Landbouwbedrijf Backx – Tax Court of Canada finds that the central management and control of a B.V. with a sole Dutch director was in Canada
When a Netherlands couple (the Backxes) immigrated to Canada in 1998 to acquire a dairy farm here, they created a structure under which the farm was held in a partnership which was held by them directly as to 51% and as to 49% through a Netherlands holding company (“B.V.”) of which the wife’s sister (a Netherlands resident) was the sole director. On a subsequent disposition by B.V. of the partnership interest, they took the position that B.V.’s gain was exempt from tax under the Canada-Netherlands Treaty, as being from the disposition of a substantial interest in a partnership holding a property (the farm) in which its business was carried on.
Smith J found that B.V. instead was subject to capital gains tax as a Canadian resident, as its central management and control was in Canada, stating:
[I]t was the Backxes who assumed effective and independent control of [B.V.] In most if not all instances, [the sister] was not even copied with the correspondence. This quite clearly suggests that she was a mere nominee who carried out clerical and administrative functions on behalf of the Backxes.
Furthermore, B.V. was resident in Canada for Treaty purposes as its effective management and control was in Canada - and if it was resident in both countries, this was a matter for the competent authorities to address and not the Tax Court. (The Treaty provided that a dual-resident corporation was not a Treaty resident in the absence of competent-authority agreement.)
He also found that there had not been any previous step-up in the adjusted cost base of the partnership interest of B.V. under s. 128.1(1)(c), as its central management and control had been in Canada from the time of the partnership’s formation.