Landbouwbedrijf Backx – Federal Court of Appeal confirms that a Dutch company with a sole Dutch director was resident in Canada

When a Netherlands couple 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. in 2009 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.

Rivoalen JA found that there was no reversible error in the Tax Court’s finding that B.V.’s central management and control was in Canada, given the evidence that “the shareholders in Canada were making the decisions, not the director in the Netherlands.”

Rivoalen JA next addressed the Tax Court’s finding that that there had been no previous step-up to B.V. in the adjusted cost base of the partnership interest under s. 128.1(1)(c), as it was likely that B.V. had been resident in Canada from the time of the acquisition of the farm. She allowed B.V.’s appeal and referred the matter back to the Tax Court for reconsideration of this finding based on what appears to be a minor linguistic quibble: in one part of its reasons, the Tax Court had expressed its finding in this regard on the basis that “there was no evidence that [B.V.] actually ceased to be a resident of the Netherlands” - rather than stating that there was no evidence that B.V. had not been resident in Canada at all times. (Given that central management and control was in Canada at all times, this appears to be a distinction without a difference.)

Furthermore, the Tax Court had found that 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, which had not been done. The Tax Court merely quoted Art. IV(3) of the Treaty in this regard – which provides:

Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both States, the competent authorities of the States shall endeavour to settle the question by mutual agreement ... . In the absence of such agreement, such person shall be deemed not to be a resident of either State for the purposes of Articles 6 to 21 inclusive and Articles 23 and 24.

The Tax Court did not go on to indicate (presumably because this was obvious) that, given that the competent authorities had not been engaged, this meant that the Treaty could have no application to B.V. Rivoalen JA found that there also was an error here:

[T]he Convention provides an exception or relief to the appellant, it would take precedence over the Act. The Tax Court did not apply and consider the provisions of the Convention to the facts of this case.

The allowing of its appeal likely will be an illusory victory for B.V.

Neal Armstrong. Summaries of Landbouwbedrijf Backx B.V. v. Canada, 2019 FCA 310 under s. 2(1), s. 128.1(1)(c) and Treaties - Income Tax Conventions - Art. 4.