Doris Lillian Gadsden v. Minister of National Revenue, [1983] CTC 2132, 83 DTC 127

Guy Tremblay:—This case was heard on September 24, 1981, at the City of Montreal, Quebec. Counsel for both parties sent written submissions. The last document was received by the Board on January 9, 1982. The case was then taken under advisement.

1. The Point at Issue

The point at issue is whether the appellant, a non-resident person, is correct in not including in her income for the 1976 taxation year the amount of $425,000 which is the proceeds of disposition of her income interest from insurance companies in Canada.

The appellant contends that the said amount is not taxable because it is exempted by article 12(3) of the 1966 Canada-United Kingdom Income Tax Agreement.

The respondent’s thesis is that the said amount is taxable under subparagraph 115(1 )(a)(iv) of the Income Tax Act, SC 1970-71-72, c 63, as amended, and the 1980 Canada-United Kingdom Income Tax Convention.

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 the assessment or reassessment are also deemed to be correct. In the present case the assumed facts are described in the reply to the notice of appeal as follows:

2. In assessing the Appellant for the 1976 taxation year, the Respondent acted, inter alia, upon the following assumption of facts:

(a) during the taxation year under appeal, the Appellant was a non-resident person;

(b) until October 1976, the Appellant was the beneficiary of a life income interest in a trust resident in Canada;

(c) in October 1976, the Appellant disposed of her income interest to the Standard Life Assurance Company and the Mercantile and General Reinsurance Company Ltd;

(d) the proceeds of the said disposition was the amount of $425,000. 3. The Facts

3.01 The facts assumed by the respondent are not in dispute.

3.02 The respondent filed the last will and testament of Andrew Hamilton Gault dated October 14, 1958, as Exhibit R-1. Mr Gault died in November 1958. The appellant, the niece of the deceased, inherited and was the beneficiary of a life income interest in a trust.

3.03 The respondent also filed as Exhibit R-2, an agreement signed on October 14, 1976, by which the appellant disposed of her income interest for $425,000.

3.04 As there is no problem arising from the wording of the said exhibits, it is not necessary to quote them.

4. Law—Cases at Law—Analysis

4.01 Law

The main legal provisions involved in the present case are, first, section 3, subsections 2(3), 40(1), paragraphs 39(1)(a), 54(b), 106(2)(a), 106(2)(b), 108(1)(e), and, subparagraph 115(1)(a)(iv) of the Income Tax Act; and, secondly, articles 2(2), 12(1) and 12(3) of the 1966 Canada-United Kingdom Income Tax Agreement, and articles 3(2), 13(1) and 13(6) of the 1980 Canada-United Kingdom Income Tax Convention.

These provisions will be quoted, if necessary, during the analysis.

4. Cases at Law

Counsel for both parties referred the Board to the following cases at law:

1. Paget v CIR (1937), 21 TC 677;

2. The Queen v Associates Corporation of North America, [1980] CTC 215; 80 DTC 6140;

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

4. W V Saunders v MNR, 11 Tax ABC 399; 54 DTC 524;

5. Furness, Withy & Co Ltd v MNR, [1966] CTC 482; 66 DTC 5358;

6. Coleman E Hall v MNR, [1970] CTC 510; 70 DTC 6333;

7. Premium Iron Ores Ltd v MNR, [1966] CTC 391; 66 DTC 5280;

8. Grant Geddes v MNR, [1976] CTC 2449; 76 DTC 1338;

9. M Granatstein & Sons Limited v MNR, 13 Tax ABC 194; 55 DTC 396;

10. Frederick W Henderson, Murray Watts and W G Leliever v MNR, [1977] CTC 2421; 77 DTC 297.

4.03 Analysis

4.03.1 First, counsel for both parties admitted that if the appellant had been a resident of Canada, subsection 106(2) of the Income Tax Act would have applied. This provision reads as follows:

(2) Disposition by taxpayer of income interest. Where in a taxation year a taxpayer disposes of an income interest in a trust,

(a) except where subsection (3) is applicable, there shall be included in computing his income for the year the proceeds of the disposition;

(b) any taxable capital gain or allowable capital loss of the taxpayer from the disposition shall be deemed to be nil; and

(c) for greater certainty, the cost to the taxpayer of each property received by him as consideration for the disposition is the fair market value of the property at the time of the disposition.

“Income interest” is defined in paragraph 108(1 )(e) of the Act. It reads as follows:

108. Definitions.

(1) In this subdivision,

(e) “Income interest”.—“income interest” of a taxpayer in a trust means a right (whether immediate or future and whether absolute or contingent) of the taxpayer as a beneficiary under the trust to, or to receive, all or any part of the income of the trust.

It is admitted that the capital gain would be exempted by virtue of paragraph 106(2)(b) of the Act, but that the proceeds of the disposition ($425,000) would have to be included in the income by virtue of paragraph 106(2)(a).

4.03.2 Both parties also admitted that subparagraph 115(1 )(a)(iv) of the Act applies for a non-resident person unless an agreement between Canada and the country of the non-resident is to the contrary. This subparagraph reads as follows:

115. Non-residents’ taxable income earned in Canada.

(1) For the purposes of this Act, a non-resident person’s taxable income earned in Canada for a taxation year is the amount of his income for the year that would be determined under section 3 if

(a) he had no income other than

(iv) the amount, if any, by which any amount required by subsection 106(2) to be included in computing his income for the year as proceeds of the disposition of an income interest in a trust resident in Canada exceeds the amount in respect of that income interest that would, if he had been resident in Canada throughout the year, be deductible under subsection 106(1) in computing his income for the year.

It is admitted that if this provision applies in the present case, the $425,000 must be included in the appellant’s income.

4.03.3 However, counsel for the appellant contends that the 1966 Canada- United Kingdom Income Tax Agreement must apply in the transaction which occurred in 1976 (see paragraph 3.03 above), and that pursuant to the said Agreement the appeal must be allowed. However, counsel for the respondent affirms that it is the 1980 Canada-United Kingdom Income Tax Convention which applies in the 1976 taxation year, and that pursuant to this Convention, the appeal must be dismissed. Which agreement or convention applies in the present case?

4.03.4 The 1980 Canada-United Kingdom Tax Convention was passed on December 17, 1980, and was declared to have force of law in Canada. However, article d28(1) of the Convention provides the entry into force for the 1976 taxation year.

Article 28

Entry into Force

1. The Convention shall come into force on the date when the last of all such things shall have been done in Canada and the United Kingdom as are necessary to give the Convention the force of law in Canada and the United Kingdom respectively and shall thereupon have effect:

(a) in Canada:

(i) in respect of tax withheld at the source on amounts paid or credited to non-residents on or after 1 January 1976;

(ii) in respect of other Canadian taxes, for the 1976 taxation year and subsequent years.

At first glance, it seems that the respondent’s contention is correct. However, counsel for the appellant referred to article 28(4) of the Convention, which reads as follows:

4. Where, however, any greater relief from tax would have been afforded by any provision of the existing Agreement than is due under this Convention, any such provision as aforesaid shall continue to have effect—

(a) in the United Kingdom for any year of assessment, chargeable period of financial year;

(b) in Canada for any taxation year;

beginning before the entry into force of this Convention.

In this provision, “the existing Agreement” means the 1966 Canada-United Kingdom Income Tax Agreement, and “this Convention” means the 1980 Canada-United Kingdom Income Tax Convention. It is admitted by the respondent’s counsel that the 1966 Agreement terminated on December 18, 1980, at which time the 1980 Convention came into force (written submissions of the respondent at page 3). It is proper to examine the terms of the 1966 Agreement and the 1980 Convention in respect of any transaction occurring in any taxation year prior to 1980. If the 1966 Agreement results, in such instance, in a more favourable tax treatment being accorded to a taxpayer, then the provisions of the said Agreement, and not those of the 1980 Convention, will apply.

4.03.5 Counsel for both parties, after verbal submissions before the Board, were asked to send written submissions because of the issue introduced by the respondent’s counsel that the 1980 Convention applies to the present case, not the 1966 Agreement. Counsel for the appellant, in his verbal submission, based his argumentation on the deemed undisputed legal fact that the 1966 Agreement is applicable.

4.03.06 The main provisions of the 1966 Agreement and of the 1980 Convention invoked by counsel for both parties are the following:

(1) Taxes covered

(a) 1966 Agreement

Article 1 (Taxes covered).—(1) The taxes which are the subject of this Agreement are—

(a) In the United Kingdom of Great Britain and Northern Ireland:

the income tax including surtax, the profits tax, the coporation tax and the capital gains tax;

(b) In Canada:

the income taxes, including the old age security tax on income, which are imposed by the Government of Canada.

(2) This Agreement shall also apply to any identical or substantially similar taxes which are imposed after the date of signature of this Agreement in addition to, or in place of, the existing taxes by either Government or by the Government of any territory to which the present Agreement is extended under Article 26.

(b) 1980 Convention

Article 2 (Taxes covered.)

1. The taxes which are the subject of this Convention are:

(a) in Canada:

the income taxes which are imposed by the Government of Canada, (hereinafter referred to as “Canadian tax”);

(b) in the United Kingdom of Great Britain and Northern Ireland:

the income tax, the corporation tax, the capital gains tax, the petroleum revenue tax and the development land tax (hereinafter referred to as “United Kingdom tax”).

2. The Convention shall apply also to any identical or substantially similar taxes which are imposed after the date of signature of this Convention in addition to, or in place of, the existing taxes by either Contracting State or by the Government of any territory to which the present Convention is extended under Article 26. The Contracting States shall notify each other of changes which have been made in their respective taxation laws.

(2) General Definition

(a) 1966 Agreement

Article 2 (General definitions.)

(2) In the application of the provisions of this Agreement by one of the Contracting Governments any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that Government relating to the taxes which are the subject of this Agreement.

(b) 1980 Convention

Article 3 (General definitions.)

2. As regards the application of the Convention by a Contracting State any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting State relating to the taxes which are the subject of the Convention.

(3) Income from Immovable Property

(a) 1966 Agreement

Article 5 (Income from immovable property.)

(1) Income from immovable property may be taxed in the territory in which such property is situated.

(3) The provisions of paragraph (1) shall apply to income derived from the direct use, letting, or use in any other form of immovable property.

(b) 1980 Convention

Article 6 (Income from immovable property.)

1. Income from immovable property, including income from agriculture or forestry, may be taxed in the Contracting State in which such proeprty is situated.

3. The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or use in any other form of immovable property and to profits from the alienation of such property.

(4) Capital Gains

(a) 1966 Agreement

Article 12 (Capital gains.)

(1) Gains from the alienation of immovable property, as defined in paragraph (2) of Article 5, may be taxed in the territory in which such property is situated.

(2) Gains from the alienation of movable property forming part of the business property of a permanent establishment. . .

(3) Gains from the alienation of any property other than those mentioned in paragraphs (1) and (2) shall be taxable only in the territory of which the alienator is a resident.

(b) 1980 Convention

Article 13 (Capital gains.)

1. Gains from the alientation of immovable property may be taxed in the Contracting State in which such property is situated.

6. Gains from the alientation of any property, other than those mentioned in paragraphs 1, 2, 3 and 4 shall be taxable only in the Contracting State of which the alienator is a resident.

4.03.7 There is, however, a provision to which counsel for both parties did not refer. It is article 13(4) of the 1980 Convention which concerns an alienation of an interest in a trust as in the present case. However, there is no distinction between income interest and capital interest as in sections 106 and 107 of the Income Tax Act. Article 13(4) of the 1980 Convention reads as follows:

Article 13 (Capital gains.)

4. Gains from the alienation of

(a) shares, other than shares quoted on an approved stock exchange, deriving their value or the greater part of their value directly or indirectly from immovable property situated in a Contracting State or from any right referred to in paragraph 3 of this Article, or

(b) an interest in a partnership or trust the assets of which consist principally of immovable property situated in a Contracting State, of rights referred to in paragraph 3 of this Article, or of shares referred to in sub-paragraph (a) above,

may be taxed in that State.

Because of the reference made to article 13(3), it is also useful to quote it:

Article 13 (Capital gains.)

4. Gains from the alienation of

(a) any right, licence or privilege to explore for, drill for, or take petroleum,

natural gas or other related hydrocarbons situated in a Contracting State, or

(b) any right to assets to be produced in a Contracting State by the activities referred to in sub-paragraph (a) above or to interests in or to the benefit of such assets situated in a Contracting State,

may be taxed in that State.

No evidence was given that the assets of the trust which paid the life income interest to the appellant (para 2.02 (2)(b)) consisted principally of immovable property or rights related to exploitation of hydrocarbons or shares deriving their value from immovable property or from any right related to exploitation of hydrocarbons. Therefore, the Board must ignore the application to the present case of article 13(3), remembering however, that article 13(4), concerning an interest in a trust, is contemplated in the 1980 Convention and that there is no similar article in the 1966 Agreement.

A. Meaning of “gain” according to the appellant’s counsel

4.03.8 The main legal argumentation of the appellant’s counel to show that the 1966 Agreement provides relief to his client, is that the word “gain” in article 12(3) of the said Agreement (quoted above), refers to both income and capital elements and therefore includes “the proceeds of the disposition” provided for in subsection 106(2) of the Income Tax Act (quoted above). Therefore, this “gain” would not be taxable in Canada, but in the United Kingdom where the appellant resides.

To arrive at this conclusion, the learned counsel first referred to article 2(2) of the Agreement (quoted above), which in sum refers to the Canadian Income Tax Act to establish the meaning of “gain”, because if is not defined in the said Agreement. Counsel for the appellant quoted paragraph 39(1 )(a) of the Income Tax Act, which gives the meaning of capital gain:

39. Meaning of capital gain and capital loss.

(1) For the purposes of this Act,

(a) a taxpayer’s capital gain for a taxation year from the disposition of any property is his gain for the year determined under this subdivision.. .from the disposition of any property of the taxpayer other than

(i) eligible capital property.

On pages 4, 5 and 6 of his written submissions, counsel for the appellant explained:

In subsection 39(1) of the Act, the term “gain” is utilized in such fashion as to Clearly indicate that the term “gain” refers to both income and capital elements. Paraphrasing subsection 39(1) for the purposes of this discussion, that subsection refers to a capital gain as being the gain determined under subdivision c, but only to the extent of such gain not otherwise included in income. Therefore, it must be recognized that the term “gain” is used in the Act in such a manner as to refer to both capital and non-capital amounts. According to subsection 39(1) of the Act, the term “gain” necessarily encompasses a broader spectrum than does the term “Capital gain”. In that subsection only certain categories of gains are regarded as being capital gains; others (being otherwise included in income) are not capital gains. (page 4)

...the term “gain” as found in the Act requires the term to encompass both income and capital elements, (pages 5 and 6)

In support of the contention that the meaning of the term “gain”, as employed in the Act, refers to both income and capital elements, counsel for the appellant relied upon the following authors and/or publications. The Board quotes only some sentences chosen among them:

1. Department of National Revenue, Taxation, Interpretation Bulletin IT-95 entitled “Foreign Exchange, Gains and Losses”;

2. Department of National Revenue, Taxation, Interpretation Bulletin IT-256 entitled “Gains from Theft, Defalcation or Embezzlement”. Clearly the term “gains” appearing in the title does not refer to capital gains;

3. Income—General Rules, an article by Russel Disney contained in the Butterworths series at pages 13-3 and 13-5;

The question whether a gain is realized in a particular set of circumstances is of an income or a capital nature had produced. ..

4. Income—Business, article by George A Caines appearing in the Butterworths series at pages 15-6 and 15-34;

5. CCH Canadian Tax Reporter, Volume 2 at paragraph 6010;

6. Capital Gains, an article by Vern Krishna contained in the Butterworths series at pages 17-12, 17-13, 17-14 and 17-60;

...the characterization of a gain (loss) as either a capital gain (loss) or an income gain (loss) must depend upon common law jurisprudence.

7. Materials on Canadian Income Tax at page 481;

8. Real Estate, an article by R W Crawford contained in the Butterworths series at page 21-6;

9. Current Tax Planning by David A Ward, David W Smith and Brian J Arnold at page 2-12;

Whether a particular gain constitutes a capital gain or an ordinary income gain is determined by reference to the large body of existing jurisprudence as to the distinction between capital and income.

10. M Granatstein & Son Limited vs Minister of National Revenue, 13 Tax ABC, 194 at p 198 and p 199;

11. Robbie Holdings Ltd vs Her Majesty the Queen, [1980] CTC 422 at p 427;

_. . .the matter is referred back to the Minister for reassessment of the plaintiff’s income tax for the year 1974 on the basis that the gain made on the sale of the farm lands in question was a capital gain.

12. Grant Geddes vs Minister of National Revenue, [1976] CTC 2449 at p 2451;

13. Frederick W Henderson, Murray Watts and William G Leliever vs Minister of National Revenue, [1977] CTC 2421 at p 2428;

14. Hays Farms International Limited vs Minister of National Revenue, [1980] CTC 2975 at p 2982;

...that the gain in question was income from an adventure in the nature of trade.

4.03.9 Finally, counsel for the appellant contended that the same submissions concerning the meaning of “gain” may be given for article 13(6) (quoted above) of the 1980 Convention, and concluded that the appellant is liable to tax pursuant to the laws of the United Kingdom and not pursuant to the Canadian Income Tax Act.

4.03.10 At first glance, it also seems that there is another legal reason for confirming this conclusion: article 1(1) of the 1966 Agreement and article 2(1) of the 1980 Convention, both quoted above, are to the effect that the capital gain tax is subject only to British laws and not to Canadian laws.

Therefore, if the word “gain” means “capital gains” in article 12(3) of the 1966 Agreement and article 13(6) of the 1980 Convention, then it must be taxed pursuant to British laws only and not pursuant to Canadian laws.

However, it seems that this argumentation can be rebutted. In Great Britain, taxation of capital gain and taxation of income are levied under two different basis. In Canada, taxation of capital gain is part of taxation of income. Paragraph 3(b) of the Income Tax Act includes as income the taxable capital gains. That is why it was sufficient, especially in article 2(1 )(a) of the 1980 Convention (quoted above), to refer only to “income taxes”.

When the 1966 Agreement was passed, capital gains were not yet taxed in Canada. However, because of article 1(2) of the 1966 Agreement (quoted above), when taxation of capital gains came into force in 1972, it can be said that it was as income. Therefore, the “income taxes” to which article 1(1) of the said Agreement refers, includes capital gains tax.

It is true that, technically, taxable capital gains have been included in the income to be taxed according to the Income Tax Act rates. However, it could have been taxable in a different way, for instance: 25% of the profit without regard to the other income of the taxpayer for the year. The Board thinks that it is only a technique for taxing. In substance, however, there was no capital gains tax before 1972 in Canada.

B. Meaning of "gain” according to the respondent’s counsel

4.03.11 In his written submissions, counsel for the respondent compared articles 6(1), 6(3) and 13(1) of the 1980 Convention to find the meaning of “gain” in article 13(6) of the said Convention (quoted above).

Since it is a basic rule of construction of statutes to give the same meaning to the same words occurring in different parts of an act of Parliament, therefore the meaning to be ascribed to the word “gain” in Article 13(1) of the Convention should be identical to the one ascribed to the word “gain” as founded in paragraph 13(6) of the said Conveniton.

Paragraphs 6(1) and 6(3) of the Convention provide:

6(1) Income from immovable property, including income from agriculture or forestry, may be taxed in the Contracting State in which such property is situated.

6(3) The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or use in any other form of immovable property and to profits from the alienation of such property.

Article 13(1) of the Convention provides:

Gains from the alienation of immovable property may be taxed in the Contracting State in which such property is situated.

Reference to article 6(3) of the Convention to “profits from the alienation of property” is a new feature of the Convention. According to section 11 of the Interpretation Act: “Every enactment shall be deemed remedial” and therefore it must be concluded that “profits from the alienation of immovable property” being business income as opposed to capital gains were not exempt from taxation under the former treaty with the inescapable consequence that the word “gain” found in Article 12(1) (of the 1966 Agreement) was not capable of encompassing business profits derived from the alienation of property. To hold otherwise would imply that the new amending provision has no effect which would be contrary to the principle of the “useful effect” of an enactment. ( R v Nakis, 1975 2 RCS 485)

By using the word “income” in article 6(1) and “profits” in article 6(3) and “gains” in Article 13(1), Parliament is deemed to have used the respective words to confer a different meaning. What other meaning could be ascibed to the word “gain” other than “capital gains”? It is respectfully submitted that to ask the question is to answer it. If the word “gain” in Article 13(1) refers only to capital gains, it necessarily follows that the same word “gain” in Article 13(6) is of the same purview and refers also exclusively to capital gains.

(Counsel for the respondent’s written submissions, pages 21 to 24)

C. Meaning of “gain” from paragraph 54(b) of the Income Tax Act

4.03.12

54. Definitions. In this subdivision,

(b) “capital property”.—“capital property” of a taxpayer means

(i) any depreciable property of the taxpayer, and

(ii) any property (other than depreciable property), any gain or loss from the disposition of which would, if the property were disposed of, be a capital gain or a Capital loss, as the case may be, of the taxpayer.

Concerning section 54 of the Act, counsel for the appellant submitted the following:

The Appellant submits that this definition requires one to come to the conclusion that some gains constitute capital gains and other gains do not constitute capital gains. A property is a “capital property” only where the gains from the disposition of the property results in a capital gain. Where the gain does not result in a capital gain, the property in question is not a “capital property”. One can only conclude that the term “gain” is not equivalent to or synonymous with the term “capital gain”.

D. A taxpayer’s gain according to paragraph 40( 1 )(a)ofthe Income Tax Act

4.03.13 Paragraph 39(1)(a) of the Act says that “a taxpayer’s capital gain ... is his gain for the year determined under this subdivision..(Subdivision c of Division B of Part I of the Act). The heading of the said subdivision is “Taxable Capital Gains and Allowable Capital Losses”. Paragraph 40(1 )(a) of the same subdivision gives the definition of a taxpayer’s gain as follows:

40. General rules

(1) Except as otherwise expressly provided in this Part

(a) a taxpayer’s gain for a taxation year from the disposition of any property is the amount, if any, by which

(i) if the property was disposed of in the year,. the amount, if any, by which his proceeds of disposition exceeds the aggregate of the adjusted cost base to him of the property immediately before the disposition and any outlays and expenses to the extent that they were made or incurred by him for the purpose of making the disposition, or

The Board states that gains or profits are always the difference between two things: the proceeds of disposition and the cost. The difference between capital gain and business profit (or business gain) comes from the nature of the property sold and depends on a lot of other circumstances.

E. Preambles and the heading “Capital gains”

4.03.14 There are other arguments which are very important in the contentions of the parties, firstly, the preambles of the 1966 Agreement and of the 1980 Convention, and, secondly, the heading note preceding article 12 of the 1966 Agreement and article 13 of the 1980 Convention: “Capital gains’. In both contracts the preambles read as follows:

(a) 1966 Agreement

Agreement between the Government of Canada and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains.

The Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Canada,

Desiring to conclude an Agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains, have agreed as follows:

(b) 1980 Convention

Convention between the Government of Canada and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains.

The Government of Canada and the Government of the United Kingdom of Great Britain and Northern Ireland, desiring to conclude a Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains, have agreed as follows:

Sections 12 and 13 of the Interpretation Act give rules regarding preambles and marginal notes. They read as follows:

12. The preamble of an enactment shall be read as a part thereof intended to assist in explaining its purport and object. 1967-68, c 7, s 12.

13. Marginal notes and references to former enactments in an enactment after the end of a section or other division thereof form no part of the enactment, but shall be deemed to have been inserted for convenience of reference only. 1967-68, c 7, s 13.

The preambles and article 1 of both contracts speak of “capital gains”, the said capital gains being covered, at first glance, only by the British laws in the 1966 Agreement. This point was settled in paragraph 4.03.10 above.

Concerning the heading “capital gains” in article 12 of the 1966 Agreement and article 13 of the 1980 Convention, counsel for the appellant contended that it is the text of the contract that should prevail. The heading should not be viewed as being conclusive for the purpose of arriving at an interpretation of the term “gains”.

The appellant’s counsel based his contention on the following judicial authorities:

1. fl vs Hare (1934) 1 KB 354—“Headings of sections and marginal notes form no part of the statute. They are not voted on or passed by Parliament but are inserted after the Bill has become law. Headnotes cannot control the plain meaning of the enactment, though they may, in some cases, be looked upon in the light of preambles if there is any ambiguity in the meaning of the sections on which they throw light”.

2. fl vs Bates and Russell (1952) WN 506—“They (headings) are not to be taken into consideration if the language of the enactment is clear”.

3. Fletcher vs Birkenkead Corporation (1907) KB 205—“But while the court is entitled to look at the headings in an Act of Parliament to resolve any doubt they may have as to ambiguous words, the law is quite clear that you cannot use such headings to give a different effect to clear words of the section where there cannot be any doubt as to their ordinary meaning”.

(Written submissions of the appellant’s counsel, pages 10 and 11)

It seems that the headings can only be used when the language of the enactment is ambiguous.

In Jean Des Rosiers v The Queen, [1975] CTC 416; 75 DTC 5298, Mr Justice R Decary of the Federal Court, Trial Division, interpreted subsection 137(1) of the Income Tax Act, RSC 1952, in light of the heading of that section which was “Tax Evasion”, and concluded that in the absence of evidence of an intent to evade tax, the section had no application. Moreover, in R v Bates and Another, 1952 All ER 842, it is explained that the principle of interpretation with respect to the title of an act is . .to make general provision for preventing fraud in connection with dealings in investments. . and is said to apply to the cross-heading “General provisions for the prevention of fraud”. In the absence of proof of fraud, the defendants were not convicted.

F. “Gain” in the contracts means “Capital gain”

4.03.15 In the present case, the Board thinks, after studying the arguments on both sides concerning the meaning of “gain” in article 12 of the 1966 Agreement and in article 13 of the 1980 Convention, that it is not clear that the said “gain” may apply indifferently to capital gain and to business profit (or business gain). Therefore, the heading “Capital gain” may be used to. construe the said articles. In light of the preambles, it is a fair and reasonable interpretation to conclude that the meaning of the word “gain” in the said articles means “Capital gain”.

G. Life income interest in a trust: capital or income nature

4.03.16 According to the appellant’s counsel, a life income interest in a trust is a capital property, the disposition of which gives rise to a capital gain which would be exempt from tax by virtue of article 12(4) of the 1966 Agreement or article 13(6) of the 1980 Convention.

However, paragraph 106(2)(b) of the Act quoted above, exempts from taxation any capital gains arising from the disposition of a life income interest in a trust.

The appellant’s counsel argued that, through paragraph 106(2)(b), Canadian Parliament tries to unilaterally restrict the application of the 1980 Convention with respect to a United Kingdom resident by altering the true legal fiscal nature of an income life interest in a trust. The appellant’s counsel based his opinion on two cases: Melford Developments Inc, (supra), and Associates Corporations of North America, (supra). In the latter case:

The taxpayer, an American corporation with no permanent establishment in Canada, earned fees by guaranteeing repayment of money borrowed by its Canadian subsidiary. The Minister sought to impose a 15 per cent tax on the fees, but on appeal by the taxpayer, the Federal Court — Trial Division (80 DTC 6049) found that the Canada-US Tax Convention took precedence over the Income Tax Act and that accordingly the Act could not deem the fees to be interest. As a result, no tax could be imposed on them.

The Federal Court of Appeal confirmed the judgment of the trial judge. It decided that the definition of “interest” could not be unilaterally expanded by Canadian Parliament to embrace income that is not interest at all.

However, the Court added the following comment:

In saying this, we expressly refrain from any finding that a “deeming” provision in the domestic tax law might not, in other circumstances, be embraced by the provisions of international conventions.

This case is now under appeal before the Supreme Court of Canada.

In the Melford Developments Inc case, (Supra):

The taxpayer company arranged with a German commercial bank to guarantee repayment of money borrowed by the taxpayer in Canada. In its 1975, 1976 and 1977 taxation years, the taxpayer made payments to the German bank in return for the guarantee, but made no deductions for non-resident withholding tax. The tax department assessed the taxpayer on the basis that it was required to deduct the withholding tax because the payments were in the nature of interest and were not exempt from Canadian taxation by tax treaty. Following a successful appeal by the taxpayer to the Federal Court — Trial Division (80) DTC 6074 and 6227), the Crown appealed to the Federal Court of Appeal.

The latter Court confirmed the decision of the trial judge on the basis that the guarantee fees were part of the German bank’s industrial and commercial profits. The applicable treaty was a bar to Canadian tax on the payments. The relevant provision of the Income Tax Act was not effective in deeming the payments to constitute interest. Such provision, enacted many years after the treaty came into force, could not unilaterally alter the meaning of the term “interest” as defined in the treaty. This case was recently heard by the Supreme Court of Canada, but the judgment is not yet given.

Do the principles outlined in those two cases apply to the 1966 Agreement and 1980 Convention?

4.03.17 In the present case, the 1980 Convention was signed when paragraph 106(2)(b) of the Income Tax Act was already in force in Canada. Therefore, it is impossible to contend that Canadian Parliament attempted to restrict the application of the 1980 Convention, since the said Convention was not in force when paragraph 106(2)(b) was adopted. The Board shares the opinion of the respondent’s counsel that:

If the United Kingdon Government having full knowledge of the Canadian domestic tax laws at the time it signed the Convention did not see fit to negotiate with the Canadian Government for the inclusion in the convention of a provision to cover such cases, then one must conclude that the United Kingdom Government was satisfied with the situation. (Counsel for the respondent’s written submissions, page 28)

4.03.18 However, the 1966 Agreement was already signed and in force when paragraph 106(2)(b) of the Act was enacted in 1972. The nature of the ali- neation of an income interest in a trust is determined by subsection 106(2) of the Act. The legislator, in deeming that in paragraph 106(2)(b) of the Act the taxable capital gain or the allowable capital loss in an alienation of an income interest in a trust is nil, affirms that normally the said alienation would result in a capital gain or capital loss. Besides, this deeming provision was the only method to base the taxation of the proceeds of disposition under paragraph 106(2)(a) of the Act.

This conclusion is confirmed by the fact that article 13(4) of the 1980 Convention also provides that an alienation of an interest in a trust results in a capital gain (see paragraph 4.03.7 above). Indeed, the word “gain” in article 13 of the said Convention, must be read as “capital gain” as it was decided above. When under the 1980 Convention the proceeds of dispostion is taxed it is because of paragraph 106(2)(a) of the Act and the deeming paragraph 106(2)(b).

Subsection 106(2) of the Act changes the ordinary method of taxing an alienation of an income interest in a trust, but under the 1966 Agreement, which existed before the enactment of section 106, it is the ordinary method which must be applied for the 1976 taxation year, at which time the transaction involved in the present case was made.

Indeed, the method of taxing an income interest in a trust could not be unilaterally changed by Canadian Parliament to impose more tax on a nonresident by virtue of an international agreement already existing.

As there is a greater relief from tax under the 1966 Agreement than under the 1980 Convention, the 1966 Agreement must therefore be applied in accordance with article 28(4) of the 1980 Convention quoted above in paragraph 4.03.4.

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.