection 126(7) of the Act provides that:
“qualifying incomes” of a taxpayer from sources in a country means
incomes from sources in the country, determined in accordance with subsection
(9);
[9] The incomes that comprise “qualifying incomes” would be incomes determined
in accordance with the Act. Therefore, in relation to a disposition of
shares that results in a capital gain for the purposes of the Act, the proceeds
realized from the disposition of the shares minus the fees and commissions
related to the disposition would not be the amount that would be included in
determining qualifying incomes for the purposes of subsection 126(1) of the Act.
The amount that would be included would be the amount of the taxable capital
gain.
[10] However, the issue in this case is whether the amounts that were
deducted by the brokerage firm were taxes that were paid to the United States.
In order for the Appellant to claim a credit for foreign taxes paid under
section 126 of the Act, the Appellant must have paid non-business income
tax to a government of a country other than Canada.
[11] The position of the Respondent in this case is that there was no
liability to pay any amount to the US government as taxes in relation to this disposition
of shares by the Appellant. The Appellant was neither a resident of the United
States nor a citizen of the United States. The Appellant worked in Toronto and was
a resident of Canada. He is also a Canadian citizen. The position of the
Respondent was that any gain realized by the Appellant as a result of the
disposition of the shares will be exempted from US tax as a result of the
application of Article XIII of the Canada ‑ US Tax Convention.
[12] The Appellant's position is that the stock option plan was established
by his employer, the amounts were deducted by the brokerage firm acting for his
employer, he had no control over the deduction of these amounts and that these
amounts were a tax. The Appellant submitted a copy of the US code
collection Section 1441 which is found in Title 26 of the Internal Revenue
Code, Subtitle A, Chapter 3, Subchapter A. This section provides, in part, as
follows:
1441. Withholding of tax on nonresident
aliens
(a) General rule
Except as otherwise provided in subsection (c), all
persons, in whatever capacity acting (including lessees or mortgagors of real
or personal property, fiduciaries, employers, and all officers and employees of
the United States) having the control, receipt, custody, disposal, or payment
of any of the items of income specified in subsection (b) (to the extent that
any of such items constitutes gross income from sources within the United
States), of any nonresident alien individual or of any foreign partnership shall
(except as otherwise provided in regulations prescribed by the Secretary under
section 874) deduct and withhold from such items a tax equal to 30
percent thereof….
(emphasis added)
[13] This provision provides that, if applicable, the amount to be withheld
is 30% of the income amounts identified in 1441(b), which provides, in part,
as follows:
(b) Income items
The items of income referred to in subsection (a) are
interest (other than original issue discount as defined in section 1273), dividends, rent, salaries, wages,
premiums, annuities, compensations, remunerations, emoluments, or other fixed
or determinable annual or periodical gains, profits, and income, gains
described in section 631 (b) or (c), amounts subject to tax under section
871 (a)(1)(C), gains subject to tax under section 871 (a)(1)(D), and gains on transfers described in
section 1235 made on or before October 4, 1966….
[14] The Form 1099 for 2005 that the Appellant received from the brokerage
firm suggests that the amount withheld was based on the Net Proceeds as stated
in table above. However, the amount withheld as a percentage of the net
proceeds was 28% not 30% (which is from the table above and which is the
same percentage determined based on the US dollar amounts set out in the Form
1099). As well since the grant price was deducted from the proceeds payable to
the Appellant (and hence the Appellant paid the grant price), the payor knew
the amount of the gain realized by the Appellant and it is not clear why the
amount withheld would not have been based on the gain and not the net proceeds.
[15] US Code Collection section 1441
does not, however, conclusively establish that the amounts should have been
withheld under this paragraph. This section notes that the persons identified
in the first part shall “except as otherwise provided in regulations prescribed
by the Secretary under section 874” deduct and remit the appropriate amounts.
However, since these regulations were not submitted at the hearing, it cannot
be determined whether there is any applicable exception to this requirement to
withhold in these regulations, and therefore it cannot be determined whether
these amounts were required to be withheld from the Appellant.
[16] The provision of any regulations passed in accordance with the laws of
the United States would be a matter of foreign law. Justice Rothstein
in Backman v. The Queen, 178 D.L.R. (4th) 126, [1999] F.C.J. No. 1327, stated
as follows:
38 Where
foreign law is relevant to a case, it is a question of fact which must be
specifically pleaded and proved to the satisfaction of the Court. Professor
J.-G. Castel has summarized the effect of the failure of a party to establish
foreign law as a fact before the Court:
If foreign law is not pleaded and proved or is insufficiently proved, it
is assumed to be the same as the lex fori. This seems to include statutes as
well as the law established by judicial decision.
39 Professor
Castel acknowledges that some Canadian courts have been reluctant to apply the
presumption that the law of the foreign jurisdiction is the same as that of the
forum, where the law of the forum is a statute. However in Fernandez v.
Mercury Bell (The), Marceau J.A. held that the salient
distinction is not whether the law of the forum is statutory or common law:
What has appeared constant to me, however, in reading the cases, is the
reluctance of the judges to dispose of litigation involving foreign people and
foreign law on the basis of provisions of our legislation peculiar to local
situations or linked to local conditions or establishing regulatory
requirements. Such reluctance recognizes a distinction between substantive
provisions of a general character and others of a localized or regulatory
character; this distinction, a distinction, formally endorsed I think by
Cartwright J. in the two passages I have just quoted, is wholly rational which
is more than can be said of a simple division between common law and statute
law. …
In a separate
concurring opinion, Hugessen J.A. observed that even at the time when the
preponderance of English law was judge-made, it was doubtful that it would have
been argued that a statute of general application should not come within the
rule of presumption:
My second observation relates to the suggestion, in some of the
authorities, that the application of the lex fori is limited to the common law
as settled by judicial decisions and excludes all statutory provisions. Here
again I think the expressions of the rule have been coloured by the historical
context and go back to a time when the great body of English law was
judge-made; statutes were creatures of exception, outside the general body of
the law. Even at that time, however, I doubt that it would seriously have been
argued that a statute of general application such as, for example, the Bills of
Exchange Act should be overlooked, so as to oblige the court to search in the
obscurities of history to determine the state of the law prior to its
enactment. The proper expression of the rule, as it seems to me, is that the
court will apply only those parts of the lex fori which form part of the general
law of the country.
40 I
think that legislation with respect to partnerships is such an example of
statutory law of general application. There is nothing intrinsically local or
particular with respect to partnerships, and there is considerable uniformity
in this area of law across jurisdictions.
[17] In my opinion, the income tax laws of any country would not be
considered to be statutory laws of general application for the purposes of the
application of the lex fori to any unproven tax laws of a foreign
jurisdiction, and therefore the provisions of the Act and the Income
Tax Regulations should not be applied to fill in any gaps missing from the
US tax laws that have been established at the hearing. Since the Appellant has
not established that the regulations referred to in US Code Collection section
1441 do not apply to exempt his payments from the tax imposed under this
section and since the amounts deducted do not correspond to the amounts
referred to in this section, the Appellant has failed to establish that the
amounts deducted by the brokerage firm were a tax.
[18] This case is also similar to the case of Meyer v. The Queen, 2004
TCC 199. The individual in that case failed to claim a treaty exemption, but
yet still sought to deduct the amount of taxes paid to the United States
as a foreign tax credit. In that case Justice Hershfield made the following
comments:
20 While I have some reservations in accepting the notion
that the CCRA can determine if a foreign tax paid is a voluntary payment and
therefore not a "tax", on the facts of this case, based on the
authorities cited by the Respondent, I accept that the amount in dispute was
not a "tax" paid to the foreign jurisdiction in question. That is not
to say however that all voluntary payments are not a "tax". For
example, that one might not claim discretionary deductions and voluntarily
increase the tax in a foreign jurisdiction would not entitle the CCRA to deny a
credit on that basis. Nor should the CCRA dictate any foreign filing position
on a resident taxpayer. However, where the resident taxpayer has
approached his foreign filing position without regard to providing the
information necessary to determine the tax payable, such as not submitting
required forms or return information to claim a Treaty entitlement, and has
refused to correct the error or establish that it was not in error, the
resultant overpayment can be regarded as an amount paid other than as a
"tax".
…
22 With
that said, I wish to emphasize that it is always open to the taxpayer to bring
evidence that the foreign tax paid was not gratuitously paid without basis
under the laws of the foreign jurisdiction. That is a question this Court can
determine but the onus is on the taxpayer. The Appellant chose to ignore that
onus and simply wanted the CCRA to work it out with the U.S. Treasury or Internal
Revenue Service and leave him out of it. This is not an acceptable position in
my view. That is, while the language of section 126 does not ultimately permit
the CCRA to deny a credit because it has reason to believe that the foreign tax
has been erroneously calculated under the laws of that foreign jurisdiction or
is limited by provisions of the tax Treaty between that jurisdiction and Canada,
nothing prevents it from taking that position and putting the onus on the
taxpayer to show that such belief is not well-founded. In any event Article
XVIII, paragraph 2(a), expressly provides that the U.S. cannot charge a tax in
excess of 15% in respect of pensions received from the U.S. by a Canadian
resident. Article XXIX, paragraph 3, provides that this limitation applies to
citizens of the U.S. An excess amount paid then is not a "tax".
(emphasis added)
[19] In this case it is clear that the Appellant has not taken any action to
have the provisions of Article XIII of the Canada - US Tax Convention applied to his case in relation
to the disposition of the shares of Boeing.
[20] Article XIII of the Canada - US Tax Convention provides in part as follows:
1. Gains derived by a resident of a Contracting
State from the alienation of real property situated in the other Contracting State
may be taxed in that other State.
…
3. For the purposes of this Article the term “real property situated in
the other Contracting State”
(a) in the case of real property situated in the United States, means a
United States real property interest and real property referred to in
Article VI (Income from Real Property) situated in the United States, but does
not include a share of the capital stock of a company that is not a resident of
the United States; and
(b) in the case of real property situated in Canada means:
(i) real property referred to in Article VI (Income from Real Property)
situated in Canada;
(ii) a share of the capital stock of a company that is a resident of
Canada, the value of whose shares is derived principally from real property
situated in Canada; and
(iii) an interest in a partnership, trust or estate, the value of which
is derived principally from real property situated in Canada.
4. Gains from the alienation of any property other than that referred to
in paragraphs 1, 2 and 3 shall be taxable only in the Contracting State of
which the alienator is a resident.
[21] Gains derived by a resident of Canada from the disposition of a property
that is not described in paragraphs 1, 2 or 3 will only be taxable in Canada. Gains
derived by a resident of Canada from the disposition of a United States
real property interest (other than a share of a company that is not a resident
of the United States) will not be exempted from tax in the US under
Article XIII. The fact that this paragraph provides an exception for shares of
certain companies means that shares of a company could be included in the
definition of a United States real property interest. Otherwise there would be no
need to exclude shares of companies not resident in the United States
if shares of a company could not be a United
States real property interest.
[22] As well in the Technical Explanation provided for this Article of the Convention
it is stated that:
Under paragraph 3(a) of Article XIII of the Convention, real property
situated in the United States includes real property (as defined in Article VI
(Income from Real Property) of the Convention) situated in the United States
and a United States real property interest. Under section 897(c) of the
Internal Revenue Code (the “Code”) the term “United States real property
interest” includes shares in a U.S. corporation that owns sufficient U.S. real
property interests to satisfy an asset-ratio test on certain testing dates.
[23] There was no evidence submitted with respect to the assets of Boeing
and no balance sheet was submitted. While it may be unlikely that the shares of
Boeing, which is a well‑known manufacturer of airplanes, would be a United States
real property interest, I am unable to make any finding on this point without
further evidence on the applicable tests under the Internal Revenue Code. There
was also no evidence with respect to whether there may be an exception for
shares of publicly traded companies based on the percentage of shares held by
the particular person. Further evidence would be required to determine the
criteria that must be examined to determine if shares of a company are a United
States real property interest and whether the shares of Boeing sold by the
Appellant would be a United States real property interest. It is, however, clear that
the Appellant has not taken any steps to determine his liability for U.S. taxes as a
result of the application of the provisions of the Canada – U.S.
Tax Convention.
[24] As noted by Justice Hershfield in Meyer, the provisions of
Article XXVI of the Canada - US Tax Convention may also be available to assist
the Appellant. This Article provides in part that:
1. Where a person considers that the actions of one or both of the
Contracting States result or will result for him in taxation not in accordance
with the provisions of this Convention, he may, irrespective of the remedies
provided by the domestic law of those States, present his case in writing to
the competent authority of the Contracting State of which he is a resident or,
if he is a resident of neither Contracting State, of which he is a national.
2. The competent authority of the Contracting State to which the case has
been presented shall endeavor, if the objection appears to it to be justified
and if it is not itself able to arrive at a satisfactory solution, to resolve
the case by mutual agreement with the competent authority of the other
Contracting State, with a view to the avoidance of taxation which is not in
accordance with the Convention. Except where the provisions of Article IX
(Related Persons) apply, any agreement reached shall be implemented
notwithstanding any time or other procedural limitations in the domestic law of
the Contracting States, provided that the competent authority of the other
Contracting State has received notification that such a case exists within six
years from the end of the taxable year to which the case relates.
3. The competent authorities of the Contracting States shall endeavor to
resolve by mutual agreement any difficulties or doubts arising as to the
interpretation or application of the Convention. In particular, the competent
authorities of the Contracting States may agree:
(a) to the same attribution of profits to a resident of a Contracting State
and its permanent establishment situated in the other Contracting State;
(b) to the same allocation of income, deductions, credits or allowances
between persons;
(c) to the same determination of the source, and the same
characterization, of particular items of income;
(d) to a common meaning of any term used in the Convention;
(e) to the elimination of double taxation with respect to income
distributed by an estate or trust;
(f) to the elimination of double taxation with respect to a partnership;
(g) to provide relief from double taxation resulting from the application
of the estate tax imposed by the United States or the Canadian tax as a result
of a distribution or disposition of property by a trust that is a qualified
domestic trust within the meaning of section 2056A of the Internal Revenue
Code, or is described in subsection 70(6) of the Income Tax Act or is treated
as such under paragraph 5 of Article XXIX-B (Taxes Imposed by Reason of Death),
in cases where no relief is otherwise available; or
(h) to increases in any dollar amounts referred to in the Convention to
reflect monetary or economic developments.
They may also consult together for the elimination of double taxation in
cases not provided for in the Convention.
[25] Therefore, if the Appellant is unable to resolve this matter directly
with the US tax authorities, the Appellant will have the right to apply in writing
to the Canada Revenue Agency under Article XXVI of the Canada – US Tax
Convention to try to have the matter resolved by the Canada Revenue Agency. As
the Respondent has clearly assumed in the Reply that no amount is payable to
the United States Internal Revenue Service on account of tax payable as a result
of the disposition of the Boeing shares by the Appellant, there does not appear
to be any basis on which the Canada Revenue Agency could say that the objection
of the Appellant does not appear to be justified if the Appellant is unable to
resolve this matter directly with the Internal Revenue Service.
[26] The Appellant has failed to establish that the amounts withheld by the
brokerage firm were a tax paid to the United States as the Code Collection
provision referred to above was incomplete (as the regulations referred to in
this provision were not submitted) and as the Appellant has failed to take any
action in relation to his right to claim an exemption under the Canada - US Tax
Convention. Therefore the appeal is dismissed without costs. The Appellant had
also raised the issue of a deduction under subsection 20(12) of the Act.
However, since a deduction under this section would also be based on the
non-business income tax paid by the Appellant, the failure of the Appellant to
establish that the amounts withheld by the brokerage firm were a tax paid to
the United States, also means that no deduction would be available to the
Appellant in this case pursuant to subsection 20(12) of the Act.
[27] The appeal is dismissed, without costs.
Signed at Halifax, Nova Scotia, this 17th day of March 2008.
“Wyman W. Webb”
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