Citation: 2006TCC579
Date: 20061024
Docket: 2005-469(IT)G
BETWEEN:
CANWEST MEDIAWORKS INC.
(successor by amalgamation to CanVideo Television
Sales (1983) Limited),
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Miller J.
[1] The Appellant,
Canwest Mediaworks Inc., is the successor by amalgamation to CanVideo
Television Sales (1983) Limited (CanVideo). Canwest International Communications
Inc. (CICI) was a resident Barbadian company and a controlled foreign affiliate
(CFA) of CanVideo at the relevant time. The Minister of National Revenue (the
Minister), relying on the foreign accrual property income (FAPI) provisions of
section 91 of the Income Tax Act (the Act), reassessed CanVideo
for its 1997 taxation year within the time limits provided by Canadian domestic
laws (due to a waiver), though beyond the five‑year limitation period set
forth in Article XXVII(3) of the Canada-Barbados Income Tax
Convention, 1980 (the "Treaty"). The Minister justifies
the reassessment on the basis that Article XXX(2) of the Treaty
overrides Article XXVII(3).
[2] Article XXVII(3)
and XXX(2) of the Treaty read as follows:
XXVII(3) A Contracting
State shall not, after the expiry of the time limits provided in its national
laws and, in any case, after five years from the end of the taxable period in
which the income concerned has accrued, increase the tax base of a resident of
either Contracting State by including therein items of income which have also
been charged to tax in the other Contracting State. This paragraph shall not
apply in the case of fraud, wilful default or neglect.
…
XXX(2) Nothing in this
Agreement shall be construed so as to prevent Canada from imposing its tax on
amounts included in the income of a resident of Canada according to section 91 of the Canadian Income Tax Act.
[3] The sole issue is
whether the limitation period in Article XXVII(3) applies or whether Article
XXX(2) overrides the limitation period, allowing the Minister's
reassessment after the five-year limitation period. I find the limitation
period applies and the Minister's reassessment was issued too late.
[4] The parties
provided an Agreed Statement of Facts which put some meat on the factual
barebones set forth in the previous paragraphs. The following are segments of
those agreed facts:
6. During its
taxation year ending August 31, 1996 (the "1996 CICI Taxation Year"),
CICI earned, among its other income, interest on treasury bills and deposits
with the Royal Bank of Canada (collectively, the "RBC
Deposits") in the aggregate amount of C$659,974 (the "RBC
Interest").
7. The RBC
Interest was included as interest income in determining the Barbados tax liability of CICI for the 1996 CICI Taxation
Year. The Barbados Department of Inland Revenue issued an assessment of the
1996 CICI Taxation Year on September 12, 1997, charging the RBC Interest to tax
in Barbados
8. The RBC
Interest was not included as foreign accrual property income
("FAPI"), as that term is defined in subsection 95(1) of the Act,
in the tax return filed by CanVideo for the Taxation Year. There is no suggestion
of fraud, wilful default or neglect on the part of CanVideo in not including
the RBC Interest as FAPI in its tax return for the Taxation Year.
9. On December 18,
1997, the Minister of National Revenue (the "Minister") issued to
CanVideo an original notice of assessment for the Taxation Year on the basis
that the RBC Interest was not included as FAPI, pursuant to subsection 91(1) of
the Act, in determining CanVideo's tax liability for the Taxation Year.
10. The normal
reassessment period for the Taxation Year, as defined in subsection 152(3.1) of
the Act, was four years from the date of the original notice of
assessment and therefore ended on December 18, 2001.
11. Prior to the
expiry of the normal reassessment period of the Taxation Year, the Minister
requested a waiver of the limitation periods under the Act relating to a
number of issues concerning the Taxation Year, including in respect of FAPI
earned by CFA of CanVideo. On November 9, 2001, GCL delivered such a waiver to
the Minister in respect of CanVideo that allowed the Minister a continuation of
its review of the Taxation Year.
12. On August 16,
2004, the Minister issued to GCL a notice of reassessment in respect of
CanVideo for the Taxation Year (the "Reassessment"). In the
Reassessment, the Minister increased the tax base of CanVideo for the Taxation
Year to include the amount of C$659,974 attributable to the RBC Interest earned
by CICI in its 1996 CICI Taxation Year, which the Minister characterized as
FAPI under subsection 91(1) of the Act. As a result of the delivery of
the waiver, the Reassessment was issued prior to the expiry of the limitation
periods under the Act but beyond the limitation period set out in Article
XXVII of the Treaty.
…
14. The Treaty
was signed on January 22, 1980 by representatives of the Governments of Canada
and Barbados. The Treaty is generally
patterned on the 1977 Model Double Taxation Convention prepared by the
Organisation for Economic Co-operation and Development (the "OECD")
(the "OECD Model Convention").
…
17. There have been
no public or published statements by the Government of Canada or the Government
of Barbados, or in each case by any agency, department or similar subdivision
thereof, with respect to the interaction between paragraph 3 of Article
XXVII and paragraph 2 of Article XXX. There has been no exchange of
diplomatic notes between the Government of Canada and the Government of
Barbados with respect to the interaction between paragraph 3 of Article
XXVII and paragraph 2 of Article XXX. Canada is not aware of any documentation,
internal directives or other written material that demonstrate that one of the
purposes of paragraph 2 of Article XXX of the Treaty is to
overcome the limitation period in paragraph 3 of Article XXVII. Canada is not aware of any documentation,
internal directives or other written material that demonstrate that one of the
purposes of paragraph 3 of Article XXVII of the Treaty is to
overcome the effect of paragraph 2 of Article XXX.
…
21. Barbados tax law does not have regime analogous to the FAPI regime described
in subsections 91(1) and 95(1) of the Act. Canada has entered into tax treaties with approximately 14 countries that
have a FAPI regime. Most of those treaties have a provision analogous to
paragraph 2 of Article XXX of the Treaty, approximately half
of those treaties have no provision analogous to paragraph 3 of Article
XXVII of the Treaty, approximately one quarter of those treaties have a
provision analogous to paragraph 3 of Article XXVII of the Treaty,
and approximately one quarter of those treaties have a limitation provision
that is restricted to Article IX of the Treaty (Association
Enterprises, sometimes described as Related Persons).
…
25. Pursuant to subsection 91(1) of the Act,
items of income qualifying as FAPI that are earned by a CFA in a particular
taxation year of the CFA are added to the tax base of the Canadian resident in
the taxation year of the Canadian resident in which the particular taxation
year of the CFA ends.
[5] The Respondent also
called Mr. Ross John Kauffman, a senior advisor on tax treaties with the Canada
Revenue Agency. Over the last ten years he was involved in negotiating 20
treaties, all of which had a provision similar to, or broader than, Article
XXX(2) of the Treaty (the FAPI provision). He explained that the reason
for including such a provision in the treaties he negotiated was to preserve or
ensure Canada's right to "get
at" FAPI. With respect to Article XXVII(3) his understanding was
that this was a relieving provision, setting a maximum time limit within which
either state would be required to adjust the taxpayer's income. Mr. Kauffman
testified that his experience was this type of provision was driven by transfer
pricing cases and by concerns over records not being available from too many
years gone by.
Appellant's position
[6] The Appellant
argues that the two Articles can live in harmony, as one deals with Canada's jurisdiction to tax,
while the other is a procedural limitation provision only. They can be read cohesively,
enabling the Minister to assess FAPI giving effect to Article XXX(2) but
only within the Article XXVII(3) limitation. In other words, Article
XXVII(3), as a clear procedural provision, does not prevent the taxation of
FAPI.
Respondent's position
[7] The Respondent
argues that the words of Article XXX are clear and that Article
XXVII(3) is a provision in the Treaty that can be construed so as to
prevent Canada from taxing FAPI. In
this case, it is therefore in order for the Minister to not construe Article
XXVII(3) in that fashion by giving Article XXX paramountcy. As an
alternative argument, the Respondent falls back on the implied exception
principle of statutory interpretation that the specific overrides the general,
arguing that the FAPI provision is a specific provision overriding the general
limitation period provision.
Analysis
[8] Both sides agree
that, in line with the Supreme Court of Canada decision in The Queen v.
Crown Forest Industries Limited et al.,
it is essential in interpreting a treaty to look to the language used and the intention
of the parties.
Language used
[9] The Respondent's
position is simple – the words "Nothing in this Agreement shall be
construed so as to prevent Canada" from taxing FAPI could not be clearer. Article
XXVII(3), as a limitation provision, can be construed to prevent Canada from taxing FAPI in
certain circumstances. This case is one of those circumstances. The Respondent
sees no ambiguity in the wording of either Article.
[10] The Appellant
scrutinizes the expression "construed so as to prevent" in some
detail, arguing that limiting the application of a rule to five years is
fundamentally different from preventing the application of a rule. The
Appellant contends that even beyond the five-year period, Article
XXVII(3) does not prevent taxation by Canada of FAPI, but simply narrows the
items that may be included in income to those that have not been subjected to
tax in Barbados, those in respect of which there has been fraud, neglect or
wilful default, and those that have been included in income within the five
years and assessed. In effect, Canada's right to tax FAPI is not prevented. I find this argument
persuasive.
[11] "Prevent"
implies a total prohibition of something before it occurs. The Oxford English
Dictionary defines "prevent":
To stop, keep, or hinder (a person or
other agent) from doing something (7); To provide beforehand against the
occurrence of (something); to render (an act or event) impracticable or
impossible by anticipatory action; to preclude, stop, hinder (8).
Justice Kerr in Abbott Laboratories, Limited v. The
Queen
gave the following definitions:
… Various dictionary definitions were referred to, including the
following:
Prevent
… To prevent is to stop something
effectually by forestalling action and rendering it impossible. (Random
House Dictionary of the English Language, 1966).
… 7. To use preventive measures. (The
Shorter Oxford English Dictionary, Third Edition, 1956).
Prevention
… the action of keeping from happening or
of rendering impossible an anticipated event or an intended act; a means of
prevention; (The Shorter Oxford English Dictionary, Vol. 1, 3rd ed.,
1944, reprinted in 1947).
The act of preventing; effectual
hindrance. (Random House Dictionary of the English Language, 1966).
[12] This degree of a
permanent cessation or forestalling is not what Article XXVII(3)
does. I regard Article XXVII(3) as providing that Canada can tax FAPI as a
Canadian resident, except after five years if FAPI has been charged to tax in Barbados. In effect, Canada is not
"prevented" from imposing tax by Article XXVII(3); it is
precluded from imposing tax by it own actions of not imposing tax on a timely
basis.
[13] I find further
support for this view of the interplay between the two Articles by
considering the use of the term "shall be construed so as to". These
words must mean something: Article XXVII(3) does not read simply,
"nothing in this agreement shall prevent". These additional words are
inserted for a reason. Why? The logical explanation is because there may be
provisions which are open to construction – they need interpretation one way or
another. Nothing in Article XXVII(3) requires interpretation: it is
a straightforward limitation provision – no construction necessary (unlike Articles
VII and XX which I will consider later in reviewing the intent of Articles
XXVII and XXX).
[14] Simply based on the
language of the Articles:
(i) Does
Article XXVII(3), on any construction, prevent Canada from taxing a Canadian resident on
its FAPI? No.
(ii) Specifically,
does Article XXVII(3) prevent Canada from taxing the Appellant on its FAPI? No. Canada can tax Canwest on its
FAPI.
(iii) Even
more specifically, does Article XXVII(3) prevent Canada from taxing Canwest on
its FAPI after the five-year limitation? No, in certain circumstances Canada could still tax Canwest
on its FAPI; and
(iv) Finally,
does Article XXVII(3) prevent Canada from taxing Canwest after the
five-year limitation period on FAPI charged to tax in Barbados? Yes, says the Respondent, so Article
XXX(2) requires that Article XXVII(3) not be construed that way.
This is illogical, as there is no
other way to construe Article XXVII(3). What the Respondent is really
saying is that Article XXVII(3) be ignored, not that Article
XXVII(3) be construed in a different way consistent with Article XXX(2).
It is to be "construed" as though it does not exist; that is, that
there simply is no limitation on FAPI. That is not a construction: that is a
destruction. All to say, by its use of "construe", I find Article XXX
is not directed at Article XXVII(3).
[15] It is clear to me
that Article XXX, in addressing "nothing in this Agreement
shall be construed so as to prevent" is directing the reader to consider
the wording of other Articles in the Treaty, not the specific
facts of a specific taxpayer. Just look at the other Articles and on
their face do they prevent Canada from taxing FAPI; not a question of do they prevent Canada from taxing FAPI in
certain specific situations. Does any part of the Treaty effectively
strike down Canada's authority to tax FAPI? That is what the words imply to me. In that
context, a limitation provision cannot be read to deprive Canada of that authority.
Certainly the language of Article XXVII(3) does not except FAPI out of
its application, as it does for situations of fraud, neglect or wilful default.
Intention
[16] I am reinforced in
my interpretation of the language of the two Articles by my findings as
to the intent of the Articles. While there is no direct evidence from
anyone engaged in the negotiating of the Canada-Barbados Treaty, some
guidance was offered by Mr. Kauffman as to the rationale behind both Articles.
With respect to Article XXVII(3), he suggested that this type of
limitation provision avoids the problem of having to rely on competent
authority provisions to make relieving adjustments long after records may have
been lost or destroyed. I also accept the Appellant's position that limitation
provisions of this sort do provide taxpayers some certainty. There was no
evidence to suggest the provision was inserted for any reason related to
specifically curtailing Canada's ability to tax FAPI arising in Barbados.
[17] It is the intention
behind Article XXX(2) that is of greater import. The Respondent argues
that the intention is clearly gleaned from the words, and where the words are
clear, it is inappropriate to rely on extrinsic sources to determine intention.
The Appellant argues that the correct interpretation of Article XXX(2) revolves
around a determination that the intention of the negotiators in inserting this
provision was to remove any uncertainty regarding Canada's right to tax FAPI. This
intention can be readily ascertained from a review of other provisions in the Treaty
and also from consideration of extrinsic sources, such as academics' opinions,
the OECD Model Tax Convention and case law. Given that the Crown introduced Mr.
Kauffman's evidence that similar provisions were written into other treaties to
basically preserve Canada's right to "get at" FAPI, and given that the wording of Article
XXX did require some considerable probing, I am prepared to consider the
sources just mentioned in confirming the intention of the Articles.
[18] Before considering
those sources, I shall consider just the Treaty itself in determining
intention. The language of Article XXX(2) implies that there may be
other Articles in the Treaty whose meaning is open to an
interpretation of preventing Canada from taxing FAPI. So, are there such Articles? The
Appellant's counsel referred to Articles VII(1) and X(5) of the Treaty.
[19] Article VII
states:
The profits of an enterprise of a
Contracting State [defined in Article III(1) as an enterprise carried on
by a resident of a Contracting State] shall be taxable only in that State
unless the enterprise carries on or has carried on business in the other
Contracting State through a permanent establishment situated therein.
It is not difficult to see how this provision could be
construed to prevent Canada taxing profits of a CFA, unless the CFA
has a permanent establishment in Canada. Another interpretation is that the CFA's
profits are simply notionally attributed to the Canadian parent and, therefore,
not within the "profits" referred to in Article VII.
[20] Article X(5) states:
Where a company is a resident of only one
Contracting State, the other Contracting State may not impose any tax on the
dividends paid by the company to persons who are not residents of that other
State, or subject the company to a tax on undistributed profits, even if the
dividends paid or the undistributed profits consist wholly or partly of profits
or income arising in such other State.
This provision too could be interpreted as preventing
Canada from taxing FAPI, since such taxation could in substance be considered
to be the imposition of tax on the undistributed profits of a resident in Barbados. Again, another interpretation
would be that the Article does not prevent the taxation of FAPI, because
the FAPI regime seeks to tax the Canadian parent and imposes such tax on a
notional amount attributed to the Canadian parent, rather than directly on the
undistributed profits of the CFA.
[21] I conclude, that within the Treaty itself, there
are uncertainties as to Canada's right
to tax FAPI that could justify the need for Article XXX to, as
Mr. Kauffman put it, ensure Canada can get at FAPI.
[22] This issue appears to have been addressed by the 2002 Update
to the OECD Model Tax Convention:
Thus, whilst some countries have felt it useful to
expressly clarify, in their conventions, that controlled foreign companies
legislation did not conflict with the Convention, such clarification is not
necessary. It is recognised that controlled foreign companies legislation
structured in this way is not contrary to the provisions of the Convention.
Clearly, Canada was one
of the countries that expressly clarified that the Treaty was not to be
in conflict with domestic FAPI legislation. As Professor Brian Arnold
indicated in "Tax Treaties and Tax Avoidance: The 2003 Revisions to the
Commentary to the OECD Model":
Before the 2003 changes, the Commentary to the OECD
Model was unclear and unsatisfactory in its treatment of the relationship
between CFC rules and tax treaties.
[23] The Courts have also had to deal with the issue of a
country's authority to tax controlled foreign companies' (CFC) income. The
Appellant referred to the French case of Re Société Schneider Electric
and the Finnish case of Re A Oyj Abp.
Both cases dealt with treaties with Articles similar to Article VII
of the Canada-Barbados Treaty. The French Conseil d'État held that France's CFC legislation was not compatible
with the France/Switzerland Treaty. The Finnish Supreme Administrative Court held profits of a Belgium subsidiary
did fall within Finland's CFC regime and that Article
VII of the Belgium-Finland Treaty did not prevent Finland from imposing such taxes. Neither
treaty had the equivalent of Article XXX of the Canada-Barbados
Treaty. While these cases are both long after the Canada-Barbados Treaty
was negotiated, they confirm some degree of uncertainty of a treaty's impact on
CFC legislation, barring a clarifying provision such as Article XXX.
[24] The Appellant also referred to statements of Professor
Dr. Michael Lang. In "CFC Regulations and Double Taxation Treaties",
Professor Lang wrote:
In many countries, the issue of the compatibility of
the CFC regulations with treaty law is far from settled. In many cases, there
are no supreme court decisions on the issue. Most of the opinions mentioned in
the 1987 OECD report and the 1992 Commentaries to the OECD Model represent the
views of tax administrations of OECD countries. These views by no means reflect
the current conclusions of other experts or the latest case law.
…
Tax treaties have a limiting effect on national
taxation regimes. Therefore, in the absence of any arguments to the contrary,
one may not assume that tax treaties will have no impact on inconsistent CFC
regulations.
Also, Renata Fontana in a paper called "The
Uncertain Future of CFC Regimes in the Member States of the European Union –
Part I", stated:
The application of tax treaties to CFC regimes and
their compatibility is neither a recent nor a settled debate. Rather, this is
still a disputed issue in the national courts of the various states involved,
with divergent decisions on the issues.
…
Although scholars, domestic (administrative and
judicial) courts and the OECD itself have continuously addressed the issue of
the compatibility between CFC regimes and tax treaties, no uniform and
definitive solution has been found to date.
I appreciate that academics' comments, statements
concerning the OECD and pronouncements by French and Finnish Courts do not
constitute any direct evidence of the Canadian and Barbadian negotiators' true
intent, but these sources do present a useful background. Combined with Mr.
Kauffman's testimony of Canada's position with respect to other treaties on
these particular provisions, and with the very wording of Article XXX, these
extrinsic sources confirm my conclusion that Article XXX was intended to
ensure no other Article takes away Canada's authority to impose tax on FAPI of a Barbadian resident. There is no
evidence to suggest anything contrary. In that light, is the limitation
provision, Article XXVII(3) incompatible with that intention? I find it
is not. Indeed, as I indicated earlier, if anything, it supports Canada's right to tax FAPI. I accept the
Appellant's position that Article XXX(2) goes to Canada's very jurisdiction to tax, while Article
XXVII is simply a clear procedural provision.
[25] Based on both the language used in the Treaty
itself, and the intent of Articles XXVII(3) and XXX(2), I am satisfied
that Article XXX(2) is not to be interpreted as overriding Article
XXVII(3) rendering the limitation meaningless. The five-year limitation is in
play and the Respondent has, in this case, missed that limitation. I therefore
allow the appeal and vacate the reassessment of August 16, 2004 as it was
made beyond the Treaty maximum reassessment period. Costs to the
Appellant.
Signed at Ottawa, Canada, this 24th day of October, 2006.
"Campbell J. Miller"
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