Canada- Israel Development Ltd. v. MNR, 85 DTC 718, [1985] 2 CTC 2460 (TCC)

Tremblay, TC): This case was heard on January 18, 1985 in the City of Montreal, Quebec.

1. The Point at Issue

The point is whether the appellant is correct in the computation of its income in respect of the 1979 taxation year, to deduct the sum of $120,520 (US $88,410) under subsection 91(4) of the Income Tax Act. The appellant contends that a wholly owned subsidiary, a resident of Israel, received a dividend of US$116,196 from another corporation of Israel.

The appellant reported the said amount as income in Canada and claimed a deduction of US$88,410 basing it on the Canada-Israel Income Tax Convention.

The respondent disallowed the deduction on the main basis that no tax was paid to the Government of Israel and hence that there is no double taxation to be avoided.

2. The Burden of Proof

There is no burden of proof in the instant case because the said burden is on the facts and in this appeal all the facts, as stated after, are admitted. The crux of the matter then remains only in the interpretation of the legal provisions involved.

3. The Facts

The facts are complicated but fortunately they are not in dispute. The legal provisions to which it is referred in the facts are quoted after in paragraph 4.01.

3.01 The taxation year 1979 of the appellant corporation is from April 1, 1978 to March 31, 1979.

3.02 In the taxation year in question, the appellant was the sole shareholder of Can-ls Investment Corporation Ltd (Can-ls), a corporation under the laws of Israel and resident therein. Its fiscal year 1979 also ended March 31, 1979.

3.03 Can-ls, vis-à-vis the appellant was therefore a controlled foreign affiliate within the meaning of paragraph 95(1)(a) of the Income Tax Act (the Act).

3.04 In the taxation year in question, “Can-ls” received a dividend from Israel Corporation Ltd (ICL) in the amount of US 123,600.

3.05 In the taxation year in question, Can-Is was in fact a shareholder of ICL, another corporation incorporated under the laws of Israel. Can-ls owned less than 10 per cent of the issued shares of any class of ICL.

3.06 The appellant in the same year in question included an amount of US $116,196 in respect of the dividend received by Can-ls from ICL, under subsection 91(1) of the Act as Foreign Accrual Property Income (FAPI) as defined in 95(1 )(b) of the Act, even if it had not received that dividend out of Can-ls, the US$116,196 being the net amount of Can-ls income less expenses and foreign exchange losses.

3.07 Referring to Article XXIII of the Canada-Israel Income Tax Convention and to subsection 91(4) of the Act, the appellant claimed as deduction an amount of US $88,410 ($102,520 in Canadian dollars) being the equivalent of 35 per cent X $116,196 X 2.1739, the latter being the relevant tax factor.

3.08 The amount of 35 per cent represents the taxes that would otherwise have been paid by Can-ls on the dividend from ICL but for the provisions of sections 5 and 6 of the Israel Corporation Ltd, Law 5729-1969, no tax was imposed on such dividend in Israel.

3.09 In the taxation year in question, Can-ls paid to the appellant a dividend of US $123,510.

3.10 Still in the same year in question, in addition the appellant duly reported this amount of US$123,510 in its income pursuant to section 90 of this Act.

3.11 The appellant claimed deductions in respect of the dividend received from Can-ls in the amount of US $123,510 equal to $123,026 under subsection 91(5) of the Act and $484 pursuant to subsection 113(1) of the Act.

3.12 The flow of funds can be summarized as follows:

3.13 The said deduction of US $88,410 ($102,520 Canadian dollars) was disallowed by the respondent. The T-7 W-C form issued with the notice of reas- sessment reads as follows:

4. Law — Cases at Law — Analysis

4.01 Law

The legal provisions involved in this appeal are as follows:

(a) Income Tax Act

90(1), 91(1), 91(4), 95(1)(a), 95(1)(b), 95(1)(c), 95(1)(f), 126

(b) Canada-Israel Income Tax Convention

Article XXIII (1)(a), (2)(b), (c)

Protocol (2)

(c) Israel Corporation Ltd. Law 5729-1969

(d) Income Tax Ordinance of Israel 161(a)(3), (3a)(a)

They read as follows:

(a) Income Tax Act

Section 90(1)

Sec 90 Dividends received from non-resident corporation.

(1) In computing the income for a taxation year of a taxpayer resident in Canada, there shall be included any amounts received by the taxpayer in the year as, on account or in lieu of payment of, or in satisfaction of, dividends on a share owned by him of the capital stock of a corporation not resident in Canada.

Section 91(1)

Sec 91 Amounts to be included in respect of share of foreign affiliate.

(1) In computing the income for a taxation year of a taxpayer resident in Canada, there shall be included, in respect of each share owned by him of the capital stock of a controlled foreign affiliate of the taxpayer, as income from the share, the percentage of the foreign accrual property income of any controlled foreign affiliate of the taxpayer, for each taxation year of the affiliate ending in the taxation year of the taxpayer, equal to that share’s participating percentage in respect of the affiliate, determined at the end of each such taxation year of the affiliate.

Section 91(4)

Sec 91(4) Amounts deductible in respect of foreign taxes.

Where, by virtue of subsection (1), an amount in respect of a share has been included in computing the income of a taxpayer for a taxation year or for any of the 5 immediately preceding taxation years (in this subsection referred to as the “income amount”), thee may be deducted in computing the taxpayer’s income for the year the lesser of

(a) the product obtained when

(i) the portion of the foreign accrual tax applicable to the income amount that was not deductible under this subsection

is multiplied by

(ii) the relevant tax factor; and

(b) the amount, if any, by which the income amount exceeds the aggregate of the amounts in respect of that share deductible under this subsection in any of the 5 immediately preceding taxation years in respect of the income amount.

Section 95(1 )(a)

Sec 95 Definitions

(a) “Controlled foreign affiliate” — “controlled foreign affiliate”, at any time, of a taxpayer resident in Canada means a foreign affiliate of the taxpayer that was, at that time, controlled, directly or indirectly in any manner whatever, by

(i) the taxpayer,

(ii) the taxpayer and not more than four other persons resident in Canada, or

(iii) a related group of which the taxpayer is a member.

Section 95(1 )(b)

Sec 95(1)

(b) “Foreign accrual property income” — “foreign accrual property income” of a foreign affiliate of a taxpayer, for any taxation year of the affiliate, means the amount, if any, by which the aggregate of

(i) the affiliate’s incomes for the year from property and businesses other than active businesses, other than

(A) interest that would, by virtue of paragraph 81(1)(m), not be included in computing the income of the affiliate if it were resident in Canada,

(B) a dividend from another foreign affiliate of the taxpayer, or

(C) a taxable dividend to the extent that the amount thereof would, if the dividend were received by the taxpayer, be deductible by him under section 112,

(ii) such portion of the affiliate’s taxable capital gains for the year from dispositions of property,

exceeds the aggregate of

(iii) the affiliate’s losses for the year from property and businesses,

(iv) such portion of the affiliate’s allowable capital losses for the year from dispositions of property.

Section 95(1 )(c)

Section 95(1)

(c) “foreign accrual tax” applicable to any amount included in computing a taxpayer’s income by virtue of subsection 91(1) for a taxation year in respect of a particular foreign affiliate of the taxpayer means the portion of any income or profits tax that was paid by

(i) the particular affiliate, or

(ii) any other foreign affiliate of the taxpayer in respect of a dividend received from the particular affiliate

and that may reasonably be regarded as applicable.

Section 95(1 )(f)

Section 95(1)

(f) “Relevant tax factor” — “relevant tax factor” means

(i) where the taxpayer is an individual, 2, or

(ii) where the taxpayer is a corporation, the factor obtained when one is divided by the percentage referred to in section 123 for the taxation year.

Section 126

Sec. 126 Foreign tax deduction.

(1) A taxpayer who was resident in Canada at any time in a taxation year may deduct from the tax for the year otherwise payable under this Part by him an amount equal to

(a) such part of any non-business-income tax paid by him for the year to the government of a country other than Canada (except, where the taxpayer is a corporation, any such tax or part thereof that may reasonably be regarded as having been paid by the taxpayer in respect of income from a share of the capital stock of a foreign affiliate of the taxpayer) as the taxpayer may claim.

(b) Canada-Israel Income Tax Convention

Article XXIII (1)(a), (2)(b), (c)

Article XXIII. (Elimination of double taxation.)

(1) In the case of Canada, double taxation shall be avoided as follows:

(a) Subject to the existing provisions of the law of Canada regarding the deduction from tax payable in Canada of tax paid in a territory outside Canada and to any subsequent modification of those provisions (which shall not affect the general principle hereof) and unless a greater deduction or relief is provided under the laws of Canada, Israeli tax payable under the law of Israel and in accordance with this Convention on profits, income or gains arising in Israel shall be deducted from any Canadian tax payable in respect of such profits, income or gains.

(2) For the purpose of paragraph 1(a), Israeli tax payable by a resident of Canada

(b) in respect of dividends or interest received by it from a company which is a resident of Israel, shall be deemed to include any amount which would have been payable as Israeli tax for any year but for an exemption from, or reduction of, tax granted for the year or any part thereof under —

(c) any of the following provisions, that is to say:

sections 5 and 6 of the Israeli Corporation Ltd Law, 5729-1969.

Protocol (2)

At the moment of signing the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital, this day concluded between Canada and the State of Israel, the undersigned have agreed upon the following provisions which shall be an integral part of the Convention:

(2) Nothing in this Convention shall be construed as preventing Canada from imposing a tax on amounts included in the income of a resident of Canada according to section 91 of the Canadian Income Tax Act, or to any substantially similar provision subsequently enacted by Canada in addition to, or in place of, that section.

(c) Israel Corporation Ltd Law 5729-1969

1. In this Law —

“the Corporation” means the company registered in Israel under the name “the Israel Corporation Ltd”;

5.

(a) In respect of entitling income, the Corporation shall —

(1) be liable to company tax at a rate not exceeding 28 per cent;

(2) be exempt from every other tax imposed on income.

(b) For the purposes of this section and section 6 —

“entitling income”, in relation to any tax year, means such part of the chargeable income of the Corporation in that tax year as bears to its total chargeable income in that tax year the same proportion as its total paid-up share capital of those series of shares of which the period of benefits has not yet expired bears to its total paid-up share capital as determined at the expiration of that tax year;

“period of benefits”, in relation to any series of shares, means eleven tax years beginning with the tax year in which the series is offered or ten tax years beginning with the first tax year in which the Corporation has a chargeable income, whichever period ends later.

6.

(a) A person who, within fifteen years from the year in which any entitling income is obtained, receives from the Corporation dividend out of that income, shall be exempt from all tax thereon additional to the tax paid by the Corporation, and the same shall apply in respect of an investment yield paid as dividend by another body corporate out of dividend received as aforesaid. For this purpose, income of the Corporation which accrued first shall be deemed to have been distributed first.

(b) A person who receives any dividend out of a capital profit of the Corporation shall be exempt from all tax thereon.

(c) A non-resident who receives dividend to which subsection (a) does not apply shall be exempt from all tax thereon except the tax which the Company is required to deduct under section 161 of the Ordinance.

(d) A person who sells a share out of a series of shares shall be exempt from tax on the capital profit arising from such sale.

(d) Income Tax Ordinance of Israel 161(a)(3), (3a)(a)

Deduction of tax from interest and dividend

161.(a)

(3) A body of persons resident in Israel which pays to a resident in Israel interest on debentures shall deduct tax at source at the rate of 35 per cent or at a lower rate prescribed by any law.

(3a) A body of persons resident in Israel, which pays to a resident of Israel

dividend on shares, shall deduct tax at the source at the following rates:

(a) in respect of shares traded on the Stock Exchange, or paid to a body of persons — 35 per cent;

4.02 Jurisprudence and Cases at Law

Counsel for the parties referred the Court to the following different jurisprudence and cases at law:

A. Jurisprudence

1. Gérard Coulombe, Certain Policy Aspects of Canadian Tax Treaties, Twenty-Eighth Tax Conference, 1976.

2. David A Ward, Principles To be Applied in Interpreting Tax Treaties, 1977 Canadian Tax Journal, page 263.

3. A B McKie, R Robertson, James R Wilson, Foreign Tax Credits and Foreign Affiliates, 184, pages 69 to 77.

B. Cases at Law

4. Saunders v MNR, 11 Tax ABC 399; 54 DTC 524.

5. Shahmoon v MNR, [1975] CTC 2361; 75 DTC 275.

6. Canadian Pacific Limited v The Queen, [1976] CTC 221; 76 DTC 6120 (reversed on certain issues not relevant to the present case, [1976] CTC 606; 77 DTC 5383).

7. The Queen v John M Cruickshank, [1977] CTC 344; 77 DTC 5226.

8. Peter J Appleby v MNR, [1979] CTC 2168; 79 DTC 172.

9. Hunter Douglas Ltd v The Queen, [1979] CTC 424; 79 DTC 5340 [discontinued].

10. The Estate of the late John N Gladden v The Queen, [1985] 1 CTC 163; 85 DIC 5188.

11. The Queen v Mel ford Developments Inc, [1982] CTC 330; 82 DTC 6281.

4.03 Analysis

4.03.1 The crux of the matter

The point in dispute being the disallowance of the deduction of US $88,410 ($102,520 Canadian Dollars), (see par 3.13) and the appellant’s legal basis of this deduction being Article XXIII of the Canada-Israel Income Tax Convention and subsection 91(4) of the Act (see paragraph 3.07), the crux of the matter is the interpretation of these legal provisions.

A. Appellant's Argument

4.03.2 The main point of the appellant is that the Convention being an agreement between two countries, a large and liberal interpretation must be given.

He quoted extracts from the article of David A Ward (paragraph 4.02(3)) and extracts of different cases at law (paragraphs 4.02(4), (5), (6), (7), (8), (9)). The best known quotation is the one of Mr R S W Fordham QC, member of the then Income Tax Appeal Board in the Saunders case (4.02(4)).

Counsel for the appellant quoted the following part:

(Tax convention liberally interpreted)

The accepted principle appears to be that a taxing Act must be construed against either the Crown or the person sought to be charged, with perfect strictness — so far as the intention of Parliament is discoverable. Where a tax convention is involved, however, the situation is different and a liberal interpretation is usual, in the interests of the comity of nations. Tax conventions are negotiated primarily to remedy a subject’s tax position by the avoidance of double taxation rather than to make it more burdensome. This fact is indicated in the preamble to the Convention. Accordingly it is undesirable to look beyond the four corners of the Convention and Protocol when seeking to ascertain the exact meaning of a particular phrase or word therein.

He also referred to section 11 of the Interpretation Act. It reads as follows:

11. Every enactment shall be deemed remedial, and shall be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects.

The large and liberal interpretation of Article XXIII of the Canada-lsrael Income Tax Convention applied to section 91 of the Act, permits, according to counsel for the appellant, to allow the deduction provided in subsection 91(4) despite the fact that in reality no tax was paid in Israel by Can-ls on the dividend received from ICL.

Counsel then quoted Mr McKie’s book (4.02(3)) and Mr Gerard Coulombe’s conference (4.02(1)).

4.03.3 For explaining subsections 91(1) and (4) of the Act, Counsel referred to pages 73 and 74 of McKie, Robertson and Wilson’s book (par 4.02(3)).

Subsection 91(1), the basic attribution rule, provides that a Canadian resident taxpayer must include in taxable income the participating percentage of the foreign accrual property income of every share owned by the taxpayer in the capital of a controlled foreign affiliate. For these purposes, “foreign accrual property income” (FAPI) or “passive income” means foreign direct investment income of a nonactive business nature and includes, inter alia, dividends, interest, rents, royal- ties, capital gains and business income other than from an active business (95(1)(b). Subject to a de minimis rule whereby there is no attribution if FAPI is less than $5,000, the term “participating percentage” in relation to a controlled foreign affiliate is defined to reflect the actual equity participation of the Canadian resident in the foreign affiliate (95(1)(e) ). “Foreign affiliate” means a nonresident corporation in which a Canadian resident has an “equity percentage” of 10% or more (95(1)(d)). A “controlled foreign affiliate” is defined as a foreign affiliate that is controlled directly or indirectly by a Canadian resident, by a Canadian resident and four or fewer other Canadian residents or by a related group of persons of which a Canadian resident is a member (95(1)(a) ).

Where FAPI is attributed a Canadian taxpayer may deduct reasonable reserves if the Minister is satisfied that to include the full amount of FAPI will impose an undue hardship by reason of the monetary or exchange restrictions of another country (91(2)). The full amount of any reserve deducted, however, must be brought back into the taxpayer's income in the next following year (91(3)), (at which time if the hardship is regarded as continuing, a new reserve may be claimed).

Where FAPI is attributed a taxpayer is entitled to a deduction in respect of the “foreign accrual tax” applicable to such income (91(4)) multiplied by the “relevant tax factor” (95(1)(f)). In this way recognition is given to the tax paid by the foreign affiliate on the income distributed by virtue of the FAPI provisions. This is to ensure that the Canadian tax payable by the Canadian taxpayer in respect of the attributed FAPI income when added to the non-Canadian tax paid does not exceed the Canadian tax which would have been payable if such investment income was earned directly. Foreign accrual tax includes, inter alia, any income or profits tax paid by the foreign affiliate in respect of the attributed income (95(1)(c) ). This deduction may be claimed by the taxpayer in the taxation year of attribution or during the subsequent five taxation years.

4.03.4 Mr Gérard Coulombe, Assistant Director, Personal and International Tax Division, negotiated all the Canada Income Tax Conventions with other countries. Among other things in the conference he explained the special heated policies regarding development countries (par 4.02(1)). At pages 298 and 299, he said:

As a general rule, two types of departures from its standard treaty are generally accepted by Canada in its negotiations with third world countries: a recognition by Canada of tax incentives granted to foreign investors by the developing countries and a reduction of the revenue sacrifice which a standard treaty would demand from the source country.

In every case where a developed country utilizes the method of foreign tax credit to relieve double taxation, the failure to adopt a tax sparing or a matching credit provision will result in a transfer of revenues from the Treasury of the developing country to the Treasury of the developed country whenever the developing country reduces or eliminates its tax as an incentive to foreign investment. For example, if developing country A reduces its withholding tax rate from 25% to 5 in the case of royalties paid in respect of advanced technology, and if Canada applies its ordinary foreign tax credit provisions, the net result of the sacrifice of country A will likely be to increase the amount of Canadian tax payable.

Industrialized countries, including Canada, have considered two methods for improving their foreign tax credit provisions with respect to income arising in developing countries: the first one is the “matching credit” system and the second one is the “tax-sparing” method. These two techniques are really quite similar and many experts use the two expressions interchangeably. I believe, however, that there is a useful distinction to be made. “Matching credit” consists in the granting of a fictitious tax credit computed at a rate higher than the rate that would have been effectively applicable in the country of source. For example, if the tax that the source country is allowed to levey on interest — under its domestic legislation or under the tax treaty — is 15%, the country of residence would agree to grant a foreign tax credit equal to, say, 20% of the amount of the interest. This system is regularly used by Continental European countries in particular France, Germany and the Scandinavian countries. On the other hand, “taxsparing” consists in the granting of a tax credit corresponding exactly to the amount of tax which would have been payable in the country of source if there had been no reduction or exemption under an incentive measure. For example, if the source country tax provided for in the domestic legislation of developing country A is 25% and if the tax is reduced to 15% by treaty, the granting of a complete exemption under an incentive provision will give rise to a tax-sparing credit in the country of residence of 15% only, since this is the rate of tax that could have been levied by country A. This is the method which is generally used by the United Kingdom and has been adopted by Canada. Examples of this method can be found in our treaties with the Dominican Republic, Israel, Malaysia, Morocco, Pakistan, the Philippines and Singapore.

4.03.5 Counsel for the appellant contended that the purpose of the treaty with Israel is “a recognition by Canada of tax incentives granted to foreign investors . . .” in developing countries. And Israel is a developing country. If on the one hand, Israel offers an incentive to foreign investors in not taxing certain income and, if Canada, on the other hand, continues to tax the said income, then there is no incentive for the Canadian taxpayers to go and invest in Israel. Such interpretation, he said, is not in conformity with a liberal interpretation of the convention.

He referred to subsection 2 of Article XXIII that says that the “‘tax payable . . . shall be deemed to include any amount which would have been payable as Israeli tax for any year but for an exemption from, or reduction of, tax granted for that year or any part thereof . . . under sections 5 and 6 of the Israeli Corporation Ltd Law 5729-1969 . . .”.

4.03.6 Counsel for the appellant gave an illustration of a tax sparing principle when:

A. treaty does not provide for tax-sparing and when

B. treaty does provide tax-sparing

CANADA-ISRAEL LIMITED

ILLUSTRATION OF TAX SPARING PRINCIPLE

			Tax in
		Tax in	Country of	Total Tax
		Source	Residence	in Both
		Country	(eg Canada)	Countries
A—TAX RELIEF WHERE
	TREATY DOES NOT
	PROVIDE FOR TAX SPARING
	CASE I
	—Income Earned in
	Source Country
	—Source Country
	(eg US)
	Tax Rate—50%
	No Incentive
	Legislation in
	Source Country
Results
	Tax in USA	$ 50
	Tax in Canada
	Basic		$ 50
	Credit—Domestic
	Law & Treaty		$(50)
Nçt	Net	$ 50	</>	$50

CASE I]
Assumptions
Same as Case I
except Source Country
has Tax Sparing
Results
—Tax in Source
—Basic	$ 50
—Incentive Legisl	$(50)
<t>
Tax in Canada
—Basic	$ 50
—Credit
	0
	$ 50	$ 50
B—TAX RELIEF WHERE
TREATY DOES PROVIDE
TAX SPARING
Case III
—Same as Case ll
Except Source is
Israel
Results
Tax in Israel
Basic	$ 50
Incentive Legisl	$(50)
	0
Tax in Canada
Basic	$ 50
Credit—Article XXIII(2)	$(50)
	rfi:

4.03.7 Counsel for the appellant finally gave a comparison of the application [of] section 126 of the Act concerning the ordinary rule of foreign tax deduction and subsection 91(4). The latter provision, being the replacement of subsection 126(1) in cases of controlled foreign affiliates.

rectly to Canada-Israel (not in our dend paid to intermediary holding

case))		company (Can-ls) but taxed in hands of
		Canadian, Canada-lsrael)
Dividend paid by ICL and included in		Dividend paid by
income of Canada-Israel — Section 90		ICL to Can-ls and
of Income Tax Act		included in income of
	$116,196	Canada-Israel —
		Section 91(1) ITA
Taxable Income	$116,196
		(FAPI Attribution)	$116,196

Section 126		Section 91(4)
Tax Thereon		Deduct, in computing
Tax Thereon —
		taxable income relief
S 123 ITA at 46%	53,450
		for Israel Tax:
Deduct (Relief for)
		—S 91(4):
Israeli Tax
		—95(1)(c) — foreign
(at 35%)*	40,669
		accrual tax — $40,669*
		—95(1)(f) — Relevant
Net Tax Payable		Tax Factor —
To Canada	$ 12,7811	1/.46 = 2.1739
		40,669 x 2.1739
			88,410
		Taxable Income	27,786
		Tax Thereon — S 123
		ITA (46%)	12,781
		Net Tax Payable
		To Canada	$ 12,7811
*Tax “Spared” but covered by Article XXIII(2)
tlgnoring Section 124 Abatement for Province.

B. Respondent's Argument

4.03.8 The first argument of counsel for the respondent is that Article XXIII provides that the tax paid to “Israel shall be deducted from any Canadian tax payable . . .”. Therefore the deduction is provided in the computation of the tax. Subsection 91(4) cannot meet this requirement because the deduction is provided in the computation of the income and not in the computation of the tax.

4.03.9 The second argument of counsel for the respondent is that Article XXIII of the Canada-Israel Treaty does not apply to the instant case. The said article indeed concerns only Israeli Tax Payable by a resident in Canada. As there is no tax payable by the appellant to Israel, therefore the deemed disposition section 2 . shall be deemed to include any amount but for an exemption . . .” has no relevancy. As article XXIII has no application and as no tax was paid to the Government of Israel concerning the dividend received by Can-ls hence there is no double taxation to be avoided.

4.03.10 Finally counsel for the respondent referred the Court to the protocol of the Convention. The introduction and section 2 are quoted above in paragraph 4.01.

The counsel contends that because of the said protocol Article XXIII of the Convention does not apply. Therefore the result of the computation of the deduction pursuant to 91(4) is nil. Indeed in multiplying the portion of the foreign accrual tax which is nil by the relevant factor, the result, which is the lesser, is nil. The deduction is nil.

C. Reply of Counsel for the appellant

4.03.11 Concerning the last argument of the appellant, counsel for the respondent contended that section 2 was added in the protocol just before the signature because in originally drafting and negotiating the convention the point of FAPI income probably never even came up and the parties forgot about it. This however does not change the substance of the convention because it is the whole of section 91 which is involved and not only 91(4).

D. Court's Decision

4.03.12 First, the Court agrees with counsel for the appellant that a liberal interpretation must be given to the Convention (par 4.03.2).

4.03.13 In consequence of this liberal interpretation, the Court does not share the respondent's contention to the effect that Article XXIII of the Convention providing deduction in the computation of the tax cannot apply to subsection 91(4) of the Act because the latter provides the deduction in the computation of the Income (par 4.03.8). One of the main elements indeed provided in the computation of the income pursuant to subsection 91(4) of the Act is the tax payable provided in Article XXIII of the Convention. One cannot reproach the legislator for using that factor.

Moreover Article XXIII is under the heading "Methods for preventing double taxation". The purpose of this Article is in substance that tax paid by a taxpayer in a foreign country be taken into account by the same taxpayer in filing his income tax return in his own country, whatever the deduction be in the computation of the net income or the computation of the taxable income or in the computation of the tax. The final purpose is that it be taken into account. It is true that in studying the Act and construing it, it is important to make the distinction of the three levels of computation. However, the Convention is not the Act and it is the purpose that is the main criterion unless there be a specific provision to the contrary.

4.03.14 For the same principle of liberal interpretation, the Court does neither share the contention of counsel for the respondent to the effect that Article XXIII of the convention speaking about “Israeli tax payable” and as the appellant does not owe tax to Israel, hence that there is no application in the instant case. The income, indeed, provided in subsection 91(1) of the Act, to be included in the computation of the appellant’s income is not an actual income of the appellant but the actual income of its controlled foreign affiliated company. It is not therefore possible that an actual tax be paid directly by the appellant to Israel. However subsection 91(4) of the Act considers as a factor in the computation of the deduction, "the portion of the foreign accrual tax applicable” that is the one paid by the affiliated company pursuant to paragraph 91 (5)(c). Once again one cannot reproach the legislator for having chosen the said factor that he considers, in a certain way, as being paid by the appellant. And the appellant is resident in Canada.

4.03.15 The Court also thinks that the expression "Israeli tax payable” pursuant to provision XXIII (2) of the Convention, must be construed in the sense that even if a tax is not paid to Israel because of an exemption provided of the said provision, it must be considered as if it were really paid. Therefore the respondent's argument, that in fact there is no double taxation to be avoided, cannot be retained.

In my opinion, the wording of the said provision is clear and it meets the intention of the parties to the convention. This however is subject to the decision concerning the respondent's argument arisen [sic] from the Protocol of the Convention.

4.03.16 Protocol

It is not unuseful to quote once again paragraph 2 of the Protocol:

2. Nothing in this Convention shall be construed as preventing Canada from imposing a tax on amounts included in the income of a resident of Canada according to section 91 of the Canadian Income Tax Act, or to any substantially similar provision subsequently enacted by Canada in addition to, or in place of, that section.

Despite the circumstances explained by counsel for the appellant which can be given to explain this provision in the protocol (in fact there is no evidence about that), the Court must continue it as it is written. Is there a provision of the Convention that prevents Canada from imposing a tax on amounts included in the income of a resident of Canada according to section 91 of the Act? “Yes” the respondent answers, “Article XXIII (2) of the Convention”. The deemed “Israeli tax payable” when it is exempted or reduced, prevents Canada from imposing tax. A deduction of US $88,410 indeed must be made from the US$116,196 included (see par 3.06 and 3.07 above) in the income pursuant to 91(1). If such deeming provision does not exist, the multiplication of the portion of the foreign accrual tax (91 (4)(a)(1) ), (that is then “nil’’) by the relevant factor gives a result “nil” for the deduction and then the whole amount of US $116,196 remains taxable.

The Court states first that section 91 included in the appellant’s income an amount that has not been received by it but by its controlled foreign affiliate Can-ls. It is a deemed income just like the “Israeli tax payable” of Article XXIII (2) of the Convention is a deemed tax payable when it is exempted as in the instant case.

Secondly it can be said that the Convention does not prevent the said deemed income to be computed in the appellant’s income.

However, Article XXIII (2) of the Convention prevents from imposing tax on US $88,410 computed pursuant to subsection 91(4). Section 2 of the Protocol says “as preventing Canada from imposing a tax on amounts included in the income . . . according to section 91” and not “as preventing Canada from including income provided in section 91”.

It seems to the Court that provision 2 of the Protocol as it was written, is stricter and prevents the application of subsection 91(4).

The Court understands all the reasoning of the appellant and the liberal interpretation to be given the Convention (the Protocol being part of it). The Court knows the general rule of interpretation provided in Article 31 of the Vienna Convention on the Law of Treaties (1969) to which Canada subscribed. It 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.

The Court knows that one of the main objects of the Convention involved in this case is “for the avoidance of double taxation with respect to income tax”.

However, the Court cannot see the usefulness of the existence of this specific provision in the Protocol, if it is not to prevent “any provision of the Convention from imposing a tax on amounts included in the income of a resident of Canada according to Section 91 of the Act”.

The parties of an agreement should not speak and yet say nothing. The only meaning the Court can see is the one given above. Therefore the reassessment must be maintained.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.