Ho Shuk Yuen Lai, Mei Yang Wong, Jorge Hien-Lang Tseng v. Minister of National Revenue, [1980] CTC 2073, 80 DTC 1051

Guy Tremblay:— This case was heard in Vancouver, British Columbia, on February 21, 1979, on common evidence with the cases of Mei Yang Wong (78-850), and Jorge Hien-Lang Tseng (78-851).

1. Point at Issue

The point is whether the appellant is correct in deducting the amount of $1,336.72 of tax payable on his return for the 1976 taxation year. This amount of $1,336.72 was tax paid to the government of Hong Kong for rental income, pursuant to the Inland Revenue Ordinance of Hong Kong.

2. Burden of Proof

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

3. The Facts

At the beginning of the hearing, the parties, by their respective solicitors, deposited an “Agreed Statement of Facts’’ which reads as follows:

“The facts hereby admitted are:

1. That the appellant is an individual and at all times material to this appeal was resident in the City of Vancouver, Province of British Columbia.

2. That at all times material to this appeal the appellant leased, under a long term lease granted by Her Majesty the Queen, a certain parcel of land situated in the Colony of Hong Kong and owned the buildings Situated thereon.

3. That during the appellant’s 1976 taxation year she earned income in the amount of $6,562.21 from rental of the said land and buildings.

4. That during the appellant’s 1976 taxation year she paid taxes in the amount of $1,336.72 to the Government of the Colony of Hong Kong in respect of the said land and buildings pursuant to the provisions of Part II of the Inland Revenue Ordinance of the Colony of Hong Kong.

5. That the Government of the Colony of Hong Kong is a government of a country other than Canada, or the government of a state, province or other political subdivision of such a country within the meaning of paragraph 126(7)(c) of the Income Tax Act, RSC 1952, c 148 as amended.

6. That throughout that portion of the appellant’s 1976 taxation year commencing January 1, 1976 and ending March 31, 1976 the Inland Revenue Ordinance of the Colony of Hong Kong (hereinafter called the “Inland Revenue Ordinance’’) was in the form of the statute published by the Government Printer Hong Kong as Inland Revenue Ordinance Chapter 112 of the Laws of Hong Kong revised edition 1975 except to the extent amended by Ordinance No 76 of 1975. That throughout the balance of the appellant’s 1976 taxation year the Inland Revenue Ordinance was in the form of the said Statute revised edition 1975.

7. That the Inland Revenue Ordinance is divided into 17 parts. That Part I of the Inland Revenue Ordinance defines the terms used therein, establishes a Board of Inland Revenue Commissioners and defines their powers. That Parts III to V of the Inland Revenue Ordinance impose taxes on income derived in the form of salaries, profits and interest respectively. That Part VI of the Inland Revenue Ordinance provides a deduction in respect of depreciation in computing the income from a trade. That Part VII of the Inland Revenue Ordinance permits residents of the Colony of Hong Kong to elect to be assessed and pay tax on their total income in lieu of the taxes payable under Parts II to V of the said Ordinance. That Part VIII of the Inland Revenue Ordinance provides a deduction from the taxes levied thereunder for income taxes charged under the law of any part of the British Commonwealth other than the United Kingdom. That Parts X to XV of the Inland Revenue Ordinance contain, inter alia, administrative provisions for the filing of returns, assessment and collection of tax and processing of objections to and appeals from assessments of tax.

8. That throughout the period commencing January 1, 1976 and ending March 31, 1976 the tax imposed under Part II of the Inland Revenue Ordinance was an annual tax imposed on owners of land and buildings and charged at the standard rate of 15% of the rateable value thereof as determined for purposes of the Rating Ordinance of the Colony of Hong Kong less an allowance for repairs and outgoings of 20% of that rateable value.

9. That at all times material to this appeal the said Rating Ordinance was in the form of the Statute published by the Government Printer Hong Kong as Rating Ordinance Chapter 116 of the Laws of Hong Kong revised edition 1975.

10. That throughout the period commencing April 1, 1976 and ending December 31, 1976 the tax imposed under Part II of the Inland Revenue Ordinance was an annual tax imposed on owners of land and buildings and charged at the standard rate of 15% of the net assessable value thereof. That for this purpose ‘‘net assessable value” was defined in Subsection 5(1 A) of the Inland Revenue Ordinance as the assessable value of land or buildings less an allowance for repairs and outgoings of 20% of that assessable value. That pursuant to subsection 5A(2) of the Inland Revenue Ordinance the assessable value of the appellant’s land and buildings was an amount equal to the annual rent at which the land and buildings might be expected to rent on April 1, 1976 on the assumption that the tenant undertook to pay all usual tenant’s rates and taxes and the landlord undertook to pay the Crown rent, cost of repairs and insurance and any other expenses necessary to maintain the property.

11. That pursuant to subsection 5(3) of the Inland Revenue Ordinance a building occupied by an owner solely and exclusively for residential purposes throughout the year of assessment was exempt from tax under Part Il of the Ordinance.

12. That pursuant to section 7 of the Inland Revenue Ordinance where any land or buildings were occupied for less than twelve months in any year the tax payable under Part Il in respect of such land or buildings was reduced proportionately.

13. That pursuant to section 25 of the Inland Revenue Ordinance where tax under Part II is payable in respect of land or buildings owned by a person carrying on a trade, profession or business, any profits tax payable by that person shall be reduced by the amount of any taxes paid by him under Part Il to the extent that profits derived from the land or buildings are part of the profits of the trade, profession or business carried on by him and if such tax under Part Il exceeds the amount of profits tax payable by him the amount of that excess tax is refunded to the taxpayer.

14. That for the purposes of an election to be assessed and pay tax on total income under Part VII of the Inland Revenue Ordinance total income includes the net assessable value of land and buildings otherwise subject to property tax which have been let for any period during the year of assessment.

15. That at all times material to this appeal the said Rating Ordinance of the Colony of Hong Kong imposed a tax on owners and occupiers of lands and buildings which tax was separate and distinct from the tax imposed under Part Il of the Inland Revenue Ordinance.

4. Law— Precedent Cases—Comments

4.1 Law

The section of the new Income Tax Act which is involved in the present case is section 126. The relevant paragraphs of this section read as follows:

(1) A taxpayer who was resident in Canada at any time in a taxation year may deduct from the tax for the year otherwise payable under this Part by him an amount equal to

(a) such part of any non-business-income tax paid by him for the year to the government of a country other than Canada (except, where the taxpayer is a corporation, any such tax or part thereof that may reasonably be regarded as having been paid by the taxpayer in respect of income from a share of the capital stock of a foreign affiliate of the taxpayer) as the taxpayer may claim,

(5) A tax paid to the government of a country other than Canada or to the government of a state, province or other political subdivision of any such country may, subject to prescribed conditions, be deemed, for the purposes of this Act, to be an income or profits tax paid to the government of that country.

(7) In this section,

(c) —“non-business-income tax’’ paid by a taxpayer for a taxation year to the government of a country other than Canada means such portion of any income or profits tax paid by him for the year to the government of that country, or to the government of a state, province or other political subdivision of that country, as

(i) was not included in computing the taxpayer’s business-income tax for the year in respect of any business carried on by him in any country other than Canada, and

(ii) was not deductible by virtue of subsection 20(11) in computing the taxpayer’s income for the year;

The main sections of the Inland Revenue Ordinance, c 112 are the following ones:

5.(1) Property tax shall, subject to the provisions of this Ordinance, be charged for each year of assessment on the owner of any land or buildings or land and buildings wherever situate in the Colony and shall be computed at the standard rate on the net assessable value of such land or buildings or land and buildings for each such year.

Provided that—

(a) (Deleted, 76 of 1975, s 3. Effective from 1.4.76)

(b) where the owner of the land is not the owner of the buildings thereon, separate assessments shall be made for the land and for the buildings;

(c) (Deleted, 26 of 1969, s 5)

(d) (Deleted, 76 of 1975, s 3. Effective from 1.4.76)

(e) property tax shall not be charged for any year of assessment in respect of any land or buildings or land and buildings in the New Territories other than New Kowloon unless and until the Governor by proclamation in the Gazette declares that property tax shall be so charged. (Added, 49 of 1956, s 4) (Replaced, 36 of 1955, s 6)

(1A) In subsection (1), “net assessable value’’ means the assessable value of land or buildings or land and buildings, ascertained in accordance with section 5A, less an allowance for repairs and outgoings of 20 per cent of that assessable value. (Added, 76 of 1975, s 3. Effective from 1.4.76)

(4) Where any building or part of any building in respect of which the property tax has not been charged or has been reduced in pursuance of any of the provisions of subsection (3) ceases to be occupied solely by the owner exclusively for residential purposes, or in the case referred to in paragraph (e) of that subsection, solely by any of the owners by reason of whose occupation the property tax was not charged or was reduced, such owner shall notify the Commissioner in writing within 3 months of his ceasing so to occupy the same. (Added, 35 of 1965, s 3)

5A.(1) In a case where subsection (4) applies, the assessable value of land or buildings or land and buildings shall be an amount equal to the estimated annual rent which would be permitted under Part I or authorized under Part Il as the case may be, or the Landlord and Tenant (Consolidation) Ordinance if—

(a) the tenant undertook to pay all usual tenant’s rates and taxes; and

(b) the landlord undertook to pay the Crown rent, the costs of repairs and insurance and any other expenses necessary to maintain the property in a state to command that rent.

7. Where it is proved to the satisfaction of the Commissioner that any land or buildings or land and buildings have been occupied for less than 12 months in any year of assessment any property tax payable in respect thereof shall be reduced proportionately and any excess tax paid shall be refunded. (Replaced, 36 of 1955, s 8. Amended, 8 of 1973, s 3; 16 of 1974, s 3, and 76 of 1975, s 5 (effective from 1.4.76))

4.2 Precedent Cases

During the submission, the solicitors cited the following cases:

Article of Doctrine and Texts of Law

1. The London County Council and Others and the Attorney General, HL (E) 1900 p 27;

2. British Columbia Insurance v MNR, 11 Tax ABC 225; 54 DTC 422;

3. Charles J Crawford v MNR, 3 Tax ABC 359; 51 DTC 99;

4. F W Woolworth Co v United States, 91 Federal Reporter, 2 Series p 973;

5. C E Seley v MNR, 30 Tax ABC 243; 62 DTC 565;

6. Canada’s Foreign Tax Credit System by James Scott Peterson, Canadian Tax Journal, Vol XIX, No 2, March-April 1971 p 89;

7. Laws of Hong Kong, Inland Revenue Ordinance, c 112, 1971;

8. Laws of Hong Kong, Inland Revenue Ordinance, c 112, Revised Edition 1975;

9. Laws of Hong Kong, Raling Ordinance, c 116;

10. Hong Kong—Report of the Third Inland Revenue Ordinance Review Committee;

11. Income Tax, c 34, 16 & 17 Victoria, An Act for granting to Her Majesty Duties on Profits arising from Property, Professions, Trades and Offices, June 28, 1853;

12. Customs and Inland Revenue Act, 1888—51 Victoria;

13. An Act for granting to Her Majesty Duties on Profits arising from Property, Professions, Trades and Offices until the Sixth Day of April one thousand eight hundred and forty-five, c XXXV (June 22, 1842), 5-6 Victoria;

14. Hong Kong Taxation, c 3—Property Tax.

4.3 Comments

4.3.1 The crux of the matter is whether the tax calculated on the estimated annual rent of land and building pursuant to the Inland Revenue Ordinance of Hong Kong is “an income or profits tax’’ in the meaning of subsection 126(5) and paragraph 126(7)(c) of the Income Tax Act?

The legislation concerning property tax changed April 1,1976. In the book “Hong Kong Taxation”, c 3 at 23 and 24 the legislations existing up to March 31. 1976 and after is well summarized:

Up to March 31, 1976, tax was charged at the standard rate for each assessment year on the rateable value of the property with a statutory deduction of 20% to cover repairs and outgoings.

	EXAMPLE
Rateable value of flat		$12,600
Less: Statutory allowance at 20%		2,520
		10,080
Property Tax at 15%	=	$ 1,512

This method of taxing income from property eliminated the necessity to assess the gross rentals less expenses for each landlord. Rateable Value. This is the annual letting value of a property and is arrived at by periodical valuations made by the Rating and Valuation Department. The rateable value approximates to the annual rent obtainable for a property, the tenant paying the rates. The Commissioner could require a rateable value to be placed on a property if no valuation has been made by the Rating and Valuation Department.

From April 1, 1976, tax is charged for each year of assessment on the assessable value of the property with a statutory deduction of 20% to cover repairs and outgoings. The percentage allowance may be amended by resolution of the Legislative Council.

Assessable Value. The provisions to determine the assessable value are set out in Sec 5A. Generally it is the rent which the property would let at where—

(a) the tenant pays all rates and taxes; and

(b) the landlord pays any Crown rent, the cost of repairs and insurance and other expenses necessary to maintain the property in a state to command the rent.

Lifts and other machinery are regarded as part of the property (but not machinery used for manufacturing or trade processes) for valuation purposes, but reasonable expenses incurred in working the lifts etc is allowed in arriving at the assessable value of the property.

The new system is expected to assess as nearly as possible the actual current rate of a property.

In the report of the Third Inland Revenue Ordinance Revenue Committee (c 8, paragraph 150) it is said concerning the change:

In explaining this change to the Legislative Council on November 5, 1975, the Financial secretary said that rates are basically a tax on occupiers of premises (towards defraying the cost of local services). Whereas property tax is intended to be a tax on income derived from ownership of property, a circumstance which justified some divergence in the underlying valuations the assessing of property tax values independent of rating Valuation lists enables Values to be fixed in line with current market rental values and not on a “tone of the list’’ basis. However, it seems from recent press comments that the principles underlying this change are not fully understood.

4.3.2 The Respondent’s Position

Because of the importance of the case, it is important to give the respondent’s submission as summarized in its “Outline of respondent’s argument”, but completed by the Board in adding some quotation of the case to which it is referred.

Amounts paid by the appellant as “property tax’’ pursuant to the provisions of Part Il of the Inland Revenue Ordinance of Hong Kong are not an “income or profits tax” within the meaning of Section 126 of the Income Tax Act and accordingly are not deductible from income tax payable by the appellant in 1976.

ARGUMENT

1. Whether a tax paid to a foreign jurisdiction is an “income or profits tax” must be determined by reference to Canadian tax law.

Crawford v MNR, 51 DTC 99 (ITAB) at 101 J S Peterson, Canada’s Foreign Tax Credit System, XIX Canadian Tax Journal (1971) 89 at 91

2. Subsection 9(1) of the Income Tax Act defines income from a business or property as the ‘profit therefrom’. Lord Herschell said in Russell v Town & County Bank, 13 AC 418 at 424:

the profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts.

(cited in MNR v Anaconda American Brass Ltd, 55 DTC 1220 at 1225)

3. The Hong Kong property tax is not based on profits actually earned but on a presumption that a taxable benefit will accrue to the owner of property which is not vacant or owner-occupied.

Inland Revenue Ordinance, Laws of Hong Kong, c 112, Rev Ed 1975, Sections 5, 5A, 7

Report of the Third Inland Revenue Ordinance Review Committee, pp 88-89, 92, 96

4. Notwithstanding amendments to the Hong Kong Ordinance effective April 1, 1976 which brought the net assessable value of taxable property more in line with current market rents than the previous “rateable value”, the Hong Kong system entails the levying of tax on an entirely notional basis in the following cases:

(a) where the premises are owned by a corporation not carrying on a trade or business in Hong Kong;

(b) where a taxpayer resides at more than one property;

(c) where the property is occupied either rent-free or at less than the full market value by persons other than the owner’s immediate family;

(d) clubs and similar institutions not regarded as carrying on any trade or business; and

(e) ancestral properties registered in the names of Tso’s and Tong’s Report of the Third Inland Revenue Ordinance Committee, p 91

5. The Hong Kong Ordinance itself treats “property tax” differently from the other forms of tax levied thereunder:

(a) The Inland Revenue Ordinance, Section 2 defines “assessable income” as “income ... of a person chargeable to salaries tax”, and “assessable profits” as “profits in respect of which a person is chargeable to tax for the basic period for any year of assessment calculated in accordance with the provisions of Part IV”. (Part IV deals with profits from trade, profession or business.) Thus prop erty tax is not included in the definition of assessable income or profits in Hong Kong, although it does come within the scope of the Inland Revenue Ordinance.

(b) Under Part VII of the Inland Revenue Ordinance a Hong Kong resident may make an election for personal assessment of his income. Section 42(1)(a) brings into total income only the net assessable value of properties which have actually been let. Admittedly the income might again be partially notional or presumed where the property was rented at less than market value, but all the other cases of presumed profit cited in the Report of the Third Inland Revenue Ordinance Committee are eliminated in this provision. This is indication that, even in Hong Kong, “property tax” levied under Part II encompasses more than a tax on income even though it comes within the scope of the main taxing Statute.

In any event, even if the tax in question can be considered a tax on income as that term is used in the Hong Kong Ordinance, this does not necessarily make it income or profits tax within the meaning of the Canadian Income Tax Act.

6. The situation is somewhat analogous to the “composite tax” described in the Peterson article referred to, supra, at p 89:

The taxes on business capital relating to the assessed value of a business establishment and on total wages paid bear no relation to the income or profits of the corporation and are therefore non-creditable.

7. In F W Woolworth Co v United States, 91 F(2d) 973 the US Second Circuit Court of Appeals did not allow a credit for taxes levied under Schedule A of the British Income Tax Law on the value of leased land occupied by a subsidiary of the American taxpayer and on rents received. The court stated at p 977:

A tax levied upon the use of land—however described—is not an income tax of the kind here intended; it is not paid upon accumulated profits except by the fiction of treating the value of the land when occupied as a profit. It is not necessary here to say whether “income tax” in Section 238(e) always means what we call income tax; at least it cannot mean this part of the British tax.

8. In A G v London County Council (1899), 4 TC 265 the House of Lords considered the property tax imposed by Schedule A of the English Customs and Inland Revenue Act, 1899, a tax similar to that imposed in the Hong Kong Revenue Ordinance. At p 300 Lord Davey said:

It is said that the tax imposed on property in Schedule A is not strictly an Income Tax, because it is levied on the annual value of property and not on the profits received by the owner. That no doubt is so, and if one were writing a treatise on taxation it would be proper to refer to this distinction. But the question is: What do the words “income Tax” mean in the language of the Legislature and in this Act? ... I come to the conclusion that the expression “Income Tax” is a generic description of the tax which is levied under all schedules alike, and is so used in Section 24.

It is submitted that all this case decides is that the term “Income Tax” as used in the English Act encompasses all taxes levied under that Act. It is not authority for the proposition that all such taxes, including the Schedule A tax, are taxes on income or profits for purposes of Canadian income tax law.

9. In the case of Seley v MNR, 62 DTC 565 the Tax Appeal Board held that the American equivalent of the then Canadian old age security tax was an income or profits tax for the purposes of the foreign tax credit. In that case no evidence was adduced as to the nature and quality of the American tax and the Board formed its conclusion on the basis of the nature and quality of the corresponding old age security tax in Canada. In the case at bar the Board has evidence of the nature and quality of the Hong Kong property tax upon which to base a conclusion that that tax is not one which would be considered an income or profits tax within the Canadian income tax system.

10. In BC Insurance Company v MNR, 54 DTC 422 the Tax Appeal Board ruled that an Australian tax paid on 10% of gross insurance premiums was creditable against Canadian income tax paid. It is submitted that this case can be distinguished on the basis that the Australian legislation provided a simplified method of determining the net profits derived by non-resident insurers, but that gross premiums had still to be actually received or receivable by the non-resident taxpayer before the net income was deemed. In the case at bar net rental income is imputed to the taxpayer in certain circumstances whether or not gross rental income has actually been received.

11. Section 126, as an exempting section, must be strictly construed: Wylie v Montreal (1885), 12 SCR 384 (referred to in Seley at 566). To depart from a basic rule of statutory interpretation—that words must be given their ordinary meaning unless there is clear indication to the contrary—would not be a strict construction of Section 126. Thus the words ‘‘income or profits” should not be stretched to include notional or presumed income or profits.

4.3.3 The appellant’s position

After quoting the words of paragraph 126(7)(c), “of any income or profits tax” the appellant’s counsel, quoted the definition of “income tax” given by Lord Macnaghten of the Privy Council in the case of London County Council v Attorney General cited above at 35 and 36:

Income tax, if I I may be pardoned for saying so, is a tax on income. It is not meant to be a tax on anything else. It is one tax, not a collection of taxes essentially distinct. There is no difference in kind between the duties of income tax assessed under Sched D and those assessed under Sched A or any of the other schedules of charge. One man has fixed property, another lives by his wits; each contributes to the tax if his income is above the prescribed limit. The standard of assessment varies according to the nature of the source from which taxable income is derived. That is all. Sched A contains the duties chargeable for and in respect of the property in all lands, tenements, and hereditaments capable of actual occupation. There the standard is annual value. It is difficult to see what other standard could have been adopted as a general rule. But there again, if the subject of charge be lands let at rack-rent, the annual value is ‘understood to be the rent by the year at which the same are let.’ In every case the tax is a tax on income, whatever may be the standard by which the income is measured.

The problem which is referred to, concerning Schedules A and D is explained in the judgment at 34.

The question depends upon the meaning and effect of sub-s 3, s 24, of the Customs and Inland Revenue Act, 1888, which enacts that ‘upon payment of any interest of money or annuities charged with income tax under Sched D and not payable or not wholly payable out of profits or gains brought into charge to such tax,’ the rate of income tax in force at the time shall be deducted and an account rendered to the Commissioners of Inland Revenue “of the amount so deducted or of the amount deducted out of so much of the interest or annuities as is not paid out of profits or gains brought into charge, as the case may be.” And then the amount deducted is declared to be a debt due to the Crown and recoverable accordingly.

section 23 of the same Act of 1888. explains the tax which is charged:

There shall be charged, collected, and paid for the year which commenced on the sixth day of April one thousand eight hundred and eighty-eight, in respect of all property, profits, and gains mentioned or described as chargeable in the Act of the sixteenth and seventeenth years of Her Majesty’s reign, chapter thirty-four, the following duties of income tax (that is to Say):

For every twenty shillings of the annual value or amount of property, profits and gains chargeable under Schedules (A), (C), (D), or (E) of the said Act, the duty of sixpence.

The section which is referred to in the Act of sixteenth and seventeenth years (1853) of Her Majesty’s Reign, c 34, reads as follows:

V. The said Duties hereby granted shall be assessed, raised, levied, and collected under the Regulations and Provisions of the Act passed in the Session of Parliament held in the Fifth and Sixth Years of Her Majesty, Chapter Thirty-five, and of the several Acts therein mentioned or referred to, and also of any Act or Acts subsequently passed explaining, altering, amending, or continuing the said first- mentioned Act;

The section which is referred to in the Act passed in the Session of Parliament held in the Fifth and Sixth years (1842) of her Majesty, c 35 reads as follows:

SCHEDULE (A)

No I—General Rule for estimating Lands, Tenements, Hereditaments, or Heritages mentioned in Schedule (A)

The annual Value of Lands, Tenements, Hereditaments, or Heritages charged under Schedule (A) shall be understood to be the Rent by the Year at which the same are let at Rack Rent, if the Amount of such Rent shall have been fixed by Agreement commencing within the Period of Seven Years preceding the Fifth Day of April next before the Time of making the Assessment, but if the same are not so let at Rack Rent, then at the Rack Rent at which the same are worth to be let by the Year; which Rule shall be construed to extend to all Lands, Tenements, and Hereditaments, or Heritages, capable of actual Occupation, of whatever Nature, and for whatever Purpose occupied or enjoyed, and of whatever Value, except the Properties mentioned in No Il and No III of this Schedule.

The decision of the Privy Council in “The London County Council” allowing the appeal finally considered as income tax, duties assessed on Schedule D and those of Schedule A even if the rent is not actual rent and in fact is the same nature of rent as the one provided in subsections 5(i), 5A(1), 5(3) 1E (estimated rent) of the Inland Revenue Ordinance of the Laws of Hong Kong. In the report of the Third Inland Revenue Ordinance Review Committee, (c 8) paragraph 145, it is said that “property tax introduced in Hong Kong in 1946 constituted a simplified version of the Schedule A system at the time in force in the United Kingdom which levied income tax by reference to the ownership of property,—land and buildings”.

4.3.4 It is admitted in paragraph 3 of the agreed statement of facts that during the 1976 taxation year the appellant “earned income in the amount of $6,562.21 from rental of the said land and buildings”.

This figure comes from two rents, the first from the buildings located on Beacon Hill Road, Hong Kong (Beacon) and Mody Road, Hong Kong (Mody) as it appears in the appellant’s 1976 Canadian tax return. It is necessary to say that the appellant and her husband were co-owners of those premises. The following figures are the half applying to the appellant:

It appears that it is the actual rental income that the appellant has included in her general income. Indeed, paragraph 152 of the Report of the Third Inland Revenue Ordinance Review Committee reads as follows:

While this legislative change, if followed by frequent revaluations, would be expected to lead to a tax charge closely in line with the actual rent currently passing in many cases (thus increasing the productivity of the property tax charge) the new system still entails the levying of tax on an entirely notional basis in the following cases—

The cases are the paragraphs a, b, c, d, e of the fourth argument of the respondent quoted above.

Whereas, the notional basis applies to exceptional cases, none of them applies to the appellant’s case.

In the Board’s opinion, the only simplified method is to tax the actual rental income. The percentage of 20%, of the expenses for repairs and outgoings to be deducted, is according to reality and moreover the fact that the percentage can be amended by simple resolution of the Legislative Council and not by Parliament shows the intention of the legislator to use an easier method to make changes when it is required by the actuality. Another point is that the exemption and relief on owner/occupier of a residence and refund of tax in case of unoccupied property is a proof that the property tax is a tax on rental income, because when there is no income, there is no tax.

In the Board’s opinion, the property tax provided in Part II of Inland Revenue Ordinance of Laws of Hong Kong is a tax on profit of the same nature as the one provided in the Canadian Income Tax Act.

The method of estimated or deemed income is not particular to Hong Kong legislator in an Income Tax Act. As explained before, the taxable property of Hong Kong comes from England.

In the Canadian Income Tax Act there are many deemed sections fixing the purchase prices or the sale prices of properties (for instance section 68, subsection 70(5), section 73), and consequently determining the profits on the transactions.

Conclusion

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

Appeal allowed.