Macmillan Bloedel Limited v. Minister of National Revenue, [1979] CTC 2342, 79 DTC 297

Assistant Chairman:—The appellant in this appeal took advantage of subsection 165(3) of the Income Tax Act, RSC 1952, c 148 as amended by SC 1970-71-72, c 63, with the consent of the respondent. Counsel for the appellant had many discussions with the local officer of the respondent in Vancouver, wrote several letters to the head office of the respondent in Ottawa, as well as interviewing and discussing the matter personally with officers of the respondent. It would appear from the submissions by counsel that, if I were to say that he begged the respondent to take a firm position or a decision, I might be understating what transpired before an assessment was issued. Once the assessment was issued, the appellant asked that its objection, in effect, be considered a notice of appeal to this Board. The Minister agreed and the notice of objection dated May 29, 1978, which objected to the assessment of May 12, 1978, was heard as an appeal to this Board on October 20, 1978. Unfortunately, because it was felt that a transcript of the proceedings was necessary to appreciate the full position of the appellant before a decision could be rendered, since the transcript was only recently received, the decision of this Board has been delayed to this date.

The assessment appealed from is not an assessment of tax based on the appellant’s income. It is a penalty assessment. The respondent assumed that the appellant paid interest to non-residents and did not deduct the amount of tax which the respondent believed it was required to deduct pursuant to subsection 212(1) of the said Act. The appellant, in effect, said it did and hence the appeal.

While there was not literally an agreement as to facts in this case, there really was no dispute as to the facts. The appellant is a public company and it acts as the financial core of the many other companies in which it owns shares. It has subsidiaries in ten or fifteen countries all over the world, with many in the United States. The appellant had, at the end of its 1977 year, funded debt of about $247,000,000 in the form of debentures, one of which was “series C debentures”. The appellant had a “Principal Trust Debenture” which, in effect, does two things:

(a) it sets forth the agreement pursuant to which the appellant issued its funded debt in series, and

(b) it is the vehicle through which the bonds were created and sold.

The terms on the bond in question in this appeal are the same as those shown in the principal trust debenture. However the rate of interest and amount of the issue are covered in a supplementary trust debenture. According to the principal trust debenture, the registered holder—as stated by the witness for the appellant—is entitled to the principal, interest and premium and he is the person with whom the company must deal. Counsel for the appellant, through his witness, the secretary of the appellant, referred to section 233 of the British Columbia Companies Act, SBC 1973, c 18 as amended, with respect to the Minister (BC) ordering an inquiry to determine the beneficial ownership of shares. It was suggested that, since the Minister (BC) could make such an inquiry, there was no power in the company itself to do so.

The appellant’s witness stated that, in connection with the “series C debentures”, all of the holders are resident or apparent residents of the United States. Until February 1976, considering section 212 of the Income Tax Act after tax reform and Article XI of the Canada-US Tax Convention, the appellant deducted the tax required of 15% from the interest being paid and remitted it as required to the Government of Canada. The appellant then sent a cheque for the balance to the US trustee (First National City Bank) and they disbursed it according to the register which they keep. The appellant made no “inquiry as to the beneficial ownership of any series ‘C’ debenture which might lie behind the registered holder thereof.” The appellant’s witness stated that he would estimate that about thirty-eight percentum of the series “C” debentures were held by apparent nominees.

Around February 1976, it came to the attention of officers of the appellant, through a press release from the Department of National Revenue (Taxation), that the appellant (as well as others in a similar position) were expected or even required to find out who the beneficial owners of its securities were. The effect in reality was that tax at the rate of 25% was to be deducted from the payment of interest by the payer if the payee were a nominee or agent unless the payee or nominee indicated that the beneficial owner of the interest being paid was a resident of a country which had a tax treaty with Canada. The press release was followed by an Information Circular #76-12, which was in great detail. While the Information Circular does not determine the tax liability of the appellant, it has been referred to in order to indicate the position in which the appellant found itself. The circular states in effect that those rules apply from January 1, 1976. While an effort was made by the American trustee of the appellant’s Trust Debenture to get the beneficial owners of those debentures to fill out the required certificate, a good many did not comply.

Correspondence passed between counsel for the appellant and officers of the Department of National Revenue, Taxation. This correspondence started in November 1976 by a letter to National Revenue. It, in substance, stated that there were among the registered holders, names which would appear to be nominees but were not known by the appellant to be such nominees and the letter continued that the appellant refused to make any inquiry as to the beneficial ownership which might lie behind the apparent nominees. The letter then stated:

I would be obliged if you would forthwith assess MacMillan Bloedel Limited for the amount of the 10% difference pursuant to sections 215 and 227(10) of the Income Tax Act so that I can file a notice of objection thereto.

National Revenue later wrote to the appellant asking for the certificates as to the beneficial ownership. The appellant replied as follows:

In this letter of November 10, 1976 to Mr A W Crawford of the Vancouver District Office, a copy of which you have, Mr P N Thorsteinsson stated that it was our intention not to fulfil the requirements of Information Circular 76-12 in these three cases in order to precipitate an assessment. Would you kindly issue one as soon as possible.

National Revenue, by letter of May 19, 1977, wrote to counsel for the appellant as follows:

This is in reference to your letter of November 23, 1976 and is further to ours of December 2, 1976.

Serious consideration has been given to your request. It now appears from our findings, that the correct amount of tax under Part XIII has been withheld and remitted on behalf of the relevant non-residents. We are satisfied therefore that an assessment is not required under the circumstances.

We thank you for taking the trouble to express your views on Information Circular 76-12.

Counsel for the appellant wrote to the respondent by letter of June 1, 1977, to ensure that there was a consensus ad idem as to the resolution of the problem:

Thank you for your letter of May 19. I am glad to see that you have concluded that the correct amount of withholding tax was withheld in the three cases specified in my letter of November 10 to Mr Crawford of the Vancouver District Office.

MacMillan Bloedel Ltd will now, on the basis of your letter of May 19, commence withholding at the rate of 15% on all future interest and dividend payments made to registered holders of its securities whose addresses are shown to be in the United States, without complying with the purported requirements set forth in Information Circular 76-12 with respect to ascertainment of the identity of the beneficial owner of a security who may lie behind a nominee registered owner. As you will appreciate, the company takes the position that those purported requirements are not authorized by any provision in the Income Tax Act or any regulation validly made.

I should be pleased to receive your confirmation that withholding at the rate of 15% with respect to American registered owners of the company’s securities constitutes compliance with the requirements of the Act.

That letter was replied to by letter dated June 9, 1977, as follows:

Thank you for your letter of June 1, 1977 informing the Department that the company takes the position that the purported requirements are not authorized by any provision in the Income Tax Act or any regulation validly made.

May we mention that in developing the procedure in Information Circular 76-12 we asked for and received input from several sources in the financial community. We tried to adopt as many of the recommendations as possible while still ensuring that our revenue collection responsibilities under the Act were properly carried Out.

If an agent or nominee is acting in good faith there should be no hesitation on his part to sign a certification in order to have the treaty rate of tax applied by the Canadian payor. The alternative of course is to have the statutory rate apply and have the agent or nominee provide the necessary evidence to the Department when applying for a refund.

The Circular has been in operation for almost a year, and except for the odd request for facilitating the segregation of accounts, the Department has received continued cooperation in implementing the guidelines.

We regret to advise that we cannot accept that the rate of 15% be used with respect to American registered owners of the company’s securities unless the suggested guidelines in our Information Circular 76-12 are followed in order to determine those entitled to this rate.

At this stage counsel was of the view that he should write a full letter to Mr Garland, an Assistant Deputy Minister (Revenue Canada, Taxation), and by letter of June 21, 1977, he wrote as follows:

I write to bring to your attention a rather remarkable dialogue I have had with officials of your Source Deductions Division, Non-Resident Tax Section over the past several months, and to request a meeting with you so that the problem my client faces can be resolved. Information Circular 76-12 purports to impose upon a Canadian payer of interest or dividends to non-residents the obligation to ascertain the true residence of the beneficial owner of bonds or shares where the registered owner appears to be a nominee for another person. The circular purports to require in certain cases where the registered owner appears to be a nominee, that tax be withheld at the rates prescribed by Part XIII, and the onus is imposed upon the payer of interest or dividends to ascertain entitlement of the beneficial owner to the lesser rate prescribed by treaty. My client and I are of the view that that requirement is not validly imposed by Information Circular upon my client as a Canadian payer of interest and dividends to non-residents in the absence of statutory authority or even a regulation validly made to that effect. It is not my purpose to debate the merits of that question with you or any further with the Department: I write because I have repeatedly requested an assessment, in circumstances that will become clear from a perusal of the enclosed correspondence, so that the question whether this kind of requirement can be imposed on Canadian taxpayers by Information Circular can be appealed and contested in the courts.

My purpose in writing to you is that all of my efforts so far to precipitate a simple assessment to that end have failed, and the course of the discussions and correspondence I have had with the officials of your Department lead me to the conclusion that they are determined to avoid or delay issuing such an assessment if at all possible.

As you will see from my letter of November 10, 1976 to Mr Crawford of the Vancouver District Office, I identified three cases of apparent nominees to which MacMillan Bloedel Limited paid interest in 1976 in respect of which the company did not, and does not propose to, comply with Information Circular 76-12. That letter requested that an assessment be issued forthwith in effect to test the validity of the requirements of the Information Circular. The first reaction to my letter to Mr Crawford was an oral response from him to the effect that he had been in touch with his superiors in Ottawa who had indicated that it might not be appropriate to issue an assessment before the end of the then current calendar year arrived and turned up a true deficiency on withholding tax account. Whatever may be thought of the merits of that suggestion, the end of the calendar year is now long past.

I subsequently met with Mr Padulo in Ottawa and in the course of that meeting I explained to him I was not there to argue with him the merits of the position my client and I take, but simply to ask why we could not have an assessment of the three ‘test cases’ put forward in my earlier letter of November 10 to Mr Crawford. Matters were left on the basis that Mr Padulo would take the question up with his superiors and let me know. I stressed on that occasion the earnest desire of my client to have an early resolution of the question, one way or the other—the reason being, as you will appreciate, that this is an ongoing problem and my client is making interest and dividend payments in substantial amounts at frequent intervals. Mr Padulo wrote me on December 2 to say that the matter was being considered.

I received a further letter from Mr Padulo dated January 13 in which he indicated that the matter had been referred back to the Vancouver District Office. On January 19 I heard from Mr Crawford in the Vancouver District Office to the effect that he would send an auditor up to the offices of MacMillan Bloedel Limited in the next day or so. I may be wrong, but I took that to mean the assessor was going to check the records of the company with a view to raising the assessment that I had been requesting. The next event was a phone message received by my secretary from someone in the Department to the effect that the assessments on interest would be $802.36 and on dividends $346.50, subject to the approval of Ottawa. I took that to mean that, subject to the approval of Ottawa, assessments were in the process of being made up.

On April 21 Mr Jozwiak, who works in Mr Padulo’s section, wrote a letter to Mr Grayhurst of MacMillan Bloedel Limited making a formal enquiry the nature of which, in light of my letter of November 10 to Mr Crawford, (a copy of which had earlier been sent by him to Ottawa), I thought to be entirely idle, so I phoned Mr Jozwiak who acknowledged that he had seen my letter of November 10 to Mr Crawford, but indicated that it was desired to get word to the same effect directly from the company. Faced with that, I had Mr Grayhurst write his letter of April 26 to Mr Jozwiak. On May 7 my partners, M J O’Keefe, met with Mr Padulo and possibly also Mr Jozwiak. On that occasion he reiterated the concern my client feels with the delay in issuance of the assessment that had been requested and once again Mr Padulo undertook to take the matter up with his superiors.

In due course I received a letter dated May 19 from Mr Thibault, a copy of which is enclosed. I took that letter to mean that the Department had perhaps decided not to insist on compliance with the Information Circular, and accordingly I responded to it by my letter of June 1 to Mr Thibault. To that I received his reply dated June 9, the first page of which apart from the first paragraph is, with respect, quite irrelevant to the question, and the last paragraph of which appears to me to be in contradiction of his earlier letter of May 19.

Once again, I am not writing to you to debate the question at issue: all I want is an assessment. I cannot understand the apparent reluctance of the Department to issue one so that the question that troubles my client can be tested in the courts.

I have one or two other matters on which I have to come to Ottawa .. .

Mr Garland replied by letter of July 5, 1977, which in part reads as follows:

I understand that you feel that there is no basis in law for the requirements set out in Information Circular 76-12. Further I understand you are anxious that a test case be provided so that the matter may be taken to appeal.

As you may be aware the Department of Justice have provided the Department with an opinion which supports the requirements of Information Circular 76-12 with respect to the certification procedure. Admittedly this particular requirement has not been contested in the courts but on the basis of the opinion which we have received from the Department of Justice we feel that policy of the department is sound and ought not to be changed.

With respect to the particular case at issue I am advised that your client MacMillan Bloedel Ltd normally comply with the certification provisions of Information Circular 76-12 but that certification was not obtained in respect of interest payments made to three US nominees and withholding at the rate of 15% was made from such interest payments during 1976. I appreciate that the lack of certification was designed to provide a basis for an assessment against the Canadian payor.

Subsequent investigation indicated that the beneficial owners of the interest in question were, in fact, residents of the US. In these circumstances officials of the department declined to raise an assessment for the excess withholding of 10%. I am in agreement with the decision not to assess since to do so in light of the knowledge that the beneficial owners were residents of the US would contravene Article XI of the Canada-US Convention.

Information Circular 76-12 was adopted for public distribution in 1976 following consultation with the Department of Justice, the Investment Dealers Association, the Canadian Bankers Association and some major Canadian corporations. I would not suggest that it was sanctioned by all of those consulted but it has been generally accepted as the best of the options available. If a reduced withholding were based solely on the mailing address of the recipient the way would be open for any non-resident to direct a Canadian payor to make payments of amounts described in Section 212 of the Act to an address in a tax treaty country. Such a procedure would be clearly unacceptable.

In the circumstances I see no point in arranging a meeting to discuss this matter. I do, however, solicit your co-operation and that of your clients in the administration of the law in these troublesome circumstances.

Following receipt of this letter, counsel wrote on September 8, 1977, to an officer in the Vancouver district office of National Revenue as follows:

Further to my letter of November 10,1976 and our numerous subsequent conversations, as you know I took up the matter referred to in my said letter with the appropriate persons in the head office of your Department in Ottawa. Eventually I discussed the matter with the Assistant Deputy Minister of the Operations Branch and I have from him a letter dated July 5, 1977 in which he states in part that subsequent investigation by the Department indicated that the beneficial owners of the interest referred to in my letter to you of November 10, 1976 were in fact residents of the United States and that was the basis for the decision not to assess as requested in my letter.

I take it from that that the Department investigated the particular cases referred to in my letter to you of November 10 and found to its satisfaction that the beneficial owners of the interest in question were in truth US residents entitled to the lower treaty rate.

My client is still anxious to have an opportunity to test the validity of the requirements set forth in paragraph 4 of Information Circular 76-12, and to that end I enclose herewith a schedule identifying some additional apparent nominee accounts in respect of which withholding tax was withheld at the 15% rate on interest payments on July 15 last.

This is to request that you initiate whatever investigations the Department feels appropriate and assess MacMillan Bloedel Limited in accordance with Information Circular 76-12 with respect to those cases in which the beneficial owner is not an American resident. I might say that the accounts selected are all accounts in respect of which MacMillan Bloedel Limited has not received any certificate regarding beneficial ownership.

We are still interested in pursuing this question as soon as possible, and I would accordingly appreciate anything you can do to move the matter along without delay.

National Revenue replied by letter of October 17, 1977, as follows:

With reference to your letter of September 8,1977, with regards to withholding tax on interest and the rate to be applied, our Head Office has requested that we obtain the addresses of the five nominees or agents listed, which would assist us in our administration of this particular issue.

If you could arrange to have the addresses of the nominees sent to my attention, we will then complete our review, and advise you of our decision as to whether an assessment will be raised at this time.

That letter produced the following reply from counsel for the appellant dated October 26, 1977:

Thank you for your letter of October 17. The following are the addresses you request:

Ruth & Co, c/o R I Hosp Tr Natl Bk, Box 1558, Providence RI 02901

Bull & Co, c/o Wachovia Bk & Tr Co, Box 3075, Winston, Salem NC 27102

Paine, Webber, Jackson & Curtis Inc, 25 Broad Street, New York, NY 10004

Galt & Co, New England Merchants Natl Bank, PC Box 4521, Tr Dept, Boston, Mass 02107

Hare & Co, c/o The Bank of NY, Box 11203, New York, NY 10249.

Counsel for the appellant, at this point, referred to the reply to the notice of appeal (sic) and paragraph 5(a) thereof which reads as follows:

the Appellant paid two registered holders amounts of interest as set out below and in so doing withheld (or deducted) and remitted to the Receiver General of Canada, tax purportedly pursuant to Part XIII at a rate of 15%, not at the rate of 25% established by Section 212(1):

			Amount
Paid to	Interest	Interest	Withheld &
Registered	Amount	Amount	Remitted
Holder	Gross	Gross	(at 15%)
Hare & Co
c/o Bank of New York
New York, New York		$4,875.00	$731.25
Paine, Webber & Co
25 Broad Street
New York, New York		$ 162.50	$ 24.38

He then stated as follows:

And, if you turn to the reply to the Notice of Appeal, this is just to help the Board tie in to the assessment that has been made, in paragraph 5(a) of the reply, you will find that the figures there mentioned, which are the figures that tie into the assessment that is under appeal, relate to Hare & Co and Paine, Webber & Co, which is Paine, Webber, Jackson & Curtis, so that it would appear from that that the Department satisfied itself that the other three nominees were holding for US residents who owned beneficially, but Paine, Webber, Jackson & Curtis and Hare & Co were the two that, and I think my friend will know this better than I, I think simply didn’t respond to the enquiries made by the Department.

Arithmetically the parties agreed that, if the Minister were correct in his position, then the quantum of the assessment was correct. Of course it follows that, if the appellant were correct in his position that Part XI of the Canada-US Tax Convention applies, then in these circumstances that assessment would have to be vacated; that is, the assessment in question assesses only a non-resident tax which the appellant should have collected and, from its failure to do so, a penalty of 10% and interest. If the nonresident tax were incorrect, then there is nothing to be assessed as there could be neither penalty nor interest. The assessment has nothing to do with the imposition of tax based on the income of the appellant—it is only concerned with the failure by the appellant to deduct the appropriate amount of non-resident tax on interest it paid to a non-resident. The witness for the appellant clearly said that the two companies mentioned in paragraph 5(a) of the reply to the notice of appeal were on the one hand a “large firm of stockbrokers”, and on the other “... the nominee, the Bank of New York—they use that name to put customers’ accounts into.” He continued that ‘‘we are well aware that they are also residents of New York.”

Cross-examination brought out that in reality, except for the instance when it did not try for the appropriate certification, the appellant received 100% compliance. It did not try for the certification in the matters mentioned in the correspondence in which Mr Garland said, in effect, we accept. It also did not try in the five matters referred to in Mr Thorsteinsson’s letter, when two were not accepted. Counsel for the appellant took the position that nowhere in the Income Tax Act, the Regulations or the Canada-US Tax Convention is there a requirement that the payer of interest must seek out the beneficial owner of the income for the payment which is being made. Of course it was pointed out that if such inquiry were to be made, all such inquiries would have to be in a foreign country.

Counsel for the appellant also submitted that this income tax legislation must be taken to have been enacted within the background of the principles of company law. Counsel stated that the Companies Act of British Columbia provides for registration type companies, which concept is derived from the English Companies Acts. To support his proposition that the company is not required to pay attention to trust or equities affecting beneficial ownership of its securities, be they shares or bonds, counsel referred to Gower on Modern Company Law at 401 as follows:

Moreover, it is the policy of our company law that the company shall not be concerned with the beneficial ownership but shall only be bound or entitled to recognise the person whose name is on the register. Accordingly, so far as registered companies are concerned, section 117 of the 1948 Act provides that no notice of any trust, expressed, implied or constructive, shall be entered on the register or be receivable by the registrar.

and at p 416 as follows:

On the initial issue of debentures the register of debentures does not have the same importance as the register of members, since the only essential element in becoming a debentureholder is agreement, and entry on the register is not necessary. But as in the case of shares, this agreement is normally constituted by a prospectus followed by application, allotment, and letter of allotment, superseded in due course by the issue of the debenture itself or a debenture stock certificate. And in practice the debenture will contain provisions for a register of debentures similar to the register of members, and similarly precluding the company from taking notice of “equities,” and will be transferable by the same form of transfer as is used for shares.

The result is that on transfer the same procedure is adopted as in the case of shares, the same distinction is drawn between legal ownership of the debenture, obtained by registration, and the equitable ownership of an unregistered transferee, giving rise to the same rules regarding priorities as those explored in the previous chapter.

He then referred to section 72 of the Companies Act of British Columbia which reads as follows:

The negotiation of a cheque by, or the acknowledgment of receipt by, any person whose name is entered in the register of members, whether or not registered in a representative capacity, is a valid discharge to a company for any dividend or sum paid or property transferred by it in respect of any share registered in the name of the person, and the company is not bound to see to the execution of any trust, express, implied, or constructive, in respect of shares of the company.

All things being considered, counsel submitted that the requirement which the respondent is trying to impose must be set forth clearly in the words of the statute and, since such is not the case, the position taken by the Crown is untenable.

Counsel for the Crown contended that the tax assessed pursuant to Part XIII of the Income Tax Act after tax reform is a tax on income and the beneficial owner is the person on whose behalf the appellant is, by paragraph 212(1)(b), to pay that tax. Consequently, to have the rate of tax reduced from 25% to 15% as provided by subsection 10(4) of the Income Tax Application Rules, or the Canada-US Tax Convention, it is encumbent on the appellant to show that that beneficial owner is in effect a resident of a treaty country.

In the course of the argument reference was made to subsection 215(3) of the Income Tax Act. This section seems to say that, if the Canadian payer pays interest to the Canadian agent of a non-resident (which fact is known to the Canadian payer), the Canadian payer is not required to deduct or withhold tax but the Canadian agent is to deduct or withhold the whole amount or the shortage, if any, from the payment to the non-resident. Counsel for the appellant suggested that, with respect to paragraph 212(1 )(b) of the Income Tax Act and the Canada-US Tax Convention or the Income Tax Application Rules, the same principle should apply with respect to ‘‘an address”—even though the person at that address may be an agent—as applies in subsection 215(3). The payer does what he has to do insofar as the Income Tax Act is concerned based on the address of the payee—not the beneficial owner. Consequently, since in this cse the address of the “apparent nominee” is in the United States, the Canada-US Tax Convention applies and only 15% should be deducted.

Two other points were mentioned, the first being the question of onus, and the second being the question of pleadings. It was contended that the appellant had not met the onus of showing that the assessment was incorrect; that is, it had not shown that the beneficial owners were residents of the United States, and so the appeal should be dismissed. While the appellant did not say it had tried to ascertain the identity of the beneficial owners (if any) of the bonds in the name of Hare & Co and Paine, Webber & Co, it in fact did not try to learn those names as it had no authority to demand such information. It was impossible for it to compel the “apparent nominee” to give that information. In addition it is to be noted that counsel for the appellant, by letter of October 26, 1977, gave to the Crown the names of five “apparent nominees” to whom payments were made in respect of which only 15% had been deducted pursuant to section 212 of the Income Tax Act and the Canada-US Tax Convention. The reply to the notice of appeal says the assessment under appeal was made with respect to only two of those “apparent nominees”. It would appear by that Reply and from the letter from the Department of National Revenue (May 19, 1977) that the Minister made his own investigation as to the residency of some of the beneficial owners of the “apparent nominees”, or came to the conclusion that some “apparent nominees” were not “apparent nominees” at all but were the beneficial owners.

Paragraph 212(1)(b) reads as follows:

(1) Every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to him as, on account or in lieu of payment of, or in satisfaction of,

(b) interest except .. .

A tax is levied by this section on the non-resident person to whom the appellant paid interest. That rate is clearly 25%. To whom did the appellant pay that interest? It paid that interest to the person who was the registered owner of those debentures as shown by its books. Those two persons were:

(a) Hare & Co

c/o Bank of New York

New York, New York;

(b) Paine, Webber & Co

25 Broad Street

New York, New York.

Both counsel agreed that section 10(4) of the Income Tax Application Rules and Article XI of the Canada-US Tax Convention applied.

Subsection 10(4) of the Income Tax Application Rules reads as follows:

Where an amount is paid or credited by a person resident in Canada to a nonresident person

(a) who is resident in a prescribed country, and

(b) with whom the person resident in Canada was dealing at arm’s length,

as, on account or in lieu of payment of, or in satisfaction of, interest payable on any bond, debenture, mortgage, hypothec, note or similar obligation issued before 1976 by the person resident in Canada to the non-resident person, for the purposes of computing the tax under Part XIII of the amended Act payable by the nonresident person on the amount, subsection 212(1) thereof shall be read as if the reference therein to “25%” were read as a reference to “15%”.

Article XI of the Canada-US Tax Convention reads as follows:

1. The rate of income tax imposed by one of the contracting States, in respect of income (other than earned income) derived from sources therein, upon individuals residing in, or corporations organized under the laws of, the other contracting State, and not having a permanent establishment in the former State, shall not exceed fifteen percent for each taxable year.

First of all, if the payee is a resident of the United States in this instance and otherwise satisfies the subsection or sub-Article, the rate then is to be

only 15%. Insofar as the appellant is concerned, even though its officers classified the two recipients in question as “apparent nominees”, they are, in the terms of subsection 10(4), . resident in a prescribed country . . or, in the terms of Article Xl(1 ), . . individuals residing in, or corporations organized under the laws of the other contracting State . . As I view this assessment, one can say that it can be upheld only if words are added to the Act and the Canada-US Tax Convention or subsection 10(4) of the Income Tax Application Rules so that it is clearly indicated that the reduced rate of tax is not given to the registered owner, but only to the registered owner if he establishes that the beneficial owner (and he could be the registered owner) of the interest would be entitled to the reduction if the debentures were registered in his name. Whether or not the beneficial owner could recover the excess tax deducted by making an application to the Minister of National Revenue (section 227) is irrelevant. “What is the duty of the appellant in this case?” is the issue. I am of the view that, in the circumstances, since the payees in question were residents in a prescribed country as well as being a corporation organized under the laws of the other contracting state, the appeal must be allowed and the assessment vacated.

Appeal allowed.