Juda Rutenberg v. Minister of National Revenue, [1978] CTC 38, 78 DTC 6140

Marceau, J:—The appellant, a resident of the United States, is appealing the tax assessments made against him by the Minister on December 16 and 19, 1966 and July 8, 1971, pertaining to gains he is alleged to have made over the years 1955 to 1965 as the result of a series of purchase and sale transactions involving land situated in Canada, in the Province of Quebec.

In support of his appeal appellant first submitted several arguments, namely that these were non-taxable capital gains, that these gains did not result from an enterprise carried on in Canada, that he was not required to produce reports and therefore could not incur any penalty, and that some of the gains taxed had not been fully realized. However, he had to waive all these grounds of appeal at the beginning of the hearing, and admit formally that subsections 2(2) and 139(7) of the Income Tax Act* [1] applied to him in principle, and that no objection could be raised against the assessments as far as the amounts were concerned.

A single ground of appeal remains: in view of the provisions of the Convention and Protocol between Canada and the United States for the avoidance of double taxation and the prevention of fiscal evasion with respect to income taxes, as ratified by the Canada-United States of America Tax Convention Act, 1943, SC 1943-44, c 20 (as amended by SC 1950, c 27), the Minister could not issue an assessment, since appellant was relieved of all financial liability toward the Government of Canada, having regard to the circumstances in which the gains in question were realized. Is this ground of appeal relevant? That is what this Court must consider.

Let us first determine the facts. As already mentioned, appellant is an American resident. Until 1955 he devoted himself full time, as he Stated in his pleadings, to the business of a diamond broker, and he was never involved in transactions in real property. In 1955,. after hearing of the possibilities which the real estate market in the region of Montreal, Quebec seemed to offer, he entered into communication, on the advice and with the help of an intermediary who was his friend, with a certain Mr Feinstein, a major Montreal broker who had been investing and conduction transactions in land, on his own behalf, for some time. The two met and undoubtedly got on well, because over the next ten years they undertook a long series of land transactions, which ended in March and April 1966, when appellant, shortly after being informed of the Minister’s intention to issue assessments on the proceeds which these transactions had enabled him to make, disposed of all rights and interests in real property which he still held in the Province of Quebec.

These transactions, which involved 14 pieces of land, old farms several of which having an area of more than one or two million square feet, were introduced in evidence with the help of documents which respondent was able to obtain. There is no need to make a detailed analysis of them all here; it will suffice to note the common features they contain. The numerous transactions involve sometimes individuals buying or selling joint shares in the property covered by the contract, and sometimes corporations, most of which formed to meet the needs of the moment, mainly, according to the witness Feinstein, to relieve the purchasers of personal liability for the payment of operating costs or for repayment of mortgage loans. The parties to the contracts, whose names appear on the deeds, declare in some of them that they are acting only as trustees. In each group of transactions, that is those relating to the same large piece of land acquired from a farmer, several individuals, who were often actually the same from one group to another, may be interested, but until the time the land is disposed of to a third party who will use it, appellant and Feinstein, or on occasion the latter’s accountant Chodus, are always involved. It is in Montreal, at Feinstein’s or his accountant’s offices, that, between initial acquisition and final disposal, the assets were administered and the books kept.

Appellant stated that, while he knew nothing at all about the corporations—because, as he put it, it was Feinstein’s affair, administered by his accountant Chodus—he did not give Feinstein power to buy and sell for him: he had to give his approval, which he usually did by telephone, or on some occasions when Feinstein visited New York or he himself visited Montreal. It nevertheless appears from the evidence that the person in charge, the prime power in all these transactions, was Feinstein, the expert, who was directly involved, on the spot, and who arranged everything. It is true that there was no written agreement of partnership or association between appellant and Feinstein, or between them and the other co-owners when others were involved, but this lack of a written agreement does not affect in any way the impression, based on the testimony, that a firm agreement bound them to each other in this common undertaking.

These then are the circumstances of fact which must be remembered in assessing the validity of appellant’s proposition, that the Convention and Protocol between Canada and the United States, cited above, relieved him of all financial liability toward the Government of Canada.

Appellant refers to Article I of the Convention and paragraphs (b), (c), (d), (e), (f) of section 3 of the Protocol, which read as follows:

Convention

ARTICLE I

An enterprise of one of the contracting States is not subject to taxation by the other contracting State in respect of its industrial and commercial profits except in respect of such profits allocable in accordance with the Articles of this Convention to its permanent establishment in the latter State.

No account shall be taken in determining the tax in one of the contracting States, of the mere purchase of merchandise effected therein by an enterprise of the other State.

Protocol

3. As used in this Convention:

(b) the term “enterprise” includes every form of undertaking, whether carried on by an individual, partnership, corporation or any other entity;

(c) the term “enterprise of one of the contracting States” means, as the

case may be, “United States enterprise” or “Canadian enterprise”;

(d) the term “United States enterprise” means an enterprise carried on in the United States of America by an individual resident in the United States of America, or by a corporation, partnership or other entity created or organized in or under the laws of the United States of America, or of any of the States or Territories of the United States of America;

(e) the term “Canadian enterprise” is defined in the same manner mutatis mutandis as the term “United States enterprise”;

(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.

When an enterprise of one of the contracting States carries on business 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.

Appellant contends that the gains he realized in Canada in the years 1955 to 1965 are those of a United States enterprise, within the meaning of paragraph (d) of section 3 of the Protocol, and that they were not then taxable, having regard to Article I of the Convention, unless they could be connected with a permanent establishment in Canada as defined in paragraph (f) of section 3 of the Protocol. He claims that this establishment never existed because he always made his own decisions, never gave a general power of attorney to Feinstein and never had a business office in Canada.

Neither of these arguments seems to me to be justified.

1. The first is in effect based on an interpretation of Article I, and particularly of the word “enterprise” contained therein, with which I cannot concur. Counsel for the appellant argues that there is no need to distinguish between appellant’s occupation in the United States and his activities in Canada: any activity on his part was to be considered as being connected with his “enterprise” within the meaning of section 3 of the Protocol and since he was a resident of the United States, this enterprise was necessarily a United States enterprise. In his submission the Convention means that an individual may have only one enterprise, and his enterprise must be regarded as being of the State of which he is a resident. This argument leads to identification of the enterprise and the individual, so that Article I would state simply that any individual residing in one State can never be taxed by the other State on the gains which he makes abroad unless he has a permanent establishment there.

I cannot believe that the contracting States would have agreed on a disclaimer of such magnitude by expressing themselves in such an obscure and circuitous way. The interpretation which accords best with the language used, and which is the most reasonable, seems rather different to me. In the interests of furthering commercial exchanges between the two countries, as stated in the preamble to the Convention, the contracting States, as I see it, wanted to avoid a situation where an enterprise, whether an individual, a partnership or any other entity, would be compelled at all times to make a distinction for fiscal purposes between its activities on different sides of the border. Such a distinction is required only in the case of a permanent establishment in the other State. An individual may well have more than one enterprise, and in any case, an enterprise must have originated in a State and carry out some of its activities there, if it is to be considered “of that State”.

Counsel for the appellant cited in support of his contention a decision handed down by this Court on July 10, 1973, Gourdji R Masri v MNR, [1973] CTC 448; 73 DTC 5367. In my opinion, however, this decision of Heald, J does not contradict my interpretation of Article I. That case concerned an American citizen whose profession was to invest in land and to administer real property, and who decided, with the purpose of diversifying his interests and in company with other foreign residents, to acquire Canadian real estate which was later sold through the intermediary of local agents. The Court held [p 455 [5372]]:

The appellant’s “enterprise”, in my view, included his investments in blue chip stocks, his various interests in property in New York State and his interest in the Canadian property and on this basis, appellant’s “enterprise” is most certainly a United States enterprise within section 3(d).

The case at bar is quite different. Appellant was, as we have seen, a jeweller who had never been involved in the land business. He undertook in Canada, together with a Canadian, a series of transactions which were negotiated and finalized in Canada in the aforementioned circumstances. This enterprise, the moving spirit behind which was the Canadian Feinstein, is not in my view a United States enterprise within the meaning of Article I of the Convention.

2. The second proposition in appellant’s case is that there was never a permanent establishment in Canada. This presupposes that Article I of the Convention is applicable, and in view of the opinion I have just expressed on the subject, I could ignore it. To express myself on all the points at issue, however, I would say that in my view, having in mind the circumstances outlined above—especially the role played by Feinstein—appellant’s enterprise for his Canadian transactions between 1955 and 1965 must be regarded as having had in Montreal the permanent establishment defined in paragraph (f) of section 3 of the Protocol.

This means that even if Article I of the Convention were applicable, the gains made by appellant in his land transactions in Canada over those years would still be taxable.

It is therefore my opinion that the ground of appeal put forward by appellant is not relevant, and his appeal is dismissed with costs.