Taran Furs Inc v. Minister of National Revenue, [1985] 1 CTC 2255, 85 DTC 188

Tremblay, TCJ:—This case was heard on July 19, 1984, in the City of Montreal, Quebec.

1. The Point at Issue

The point is whether the appellant is correct in not deducting or not withholding tax from amounts paid to non-resident suppliers totalling $142,984 during the 1972, 1973 and 1974 taxation years. The appellant says Article III(1) of the Canada-Finland Income Tax Convention prevents taxing such interest. The respondent contends that the said payments made to the non-resident suppliers were interest payments and taxable pursuant to Article II 1(6) of the international agreement. Therefore the Income Tax Act applies, requiring the non-resident to pay 15 per cent on the said amount, and requiring the Canadian resident (appellant) who pays the interest, to withhold the said 15 per cent and remit it to the respondent. The latter also contends that the appellant knowingly failed to deduct and therefore must pay the said tax ($21,447.60) plus penalty ($2,144.75) and interest ($2,747.28). The appellant however contends that the sums paid to the non-resident suppliers were not payment for interests but payment for merchandise.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessment or reassessment are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

7. In assessing the appellant for its 1972, 1973 and 1974 taxation years, the respondent relied on the following assumptions of facts:

(a) The appellant carried on the business of manufacturing and selling furs in Canada;

(b) In the course of this business carried on in Canada, the appellant bought skins from non-resident suppliers, Finnish Fur Sales Ltd and Danish Fur Sales Ltd, who carried on their own business in Finland and Denmark;

(c) The appellant did not carry on any business in a country other than Canada and the mere purchase of goods outside Canada, does not amount to carrying on a business in a foreign country;

(d) Payments of interest on late payments to the suppliers, were provided in the

contracts passed on by the appellant with its different non-resident suppliers;

(e) During the 1972, 1973 and 1974 taxation years, the appellant respectively paid on late payments to its non-resident suppliers the following amounts on account or in lieu of payment of, or in satisfaction of interest to its non-resident suppliers:

	Denmark	Finland
1972	—	$14,457
1973	$ 7,797	$34,292
1974	$35,897	$50,541
	$142,984

(f) In computing these amounts so paid to its non-resident suppliers, the appellant applied a rate of interest to its overdue payments which were outstanding after a certain length of time;

(g) The interest paid by the appellant was a non-residents’ income derived from a Canadian source;

(h) The appellant knowingly failed to deduct or withhold tax from the amounts of interest paid to its non-resident suppliers;

(i) The appellant is liable to pay the following amounts of tax that should have been deducted or withheld:

Year	Tax	Tax	Penalty		Interest
1972	$ 2,168.55		$	216.85	$	505.99
1973	$ 6,313.35		$	631.33	$1,031.17
1974	$12,965.70		$1,296.57		$1,210.12
	$21,447.60		$2,144.75		$2,747.28

3. The Facts

3.01 The only point in dispute is the interpretation of the law. In substance the facts are not in dispute.

3.02 The reassessments levy a non-resident tax of 15 per cent in respect of payments made to Finnish Fur Sales Ltd of Finland and Danish Fur Sales Ltd of Denmark on merchandise purchased in those two countries from those two foreign companies. They are auction houses. They carry on fur auction businesses in those countries.

3.03 The counsel for the respondent informed the Court that his client consented to judgment on the following interest computed on tax payable under Part XIII of the Act:

The counsel for the respondent informed the court that the respondent accepted these amounts as settlement for interest if the appeal is dismissed.

3.04 Both counsels for the parties filed on common evidence as Exhibit C-1 en liasse ten documents numbered I to 10. Most of them concern the computation of the tax (1) and invoices from Finnish Fur Ltd, bank transfers, invoices from custom brokers from KLM (5 to 10) and conditions of sale (2, 3, 4).

3.05 The computation of taxes C-1-1 reads as follows:

TARAN FURS INC

				15%
		Purchases	Interest	withholding
Payments	Year	of Skins	Paid Paid	Tax Applicable
Denmark:	1972	$ 641.841	—
				—
Finland:	1972	$1,030,065	$ 14,457	$ 2,168.55
			$ 14,457	$ 2,168.55
Denmark:	1973	$1,224,990	$ 7,797	$ 1,169.55
Finland:	1973	$1,427,334	$ 34,292	$ 5,143.80
			$ 42,089	$ 6,313.35
Denmark:	1974	$1,112,109	$ 35,897	$ 5,384,55
Finland:	1974	$2,102,757	$ 50,541	$ 7,581.15
			$ 86,438	$12,965.70
Grand Total:			$142,984	$21,447.60

3.06 The main important excerpts of the conditions of sales (Exhibit C-l) reads as follows:

Clause 2: The skins and lots, respectively, are sold as in their actual conditions at the

fall of the hammer. All information in the issued catalogue and all samples supplied as showbundles are provided without liability and intended to serve only as a guide in connection with the inspection which the Purchaser should perform of the merchandise prior to the auction. No warranties whatsoever

— express or implied — are made concerning the composition of the lots, or the quality, condition, fitness or suitability of the goods, or otherwise. Purchased lots must be accepted by the Purchaser “as is’’, regardless of any faults or imperfections.

Clause 6:	(TS 1, pp 11 & 12)
	The Purchaser shall pay the purchase price plus 3% thereof as an auction
	fee. The Purchaser shall also pay mink marketing charges as provided
	below and such interest and costs which may accrue on purchased mer
	chandise subsequent to the fall of the hammer.
	Any fees on export, licence, customs, clearing commissions and the like
	due on the purchase as well as any expenses due for delivery shall be paid
	by the Purchaser.
	The Purchaser is to be charged mink marketing charges at a rate of Danish
	kroner 0,15 per skin for each skin purchased. The total amount of these
	monies shall be made available to the organization MINK INTERNA
	TIONAL to be used for the advertising of mink.
Clause 7:	(TS 1, p 12)
	The “prompt day’’ shall be the 21st day after the last day of the auction
	and all liabilities of the Purchaser shall be fulfilled as of the close of busi
	ness on the applicable prompt day.
Clause 9:	(TS 1, p 13)
	If the Purchaser’s liabilities are not fulfilled when performance is due the
	Purchaser shall be obliged to pay interest at a rate which will be published
	prior to each auction. The rate may be changed at 21 days’ notice.
	In collecting interest the Company shall not be deemed to have waived
	recourse to any of the Company’s remedies specified under par 10 hereof.

Clause 10: (TS 1, p 13)

The Company shall have all property rights in the merchandise sold until all liabilities of the Purchaser have been fulfilled.

In the event of a Purchaser failing to fulfill his liabilities towards the Company when performance is due or in the event of a Purchaser becoming insolvent or bankrupt or suspending payment or committing any act of insolvency or bankruptcy, then in any such event any deposit made or any payment made on account shall be forfeited and the Company shall be at liberty, to rescind the sale and/or, without further notice, resell the skins and retain the proceeds thereof and the Purchaser shall make good to the Company the deficiency if any on such resale together with all expenses and losses.

Clause 12: (TS 1, p 14)

Delivery of sold merchandise is made from the Company’s warehouse, where the goods are to be distributed in proper rotation as and from the day subsequent to the auction upon fulfillment of the Purchaser’s obligations.

If the Company is prevented from carrying out the delivery by reason of strike, disturbances, intervention by authority or other incident reasonably beyond the normal control of the Company, the Purchaser shall not be entitled to compensation therefor nor shall the Purchaser be discharged from any liabilities towards the Company, which liabilities the Purchaser shall be obligated to fulfill as soon as the hindrance has ceased.

Clause 13: Skins still in the Company’s warehouse shall be covered by insurance

against fire and burglary at the Company’s expense, but the Company assumes no other responsibility than to compensate the Purchaser — contingent upon the Purchaser’s fulfillment of his liabilities — with the amount of money that the insurance company pays according to its valuation.

3.07 Mr Albert Taran, 44 years old, vice-president of the appellant company, testified in direct examination that:

(a) He started working for Taran Furs in 1955-56.

(b) It was incorporated around 1942 as a wholesale manufacturer. “We buy raw pelts, send them to the tanner, get them back to our factory and we turn them into garments”. (TS 1, p 40) Sometimes it happened however that skins were purchased to be resold as skins. (TS 1, p 86)

(c) The fur garments are sold in Canada (40 per cent) and outside Canada (60 per cent, USA and Europe (Italy, Switzerland, England, France, Germany, etc).

(d) The volume of sale of the appellant was:

1973: $12,271,392

1974: $15,667,758

Exhibit A-1: Financial statement for 1974 with comparisons for 1973.

(e) Taran Furs is one of the largest fur companies in the world today. (TS 1, P 46)

(f) Most of the skins are bought at auctions: minks, 100 per cent; foxes, 100 per cent; raccoons and coyotes, 90 per cent at auction and 10 per cent from collectors in North America.

(g) From 1972 to 1974, the auctions were held in Leningrad, Oslo, Copenhagen, Stockholm, London, New York and Montreal. The appellant was represented at all these auctions. The number of auctions in a year was as follows: Russia, two; Scandinavia, five or six; Montreal three or four; New York, three or four.

(h) Normally his father, Ben Taran, went to these auctions alone or sometimes with another person. Ordinarily he stayed two weeks. During the first four to nine days, he would check the skins with the appropriate catalogue of the auction and take notes in it. The auction catalogue of Danish Fur Sales Ltd in Copenhagen for 1975 was filed as Exhibit A-3. This catalogue is a standard catalogue throughout the world. (TS 1, p 54) The language of operation is English even in Leningrad because most of the buyers come from North America. The auction season “runs from early December to the middle of May”.

(i) No member of his family has any interest in Finnish Fur Sales Ltd or in Danish Fur Sales Ltd. Neither of these companies nor their shareholders have interest in the Taran Fur Inc.

(j) The skins are paid with the currency of the country where the auction was held: Danish Kroner, Finnish Mark, etc.

(k) “When you buy goods, its f o b the auction house. You have to take out of the warehouse yourself.” (TS 1, p 60) or by the intermediary of a forwarding agent. The appellant’s agent was MAHE. The agent picks up the skins and looks after packaging and shipping by air to Montreal. The appellant pays for these services in the same way it pays “for everything outside of the skin itself”; as soon as it gets it.

(1) The purchaser of skins is supposed to pay 21 days after the auction. It is called the “prompt date”. The appellant paid when they needed the merchandise; sometimes it is on the prompt date, sometimes it is before and ‘‘on a lot of occasions it was after.” (TS 1, pp 63, 64, 65)

To preserve the raw skins, they must be kept in refrigeration. There is no facility in Montreal that has refrigeration for furs. Therefore the appellant left the merchandise in the auction house. The best facilities are in Copenhagen or elsewhere until it had an immediate need. Then it paid through the intermediary of the bank and informed its agent. Sometimes they are obliged to leave them there for months, especially those purchased in April or May, the time of the last auctions. No payment was required until the appellant needed the furs and asked for the shipping. In Exhibit C-l, p 5, the invoice from Finnish Fur No 30328J shows that the prompt day was 24-05-72 and the date of payment was 23-10-72.

(m) The appellant paid the price, plus something which is called “interest”. They don’t charge separately for the storage, the insurance or the handling. All those charges are called “interest”. (TS 2, p 68)

But this also includes ordinary “interest”. (TS 1, p 73)

(n) The above invoice (C-l, p 5) shows that the total amount of $267.234.30 in Danish currency is computed as follows:

The document from page 6 of C-l is another invoice from Finnish Fur to the appellant dated 31-01-73. It refers to the former invoice 30328J. “Interest on FMK 156.732.92 from 24-05-72 to 24-10-72: FMK 6.530.54 paid 25-10-72”.

The rate of interest on this invoice does not appear. However it clearly appears on other invoices: 9 per cent, 11 per cent, 12 per cent, 14 per cent. For instance on one date, November 1, 1974, the rate was 12 per cent for the period from 9-06-74 to 09-09-74 and 14 per cent from 09-09-74 to 01-11-74. In the meantime the bank was charging 10% per cent.

(o) It would have been possible to borrow money from the bank and hence to pay less interest. However the appellant company had to keep merchandise in Montreal and there was a lack of refrigeration storage facilities in Montreal for pelts. Therefore it had to keep the furs in Copenhagen and paid the required interest.

(p) The first time he heard about withholding tax on payment of interest, to Finnish Fur and Danish Fur, was when the reassessments were issued by the respondent. They were issued on May 27, 1976.

3.08 In cross-examination, Mr Albert Taran testified that:

(a) A telex to the appellant from Danish Fur Sales re: Finnish Fur Sales filed as Exhibit Cl (8) and dated October 23, 1972, read as follows:

(b) Exhibits Cl (5), Cl (6), CI (8) constitute a typical transaction during the years in issue between Danish Fur Sales and the appellant.

3.09 Mr Charles Taran, vice-president of the appellant company testified that (TS 1, pp 90 to 97):

(a) he has been working for the appellant for 35 years.

(b) he attended fur auctions in Copenhagen with his father whose prime position was buyer of the pelts for the appellant.

(c) before the auction, which lasts between 7 to 10 days, there was an inspection of the pelts which lasted 10 days.

(d) he recognized his father’s handwriting on the 1975 auction catalogue already filed as Exhibits A2 and A2.

(e) there were many hundreds of buyers at those auctions.

(f) the pelts they bought stayed at Copenhagen in the auction company facilities until the appellant needed them. Then the appellant company paid for them. After that, its shipping agent looked after the packaging, the handling and the shipping.

3.10 Counsel for the appellant said that for the moment, he cannot prove that, during the years under appeal, sales of finished garments were sold to Finland and Denmark. (TS 2, pp 4 & 5)

3.11 Moreover it is admitted by counsel for the appellant that the amounts of the interest in issue were recorded in the appellant’s books as interest and deducted as such in the computation of its income. (TS 2, p 5) The figures of interest for 1973 and 1974 are $206,609 and $266,034 respectively. (Exhibit Al, pp 5 and 8) These figures include the amounts paid to Danish Furs and Finnish Furs as interest, $42,089 (1973) and $86,438 (1974).

4. Law — Cases at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved in the instant case are 212(1)(b), 212(l)(b)(iii)(E), 215(6), 227(8). They read as follows:

Sec 212 — Tax

(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, or in satisfaction of,

(b) Interest — interest except

(iii) interest payable in a currency other than Canadian currency to a person with whom the payer is dealing at arm’s length, on

(E) any obligation entered into in the course of carrying on a business in a country other than Canada, to the extent that the interest payable on the obligation is deductible in computing the income of the payer under Part I from a business carried on by him in any such country, or that, but for subsection 18(2) or section 21, would have been so deductible, or

Sec 215(6)

(6) Liability for tax — Where a person has failed to deduct or withhold any amount as required by this section from an amount paid or credited or deemed to have been paid or credited to a non-resident person, that person is liable to pay as tax under this Part on behalf of the non-resident person the whole of the amount that should have been deducted or withheld, and is entitled to deduct or withhold from any amount paid or credited by him to the non-resident person or otherwise recover from the non-resident person any amount paid by him as tax under this Part on behalf thereof.

Sec. 227(8)

(8) Idem. Any person who has failed to deduct or withhold any amount as required by this Act or a regulation is liable to pay to Her Majesty

(a) if the amount should have been deducted or withheld under subsection 153(1) from an amount that has been paid to a person resident in Canada, or should have been deducted or withheld under section 215 from an amount that has been paid to a person not resident in Canada, 10% of the amount that should have been deducted or withheld, and

(b) in any other case, the whole amount that should have been deducted or withheld,

together with interest thereon at a prescribed rate per annum.

4.02. Cases at Law

The counsel for the parties referred the Court to the following cases at law and doctrine:

1. Lebern Jewellery Co Ltd v MNR, [1976] CTC 2422; 76 DTC 1313;

2. MNR v TE McCool Ltd, [1949] CTC 395; 4 DTC 700;

3. Canadian Pacific Ltd v The Queen, [1976] CTC 221; 76 DTC 6120;

4. A P Hilton v MNR, 31 Tax ABC 389; 63 DTC 336;

5. Hollinger North Shore Exploration Co Ltd v MNR, [1960] CTC 136; 60 DTC 1077;

6. CIR v Lever Bros, [1946] AC 441;

7. Studebaker Corp v Commissioner of Taxation for New South Wales, 29 CLR 225;

8. Riches v Westminster Bank Limited, [1947] AC 390 (HL);

9. The Queen v Melf ord Developments Inc, [1982] CTC 330; 82 DTC 6281;

10. The Queen v Melford Developments Inc, [1981] CTC 30; 81 DTC 5020;

11. A G for Ontario v Barfried Enterprises Ltd, [1963] SCR 570;

12. Sudden Valley Inc v The Queen, [1976] CTC 775; 76 DTC 6448;

13. Sudden Valley Inc v The Queen, [1976] CTC 297; 76 DTC 6178;

14. W S Barnes, Taxation in the United Kingdom dans World Tax Series [sic] Little, Brown & Company (Canada) Ltd, Toronto, 1957, 320-321;

15. Southern Pacific Co v M Botner & Sons Inc, [1973] RP 97 (CA Qué);

16. Interprovincial Pipe Line Co v MNR, [1959] CTC 339; 59 DTC 1018;

17. Interprovincial Pipe Line Co v MNR, [1968] CTC 156; 68 DTC 5093.

4.03. Analysis

4.03.1 Pursuant to the adduced evidence, the interest involved is not interest on borrowed money but interest which is an amount payable for property acquired for the purpose of gaining or producing income.

The foreign companies who are the real “taxpayers” in the issue at hand, sold raw pelts to the appellant. The latter transformed the raw pelts into finished garments and sold them in Canada (40 per cent) and outside Canada (60 per cent) (par 3.01(b), (c)). In the years involved no evidence was given to the effect that finished garments were sold to Finland and Denmark where the appellant’s foreign suppliers are located. (par 3.10)

4.03.2 Another point, adduced in evidence, is that a part of the so-called “interest” is in fact service given by the suppliers: storage, insurance, handling, etc (par 3.07(b), (m), (n)).

A. Appellant’s Argumentation

4.03.3 The appellant’s first argument is that any interest of this nature (4.03.2) is not the one envisaged by the Income Tax Act in paragraph 212(l)(b) on which the reassessments are based. According to him, “interest” covers only a borrow- er/lender relationship. Counsel for the appellant referred to the Lebern Jewellery Co Ltd decision (above par 4.02(1)) given by Mr Cardin of the then existing Tax Review Board. The facts and decisions are summarized as follows by CTC at 2422:

The Minister assessed the appellant, a Canadian company, for 15% non-resident tax upon additional amounts paid by appellant to its non-resident supplier for late payment of the invoiced price. The surcharges were calculated at a fixed rate per annum and in the Minister’s view were in the nature of interest subject to non-resident withholding tax. Penalties and interest were also assessed by the Minister for failure to withhold the tax. It was argued for the appellant that the additional amounts paid were not interest income earned by the non-resident supplier in Canada but the supplier’s carrying charges for late payments of its accounts.

HELD:

Since the surcharges were included in a sale agreement between appellant and its non-resident supplier and formed part of the negotiated price of the products, their receipt could not be taxed in the hands of the non-resident supplier as income earned in Canada and were not subject to the non-resident withholding tax. Appeal allowed in principle and assessments referred back to the Minister for verification of amounts.

More specifically Mr Cardin said at 2426 (1316 DTC):

For the appellant, any additional amount paid to the suppliers for late payment is a surcharge agreed upon between the vendor and purchaser, and is therefore included in the cost to the appellant of the goods purchased. This is an ordinary commercial and business practice which is used to facilitate payment in contracts for the purchase and sale of goods required to carry on a business, and, in my opinion, the said amounts are related directly to the costs of doing business for both the vendor and purchaser, and are only incidentally related to the vendor’s income.

Part III of the Income Tax Act, RSC 1952, c 148, as amended, and Part XIII of the Income Tax Act SC 1970-71-72, c 63, as amended, clearly deal with income by way of interest, and I do not believe that under the above circumstances the Swiss suppliers can be considered to have earned interest within the meaning and intent of those Parts of the respective Income Tax Acts.

Since the surcharges are included in a sale agreement between the appellant and the suppliers for products sold in Switzerland and form part of the negotiated price of those products, they are not, for the vendors, an additional source of income earned in Canada; they are part of the overall cost to the vendor of his products. In my opinion, the receipt of such surcharges cannot be taxed in the hands of the Swiss suppliers as income earned in Canada any more than can the income earned by the Swiss suppliers from the sale of their products to a Canadian customer.

Admittedly, taxing statutes must be interpreted restrictively. However, in principle and in the absence of a clear definition of interest income in the Income Tax Act, apply subsections 106(1) and 212(1) respectively to ordinary business carrying charges (whether or not they are called interest, as is alleged in this appeal) would, in my opinion, distort the purpose of the pertinent sections of the Act by making non-residents taxable on business income earned abroad in the ordinary course of carrying on their business with Canadian companies, which in my opinion, is not what Part III or XIII of the respective Acts were intended to do, or indeed say. [Emphasis added.]

In summary, Mr Cardin considers this interest as an incident of sale. It is normally in the hands of the vendor. However, when the vendor is a nonresident supplier and the transaction occurs in a foreign country there is no taxation pursuant to the Canadian Income Tax Act.

4.03.4 To confirm the decision in the Lebern case, counsel for the appellant quoted Mr Justice Rand of the Supreme Court of Canada in the McCool case (above par 4.02(2)) CTC at 400 and 401 (713 DTC).

The respondent has cross-appealed on the refusal to allow as an expense the payment of interest on that part of the consideration to McCool given by the company for the assets transferred which consisted of a promise to pay money. It is, I think, misleading to convert a transaction of this sort into what is considered to be its equivalent and then to attribute to it special incidents that belong to the latter. Whether, if the company had raised money by issuing bonds, with which McCool had been paid off, the interest on them could be deducted as an expense I do not stop to consider; that is not what we have before us. There was no borrowing and lending of money and no use of money for which interest would be the compensation. What the vendor did was to sell his property, for the consideration, in addition to the shares, of a price plus interest; that interest is part of the capital cost to the company. [Emphasis added.]

In the same decision, Mr Justice Kellock quoted Viscount Finlay, CTC at 407 (712 DTC):

To employ the language of Viscount Finlay in Commissioners of Inland Revenue v Port of London Authority, [1923] AC 507 at 514, in order to enable the statute to apply,

there must be a real loan and a real borrowing”. Here there is nothing more than unpaid purchase money secured by a promissory note which, in my opinion, is insufficient. It is not sufficient to say that if the company had borrowed the amount of the note and paid McCool it would have been entitled to the deduction. However that may be, that was not done and the statute does not apply. [Emphasis added.]

4.03.5 The second argument of the appellant is based on clause 10 of the conditions of sale:

the Company (supplier of pelts) shall have all property rights in the merchandise sold until all liabilities of the purchaser have been fulfilled.

Therefore, the owner of the skins is Danish Fur Sales or Finnish Fur Sales up to the time of payment. So when payment is made (capital, interest, storage, etc) every single part of that payment is part of the purchase price.

The present situation differs from the Lebern case where the property of the watches became the property of the purchaser at the time of the agreement, even though the purchaser brought them into Canada a long time before payment.

4.03.6 The third argument of counsel for the appellant is that the appellant is exempt from tax by provision 212( 1 )(b)(iii)(E) quoted above. The appellant’s contention is that the sense of the word “business” in this provision is wide enough to include the appellant’s activities in Copenhagen when it purchased the furs. In Words and Phrases, (Vol 1) at 538 it is said:

. . . business has the widest possible meaning and that it means anything which occupies the time, attention and labour of a man for the purpose of profit.

Therefore even if the appellant did not sell furs in Finland and Denmark during the said years (par 3.10), this is not necessary to meet the definition of “business”. Moreover, whereas the interest paid by the appellants is deductible under Part I (par 3.11), the appellant is exempt from taxation by provision 212(l)(b)(iii)(E).

4.03.7 The fourth argument of the appellant is that Finnish Furs and Denmark Furs are not taxable pursuant to Canada/Denmark (and Finland) Income Tax Agreement, hereinafter called “the convention”. Concerning the interpretation of tax convention between two countries, counsel for the appellant referred to the Canadian Pacific Ltd decision (above par 4.02(3)) given by Mr Justice Walsh of the Federal Court Trial Division at CTC 245 (6134 DTC):

What we have to interpret in deciding whether this tax credit should be allowed is the terms of the Convention and Protocol itself, and not of the Income Tax Act. The parties are in agreement that the terms of a treaty will override an Act and that it should be construed more liberally. A good expression of this principle is found in the case of William Vincent Saunders v MNR, 11 Tax ABC, 399; 54 DTC 524, in which R S W Fordham, QC of the Tax Appeal Board stated at page 402 526]:

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.

Moreover the Canada-Finland Income Tax Convention Act, 1959, section 3 reads as follows:

In the event of any inconsistency between the provisions of this Act, or the Convention, and the operation of any other law, the provisions of this Act and the convention prevail to the extent of the inconsistency.

Section 3 of the Canada-Denmark Tax Agreement Act, 1956 is similar.

4.03.8 The main provisions involved in the Canada-Denmark (Finnish) Agreements are clauses 1, 2 and 6 of Article III of the Convention. They read as follows:

Article III:

1. The profits of a Danish enterprise shall not be subject to Canadian tax unless the enterprise is engaged in trade or business in Canada through a permanent establishment situated therein. If it is so engaged, tax may be imposed on those profits by Canada, but only on so much of them as is attributable to that permanent establishment.

2. The profits of a Canadian enterprise shall not be subject to Danish tax unless the enterprise is engaged in trade or business in Denmark through a permanent establishment situated therein. If it is so engaged, tax may be imposed on those profits by Denmark, but only on so much of them as is attributable to that permanent establishment.

6. Paragraphs 1 and 2 of this Article shall be construed as preventing one of the Contracting Parties from imposing a withholding tax on income in the form of dividends, interest, rents or royalties, derived from sources within its territory by a resident of the territory of the other Party if such income is not attributed to a permanent establishment in the territory of the first Party. [Emphasis added.]

Concerning clause 1 and 2, there is no application in the instant case. Indeed Danish Furs and Finnish Furs have no permanent establishment in Canada. Moreover the appellant has no permanent establishment in Denmark or Finland. This is even admitted by the respondent. The two points in dispute in clause 6 are:

. . . interest . . . derived from sources within its territory by a resident of the territory of the other Party if such income is not attributed to a permanent establishment in the territory of the first Party. [Emphasis added.]

4.03.9 First, what does “interest” mean in clause 6 of the convention? There is no definition of “interest” in the convention. Therefore the ordinary meaning must be used.

In the Melford Developments case (above par 4.02(9)) the Supreme Court of Canada made a statement about the meaning of interest. First the summary of the facts is as follows at 330 CTC:

The respondent paid a West German bank with no permanent establishment in Canada a fee for its guarantee of a loan made to the respondent by the Bank of Nova Scotia. The Minister of National Revenue claimed that this payment was subject to 15% withholding tax under paragraph 212(1)(b) of the Income Tax Act because paragraph 214(15)(a) deemed it to be a payment of interest. The respondent objected on the ground that the Canada-Germany Income Tax Agreement of 1956 precluded the application of paragraph 214(15)(a) which was enacted at a later date and, therefore, the payment was an industrial or commercial profit. The Trial Division of the Federal Court of Appeal held that the payment was not liable to the tax. The Federal Court of Appeal concurred in dismissing the appeal from the judgment of the Trial Division.

HELD:

The Court of Appeal was wrong in holding that paragraph 214(15)(a) did not make the guarantee fee a payment of interest for the purpose of paragraph 212(l)(b). However, the critical issue in this case was whether the Agreement and its implementing Act were effectively amended by the introduction of paragraph 214(15)(a) in the amendment to the Income Tax Act, applicable from November 18, 1974. In the absence of express reference to the Act giving effect to the Agreement, the latter was not amended. The guarantee fee was in the nature of industrial or commercial profit and not interest and so was exempt from non-resident income tax. Appeal dismissed with costs.

At 333 (6283 DTC), the Court made the following comments:

As regards the definition of interest, counsel for the respondent placed reliance upon the comments of Rand, J in Re: Farm Security Act, [1947] SCR 394 at 411 where His Lordship stated:

“Interest 1s, in general terms, the return or consideration or compensation for the use or retention by one person of a sum of money, belonging to, in a colloquial sense, or owed to, another.’’

Read literally, this statement would not require the payment of interest to be made to the owner of the capital advanced to the borrower. Indeed, it may be broad enough to embrace the very transaction now before the Court, namely a guaranty fee for the procedurement of the money of another. If this indeed was the meaning in 1956 in the law of Canada of the term “interest”, then is can be argued that the 1974 Tax Act amendments are not in conflict with the 1956 statute. However, when the observation of Rand, J supra, is read in the context of the issue then before the Court it becomes apparent that no attempt was there being made to determine the extent of the definition of the term “interest’’ and I do not believe the comment should be taken as meaning that interest relates to anything other than the payment for the use of the principal advanced to the payor by the payee. Some light is shed on the above quoted passage from Rand, J when reference is made to the decision of this Court in Bennett and White Construction Company Ltd v MNR, [1949] SCR 287 in which the taxpayer argued that guaranty fees, like interest, were current expenses. The Court unanimously rejected the argument and Rand, J, in his reasons, made the following observation at 293:

Now the Crown has allowed the deduction of interest paid to the bank, and it must have been either on the footing that the day-to-day use of the funds was embraced within the business that produced the profit, or that the interest was within section 5, paragraph (b). But setting up that credit right or providing the banking facilities is quite another thing from paying interest; it is preparatory to earning the income and is no more part of the business carried on than would be the work involved in a bond issue.

See also the judgment of Locke, J (Rinfret C J and Kellock J concurring) at 289-90:

While the amounts paid to the guarantors were described as interest in the various resolutions which authorized their payment, this was clearly inaccurate. Interest is paid by a borrower to a lender: a sum paid to a third party as the consideration for guaranteeing a loan cannot be so described. [Emphasis added.]

Therefore the appellant concludes that the interest involved in the instant case, not being a borrower/lender interest, paragraph 6, Article III of the convention, has no application against his client. To support this conclusion counsel for the appellant also referred to the Report of the Organization for Economic Co- Operation and Development (OECD) on fiscal affairs 1979. In the Model Double Taxation Convention on Income and on Capital, paragraphs 1 and 3 of Article II, read as follows:

1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

3. The term “interest” as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article.

The emphasis is mine. This confirms, according to the appellant, that “interest”, as involved in the convention, is a borrower/lender interest.

4.03.10 The second point at issue in Clause 6 of the convention is the meaning of “derived from sources . . .” Is the “source” from Canada or from Finland (or Denmark)? In the latter case, the word “source” is also not defined, neither in the convention nor in the Income Tax Act.

4.03.11 Concerning the word “source”, counsel for the appellant stresses the Studebaker decision (above par 4.02(7)) issued by the High Court of Australia in 1921. The facts are as follows:

By an agreement made in America between a company incorporated in America and carrying on there the business of a manufacturer and vendor of motor-cars and a company incorporated in New South Wales, it was agreed that the American company should sell to the Australian company motor-cars to be from time to time agreed upon between the parties. The cars were to be delivered on rail at the American company’s factory in the United States, and to be at the sole risk of the Australian company from that point. The price fob rail was fixed by the agreement, and the Australian company was to pay freight, insurance, customs duty, packing and all other incidental forwarding charges, and was allowed five months from the date of the arrival of the cars in Australia within which to pay for the cars, but, if time was taken for payment, interest at a certain rate was chargeable on the amount shown in the particular invoice after the expiration of fifteen days from the date of the invoice. Motor-cars were ordered and supplied pursuant to the agreement, and time was taken for payment, and interest became payable and was paid to the American company.

Held, that such interest arose from business transacted and wholly carried out in America, and therefore was not income of the American company arising from a source in New South Wales, and was not assessable to income tax under sec 9 of the Income Tax (Management) Act.

At 232 and 233, the Court gives the rationale of the conclusion:

The facts already set forth make it plain that the contract for the supply of the goods was made in America, that the goods were delivered there, and that payment for the same was to be made there. It is clear that the interest assessed to tax was not the result of any business carried on or of any personal exertion or labour in Australia, and the learned Judges of the Supreme Court so held. Was the interest then income derived from property, that is, income derived from some source in the State other than personal exertion? The learned Judges of the Supreme Court, in answering this question in the affirmative, relied upon two distinct lines of reasoning: (1) The liability to pay interest only became a binding obligation when the purchaser exercised his right to defer payment for five months. The interest therefore constituted something in the shape of income that could not be attributed to any personal exertion in the United States; it was a source of income which might continue beyond five months because the obligation to pay interest would subsist until the debt was discharged. It (the interest) arose in New South Wales because of the exercise of the option in New South Wales to withhold payment in consideration of interest to go to the appellant Company. We cannot agree with this statement of the transaction. It obscures a plain state of facts. The purchaser was to pay the price for the goods and interest thereon for such time from the date of the invoice. It was part and parcel of the one business transaction. The obligation to pay and the right to receive the interest flowed from the agreement made in America. It is impossible to divide the transaction into two distinct parts, and treat one as referable to America and the other (the exercise of the so-called option) as referable to New South Wales. (2) A simple contract debt, like any other debt, is a species of property. It is a chose in action. So far as it can have a location it has all through been located here, and on principle the right to interest cannot be distinguished from the ownership of property in New South Wales which brings in an income to the appellant company. This view overlooks the fact that the Legislature in using the words “derived from any source in the State’’ was not dealing with legal concepts, but with what was the real source of income as a practical hard matter of fact (Nathan v Federal Commissioner of Taxation (1) (25 CLR, 183); Lovell & Christmas Ltd v Commissioner of Taxes (2) ([1908] AC, 46)). Thus, in Nathan's case and in Murray v Federal Commissioner of Taxation (3) (29 CLR, 134) the fact that the income was payable and paid out of Australia did not negative the fact that its source was within Australia. So, here, the attribution of locality to the obligation to pay interest is not decisive. The facts must be examined, and when we find that the interest arises from business transacted and wholly carried out in America the conclusion must be that it was not derived from any source within New South Wales.

The appeal must, in our opinion, be allowed. [Emphasis added.]

Counsel for the appellant referring to the adduced evidence, submitted that, in the instant case, “the real source of income as a practical hard matter of fact” was in Copenhagen (where the auction and the agreement occurred, etc) and not in Canada, despite the fact that the making of the decision to transfer the pelts from Copenhagen to Canada and therefore to exercise the option to withhold payment was within Canada. Therefore the appellant concludes that paragraph 6 of Article III of the Convention has no application against him.

B. Respondent's Argumentation

4.03.12 OECD Model Convention

Concerning the “penalty charges for late payment” of paragraph 3, Article II of the OECD Model Convention, counsel for the respondent argued that if it is expressly excluded as being “interest” for the purpose of Article IT, it is because it is implicitly included in the ordinary definition of “interest”. Moreover, pursuant to the counsel, this second sentence of paragraph 3 is an optional clause. The Canada-UK Income Tax Convention (1978) indeed does not include such a clause.

4.03.13 Provision 212(l)(b)(iii)(E)

Counsel for the respondent concerning the argument given by counsel for the appellant about the exemption 212( l)(b)(iii)(E) quoted above, simply referred to the decision of Mr Cardin in Lebern (above) CTC at 2424-25:

In determining the issue in this appeal, it seems necessary to first establish where the appellant was carrying on its business. The facts, in my opinion, clearly indicate that the appellant company was operating a business of buying watches and components and selling assembled watches. Regardless of where they were acquired, the purchase of watch components and/or watches, although an important facet of the appellant’s business, is not the business itself. The appellant’s operation, in my view, became a business only when the watches were sold and a profit derived therefrom. Notwithstanding the relationship that might have existed between the suppliers and the appellant, the evidence is that the appellant was a Canadian company; that it sold its products almost exclusively on the Canadian market; that its profit was made in Canada; and that taxes on the said profit were paid to the Government of Canada. In the circumstances, it is very difficult for the Board not to conclude that the appellant was carrying on business in Canada within the meaning of the Income Tax Act, a conclusion which is supported by considerable case law.

Notwithstanding counsel for the appellant’s submission that the obligation referred to in clause 106(1 )(b)(iii)(E) for the 1971 taxation year could be interpreted as being the obligation of the Swiss suppliers to accept the appellant’s late payment, I believe that both clause 106( 1 )(b)(iii)(E) and clause 212( 1 )(iii)(E) refer to an obligation of the Canadian resident taxpayer to pay certain amounts and, since the appellant, in my opinion, was not carrying on business in a country other than Canada, the exceptions in clause

(E) of subparagraph (iii) of paragraphs 106(1)(b) of the respective Acts do not apply to the facts of this appeal. [Emphasis added.]

4.03.14 Moreover counsel for the respondent, concerning provision 212(l)(b) (iii)(E) argued that if the legislator explicitly excludes interest from being “any obligation entered into in the course of carrying on a business . . .” this means that it is implicitly included in the ordinary meaning of “interest”. Moreover such interest, from “any obligation entered into in the course of carrying on a business” does not mean only a borrower/lender interest but also an interest originating from late payment for property acquired for the purpose of gaining or producing income, ie, in the instant case, payment after the “prompt day” 7th and 9th condition of sales par 3.06) of purchase of skins.

4.03.15 Ordinary meaning of interest

Counsel for the respondent referred to different cases at law, the important matter of which was the meaning of the word “interest”.

(a) In the Riches case above (par 4.02(8)), the decision was given by the House of Lords in 1947. The facts are summarized as follows:

A sum of money awarded under the powers conferred by s 3, sub-s I, of the Law Reform (Miscellaneous Provisions) Act, 1934, as interest and included in the total sum for which judgment is given is “interest of money” within the meaning of sch D, of the Income Tax Act, 1918, so that the judgment debtor, when paying the judgment debt, is entitled to deduct income tax on the amount of the award of interest and the judgment creditor must “allow such deduction” on receipt of the balance.

Observation by Wright, J in In re National Bank of Wales, Ld [1899] 2 Ch 629, 651 dissented from.

Decision of the Court of Appeal (sub nom Westminster Bank, Ld v Riches, [1945] Ch 381, affirmed.

at 399-400, the Court says:

The appellant’s contention is in any case artificial and is in my opinion erroneous because the essence of interest is that it is a payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have made if he had had the use of the money, or conversely the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation. From that point of view it would seem immaterial whether the money was due to him under a contract express or implied or a statute or whether the money was due for any other reason in law. In either case the money was due to him and was not paid, or in other words was withheld from him by the debtor after the time when payment should have been made, in breach of his legal rights, and interest was a compensation, whether the compensation was liquidated under an agreement or statute, as for instance under s 57 of the Bills of Exchange Act, 1882, or was unliquidated and claimable under the Act as in the present case. The essential quality of the claim for compensation is the same and the compensation is properly described as interest. [Emphasis added.]

(b) A-G for Ontario v Barfried Enterprises Ltd (par 4.02(11)), the decision was given by the Supreme Court of Canada. The facts are summarized as follows:

An applicant for relief under The Unconscionable Transactions Relief Act, RSO 1960, c 410, applied to have revised a certain mortgage transaction with the respondent lender. The mortgage was for a face amount of $2,250 with interest at 7 per cent per annum. The sum actually advanced was $1,500 less a commission of $67.50. The difference between the $1,500 and the face amount of $2,250 was made up of a bonus and other charges. The County Court judge set aside the mortgage in part and revised it to provide for payment of a principal sum of $1,500 with interest at 11 per cent per annum.

At 575,

The foundation for the judgment under appeal is to be found in the adoption of a wide definition of the subject-matter of interest used in the Saskatchewan Farm Security Act reference. The judgment of this Court in that case was affirmed in the Privy Council; [1949] AC 110; 1 WWR 742, 2 DLR 145. Interest was defined:

In general terms, the return or consideration or compensation for the use or retention by one person of a sum of money, belonging to, in a colloquial sense, or owed to, another.

This is substantially the definition running through the three editions of Halsbury. However, in the third edition (27 Hals, 3rd ed, p 7) the text continues:

Interest accrues de die in diem even if payable only at intervals, and is, therefore, apportionable in point of time between persons entitled in succession to the principal.

The day-to-day accrual of interest seems to me to be an essential characteristic. All the other items mentioned in The Unconscionable Transactions Relief Act except discount lack this characteristic. They are not interest. In most of these unconscionable schemes of lending the vice is in the bonus.

4.03.16 Counsel for the respondent said that the Melford case (quoted above in paragraph 4.03.9) must be cited for distinction. In the said case, the crux of the matter was whether the guarantee fees paid to a German bank were considered as interest. This German bank indeed was a third person. The Melford decision said:

Interest is paid by a borrower to a lender, a sum paid to a third person as the consideration for guaranteeing a loan cannot be so described.

4.03.17 The Lebern case and Sudden Valley case

Counsel for the respondent informed the court that an appeal was lodged to the Federal Court in the Lebern case. However, whereas the taxpayer became bankrupt and the trustee was released, a favourable decision in such circumstances, ie without opponent, would not be significant. However in the Sudden Valley case above (par 4.02 (12 & 13)) counsel for the respondent contended that the Federal Court Trial Division and Appeal Division, seriously questioned the Lebern decision where it is said that Part XIII of the Income Tax Act does not tax business income even if it were interest. The facts in Sudden Valley are summarized as follows:

The appellant company, incorporated in the State of Washington, originally was to sell subdivided lots of a recreational area to Seattle residents, but when that city became an economically depressed area the sales campaign was directed to the Greater Vancouver area. Invitations were issued to come to the recreation area for a visit, no mention being made of offering land for sale. No offers were made in Canada nor orders secured or initiated, and sales contracts were drawn up and executed in the State of Washington. A Canadian company was later incorporated, but only to direct people to the tours of the area and to receive complaints.

Appellant argued that it was carrying on business in Canada, but the Minister of National Revenue levied the 15% non-resident tax on amounts paid or credited to appellant as interest by residents of Canada.

Dismissing the appeal, the Trial Division held that, as no offer had been obtained and no attempt made to obtain any in Canada, the appellant’s real estate business was not being carried on in Canada.

HELD:

The findings of the Trial Division were supported by the evidence and were decisive of the issue. Appeal dismissed.

The court said at CTC 776 (6449 DTC):

It is clear on the facts that the appellant was not carrying on business in Canada unless its activities fall within the extended definition of “carrying on business in Canada” as set forth in paragraph 253(b) of the Income Tax Act.

And it was decided that even within the extended meaning of the said provision:

. . . solicited orders or anything offered for sale in Canada through an agent whether the contract or transaction was to be completed inside or outside Canada or partly in and partly outside Canada . . .

the taxpayer was not carrying on business in Canada.

4.03.18 Counsel for the respondent referred to subsection 214(1) which reads as follows:

The tax payable under section 212 is payable on the amounts described therein without any deduction from those amounts whatever.

In his opinion the tax must be computed from the gross amount called “interest” without deduction for “warehousing fees”, “handling charges” or “whatever”. It is the method used by the non-resident vendor, to compute service charges and to charge them by way of interest. It is the vendor’s method and the tax must be charged on the gross amount pursuant to 214(1).

4.03.19 Concerning the problem of application of the words

derived from sources within its territory by a resident of the territory of the other contracting state

contained in paragraph 6 of Article III of the Convention, counsel for the respondent contends that it is the Canada debtor, ie the appellant, who decided to pay or not pay after the “prompt day”.

The learned counsel referred to a work published by the Law School of Harvard University in 1957: World Tax Series Taxation in United Kingdom by W W Brudno and F Bower, at page 321, paragraph 11/2.5. Under the heading “Source of Income from dividends and interest”, one can read:

Interest on an indebtedness of a nonresident debtor is from a foreign source even though the interest is payable in the United Kingdom. If the debtor is resident, interest is from a domestic source even though the obligation arose out of a foreign sale of property located abroad.

The authors refer to the following case at law and footnote:

1 R Comrs v Viscount Broome’s Executors (1935), 19 TC 667 (KB); cf English, Scottish and Australian Bank, Ltd v I R Cmrs [1932] AC 238, holding the situs of a debt, for stamp tax purposes, to be the place of the debtor’s residence.

Therefore says counsel for the respondent the source is the residence of the debtor, ie of the appellant. The source is in Canada and the interest paid is not exempt by the convention. It is taxable pursuant to Part XIII of the Income Tax Act.

4.03.20. The Hilton Case

4.03.20(1) Counsel for the respondent referred to the A P Hilton case above (par 4.02(4)) that counsel for the appellant had also referred to in discussing the meaning of “source”. I have not given above the quotation of that decision because the same definition of “source” was found in the Studebaker case (par 4.03.10). However, since the counsel for the respondent stresses the point that the Hilton case decision was issued in 1962 and the Studebaker case in 1921, it is important to give a summary of the facts and large exceprts.

4.03.20(2) The summary reads as follows:

FACTS;

The appellant, a US citizen living in Canada, owned German and Japanese bearer bonds which were issued and held by investment brokers in the United States. Interest on the bonds was collected by the brokers and forwarded to the appellant by cheques in US funds. The appellant claimed that the source of income from the bonds was within the United States and that under Section 41 of the Act and the Canada-US Tax Convention she was eligible for the tax deduction for taxes paid on the bond income. The Minister alleged that the bonds were issued and printed in their respective countries and that sinking funds were maintained in the United States for the administration of the bonds; the principal and interest were payable in New York and the bonds were countersigned there and no deduction was made for the foreign taxes. The Minister contended that the bond interest was not from sources within the United States and the tax credit was not applicable thereto.

HELD:

The actual and real source of the interest on the bonds was Germany and Japan, respectively and not the United States. The investment brokers and paying agents in the United States were merely conduit pipes passing on the interest. The Canada-US Tax Convention only relieves from double taxation income arising from sources within Canada or the United States and therefore the appellant was not relieved thereby on the bond interest. The appeal was dismissed.

4.03.20(3) The contention of each party is more detailed at 402-3 (342 DTC):

It was submitted on behalf of the appellant that the contracts relative to the several bonds had been made in the United States, where the bonds were countersigned, in the case of the German bonds, by the First National Bank of the City of New York, thus making them negotiable, and, finally, that by acceptance of the bonds when they were purchased by the appellant in the United States the contract was then made, and was a contract of the United States. He submitted further that the appellant’s source of income from the German bonds was from the United States, from where, as a practical matter, the following elements gave rise to the income:

(1) The appellant received her income in the form of cheques from Merrill, Lynch and Company, drawn on their account in the United States and payable in American dollars:

(2) The bonds were issued in the United States;

(3) The bonds were negotiated on the countersignature of The First National Bank in New York;

(4) The contract was made upon acceptance of the bonds by purchase by the holder in the United States;

(5) The principal and interest of the bonds were payable at the offices of J P Morgan and Company Incorporated in the City of New York, USA;

(6) The bonds were bearer bonds and were physically situated in New York;

(7) Any notice of redemption was to be published in the City of New York.

Similar representations and submissions were made with respect to the Imperial Japanese Governments bonds and in respect of the City of Yokohama bonds.

On behalf of the respondent, it was pointed out that, with respect to the German Government bonds, they were issued: (a) in exchange for bonds of the German Reich;

(b) that they were printed in Munich, Germany; (c) that the bonds and the interest coupons attached were a mere promise to pay to bearer; (d) that no property was mortgaged or hypothecated; (e) that the bonds contained a covenant to maintain a sinking fund in New York for the administration of the bonds; (f) that the interest covered by the coupons was paid to bearer at New York by J P Morgan and Company as paying agent; (g) that the principal and interest were payable in United States dollars; (h) that the bonds were countersigned in New York “for identification”; (i) that notice of redemption was to be published in New York newspapers; and (j), that both the principal and interest of the bonds were payable without deduction of taxes imposed by the German Government. [Emphasis added.]

4.03.20(4) Concerning the study of the word “source”, the learned Commissioner Fisher who gave the decision referred to different cases at law and concluded that

neither the appellant’s investment broker nor J P Morgan & Company nor the fiscal agent of the Japanese Government, all of whom were in New York, can be considered to have been the source of the debt on which the interest was payable. They were only conduit pipes passing on the interest which came originally from sources in Germany and Japan and not from sources in the United States of America.

4.03.20(5) I think it is important to give the references and comments of Mr Fisher:

In the Exchequer Court decision in Hollinger North Shore Exploration Co Ltd v MNR, [1960] Ex CR 325; [1960] CTC 136, which judgment has been upheld unanim ously in the Supreme Court of Canada in [1963] CTC 51 (not yet reported in the Supreme Court Reports), Thurlow, J discusses a source of income in his reasons for judgment, and quotes from the reasons for judgment of Lord Atkin of the Privy Council in Liquidator, Rhodesia Metals Ltd v Commissioner of Taxes, [1940] AC 774. He then continues as follows (at pp 330, 141):

Later in the same judgment, Lord Atkin said, with reference to the meaning of the word “source” in an ordinance imposing taxation in respect of income received or accrued from any “source” within the Territory:

Their Lordships incline to the view quoted with approval from Mr Ingram’s work on South African Income Tax Law by de Villers J in his dissenting judgment: “Source means not a legal concept, but something which a practical man would regard as a real source of income”; “the ascertaining of the actual source is a practical hard matter of fact”.

It seems, however, that this observation in the judgment of de Villers, J was not original with him, since I find that Isaacs, J (as he then was), when delivering the judgment of the High Court in Nathan v The Federal Commissioner of Taxation, 25 CLR, 193; 24 Argus Law Reports (Victoria) 286 stated:

The Legislature in using the word “source” meant, not a legal concept, but something which a practical man would regard as a real source of income. Legal concepts must, of course, enter into the question when we have to consider to whom a given source belongs. But the ascertainment of the actual source of a given income is a practical hard matter of fact.

This reference to the judgment of Isaacs, J in the Nathan case may be found in Ratcliffe and McGrath’s Income Tax Decisions (Australasian) (1891-1927) at p 15 wherein the date of the said decision is given as 23/8/1918, which is the year mentioned in Volume 5 of Rowland Burrows’ Words and Phrases Judicially Defined, at page 130, under the word “SOURCE”.

I adopt the interpretation given to the word “source” which has received the approval of the Privy Council, namely, that it is not a legal concept but something which a practical man would regard as a real source of income, and that the ascertainment of the actual source of a given income is a practical hard matter of fact. Source is not defined specifically in the Income Tax Act or in the Canada-US Tax Convention, and after consideration of the circumstances of this appeal, I have reached the conclusion that the actual source of the interest on the German and Japanese bonds was Germany and Japan, respectively, as the real source of income and “as a practical hard matter of fact”.

A number of cases and textbook references were cited by counsel for the appellant, including Chamney v Lewis, 17 TC 318; Studebaker Corporation of Australasia Limited Commissioner of Taxation (1921), 29 CLR 225 (also referred to in R & MCG Income Tax Decisions (Australasian) (1891-1927) at p 165), which approved the observations of Isaacs, J in Nathan v Federal Commissioner of Taxation (supra); Commissioner of Stamps v Hope, [1891] AC 476 at 481; Westlake on Private International Law (5th ed.) at p 322, para 233: Daniels on Negotiable Instruments, Vol 1 (5th ed) p 8, para 7; Halsbury’s Laws of England (2nd ed), Vol 2, para 1020 at p 725; Twycross v Dreyfus (1877), 5 Ch D 605, CA referred to in the English & Empire Digest, Vol 6, at p 420; Canadian Tax Journal, Vol 9, 1961, at p 252; CCH Canadian Tax Reporter, paragraph 12-657 at p 1903, paragraphs 12-663 and 12-664 at pp 1910 to 1912, and paragraph 12-667 at p 1915.

Counsel for the respondent, in addition to the Hollinger North Shore and Rhodesia Metals Ltd cases as cited above, referred also the Rhodesia Metals case in the Privy Council as reported in 11 SATC at p 244; to p 57 of Vol 15 of Halsbury’s Laws of England (3rd ed) to Winans v Attorney General, [1910] AC 27; CIR v Lever Brothers & Unilever Ltd, 14 SATC 1; Kemp v MNR, [1947] Ex. CR 578; [1947] CTC 343; and to Articles XIIIE and XVI of the Canada-US Tax Convention. Respondent’s counsel also stressed the distinction between income “received” from a country and income “derived” from that country, and pointed out that one must go further than the mere “origin of the receipt” of the income to discover its “source” and from where it has been “derived”.

In addition to the above citations of counsel, there are a number of others referred to in Stikeman’s Canada Tax Digest, at p 685, under the heading of “SOURCE OF IN- COME”, including the observations of Bergman, JA, of the Manitoba Court of Appeal in Provincial Treasurer of Manitoba v William Wrigley (Junior) Company, Limited, [1945] CTC 299, and particularly at p 321 thereof, a case which ultimately went to the Privy Council, where it was reported at [1949] CTC 377.

In MNR v Robertson, [1954] Ex CR 321; [1954] CTC 110, Potter, J discusses the word “source”, particularly at pp 332, 121, where he states:

The word “source” as used in the Act is a correlative term and there can no more be, at its inception, income without a source of income than there can be a child without a mother, and the converse,

and a discussion as to sources of income is contained, also, in the Exchequer Court judgment of Thurlow, J in Interprovincial Pipe Line Co v MNR, [1959] CTC 1, which was ultimately reversed in the Supreme Court of Canada, [1959] SCR 763; [1959] CTC 339.

And then followed the conclusion quoted above in 4.03.20(4).

4.03.21 Finally, counsel for the respondent referred to the Southern Pacific Company decision (above par 4.02(16)) given by the Court of Appeal of Quebec. In this case an American company denied the jurisdiction of the Provincial Court, District of Montreal on the basis that its headquarters were in the USA and that it had no office in Quebec. The Court of Appeal decided that the receivable accounts of the American company due by CNR and CPR are “property” located in Quebec and thence the Provincial Court, District of Montreal, has jurisdiction pursuant to Article 68(1) CPC.

Counsel for the respondent concluded that the source of income 1s, therefore, located in the residence of the debtor.

C. Court’s Decision

4.03.22 In substance the two main points in dispute are the meaning of the words “Interest” and “Source”. It is obvious from all the cases at law referred to by the learned counsel for the parties that the meaning of these words have been in dispute for a long time. I do not pretend to resolve this historic dispute with this decision.

4.03.23 Interest

For the arguments given by the counsel for the respondent (4.03.14, 4.03.15), I am inclined to say that the word “interest” in its ordinary meaning includes not only borrower-lender interest but also interest originating from late payment for property acquired for the purpose of gaining and producing income.

At first glance the definition of the Privy Council, quoted in A G for Ontario v Barfried Enterprises Ltd (par 4.03.15(b)) seems to be wide enough to include the above sense:

In general terms, the return or consideration or compensation for the use or retention by one person of a sum of money, belonging to, in a colloquial sense, or owed to, another.

As there is no definition of the word “interest”, neither in the Income Tax Act, nor in the Canada-Finland Agreement, it seems that the ordinary meaning given above, should be accepted. However, as the Lebern decision has not been reversed by a higher court, I am thereby bound by the said decision.

4.03.24 Source

The Court agrees with the fourth argument of the counsel for the appellant (par 4.03.7, 4.03.8, 4.03.10, 4.03.11) in that the actual source of interest involved in the instant case, being a practical hard matter of fact, was the agreement (etc) which occurred outside Canada, ie in Denmark. Using the words of the High Court of Australia, I think that interest “is part and parcel of the one business transaction. The obligation to pay and the right to receive interest flowed from the agreement made” in Copenhagen, Denmark.

Perhaps that for stamp tax purposes, the situs of a debt was the place of the debtor’s residence in 1932. (par 4.03.19) There is no doubt that to establish the jurisdiction of a court in the Province of Quebec an account receivable is a property pursuant to Article 68(1) CPC.

However, I share the opinion of the Privy Council (more specifically in par 4.03.20(5)) that “source” is not a legal concept but something which a practical man would regard as a real source of income.

In consequence of this decision, I conclude that the two foreign supplier companies and the appellant are exempt by the International Convention Canada- Denmark (Finland) agreement from taxation and obligations provided in sections 212(l)(b), 215(6) and 227(8) of the Income Tax Act.

5. Conclusion

The appeal is allowed and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed.