Date: 20091217
Docket: A-219-09
Citation: 2009 FCA 373
CORAM: SEXTON
J.A.
EVANS
J.A.
SHARLOW
J.A.
BETWEEN:
THE MINISTER OF NATIONAL
REVENUE
Appellant
and
ROBERT M.O. MORRIS AND NEVILLE LEROY
SMITH,
TRUSTEES OF THE RCI TRUST
Respondents
REASONS FOR JUDGMENT
SHARLOW J.A.
[1]
The Minister
of National Revenue is appealing a judgment of the Federal Court that requires the
Minister to provide the RCI Trust with a written decision as to whether or not
certain property of the RCI Trust is “treaty exempt property”, based on the
conclusion of the judge that for income tax purposes the RCI Trust is a
resident of Barbados and not a resident of Canada. The judgment under appeal
has been stayed pending the disposition of this appeal.
[2]
The facts
are not in dispute and are fully described in the reasons for the Federal Court
judgment (Morris v. Canada (Minister of National Revenue
– M.N.R.),
2009 FC 434). For the purposes of this appeal only a summary is necessary.
[3]
Mr. Morris
and Mr. Smith, the trustees of the RCI Trust, provided evidence to the Federal
Court that the RCI Trust was settled under the laws of Barbados, and that in
2006 the RCI Trust disposed of certain shares of a taxable Canadian
corporation, RCI Environnement Inc. (the “RCI shares”) for proceeds of
disposition of $145,000,000, resulting in a capital gain of $144,999,800. The
purchaser was said to be Les Investissements Historia Inc. (“Historia”), a
Canadian corporation.
[4]
On May 4,
2006, the RCI Trust applied to the Minister under section 116 of the Income
Tax Act, R.S.C. 1985 (5th Supp.), c. 1, for a certificate that
would have the effect of relieving Historia of its obligation under subsection
116(5) to withhold part of the proceeds of disposition and remit the withheld
amount on behalf of the RCI Trust to the Receiver General.
[5]
Subsection
116(2) requires the RCI Trust, as the applicant for the certificate, either to
pay the Minister a specified percentage of the capital gain as or on account of
tax payable by the RCI Trust under Part I of the Income Tax Act, or to
provide security acceptable to the Minister. The RCI Trust did not pay any
money or provide any security. It is worth noting that Part I of the Income
Tax Act imposes tax on all income and capital gains for a taxation year.
Thus, an amount that a non-resident vendor of taxable Canadian property pays
under subsection 116(2) as a condition to obtaining a section 116 certificate
is intended to be applied against any Part I tax liability of the vendor,
whether it relates to the capital gain on the disposition of property or
something else. (Such a payment may also be applied against other fiscal
obligations in certain circumstances, but a discussion of that subject is not
necessary for the purposes of this appeal.)
[6]
Nothing in
the Income Tax Act relieves a person of the obligation to make a payment
or provide security when applying for a section 116 certificate. However, the
Minister has adopted a policy of providing discretionary relief where a
non-resident person claims a treaty exemption and provides specified
documentation. The policy is set out in Canada Revenue Agency Information
Circular 72-17R5, dated March 15, 2005, paragraphs 25 to 29. It is clear from
the Information Circular that a person seeking this discretionary relief must
satisfy the Minister as to certain elements of the claimed exemption including,
as in this case, details of the establishment of the trust, the transactions by
which the RCI shares were acquired by the RCI Trust, and the proposed disposition.
[7]
The
Minister considered the request of RCI Trust for a section 116 certificate, and
in that connection has asked for further information about the RCI Trust and
the relevant transactions. Some information has been provided, but the Minister
is not yet satisfied that a certificate should be issued. To date the Minister has
declined to issue a certificate without receiving the payment or security
required by subsection 116(2).
[8]
Mr. Morris
and Mr. Smith take the position that, by virtue of paragraph 4 of Article XIV
of the Agreement between Canada and Barbados for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income
and on Capital (the “Canada-Barbados Convention”), enacted by the Canada-Barbados
Income Tax Agreement Act, 1980, S.C. 1980-81-82-83, c. 44, Part IX,
Canada cannot impose tax on the capital gain realized by the RCI Trust on the
disposition of the shares of RCI Environnement Inc. They argue that it follows
that the Minister does not have the discretion to refuse to provide the RCI
Trust with the subsection 116(2) certificate.
[9]
In an
effort to establish that point, Mr. Morris and Mr. Smith commenced an
application in the Federal Court for judicial review of the Minister’s delay in
granting the certificate. I paraphrase as follows the relief sought from the
Federal Court:
(a) a declaration that subsections
116(1) to (5) do not apply to a disposition of taxable Canadian property if the
Canada-Barbados Convention prevents Canada from taxing the resulting capital
gain;
(b) in the alternative, a
declaration that where such an exempt gain arises, the Minister must issue a
subsection 116(2) certificate without requiring any payment because the payment
contravenes the Canada-Barbados Convention;
(c) a mandatory order requiring
the Minister to issue the subsection 116(2) certificate sought in this case;
(d) in the alternative, a
declaration that the Minister has withheld the subsection 116(2) certificate
for an improper purpose and a mandatory order that the Minister issue the
certificate forthwith;
(e) in the alternative, a
declaration that the Minister has delayed, unduly and for an improper purpose:
(i)
delivering
his decision as to whether or not to issue the certificate; and
(ii)
his
decision as to the applicability of Article XIV of the Canada-Barbados
Convention,
and a mandatory order requiring
the Minister to render both decisions forthwith.
[10]
Mr. Morris
and Mr. Smith rely on a treaty exemption that would apply if the fiscal
domicile of the RCI Trust is Barbados, that is, if the RCI Trust is a person
who, under the laws of Barbados, is liable to taxation in Barbados by reason of
its “domicile, residence, place of management or any other criterion of a
similar nature” (in French, « en raison de son domicile, de sa résidence, de
son siège de direction ou de tout ature critère de nature analogue »), and
is NOT liable to taxation in Canada by reason of any of those criteria. If the
RCI Trust is liable to taxation in both Barbados and Canada, there are tie-breaker rules that may
apply to establish fiscal domicile, failing which the matter is settled by the
competent authorities.
[11]
The
Minister argues that it is for the Minister to determine in the first instance
whether the RCI Trust is resident for Canadian income tax purposes, and whether
and to what extent the RCI Trust is taxable in Canada or is entitled to the benefit of the
Canada-Barbados Convention. If the RCI Trust does not agree with that
determination, the RCI Trust may have the matter judicially determined by
filing an income tax return for 2006 and appealing the resulting assessment to
the Tax Court of Canada, which has the exclusive original jurisdiction to deal
with such appeals.
[12]
The
Minister argues that the Federal Court should not have intervened in the
exercise of the Minister’s discretionary power to provide relief from the
preconditions for a section 116 certificate, and in particular should not have attempted
to resolve the question of the fiscal domicile of the RCI Trust before the
Minister had done so in the context of assessing an income tax return filed by
the RCI Trust.
[13]
I agree
with the Minister. In my view, while the Federal Court has the jurisdiction to
entertain an application for judicial review of a refusal by the Minister to
issue a section 116 certificate, the Federal Court should not exercise that
jurisdiction in a situation where the person seeking the section 116
certificate may have recourse to the Tax Court of Canada by filing an income
tax return. This conclusion is consistent with a line of decisions that includes
Addison & Leyen Ltd. v. Canada, [2007] 2 S.C.R. 793, 2007 SCC 33 (at
paragraph 11), Ogden Palladium Services (Canada)
Inc. v. Canada, [2001] 2 C.T.C. 2404, 2001
D.T.C. 345 (at paragraph 20, affirmed 2002 FCA 336) and Domtar Inc. v.
Canada, 2009 FCA 218.
[14]
Mr. Morris
and Mr. Smith argue that the RCI Trust is not required by law to file an income
tax return. In my view this is a point that need not be determined. It is
enough to say that the RCI Trust may file an income tax return, and if it does
so it will have the right to appeal any assessment the Minister may make in
response.
[15]
The
judgment under appeal is based on the premise that the statutory scheme in
section 116 is a context in which the Minister must determine a person’s tax
liability for tax on capital gains under Part I of the Income Tax Act. In
my respectful view, that premise is incorrect. Section 116 is a statutory
device for requiring the withholding of tax at source or the provision of
security, so that if a Part I tax liability arises, collection is facilitated. As
inconvenient and costly as that may be for the RCI Trust, that is the procedure
Parliament has established, and it must be respected.
[16]
For these
reasons, I would allow the appeal, set aside the judgment under appeal and,
making the judgment that should have been made by the Federal Court, I would
dismiss the application for judicial review. I would grant the Minister his
costs in this Court and in the Federal Court.
“K.
Sharlow”
“I
agree.
J. Edgar Sexton J.A.”
“I
agree.
John M. Evans J.A.”
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