David Halcrow v. Minister of National Revenue, [1980] CTC 2801, 80 DTC 1697

The Assistant Chairman:—In 1974 a group of persons, 24 in number, purchased a farm in the Province of Manitoba and took title thereto in a bare trustee, Brasch Limited, a corporation incorporated pursuant to the laws of the Province of Manitoba solely for that purpose. The interest in the land was divided into sixty-four equal shares. Some owned only one share, while others owned a greater number. All the owners of an interest in the farm were residents of the USA except one corporation which was a resident of Canada. Four of the residents of the USA lived near the US/Canada border and they in fact farmed the land in question. The bare trustee filed the appropriate income tax returns for 1975 and 1976 with the Department of Na- tional Revenue, Taxation, and, with respect to the amounts paid to residents of the US, deducted the appropriate amount of tax and remitted the same to the said Department.

The arrangement between the people with an interest in the farm was that 75% of the profit would be paid to the four persons who “farmed” the said land, and 25% would go to Amanda (the name given to the 24-person group by those 24 persons in an agreement which all parties signed). In this respect the arrangement was set forth in the reply to the notice of appeal, which was agreed to by counsel for the appellant, in paragraph 5(h) which reads as follows:

Four of the parties to the joint venture agreement, while still residing in the United States, lived in close proximity to the acreage in question. They actually farmed the land, returning to their homes each evening. These were Gordon, Charles, Keith, and David Halcrow. Gordon and Charles Halcrow, operating as Halcrow Bros Farms (David and Keith Halcrow were paid a salary by Halcrow Bros Frams) obtained 75% of the profits from farming the acreage in question, while “Amanda” obtained 25%.

The only difference in interpretation is whether or not the “profit” from the operation of the farm, as stated above, was shared on the basis of 75% to four people and 25% to Amanda, or whether the four who actually farmed the land kept 75% of the profit and then paid out as sharecropping (rental) the 25% to Amanda. While the appellant submitted that the 25% was paid as rent, there was no indication in the evidence of any lease, oral or written, by the group to any person or persons. As I view the evidence, it was on the basis that those who did the farming received the lion’s share of the profit, but all were receiving a share of the profit—no one was receiving rent.

The appellant was one of those who did the farming and he had a 5/64th interest in the farm. It was agreed that the appeals of the other three persons who also did the farming; namely, Kenneth Delbert Halcrow, Charles Warren Halcrow and Gordon Dale Halcrow, would be decided on the same evidence. As for the remaining appellants, counsel for the appellant, who represented all appellants, wished to reserve his commitment until the decision and reasons were known in this appeal. While counsel for the Crown was agreeable to all appeals following the decision in this appeal, in light of the comments by counsel for the appellants, all other appeals except the four affected by these reasons were adjourned.

In 1976 the farm was sold and the parties agreed that the profit resulting from the sale was $412,520.96. Since the appellant had a 5/64th share of this sum, he was taxed on one-half of his share. He was not taxed on the basis that it was a business profit, but rather on the basis that one-half of that capital gain was to be taxed as income. There was no dispute between the parties as to the quantum assessed or the fact that it was not a trading profit being assessed.

Counsel for the Crown traced, through the various sections of the Income Tax Act, the assessing and charging of this amount of tax. Since the appellant was not a resident of Canada, paragraph 2(3)(c) of the Income Tax Act after tax reform applied, which section reads as follows:

(3) Where a person who is not taxable under subsection (1) for a taxation year

(c) disposed of a taxable Canadian property,

at any time in the year or a previous year, an income tax shall be paid as hereinafter required upon his taxable income earned in Canada for the year determined in accordance with Division D.

He continued that the phrase “taxable Canadian property” is defined in subsection 248(1) as follows:

“taxable Canadian property” has the meaning assigned by subsection 115(1). . . .

He then submitted that we find the appellant’s income by referring to subsection 115(1) in conjunction with section 3.

Subsection 115(1) reads as follows:

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

(b) the only taxable capital gains and allowable capital losses referred to in paragraph 3(b) were taxable capital gains and allowable capital losses from dispositions of property each of which was a disposition of property or an interest therein (in this Act referred to as a “taxable Canadian property”) that was

(i) real property situated in Canada.

Paragraph 3(b) reads as follows:

The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:

(b) determine the amount, if any, by which

(i) the aggregate of his taxable capital gains for the year from dispositions of property other than listed personal property, and his taxable net gain for the year from dispositions of listed personal property,

exceed

(ii) his allowable capital losses for the year from dispositions of property other than listed personal property.

Having gone this far, the respondent submitted that the appellant is taxable unless he is exempt by the Canada-US Income Tax Convention.

Counsel for the appellant accepted that if the appellant were a Canadian resident he would have been properly taxable, however because of the Convention he is exempt. Both counsel made reference to Article VIII of the Convention but only in reply did the appellant refer to the Protocol at clause 3(f), while the Crown incorporated it with Article VIII. Article VIII reads as follows:

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

Protocol 3(f) reads as follows:

3. As used in this Convention:

(f) the term “permanent establishment” includes branches, mines and oil wells, farms, timber lands, plantations, factories, workshops, warehouses, offices, agencies and other fixed places of business of an enterprise, but does not include a subsidiary corporation. The use of substantial equipment or machinery within one of the contracting States at any time in any taxable year by an enter- prise of the other contracting State shall constitute a permanent establishment of such enterprise in the former State for such taxable year.

When an enterprise of one of the contracting States carries on busines in the other contracting State through an employee or agent established there, who has general authority to contract for his employer or principal or has a stock of merchandise from which he regularly fills orders which he receives, such enterprise shall be deemed to have a permanent establishment in the latter State.

The fact that an enterprise of one of the contracting States has business dealings in the other contracting State through a commission agent, broker or other independent agent or maintains therein an office used solely for the purchase of merchandise shall not be held to mean that such enterprise has a permanent establishment in the latter State.

The appellant’s submission was that, if there was a conflict between the Act and the Convention, the Convention would prevail. Therefore, if the Convention exempts the sum in dispute herein from tax, then the appellant would pay no tax. As the appellant’s counsel saw it, the issue was—Was there a permanent establishment in Canada on April 15, 1976? He submitted that what was paid to the members of the joint venture (the 24 people) was rental income. No one paid any business tax—it was income subject to withholding tax.

The Crown’s submission was that what the appellant and the others had been receiving was not rent but was profit from a business and that business was within the definition in the Protocol of “permanent establishment”, at least in two respects; namely, “farm” and “the use of substantial equipment or machinery within one of the contracting States at any time in any taxable year”.

Reference was made to several cases. However, it appears the main case was that of D H Peery Estate Inc v MNR, 6 Tax ABC 310; 52 DTC 202, a decision of W S Fisher of the Income Tax Appeal Board. In that case an incorporated company owned land in Alberta. It was an American company and all management decisions, officers, etc were in the United States. It rented the land (farm) on a sharecropping basis. The Minister of National Revenue assessed the company on the basis that its income was from a business. The company appealed that assessment contending that it was only subject to the non-resident tax. Mr Fisher referred to the lease, its terms, etc and concluded at 316 [206]: ‘‘l am of the opinion that I should proceed on the basis that the income received by the appellant herein in the year under appeal was a rental income.” Mr Fisher proceeded to hold that the appellant was only subject to the non-resident tax—it was not in business in Canada.

The Crown in effect accepted Mr Fisher’s decision (supra) and contended, in the circumstances of the instant appeal: the income was not rental income, there was a permanent establishment, and the assessment was properly made. In support of his submission he referred to the same decision at 318 [206]:

From this definition, it would appear that the possession of a farm in one of the countries by an enterprise of the other country would be considered as a permanent establishment of that enterprise in the country in which the farm was situated. Possibly the intention of the terms of the Convention was that, if the enterprise itself conducted farming operations on such a farm situated in the territory of the other contracting state, it would be considered to be carrying on business in that state and subject to taxation on the industrial and commercial profits arising from the farm. But, if the farm was rented to some third party, and all that was received by the enterprise was income by way of rentals, then the provisions of Article Il of the Convention quoted above would apply, and such rental income would not be considered to be industrial and commercial profits subject to general taxation under the income tax laws of the country in which the rental income arose.

As I view this appeal, there never was a lease of the land in question to anyone on a “rental basis”. The group of twenty-four, be it called a partnership, joint venture or a syndicate, carried on a business or operating a farm and, since it had a “permanent establishment” in Canada, the share received by the appellants affected by these reasons, namely, David Halcrow, Kenneth Delbert Halcrow, Charles Warren Halcrow and Gordon Dale Halcrow, has been properly assessed to income tax.

The result is, judgment will go dismissing the appeals of the four above- mentioned appellants.

Appeal dismissed.