Vista Wood Estates Limited v. Minister of National Revenue, [1989] 2 CTC 2376, 89 DTC 567

Bonner, T.C.J.:— The appellant appeals from an assessment imposing liability for failure to withhold tax on a payment to a non-resident. The appellant was incorporated under the laws of Ontario in 1970. From 1970 to 1981 Donald A. Cromarty and Ronald K. Wood were equal shareholders of the appellant. Late in 1980 or early in 1981 Mr. Wood became a resident of the United States. On November 2, 1981, the appellant entered into an agreement with Mr. Wood to purchase his shares at a price of $257,000 U.S. The purchase was authorized by a resolution of the directors of the appellant dated November 2, 1981. That resolution refers to the transaction as a “purchase for cancellation of Ron Wood's shares in the corporation”. The shares in question were cancelled on November 2, 1981.

The basis of the assessment under appeal was that:

(a) by the transaction just described the appellant, ”. . .a corporation resident in Canada . . . redeemed, acquired or cancelled shares of its capital stock. . ." within the meaning of subsection 84(3) of the Income Tax Act ("Act") and by that provision was deemed to have paid a dividend;

(b) the dividend was by virtue of paragraph 89(1)(j) of the Act a “taxable dividend";

(c) Mr. Wood was liable to pay tax on the dividend by virtue of subsection 212(2) of the Act which provides in part as follows;

Every non-resident person shall pay an income tax of 25% on every amount that a corporation resident in Canada pays or credits, or is deemed by Part I or Part XIV to pay or credit, to him as, on account or in lieu of payment of, or in satisfaction of,

(a) a taxable dividend (other than a capital gains dividend within the meaning assigned by subsection 130.1(4), 131(1) or 133(7.1) [1]

(d) The appellant was obliged by subsection 215(1) of the Act to withhold and remit the amount of the tax to the Receiver General on behalf of the non-resident payee, Mr. Wood.

The appellant, in its notice of appeal, took the position that ”. . . a deemed dividend under subsection 84(3) of the Act is not a taxable dividend within the meaning of paragraph 89(1)(j) and, therefore, not subject to nonresident withholding tax under subsection 212(2) of the Act. The deemed dividend which resulted in the assessment was paid when Mr. Wood was a resident of the United States of America".

Mr. Giffen, counsel for the appellant, commenced his argument by conceding that the assessment was warranted by the provisions of the Income Tax Act standing alone. He then raised an argument to which no reference was made in the notice of appeal. Some but not all of the factual underpinnings of that argument were touched upon in evidence. Mr. Giffen asserted that the transaction between the appellant and Mr. Wood was a sale or exchange of assets exempt from taxation by Canada under article VIII of the Canada-U.S. Tax Convention then in effect. He pointed out that under section 3 of the Canada-United States of America Tax Convention Act, 1943, the provisions of the convention and protocol between Canada and the United States must to prevail in the event of inconsistency between such provisions and those contained in the Income Tax Act. He made reference to the decision of the Supreme Court of Canada in The Queen v. Melford Developments Inc. [2]

In my opinion, it was not established that Article VIII of the Canada-U.S. Tax Convention exempted the payment to Mr. Wood from the tax assessed. Article VII reads as follows:

Gains derived in one of the contracting States from the sale or exchange of capital assets by a resident or a corporation or other entity of the other contracting State shall be exempt from taxation in the former State, provided such resident or corporation or other entity has no permanent establishment in the former State.

The appellant did not attempt to prove either that the shares in question were capital assets in the hands of Mr. Wood or that Mr. Wood had no permanent establishment in Canada. There is no basis for a conclusion that the payment sought to be taxed is a “gain” derived from a sale within the meaning of article VII]. Without doubt Mr. Giffen was correct in asserting that the ambit of the protection from Canadian taxation which was afforded to Mr. Wood by the Canada-U.S. Convention cannot be reduced by reason of any amendment to the Income Tax Act made subsequent to the enactment of the Canada-United States Tax Convention Act, 1943, and in particular section 3 thereof. The decision of the Supreme Court of Canada in The Queen v. Melford, supra, makes that quite clear. However, that consideration is of no assistance in this case because it was not shown that payments of the sort now in question were ever exempted by the provisions of the Canada-U.S. Convention. For the foregoing reasons the appeal will be dismissed.

Appeal dismissed.