Minet Inc. v. Her Majesty the Queen, [1996] 3 CTC 2108

O’Connor J.T.C.C.: — These appeals were heard in Toronto, Ontario on April 15, 16 and 17, 1996 pursuant to the General Procedure of this Court. The appeals relate to the Appellant’s taxation years 1985 through 1989. The Court was also advised that the outcome of these appeals will most likely affect taxation years assessed subsequent to 1989.

Testimony was given by Alan Middleton, the principal officer of the Appellant at all relevant times, James Kilkenny, a New Jersey attorney employed by an insurer who dealt with the Appellant and by Thorn Rosenthal, a New York attorney specializing in insurance matters. Mr. Rosenthal was called by the Appellant as an expert on the laws of certain U.S. states. In addition, parts of the discovery evidence of Richard Bernier, a representative of the Minister of National Revenue (“Minister”), were read in by counsel for the Appellant and parts of the discovery evidence of D.G. Robbs, a representative of the Appellant, were read in by counsel for the Respondent.

Issues

There are two issues. The first is whether brokerage commissions totalling $7,065,641 in the taxation years in question in respect of insurance placed by U.S. insurers in favour of U.S. insureds, which commissions were paid to U.S. affiliates of the Appellant, were includable in the Appellant’s Canadian income pursuant to Part I of the Income Tax Act (“Act”). The second issue was, since the said income was actually received by U.S. residents, was the Appellant also liable for failing to withhold and remit 15 per cent of the said income pursuant to Part XIII of the Act?

Facts

The basic facts either admitted or proven to the satisfaction of the Court are:

1. The Appellant was a Canadian corporation licensed to carry on an insurance brokerage business throughout Canada.

2. The Appellant has never been licensed to act as an insurance broker in any of the states of the United States of America.

3. During the taxation years under appeal, the sole shareholder of the Appellant was Minet Holdings PLC (“Holdings”), a United Kingdom corporation. Since 1988, Holdings has itself been wholly-owned by The St. Paul Companies, a United States corporation.

4. The Appellant specializes in the development and negotiation of sophisticated insurance coverage for large corporations. Because of its expertise, the Appellant attracted many U.S.-based corporations as clients.

5. The Appellant derived its income from two sources:

(a) brokerage commissions, and

(b) interest income on funds paid to the Appellant by insureds. This interest income was not insignificant, averaging approximately 13 per cent of total income in the years in question.

6. The flow of funds was that the Appellant invoiced the insured for the amount of the premium negotiated by the Appellant with the insurer. The insured would forward the full amount of such premium to the Appellant. The funds were deposited in the Appellant’s bank account at the Marine Midland Bank in New York and the Appellant invested same, principally in term deposits, retaining the interest income therefrom for its own account. Shortly before the premium due date the funds received from the insured, less the Appellant’s brokerage commission (i.e., the net premium) was remitted to the insurer. With respect to two U.S. affiliates of the Appellant hereinafter mentioned, the full amount of the premium was forwarded to the affiliate concerned shortly before the premium due date. The affiliate then would retain the brokerage commission and remit the net premium to the insurer. The two U.S. affiliates were Bowes & Company of New York Inc. (“Bowes”) and MIPI Brokers Inc. (“MIPI”).

7. Certain U.S. insureds expressed themselves as more comfortable with U.S. insurers than with foreign insurers which the Appellant had been using.

8. Some U.S. insurers were prepared to pay commissions to the Appellant for the insurance coverage which it placed with those insurers. All such commission income and the interest income mentioned above in paragraph 5(b) was included by the Appellant in the computation of its income for the relevant taxation years.

9. Other U.S. insurers however declined to pay commissions directly to the Appellant on the grounds that the Appellant was not licensed to conduct an insurance brokerage business in the United States under the relevant state insurance statutes. Such insurers were of the view that the payment of commissions to the Appellant would be illegal under those statutes. Thorn Rosenthal, a member of the Bar of the State of New York since 1976 and skilled in insurance law, was called as an expert by the Appellant to give his opinion on the laws of the eleven states concerned. A voir dire was held to determine whether Mr. Rosenthal’s expert opinion had to be restricted solely to the laws of the State of New York, the only state mentioned in his written affidavit filed with the Court and taken as read. The Court, after hearing counsel for both sides and receiving Mr. Rosenthal’s evidence of his expertise, determined that, indeed, Mr. Rosenthal could give expert opinion on the laws of all of the states concerned, notwithstanding that he was a member of only the Bar of New York.

10. In his affidavit Mr. Rosenthal concluded:

THAT in view of the fact that the Appellant did not hold a New York broker’s license during any of the years 1985 through 1989 inclusive, the provisions of the Insurance Law and Penal Law discussed above operated so as to prohibit the payment of commissions to the Appellant by an insurer providing insurance in New York and to prohibit the sharing of any portion of such commissions with the Appellant paid by an insurer to MIPI or to any other New York-licensed broker;

THAT in consequence, it was reasonable for U.S. insurers to refuse to pay commissions to the Appellant in respect of insurance in New York and for MIPI and all other New York-licensed brokers to refuse to share commissions on such insurance with the Appellant;

THAT had the Appellant initiated an action in the courts of New York against such insurers or such brokers for the payment of the commissions or portions thereof in question, it would have been unsuccessful in establishing any legal entitlement to such amounts....

Further with respect to the ten other states involved Mr. Rosenthal’s verbal testimony in response to questions put by Appellant’s counsel was to the effect that their applicable laws were substantially the same as New York law.

11. Rather than allow its commissions to be forfeited the Appellant would, in cases where the insurer refused to pay the Appellant, agree with either Bowes or MIPI to act as broker of record in respect of such coverage.

12. Both Bowes and MIPI were U.S. corporations which held the requisite licenses to permit the U.S. insurers to pay commissions to them under applicable U.S. law. Where Bowes or MIPI were involved, they would retain the commission and remit the net premium to the insurer as described above in paragraph 6.

13. Neither Bowes nor MIPI contributed anything to the negotiation process which led to the obtaining of the insurance in question and the resultant brokerage commissions. All of this work was done by the Appellant. The contribution of Bowes and MIPI was essentially providing the facility, because of their U.S. licenses, so that the premiums could be paid and doing some minor work towards receiving the funds, remitting the net premium to the insurer, retaining the commission as aforesaid and having their name inserted on the policy as broker of record.

14. Bowes and MIPI owned no shares of the Appellant and the Appellant owned no shares of either Bowes or MIPI. However, Bowes and MIPI are related to the Appellant, within the meaning of the Act having the same ultimate beneficial ownership.

15. Bowes and MIPI did not rebate any portion of the commissions to the Appellant. However, internal records of the Appellant ensured that at least in the eyes of the parent company the Appellant was recognized as the entity that did the work to produce the commissions paid to Bowes and MIPI. This would be reflected in remuneration paid to officers and employees of the Appellant.

16. On July 7, 1992, the Minister issued Notices of Assessment in respect of tax stated to be payable at the rate of 15 per cent under Part XIII of the Act which the Appellant had not withheld or remitted on amounts purportedly paid or credited to non-residents (i.e., Bowes and MIPI). Those amounts were as

follows:

17. On September 10, 1992, the Minister issued Notices of Reassessment adjusting the Appellant’s active business income under Part I of the Act by adding thereto amounts stated to be additional commission income. Those amounts were as follows:

Amounts

Taxation Year

1985	$ 770,231
1986	$1,047,858
1987	$1,670,009
Feb. 1988	$ 922,774
Sept. 1988	$ 867,396
1989	$1.787373
TOTAL:	$7,065,641

18. The Appellant objected to the said Notices of Assessment and Reassessment.

Submissions of the Appellant

These may be summarized as follows: Counsel submits it is important to note that the Respondent does not rely on subsection 56(2) of the Act in support of the assessments under Part I of the Act; nor does the Respondent allege any collusion between the Appellant and Bowes and MIPI. This was not a tax avoidance arrangement nor a plan to divert income from Canada.

The commissions in question were neither received nor receivable by the Appellant and, therefore, cannot be included in calculating its profit from its insurance brokerage business for the purposes of subsection 9(1) of the Act.

Bowes and MIPI were neither agents nor nominees of the Appellant.

The Appellant did not receive any amounts in respect of the commissions at issue in the present appeal. Under the relevant United States insurance laws, no amounts were even receivable by the Appellant because it was not legally entitled to a commission. The Appellant’s unremunerated efforts constituted an exercise of its business judgment to preserve and expand its client base in expectation of other placements in respect of which it would be remunerated.

As intermediaries, insurance brokers act as agents for both the insurer and the insured. However, with respect to the collection of premiums from the insured, they act as agents of the insurer. The brokerage agreements which are in evidence are unequivocal:

Section 1 of the agreement between the Appellant (the “Broker”) and Wellington Guarantee (the “Company”) provides as follows (Exhibit A-14):

1. Premium collection — The Broker is responsible for all premium collection for the Company. If the Broker cannot collect a premium due the Company, the Broker must notify the branch office of the Company nearest the Broker in writing before the premium due date. All premiums collected on behalf of the Company, less the Broker's commission, belong to the Company and must be held in trust in a Bank or Trust Company. Interest on the Trust Funds is the property of the Broker.

[Emphasis added.]

Counsel for the Appellant referred to agreements with other insurers having substantially the same provisions.

It is well established that an amount does not have the character of income in the hands of a taxpayer where it is received or receivable in trust for another or subject to an obligation or a charge which prevents the enjoyment of it.

The Appellant submits that, in assessing the Appellant for commissions received by Bowes and MIPI, the Respondent is overlooking yet another principle which is supported by jurisprudence that unless the amounts are actually received and enjoyed by the taxpayer, they cannot be taxed in his hands if he is legally prohibited from receiving them. An amount will only be included in income when the taxpayer has a clear legal right to receive the income and the amount of that income is ascertainable.

The locus classicus of this concept is Minister of National Revenue v. J. Colford Contracting Co. (sub nom. John Colford Contracting Co. Ltd. v. Minister of National Revenue), [1960] C.T.C. 178, 69 D.T.C. 1131, affirmed [1962] C.T.C. 546, 62 D.T.C. 1338 (S.C.C.), in which the Exchequer Court held that certain “holdbacks” were not to be included in the taxpayer’s income from its construction business until the taxpayer had a legal right to them. Both at common law and under the civil law of Quebec, the taxpayer had no legal right to the holdback until an architect or engineer appointed by the owner of the building issued a completion certificate. Because no certificate had been issued, the holdbacks were not taxable. Kearney, J. stated (at page 187):

In the absence of a statutory definition to the contrary, I think it is not enough that the so-called recipient have a precarious right to receive the amount in question, but he must have a clearly legal, though not necessarily immediate, right to receive it. A second meaning as mentioned by Cameron, J. [in Wilson & Wilson v. Minister of National Revenue, [1960] C.T.C. 1], is “to be received”, and Eric L. Kohler in A Dictionary for Accountants, 1957 edition, page 408, defines it as “collectible, whether or not due”. These two definitions, I think, connote entitlement.

[Emphasis added. I

There is case law from the United States which extends the principle enunciated in Minister of National Revenue v. John Coif ord Contracting Co., supra, in this fashion.

In Commissioner of Internal Revenue First Security Bank of Utah, N.A. (1972), 405 U.S. 394, the United States Supreme Court considered the application of section 482 of the United States Internal Revenue Code, which allows the Commissioner of Internal Revenue (the “Commissioner”) to allocate income among controlled corporations. The respondents, two related banks, were subsidiaries of a holding company that also controlled a management company, an insurance agency and an insurance company. The banks offered credit life insurance to their customers but were prohibited by federal law from acting as insurance agents and receiving premiums. Although the banks originated and processed the insurance, they referred their customers to an unrelated insurance company to purchase this insurance. The unrelated insurance company retained 15 per cent of the premiums for actuarial and accounting services and transferred 85 per cent of the premiums through a reinsurance agreement to the insurance company related to the banks. The related insurance company included the entire amount it received (1.e., the 85 per cent of the premiums) as reinsurance premiums in its income.

Applying section 482 of the Internal Revenue Code, the Commissioner determined that 40 per cent of the related insurance company’s income was allocable to the banks as compensation for originating and processing the insurance. The Supreme Court of the United States set aside the Commissioner’s allocation. The Court found that the holding company that controlled the banks and the insurance affiliate did not have the power to shift such income among its subsidiaries unless it operated in violation of federal banking law. Writing for a majority of the Court, Powell J. stressed that the doctrine which taxes in the hands of a taxpayer income which is assigned before it is received necessarily assumes that the income would have been received by the taxpayer (at page 403):

We know of no decision of this Court wherein a person has been found to have taxable income that he did not receive and that he was prohibited from receiving. In cases dealing with the concept of income, it has been assumed that the person to whom the income was attributed could have received it. The underlying assumption always has been that in order to be taxed for income, a taxpayer must have complete dominion over it.

[Emphasis added.]

Powell J. went on to distinguish First Security Bank, supra, from United States cases in which the proceeds of criminal activities were held to be taxable (at page 405):

We are not faced with a situation such as existed in those cases, urged by the Commissioner, in which we held the proceeds of criminal activities to be taxable. Those cases concerned situations in which the taxpayer had actually received funds. Moreover, the illegality involved was the act that gave rise to the income. Here the originating and referring of the insurance, a practice widely followed, is acknowledged to be legal. Only the receipt of insurance commissions or premiums thereon by national banks is not. Had the Banks ignored the banking laws, thereby risking the loss of their charters and subjecting their officers to personal liability, the illegal-income cases would be relevant. But the Banks from the inception of their use of credit life insurance in 1948 were careful never to place themselves in that position. We think that fairness requires the tax to fall on the party that actually receives the premiums rather than on the party that cannot.

[Emphasis added.]

Counsel cited a more recent decision of the United States Court of Appeal and concluded that First Security Bank, supra, continues to be good law in the United States even when the prohibiting law was a foreign one.

The Appellant submits that the present circumstances parallel those under consideration in the above U.S. decisions. The Appellant performed most of the work which generated the insurance commission income, but was prevented from receiving those commissions as a result of a legal prohibition.

As to agency, the Appellant submits that Bowes and MIPI could not have acted as its agents or nominees for the purpose of receiving a commission. A contract made by an agent or a nominee is the contract of the principal. The agent or nominee is merely the medium through which the contract is effected. An agent or nominee cannot accomplish on behalf of the principal that which the principal cannot himself legally accomplish. The agent or nominee has no more legal capacity than the principal which he represents.

With respect to the Part XIII assessments, counsel for the Appellant submits:

Paragraph 13 of the Respondent’s Reply to the Notice of Appeal states that the insurance commissions in question were directed by the Appellant to be paid to Bowes and MIPI and were “payments made by the Appellant to those corporations for the Appellant’s benefit or benefits which the Appellant desired to have conferred on them, within the meaning of subsection 56(2) of the Income Tax Act and were accordingly subject to Part XIII tax pursuant to subsection 212(2) and paragraph 214(3)(a) of the Income Tax Act”.

The Appellant had two submissions. First, no tax is payable under Part XIII, since neither paragraph 214(3)(a) nor subsection 56(2) is applicable in the circumstances of this case. Second, in any event, the Appellant submits that if any tax is payable under Part XIII, the Appellant is not liable for such tax.

The Appellant submits that no tax is payable under Part XIII of the Act in respect of the commissions in question. The relevant provisions of the Act are subsections 56(2), and 212(2) and paragraph 214(3)(a). The pertinent passages of these provisions read as follows:

56(2) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person...shall be included in computing the taxpayer's income to the extent that it would be if the payment or transfer had been made to the taxpayer.

[Emphasis added.]

212(2) Every non-resident person shall pay an income tax of 25 per cent on every amount that a corporation resident in Canada pays or credits, or is deemed by Part I or Part XIV to pay or credit, to the non-resident person as, on account or in lieu of payment of, or in satisfaction of,

(a) a taxable dividend...

214(3) For the purposes of this Part,

(a) where section 15 or subsection 56(2) would, if Part I were applicable, require an amount to be included in computing a taxpayer's income, that amount shall be deemed to have been paid to the taxpayer as a dividend from a corporation resident in Canada.

[Emphasis added.]

Article X, paragraph 2 of the Canada-U.S. Income Tax Convention reduced the rate of withholding from 25 percent to 15 percent.

The Appellant submits that the Respondent has misread paragraph 214(3)(a). The “taxpayer” to which paragraph 214(3)(a) refers must logically be the same taxpayer as that to which subsection 56(2) refers, 1.e., the conferor of the benefit and not the conferee. The two provisions are designed to work in tandem, with the Canadian resident conferors being caught by subsection 56(2) and non-resident conferors being caught by paragraph 214(3)(a).

Subsection 212(2) and paragraph 214(3)(a) are designed to prevent a non-resident person from avoiding Canadian tax by arranging its affairs in a manner similar to that described in subsection 56(2). They are not designed to tax a Canadian resident under Part XIII of the Act, 1.e., on a basis which applies only to non-resident persons. Canadian taxpayers which confer benefits on non-resident persons may be caught directly under subsection 56(2), without any need to resort to Part XIII. James Rossiter writes unequivocally in his article, The Application of Part XIII Nonresident Withholding Tax to Deemed Payments, [1986] 34 C.T.J. 511 as follows (at page 523):

... paragraph 214(3)(a) states that an amount “shall be deemed to have been paid to the taxpayer as a dividend from a corporation resident in Canada” (emphasis added [by Rossiter]). The taxpayer in this case is the nonresident.

Any other interpretation must inevitably lead to the same income being taxed twice.

The Appellant further submits that subsection 56(2) is inapplicable so that there can be no trigger for the application of paragraph 214(3)(a). Subsection 56(2) is designed to tax amounts that the taxpayer would itself otherwise be entitled to receive, and where, if received, would have the character of income. In this case the Appellant had no and could have no entitlement to the commissions in question. In consequence, the present circumstances should not give rise to the application of subsection 56(2) at all.

In any event, the Appellant submits that any liability for tax under Part XIII which might exist would properly fall on Bowes or MIPI, and not the Appellant. That is to say, the Minister has assessed the wrong taxpayer for any tax which might be payable under Part XIII.

Submissions of the Respondent

Counsel for Respondent submitted that in the present case the commissions which were paid to Bowes or MIPI were the result of the Appellant’s efforts and were therefore earned by the Appellant. Bowes and MIPI were merely passive recipients of these commissions and they were therefore not income from a business or undertaking carried on by them.

Adams v. Minister of National Revenue (1960), 24 Tax A.B.C. 154, 60 D.T.C. 253, at pages 255-56 (T.A.B.)

Goldblatt v. Minister of National Revenue, [1964] C.T.C. 185, 64 D.T.C. 5118, at page 5121 (Ex. Ct.)

In Adams the Tax Appeal Board held that commissions actually earned by a stockbroker but paid to companies he incorporated were nevertheless income of the stockbroker. At page 256 the following is stated:

When the material facts of the matter are examined, one finds that what transpired in 1955 and 1956 was simply this: Appellant’s numerous business connections, plus his own experience and capability, resulted in many and often large commissions being earned by him. At his oral request, commissions earned by him after the date of incorporation were credited by Norris, Allen Limited to two accounts in its books, referred to earlier herein, identified as ‘Bradanto Enterprises Ltd. - G. Adams’ and ‘G. D. Adams Enterprises Ltd.- Commission Account’. Both accounts were first opened on 30th September, 1955, and thereon and thereafter most of appellant’s commissions went into them and were dealt with subsequently in whatever manner the appellant might direct. In these circumstances, I regard what was done as nothing more or less than an assignment by the appellant, to the two companies, of income after it had been earned by him. I fail to comprehend how it could have been earned by the new companies. As already intimated, the meagre evidence adduced in this particular regard does not satisfy me that either of them was actually carrying on a business of any kind. As I view the evidence brought before the Board, these corporate entities were merely the designated recipients of funds voluntarily transferred to or placed to their credit.

In Goldblatt, a decision of the Exchequer Court, the formal holding reads as follows:

The appellant negotiated an arrangement with suppliers in the U.S.A. whereby they undertook to deal with a scrap metal company owned by the appellant and his family. As part of the arrangement the suppliers also agreed to pay a commission or finder’s fee. These commissions were paid to C, a company which was a wholly-owned subsidiary of a Nassau company. The shares in this Nassau company were held by members of an accounting firm but it was admitted that the Nassau company had invested certain of its moneys in oil paintings which were stored in the appellant’s house. The Minister assessed the appellant in respect of the commissions; the appellant appealed to the Exchequer Court of Canada.

Held: The appeal was dismissed. Company C had been activated for the express purpose of receiving the commissions. It was not actively engaged in a business concerned with earning commission, and these were clearly income in the hands of the appellant within subsection 16(1) or section 23.

At page 5121, the Court stated:

On these facts, I am of opinion that Cosmopolitan Import & Export Limited was “activated” for the express purpose of receiving the commissions from Luria Bros., Inc. and that, during the material times, it was not actively engaged in a business, except incidentally, which had nothing to do with the earning of the commissions, the subject matter of this appeal.

In my view, the case is indistinguishable from the principles enunciated in Adams, supra.

Contrary to the Appellant’s submission, the Respondent submits that it is not accurate to say that the Appellant “did not receive” the commissions in question because the gross premiums went into the Appellant’s bank account. Since the brokerage commission was the difference between the gross and the net premium, and since the Appellant remitted the gross premiums to Bowes or MIPI with the understanding that they would remit the net premiums to the insurers, it thereby assigned the commissions to Bowes or MIPI. In other words the Appellant had in substance received the commission and merely turned them over to Bowes or MIPI.

As already stated, the Appellant, with the insurers’ concurrence, kept the interest income from the deposit of the gross premiums. It therefore had dominion over those funds for a time and power to dispose of the commissions.

It is a well-established principle of law that the destination of income, i.e., its assignment after it has been earned, even if mandatory, is immaterial to the determination of the question whether it has been earned by the assignor. On this point Counsel referred to several authorities, including:

Mersey Docks & Harbour Board v. Lucas (Surveyor of Taxes) (sub nom. Mersey Docks and Harbour Board. v. Lucas) (1883-90), 2 T.C. 25 at page 88 (H.L.)

In the present case, the Respondent submits that there can be no doubt that the commissions which were remitted to Bowes and MIPI had been earned by the Appellant as a result of its efforts and activities. Bowes and MIPI played no part in them. Bowes and MIPI received these commissions by way of assignment from the Appellant after the Appellant had earned them.

Put another way, in the Respondent’s submission, it is clear on the facts that the commissions were the result of the Appellant’s services to its clients, 1.e., the insureds, and not as a result of services rendered to the insurers. While these brokerage commissions fell to be deducted from the gross premiums, the Appellant’s entitlement to them arose, 1.e., the Appellant earned them, as a result of its services to the insured. Their deduction from the gross premiums was merely the means whereby these earned amounts were received by the Appellant. It is therefore submitted that their remittance to Bowes and MIPI, even though it might have been legally compelled, merely constituted their assignment after they had been earned by the Appellant. In the Respondent’s submission, it makes no difference to the result if it should be found that the Appellant earned the commissions for services it rendered to the insurers, rather than to the insureds.

Bowes and MIPI were therefore the Appellant’s agents or conduits for the transactions which resulted in the earning of the commissions by the Appellant. Certainly, while it might be said that the insurers “paid” the commissions to Bowes or MIPI it cannot be said that they did so in any substantive or beneficial sense for Bowes and MIPI, did nothing to earn them, and the insurers did regard Bowes and MIPI as the Appellant’s agents.

Assuming however that it could be said that these commissions could not have been legally paid by the insurers to the Appellant, this does not avail the Appellant. To begin with, to say that these commissions could not have been legally paid by the insurers does not mean that they were therefore not “received” by the Appellant because the Appellant or its agents were obligated only to remit the net premiums to the insurers. However, even if it could be said that such receipts were illegal, this does not disqualify them as income. It has been abundantly established that illegal receipts do not lose their character of income by reason of the illegality.

With respect to the Part XIII issue, counsel concluded as follows: Assuming the applicability of subsection 56(2) of the Act to the commissions that were paid to Bowes and MIPI, such payments were, by virtue of paragraph 214(3)(a) of the Act deemed to have been paid to Bowes and MIPI as a dividend, to which, pursuant to subsection 212(2), a withholding tax applied.

The requirements of subsection 56(2) of the Act are fourfold:

(1) there must be a payment or transfer of property to a person other than the taxpayer;

(2) the payment or transfer is pursuant to the direction or with the concurrence of the taxpayer;

(3) the payment or transfer must be for the taxpayer’s own benefit or for the benefit of some other person on whom the taxpayer desired to have the benefit conferred, and

(4) the payment or transfer would have been included in computing the taxpayer’s income if it had been received by him instead of the other person.

Counsel submitted that on the facts of this case all four conditions have been met. There can be no doubt that conditions (1) and (4) have been met. However, the Respondent submits that conditions (2) and (3) have also been met. The commissions were paid to Bowes and MIPI pursuant to the direction or with the concurrence of the Appellant. It is submitted that this direction or concurrence on the part of the Appellant may be inferred from the evidence that the Appellant sent the gross premiums to Bowes or MIPI with the intent that Bowes or MIPI remit only the net premiums to the insurers. Thus, the Appellant acquiesced in the payment to Bowes and MIPI of the commissions which the Appellant earned from its brokerage efforts. For what substantive reasons would the insurers have to pay the commissions to Bowes or MIPI? These companies played no substantive part in the placing of the insurance coverage.

Under subsection 56(2) of the Act the taxpayer is the “conferor” of the benefit, to use the Appellant’s phrase. Under Part XIII the “taxpayer”, 1.e., the person on whom the incidence of the tax falls, is the non-resident; the Canadian payor’s liability consists of withholding the tax payable by the non-resident, and to pay it if he fails to withhold it.

Income Tax Act, subsections 212(1), 215(1), 215(6), 216(3) and 152(1)

The Appellant faults the Respondent for not pleading section 215 of the Act. In the Respondent’s submission however, this point is not well taken, because the Respondent has specifically pleaded the entire Part XIII of the Act in support of the assessment. In the Respondent’s submission it is therefore unnecessary to refer to specific provisions of Part XIII.

Analysis and Decision

Neither counsel could point to any Canadian authority directly on point. Aside from certain general principles developed in the jurisprudence cited by the Appellant, the closest to the fact situation before this Court were the Appellant’s references to the United States cases. With respect to the Respondent’s submissions the cases closest to the factual situation here were Adams and Goldblatt discussed above.

In my opinion the U.S. decisions are distinguishable and in any event are not binding on this Court. Also the Adams and Goldblatt decisions are distinguishable because in those cases there was no law prohibiting the payment of commissions.

Moreover the cases dealing with illegal activities carried on by prostitutes, bookkeepers, embezzlers, etc. are not applicable because in those cases the question of whether or not monies were actually received was not in issue.

Factors which I have considered important in arriving at my decision are the following:

1. The Appellant, not Bowes or MIPI, earned the commissions.

2. The Appellant in all cases received the full amounts from the insureds, i.e. not only the amount destined to be the brokerage commission but also the amount intended to be remitted to the insurer as premium. It invested all of the monies in term deposits and collected the income thereon. This was either the custom or in certain cases was provided for by specific arrangements with insurers. Neither the insurer nor Bowes and MIPI, in those cases where they were involved, objected to this. The Appellant received the total funds and while the funds remained in its hands the Appellant derived all of the fruits therefrom, in the form of interest on the term deposit investments.

3. Not all of the funds received by the Appellant were “impressed with a trust” in favour of the insurer. The portion representing the brokerage commission was not. See the above quotation from Exhibit A-14. The amount representing the brokerage commission belonged to the Appellant.

4. Bowes and MIPI and the Appellant are related corporations within the meaning of the Act. In substance the Appellant has acquiesced in the commissions it earned being paid to Bowes and MIPI. That clearly differs from a case where, because of a legal constraint, no commissions at all are paid.

5. The commissions were paid to related corporations with the result that the commissions earned in some form or other by the Appellant accrued to the beneficial owner of the group, 1.e., the parent company. As counsel for the Respondent pointed out, the money “remained in the family”. Although after the funds left the Appellant and were not returned to the Appellant, the Appellant was certainly instrumental in agreeing in some fashion that the amounts be paid to Bowes and MIPI. The acquiescence or instructions from the Appellant as to where the brokerage commissions were to be paid certainly indicates a degree of control or dominion over those funds.

6. The Appellant, although not actually retaining the brokerage commissions, benefitted in two ways. Future business and good business relationships and contacts were maintained. Moreover, as mentioned above, the Appellant and/or its officers or employees were recognized by the parent as being responsible for earning the commissions.

Considering the above factors, I have come to the conclusion that the total commissions of $7,065,641 were properly included by the Minister in the Part I reassessments of the Appellant for the years in question.

With respect to the Part XIII assessments, I accept the submissions of counsel for the Appellant and for the reasons set forth in those submissions, I conclude that the Part XIII assessments are to be vacated. Moreover, considering my opinion that the commissions are income of the Appellant under Part I, it would be inconsistent to hold that they are also subject to Part XIII tax.

In conclusion the appeals with respect to the Part I tax are dismissed and the appeals with respect to the Part XIII tax are allowed. The matter is referred back to the Minister for reconsideration and reassessment in accordance with these reasons.

Further considering that the Respondent has succeeded to a greater extent than the Appellant, costs are awarded to the Respondent.

Appeal dismissed for the most part.