Her Majesty the Queen v. Russell a Hunt, [1977] CTC 578, 77 DTC 5404

The Associate Chief Justice:—The issue in this appeal is whether the defendant is entitled, under Arctile VIII A of the Canada-United States Reciprocal Tax Convention, to exemption from Canadian income taxation in respect of his income from teaching as a professor at St Thomas University in Fredericton, New Brunswick for the period from January 1, 1970 to June 30, 1970.

By statute, the Convention has the force of law. Article VIII A provides:

Article VIII A. A professor or teacher who is a resident of one of the contracting States and who temporarily visits the other contracting State for the purpose of teaching, for a period not exceeding two years, at a university, college, school or other educational institution in such other State, shall be exempted by such other State from tax on his remuneration for such teaching for such period.

The defendant is a professor of English literature. He and his wife are natural-born citizens of the United States and had resided there until they came to Canada on September 10, 1968, when the defendant took up a position as a professor at St Thomas University.

On coming to Canada, the defendant gave up his rented apartment in the United States and moved his household effects to Fredericton where he and his family occupied an apartment for three months and thereafter a house, both of which were rented on a month-to-month basis. They entered Canada as landed immigrants and they had no property in the United States other than a bank account in Chicago, but they still had family relations in the United States and they went there to visit from time to time.

The arrangements for his position as a teacher at St Thomas University had been made in February of 1968. The correspondence indicates that the defendant had sought employment for the academic year 1968-69 but the arrangement disclosed by the letters does not show clearly for how long the defendant was to be employed. He expected it to be for two terms since it would be necessary for the University to begin looking for a replacement for him for the next academic year not long after his arrival if he was to be there for only one academic year and he thought it unlikely that the University would do that. On the other hand, when he arrived he found that the University did not consider itself under any obligation to continue the employment for a second year. In fact, it was continued for a second year. Had the employment ended at the end of the second academic year, it would have been for a period not exceeding two years. But in March 1970 the defendant, after having made inquiries as to teaching opportunities elsewhere and having found that teaching jobs were becoming hard to find, accepted an offer dated February 20, 1970 of permanent employment with St Thomas University. Under this arrangement he continued teaching there throughout the remainder of 197G and he has taught there ever since, save for a year of sabbatical leave which he spent in Germany. After some years, he was granted what is Known as tenure.

When he came to Canada, the defendant’s intention was to stay for only two years or two academic terms. He did not expect to like teaching at St Thomas University and expected to return to the United States after the two terms. But he and his wife were interested in living elsewhere than in the American Midwest where both of them had lived up to that time and, as the work load as a teacher at St Thomas would be less than he had experienced in the United States, he saw the proposal as an opportunity to do some writing, in addition to teaching, and thus to enhance his reputation and his chances for employment at a more prestigious institution in the United States. He still had this in mind when making inquiries for other opportunities before he accepted the University’s offer of February 20, 1970 of permanent employment.

The defendant was not taxed in Canada on his income from teaching at St Thomas University for the period from September 10, 1968 to December 30, 1968, nor for the year 1969. With respect to 1970, however, the Minister took the position that, since the defendant had remained in Canada after June 30, 1970 and had continued to teach at St Thomas University under an extension of his original 2-year employment, he was not entitled to exemption in respect of his income from teaching for any part of the year and he assessed the defendant accordingly. The Tax Review Board, following the judgments of the Supreme Court and the Federal Court of Appeal in Stickel v MNR, [1973] FC 259; [1973] CTC 202; 73 DTC 5178; [1975] 2 SCR 233; [1974] CTC 416; 74 DTC 6268, allowed the defendant’s appeal.

In the Stickel case, the taxpayer, a citizen of the United States, who had lived and worked there prior to coming to Canada in July 1967 to begin a 2-year teaching contract with the University of Alberta ending on June 30, 1969, did not return to the United States until March 1970 and, in the meantime, he held two other non-teaching jobs.

On the particular facts, he was held to be a resident of the United States within the meaning of Arcticle VIII A of the Convention, that he had been temporarily visiting in Canada for the purpose of teaching for a period not exceeding two years at a university and that he was entitled to the exemption notwithstanding the fact that he had been in Canada more than two years and had not been taxed in the United States on his teaching income earned in Canada.

With respect to the interpretation of Article VIII A, the Chief Justice of the Federal Court said at page 261 [203, 5179]:

The question of interpretation turns on whether the words “for a period not exceeding two years’’ modify the word “visits’’ or are an integral portion of the expression “for the purpose of teaching . . . at a university . . .’’.

Once it is appreciated that the words that constitute the second condition precedent to the application of Article VIII A are

“Who temporarily visits the other contracting State for the purpose of teaching, for a period not exceeding two years, at a university . . .”

and not merely “who temporarily visits the other contracting State for the purpose of teaching, for a period not exceeding two years’’, we are all agreed that the words “for a period not exceeding two years’’ are an integral part of the expression “for the purpose of teaching . . . at a university . . .’’ and do not relate to the period of the visit as revealed by the actual events.

In our view, the balance of probability on the evidence is that the appellant, who was resident in the United States, had given some thought to the possibility of moving to Canada before he obtained an opportunity to take a two-year term appointment at the University of Alberta, that he discussed the project with his family, who were not enthusiastic about the prospect of a permanent move to Canada, and that they reached a joint decision to go to Canada for the two-year appointment only but on the understanding that during that two-year period they might reconsider the possibility of making their permanent home in Canada. On those facts, having regard to the necessity of interpreting the words “temporarily visits’’ as including visiting for the purpose of teaching for a period as long as two years, we are agreed that the appellant was a person who temporarily visited Canada for the purpose of teaching at a university for a period not exceeding two years.

With regard to the question of residence, the Chief Justice also said at page 262 [204, 5179]:

A more difficult question is whether the appellant was ‘‘a resident’’ of the United States at the time contemplated by Article VIII A. The respondent’s position is that this contemplates residence in the sense given to that word when it is a basis for liability to income tax and that it is a condition of the article that a person must have been so resident throughout the period of the exemption. If that be so, it is difficult to envisage what tax relief is accorded by Article VIII A in the case of professors and teachers that would not otherwise be available in the case of all taxpayers by virtue of the foreign tax credit provisions which are, it is believed, also contemplated by the Tax Convention in question.

We do not find it expedient to attempt to formulate any definition of what is implied by the words “is a resident’’ in their context in Article VIII A. No matter how narrowly the expression is construed, it would certainly embrace the appellant if he had been sufficiently affluent and hard hearted to have left his family in a family home in the United States for the two-year period and to have continued to incur the expense of maintaining his community and social relationships there during the period of his two years’ absence. This would be so in the case of a mariner or soldier who had to absent himself from his home for such a period and the work performed while away does not constitute a relevant distinction. If that would have been so in the case of a person who could afford to maintain nis family in the United States while away, and was willing to do, we are of the view that a person who is on a two-year “temporary” visit to teach in a foreign university was equally a “resident” of his native land for the purposes of Article VIII A even though he took his family with him and did not continue to incur the expense of maintaining his community and social relationships in his native land.

Both of these views were supported by the Supreme Court.

The principal difference relied on by the plaintiff as distinguishing the Stickel case from the present was that the defendant did not cease teaching at the end of the 2-year term but continued to do so under the arrangement which continued his employment beyond that period. That difference by itself, in my view, would not lead to any difference in the result. The relevant time for the purpose of applying Article VIII A, as I see it, is when the income that is in question is being earned and what the defendant did after the end of the 2-year period would not, in my opinion, operate to deprive him of any exemption to which he had become entitled in respect of his earnings during the 2-year period.

On the facts as I have outlined them, I am satisfied that the defendant, from the time he came to Canada in September 1968 throughout the remainder of that year and all of 1969, was temporarily visiting Canada for the purpose of teaching for a period not exceeding two years at a university within the meaning of Article VIII A. True, he had entered as a landed immigrant. But I do not regard that, or the inference that it suggests, as outweighing the evidence of his expectation as to how long he would stay and of his plans for his future. He did not regard his sojourn in this country as permanent and nothing in the contract of employment he had at that time is, in my view, inconsistent with what he had in mind. I also find that he continued to be resident in the United States within the meaning of Article VIII A in the sense in which it was considered that the taxpayer in the Shekel case continued to be resident in the United States.

On the basis of these conclusions, it follows that the defendant would qualify for exemption in the period here in question for the months of January and February 1970, since in those months there was no change in the purpose for which he was temporarily visiting Canada. But it appears to me that the same cannot be said of his purpose when, in or about March 1970, he accepted the University’s offer of February 20, 1970 to continue his employment on a permanent basis. From that point on, while conceivably it might still be said that he was temporarily visiting Canada for the purpose of teaching at a university, it could, as I see it, no longer be said that such temporary visiting was for the purpose of teaching for a term not exceeding two years. The purpose then, as I see it, was that of teaching beyond the two years and indefinitely thereafter. From the time when he accepted the offer, therefore, which I take as at the beginning of March 1970, he was no longer qualified for or entitled to exemption under Article VIII A.

In the course of argument, counsel for the Crown referred to two cases in the Tax Review Board, Wyatt v MNR, [1975] CTC 2055; 75 DTC 72, and Shihadeh v MNR, [1975] CTC 2116; 75 DTC 74, in both of which a conclusion which appears to be at variance with that of the Tax Review Board in the present case and at variance as well with the view I have expressed was reached. As the Wyatt case arose on the exempting provision of the Canada-United Kingdom Income Tax Agreement, I need not comment on it. On the other hand, the Shihadeh Case arose on the exemption provided by Article VIII A of the Canada- United States Reciprocal Tax Convention and is in point but, with respect, it appears to me to be at variance with the judgment in the Stickel case and I do not think I should adopt or follow it.

Before parting with the matter, I should add a comment regarding the pleadings. During the argument, a question arose as to whether any basis had been pleaded by the Crown for disallowing the exemption other than the bare fact that the defendant in 1970 had then taught in Canada for more than two years. The fact which I have held to be determinative, that is to say, the change of purpose of the defendant’s visit, was not expressly alleged. But it was alleged in paragraphs 5, 6 and 7 of the statement of claim, and admitted in the defence, that the defendant entered Canada on September 10, 1968 and immediately took up a position as a professor of literature at St Thomas University and that, in or about the month of March 1970, he accepted a position which continued his employment as a professor of literature at St Thomas University. The plaintiff then asserted reliance on sections 2, 3 and 5 of the Income Tax Act, RSC 1952, c 148, and Article VIIT A of the Convention. Apart from admissions, the defence consisted chiefly of denials. It included a denial that the statutory provisions referred to in the statement of claim rendered him liable to taxation and purported to put the plaintiff “to the strict proof thereof’’. At the trial, however, counsel for the defendant in his Opening statement took the position that the defendant fell within Article VIII A of the Convention and was in fact exempt from January 1 to June 30, 1970, and he offered evidence to establish the defendant’s right to the exemption.

In the view I take of it, while the plaintiff’s case might have been more particularly pleaded, the substance of it is to be found in the allegations that the defendant was employed in Canada in the relevant period and thereby earned income. That, as I see it, renders the defendant liable to taxation unless he can bring himself within an exempting provision. For that purpose, it was, I think, incumbent on him to state in his defence and prove at the trial facts entitling him to exemption in respect of the period in question.* [1] I do not think, therefore, that the objection that the plaintiff did not adequately plead facts disentitling the defendant to exemption can succeed and, in any event, I do not think the defendant was in any way prejudiced by the lack of any such pleading.

The appeal accordingly fails with respect to the defendant’s income from teaching in January and February 1970 and succeeds with respect to his income from teaching in March, April, May and June 1970. Under subsection 178(2) of the Income Tax Act, RSC 1952, c 148, as amended by section 1, c 63, SC 1970-71-72, the defendant is entitled to be paid all reasonable and proper costs in connection with the appeal.