John Hale v. Her Majesty the Queen, [1992] 2 CTC 379, 92 DTC 6370

Desjardins, J.A.:—In 1981 the appellant was a Canadian resident employed by a Canadian company, Alcan Aluminium Ltd., with which he held the position of "Chief Financial Officer”. On November 30, 1981 his employer agreed to grant him share purchase options as part of an option purchase plan offered to the company's key employees. The appellant left his employment on August 1,1983 and moved to England. However, he had been allowed up to July 31, 1985 to exercise the said options: on October 26, 1984 he exercised the rights associated with the options and received from Alcan Aluminium Ltd. the sum of $125,212.50, less a tax deduction of some $35,547.83.

This deduction, which the Minister of National Revenue stated was the amount owed in tax on a benefit received by the appellant and taxable in Canada pursuant to subsection 2(3), section 7 and subparagraph 115(1)(a)(i) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act"), is the subject of the appeal at bar. It is not in dispute that the appellant paid no tax in the United Kingdom on the sum of $125,212.50 received from Alcan Aluminium Ltd.

The appellant does not dispute that the trial judge correctly understood his allegations. However, he contends that the judge did not dispose of them all (John Hale v. Canada, [1990] 2 C.T.C. 247, 90 D.T.C. 6481 (F.C.T.D.)). He therefore repeated his argument in this Court and submitted that, as a nonresident, he could benefit during the 1984 taxation year from the deduction allowed by subparagraph 110(1)(f)(ii) of the Income Tax Act, since the amount he received in 1984 is tax exempt under subsection 15(1) of the Canada-United Kingdom Income Tax Convention ("the Convention"). [1] In his submission, this amount is“ salaries, wages and other similar remuneration”; it was received "in respect of an employment"; and the "employment" was not "exercised" in Canada in 1984. If, however, it so happened that the employment was exercised in Canada in 1984, the appellant acknowledged that the remuneration received therefor would be taxable.

The Convention does not define the words "salaries, wages and other similar remuneration”. The appellant submitted that Article 3(2) of the Convention [2] requires that words not defined therein be given the meaning given to them by the Income Tax Act, as is required by section 3 of the Income Tax Conventions Interpretation Act. [3] The appellant referred the Court to section 248(1) of the Income Tax Act, and the ph rase salary or wages":

248. (1) In this Act,

“salary or wages” except in sections 5 and 63 and the definition "death benefit” in this subsection, means the income of a taxpayer from an office or employment as computed under subdivision a of Division B of Part I and includes all fees received for services not rendered in the course of the taxpayer's business but does not include superannuation or pension benefits or retiring allowances . . .

[Emphasis added.]

This phrase, the appellant argued, encompasses income of a taxpayer from an office or employment computed in accordance with sections 5 to 8. Barograph 7(1)(b), subsection (4) and paragraph 115(1)(a) of the Act cannot apply, however, as they are inconsistent with Articles 3(2) and 15(1) of the Convention. The Convention requires that if the exemption is to be applicable, "the employment [must not be] exercised" in Canada. Since this verb is used in the present and not the past, unlike Article 7(1) of the Convention [4] where the verb occurs in the present and the past, the appellant submitted that the legislature intended to exclude the case of someone who has exercised employment in Canada previously. Accordingly, the presumption contained in subsection 7(4) of the Income Tax Act [5] cannot be applied, as it is thus inconsistent with the Convention, which must be given a liberal interpretation. Gladden Estate v. The Queen, [1985] 1 C.T.C. 163, 85 D.T.C. 5188 at pages 166-67 (D.T.C. 5190-91), Saunders v. M.N.R. (1954), 11 Tax A.B.C. 399, 54 D.T.C. 524 and Canadian Pacific Ltd. v. The Queen, [1976] 2 F.C. 563 at 594-96, [1976] C.T.C. 221, 76 D.T.C. 6120 (C.T.C. 244-45, D.T.C. 6134) were cited in support.

This argument cannot stand. Assuming, without deciding the point, that subsection 248(1), which refers to a method of computation and not a definition, can nevertheless be used to define the expression "salaries, wages and other similar remuneration" in Article 15(1) of the Convention, the appellant is in my opinion making two errors. Subsection 248(1) excludes the application of section 5, which alone uses the words "salaries, wages and other remuneration". Second, the appellant did not succeed in showing that there was any real inconsistency between section 7 of the Act and Article 15(1) of the Convention. Still assuming that subsection 248(1) applies, it appears on the contrary that the result of the presumption in subsection 7(4) is that the employment which the appellant left on August 1, 1983 is "employment . . . exercised” in Canada within the exception contained in Article 15(1) of the Convention. Subsection 7(4) states that when a person to whom any provision of subsection (1) would otherwise apply has ceased to be an employee before all things have happened that would make that provision applicable, subsection (1) of section 7 shall continue to apply as though the person were still an employee and as though the employment were still in existence.

The appellant was unable to explain to the Court whether there is any presumption in the Act like that of subsection 7(4) that would make invalid or redundant the use of the verb "carried on" in Article 7(1) of the Convention, dealing with business profits. It can be assumed that if there is no such presumption, use of the verb in the past is essential when the legislature intends to cover activities engaged in earlier. If there is such a presumption, use of a verb in the past is not necessary.

As to the argument based on the liberal interpretation that should be given to the Convention, it must be recalled that in Saunders v. M.N.R., supra, a case cited by the appellant, R.S.W. Fordham, Q.C., for the Board said the following at page 412 (D.T.C. 526):

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.

[Emphasis added.]

For my part, I conclude that in the case at bar the Convention, like the Act, is governed by the Interpretation Act, R.S.C. 1985, c. 1-21, and in particular section 12 of that Act. [6]

The legal presumption in subsection 7(4) of the Act is perfectly in line with the exception contained in Article 15(1) of the Convention. In my opinion, there is no inconsistency; rather, the two provisions are complementary to each other.

Under that presumption, the appellant is deemed to have exercised an employment in Canada during the 1984 taxation year.

Appeal dismissed.