Landbouwbedrijf Backx – Tax Court of Canada finds that Dutch legal expert testimony was required in order to establish dual corporate residency
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. The FCA found that there was no reversible error in the finding of Smith J that B.V.’s central management and control was in Canada. However, it referred his decision back for further consideration by him of two points.
First, if B.V. had become resident in Canada shortly before the 2009 disposition, there would have been a step-up in the tax basis of the partnership interest under the immigration provision (s. 128.1(1)(c),) thereby reducing or perhaps eliminating the 2009 gain. In this regard, Smith J indicated that he considered B.V. to have become resident in Canada shortly before its acquisition of the partnership interest in 1998, so that s. 128.1(1) had no application.
Second, he was asked to consider the application of the Treaty residency provisions. In this regard, Smith J noted that B.V. had failed to “adduce expert evidence on applicable Dutch law” to establish that under Dutch law, B.V. “was subject to comprehensive taxation in the Netherlands” and, thus, satisfied that requirement for being a Dutch Treaty resident. Furthermore, even if B.V. was a dual resident, Art. IV(3) of the Treaty provided:
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.
Given that the competent authorities had not been engaged (B.V., when it filed its Notice of Objection, did not request that its Objection be held in abeyance pending a Competent Authority referral), this meant that the Treaty could have no application to B.V. to alter the application to it by CRA of the domestic ITA provisions.
Thus, B.V. did not accomplish anything through its appeal to the FCA other than getting Smith J to provide some more detailed findings against it on some relatively obvious secondary points.