Atlas-Gest Inc, S a Healy Company, Greenfield Construction Company, Inc, as Atlas-Healy-Greenfield, a Joint Venture v. Minister of National Revenue, [1985] 2 CTC 2066, 85 DTC 430

Bonner, TCJ:—The appellants herein were at all relevant times members of a joint venture known as Atlas-Healy-Greenfield (hereinafter ““AHG’’). They appeal from assessments made in respect of the failure of AHG to withhold and remit Part XIII tax on payments to the appellant S A Healy Company (hereinafter "Healy”), a corporation formed under the laws of Ohio, to the appellant Greenfield Construction Company, Inc (hereinafter "Greenfield”), a corporation formed under the laws of Michigan and to Gleason Crane Rentals Inc (hereinafter "Gleason”). The payments were made for the rental of machinery owned by the recipients. None of the payees was resident in Canada at any relevant time. The third appellant, Atlas-Gest Inc, is the successor to Atlas Construction Limited (hereinafter "Atlas”), a corporation formed under the laws of Canada. Atlas was the third member of the joint venture. It was resident in Canada at all relevant times.

AHG was formed pursuant to an agreement dated October 8, 1974, for the purpose of submitting a bid to the Montreal Urban Community for the construction of an eleven-foot diameter interceptor sewer and, if successful, for carrying out the resultant construction contract. The bid was successful.

In constructing the sewer AHG used certain machinery and equipment belonging to the individual joint venturers. In consideration amounts called "rent” were paid by AHG to the individual members. Further, AHG hired one or more cranes from Gleason for purposes connected with the construction work. Gleason appears to have been unrelated to AHG and its members.

The respondent assessed AHG for failure to withhold tax under Part XIII of the Income Tax Act and for penalties and interest in respect of the payments of rent to Gleason and to the non-resident joint venturers as follows:

Notices of the assessments, each dated March 5, 1979, were sent to AHG. By subsequent assessments the penalties were deleted. Counsel for the respondent conceded at the hearing that interest was not exigible and consented to judgment to that extent. Further in paragraph 5 of the reply to the notice of appeal the respondent admitted that he had erroneously subjected the payments to Gleason to tax in making the assessments now under appeal.

The principal statutory provisions upon which the Minister relied in making his assessments were subparagraph 212(1)(d)(i) and subsections 215(1) and (6) of the Income Tax Act. Subparagraph 212(1)(d)(i) reads:

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

(d) rent, royalty or a similar payment, including, but not so as to restrict the generality of the foregoing, any payment

(i) for the use of or for the right to use in Canada any property, invention, trade name, patent, trade mark, design or model, plan, secret formula, process or other thing whatever,

It will be seen that the first provision charges the non-resident recipient of rent or similar payment described therein with tax. The second imposes a liability on the payor to deduct or withhold the tax and to remit it to the Receiver General. The third imposes a liability on a payor who fails to do what is required by the other two to pay as tax the amount that should have been deducted or withheld. I may note here that it was common ground that tax was not deducted or withheld from the rental payments.

The assessments rest, for procedural purposes, on three further provisions, namely, subsections (10) and (15) of section 227 and paragraph 212(13.1)(a). The assessments in question were issued against AHG which, whether a partnership as contended by counsel for the respondent, or not, as contended by counsel for the appellants, does not in the absence of a deeming provision fall within the ordinary meaning of the word “person”.

227. (10) the Minister may assess any person for any amount payable by that person under Part XIII, this section or section 235 and, upon his sending a notice of assessment to that person, Divisions I and J of Part I are applicable mutatis mutandis.

227. (15) In this section a reference to "person" with respect to any amount or any tax deducted or withheld from an amount under Part XIII shall be deemed to include a partnership that is with respect to that amount deemed for the purposes of that Part to be a person resident in Canada or a non-resident person.

212. (13.1) For the purposes of this Part, other than section 216,

(a) where a partnership pays or credits an amount to a non-resident person, the partnership shall, in respect of the portion of that amount that is deductible, or that would but for section 21 be deductible in computing the amount of the income or loss, as the case may be, referred to in paragraph 96(1 )(f) or

(g) if the references therein to a “particular place" and "that particular place” were read as references to "Canada", be deemed to be a person resident in Canada,

The primary argument of counsel for the appellants was that the rental payments to Healy and Greenfield were amounts that were included in computing income from the businesses which they carried on in Canada and that were reasonably attributable to the businesses carried on by them in Canada and that the payments thus fell within the exception made by subsection 805(1) of the Income Tax Regulations and section 802 in respect of 1978. Authority for enactment of the Regulations is found in paragraph 214(13)(c) of the Income Tax Act. The provisions read:

214. (13) The Governor in Council may make general or special regulations, for the purposes of this Part, prescribing

(c) where a non-resident person carried on business in Canada, what amounts are taxable under this Part or what portion of the tax under this Part is payable by that person.

805. (1) Where a non-resident person carries on business in Canada he shall be taxable under Part XIII of the Act on all amounts otherwise taxable under that Part except those amounts that may reasonably be attributed to the business carried on by him in Canada.

802. For the purposes of paragraph 214(13)(c) of the Act, the amounts taxable under Part XIII of the Act in a relevant taxation year of a taxpayer are amounts paid or credited to the taxpayer in the relevant taxation year other than amounts included pursuant to Part I of the Act in computing the taxpayer's income from a business carried on by it in Canada.

Reference should also be made to subparagraph 115(1 )(a)(ii) of the Act which includes in a non-resident's taxable income earned in Canada incomes from businesses carried on by him in Canada.

The only witness called at the hearing was Donald J Zeier who, since 1972, has been president of Healy. He described the company as a general contractor specializing primarily in underground construction such as the building of subways and water, sewer and vehicular tunnels. Healy, he said, carries on business throughout the United States, Canada and Central America.

Healy’s practice, for many years, has been to combine with other contractors on individual jobs by the use of joint ventures. In this way the risks of complex engineering problems are shared. Healy, since 1965, has used tunnel boring machines rather than drilling and blasting, at least in circumstances where soil and rock conditions permit. A company which owns a machine of the appropriate size has an advantage over other bidders for a tunnelling job because of the time taken to construct such machines. Thus, when Healy enters into joint venture agreements to do work in which it is intended to use a Healy-owned tunnel boring machine provision is made for a rental for the use of the machine and related equipment intended for use in the removal of the rock excavated by the boring machine.

Mr Zeier testified that an advertisement for the Montreal job came to Healy’s attention. The company was attracted to the job because it owned a tunnel boring machine which fitted the diameter of the desired tunnel. Healy then contacted Atlas and Greenfield. It had apparently had previous business dealings with both. It was agreed that the three would form AHG with Healy assuming the role of sponsor. Mr Zeier stated that a sponsor in cases such as this is responsible for the execution of the contract, the supervision of the work, the provision of expertise and manpower and, in most cases, the provision of the bulk of the equipment. After all three companies examined the geography of the site to the extent possible each then independently prepared an estimate of the costs of the various components of the whole job. In the case of Healy that work was done at its head office at McCook, Illinois. Subsequently, the three met in Montreal and analysed each bid item in order once again to ascertain costs and to determine the amount to be bid. The meeting lasted about three days.

At the meeting the rental to be paid to Healy for its equipment was arrived at. The figure turned out to be $48.23 per foot of tunnel constructed. That rate was calculated as set forth in Exhibit A-6. Based on the rate and on monthly reports made to Healy’s Head Office at McCook, Illinois, of footage completed invoices for equipment rental were later sent by Healy to AHG.

The tunnel boring machine was, at the outset, located in Healy’s main equipment yard at McCook. It was rehabilitated in preparation for use and then broken down for shipment to Montreal. Upon arrival at the job site and after a vertical access shaft had been sunk the machine was reassembled in the tunnel where it was to commence work. The assembly work was performed by Healy employees. The maintenance and repair of the machine in the course of the construction of the sewer was done in the tunnel by joint venture employees working under the supervision of Healy's equipment superintendent.

All or almost all of the supervisory personnel engaged in work on the contract were long time Healy employees provided by Healy to the joint venture at joint venture expense. Those employees included the project manager, project engineer, several superintendents and a master mechanic.

The payments to Greenfield which are in question were, as previously noted, made in respect of the use by AHG of equipment which belonged to Greenfield. Mr Zeier’s evidence was that the equipment consisted of service trucks and also rock drills used for the purpose of drilling and blasting vertical shafts.

Mr Zeier produced a number of other joint venture agreements in which Healy participated. In some of them Healy was sponsor and supplier to the joint venture of a tunnel boring machine for which a rental was paid. One of the agreements dated January 13, 1976, was for the formation of the Greenfield-Healy-Atlas joint venture in order to bid on and construct a different section of the Montreal interceptor sewer. In that case, according to Mr Zeier, Greenfield supplied a tunnel boring machine of its own in consideration of rental payments.

It was the position of counsel for the respondent that Healy was carrying on business in Canada as a result of the joint venture agreement. He asserted that Healy was not in business at large in Canada, was not a resident of Canada and had no branch plant here. He took the position that Healy’s business in Canada was defined by the very means by which it carried on business, that is to say, the joint venture agreements. He distinguished between carrying on the business of a construction contractor qua partner in AHG and renting equipment to the partnership which he characterized as acting, in effect, as a stranger to the partnership. Thus, Mr Taylor said that the rentals were not income from the business carried on in Canada by Healy and not reasonably attributable to that business. He said there was insufficient evidence upon which to found any conclusion with respect to Greenfield. Finally, he suggested somewhat faintly that the rental revenues might better be characterized as income from property and not income from a business.

Dealing first with the last point I will note that Healy and Greenfield are corporate entities and their position is therefore different from that of individuals. In this regard reference should be made to the decision of the Federal Court of Canada in The Queen & Metcalfe Carpark Limited v MNR, [1973] CTC 810; 74 DTC 6007.

The evidence, in my view, plainly shows that Mr Zeier accurately characterized Healy’s business as that of a general contractor specializing in underground construction. For purposes of that business it invested its capital in tunnel boring machines and auxiliary equipment of the sort rented to the joint venture. It was quite evidently in Healy's interest to utilize the equipment wherever possible in the performance of contracts in which it was interested. That is precisely what Healy did in this case and in the case of other joint ventures. Although the evidence with respect to Greenfield is rather sketchy, what evidence there is supports a similar conclusion with respect to the trucks and drilling and other equipment which it rented to the joint venture. Although the relationship of Healy and Greenfield to AHG as suppliers of equipment was different from their relationship to it as members, both of those relationships fell within the ordinary scope of the businesses which they carried on in Canada and elsewhere. For the foregoing reasons I find that the rentals received by Healy and Greenfield were, by virtue of subsection 805(1) and section 802 of the Regulations, not taxable under Part XIII of the Income Tax Act. The appeals will therefore be allowed and the assessments vacated. The appellants are entitled to their costs.

Appeals allowed.