Gourdji R Masri v. Minister of National Revenue, [1973] CTC 448, 73 DTC 5367

Heald, J:—This is an appeal from a reassessment by the respondent of the appellant for the taxation years 1960 to 1967 inclusive, involving gains realized from the sale of real estate located in Canada.

The appellant, 73 years of age, was born in Iraq, left there for Iran when he was 17. In Iran, along with his brother, Sa-le-h, he became extensively involved in the export-import business as a commission agent. His business prospered to the point where his approximate worth when he left Iran in 1948 was in the order of one million dollars. He left Iran for the United States of America in 1948 where he has lived permanently ever since in New Rochelle, New York. It is agreed that the appellant is not and never has been a resident of Canada. His brother preceded him to the United States of America in 1946, and upon his arrival, the appellant and his brother proceeded to invest most of their rather substantial capital in United States stocks and bonds, largely of the “blue chip” variety. They established an office at 150 Broadway Avenue, New York, which office they still have at the present time.

The brothers also made some real estate investments. In 1950 they acquired a 12-stall parking lot and garage in New York City which they operated until 1962, selling this property at a loss. In 1951 they acquired a commercial property, on Long Island, housing seven or eight commercial stores which they held as an investment until 1967. At about the same time they acquired another commercial property on Long Island housing a restaurant and a store. In 1955 they purchased vacant property on Long Island, which they sold as vacant property in 1964, making a profit thereon of $40,000 which was treated as a capital gain by the United States Internal Revenue Service. On some of the aforementioned properties the two brothers lost money on the resale price which was treated by the IRS as capital losses.

The two partners formalized their partnership arrangement by an agreement in writing dated February 2, 1951. This agreement provided that the name of the partnership was to be Mildred Management Company, the two brothers were to be the sole partners and the purpose of the partnership was to be the operation and management of real property with offices at 150 Broadway Avenue, New York, New York. This partnership however was limited to the management of properties owned by the brothers in New York State. It had nothing to do with property later acquired in Canada.

The first acquisition of Canadian property by the two brothers took place in November of 1954 when, in company with one Iny, a resident of New York, and one Heskel Abed,* [1] a resident of Baghdad, they purchased Lot 128, Parish of Pointe Claire, a suburb of Montreal. Each partner acquired a one-quarter interest in said property. The property was vacant when purchased, containing approximately 3 million square feet, the purchase price being $170,000 payable $80,000 in cash, with the balance payable over 5 years, interest at 5% on the unpaid balance. The appellant’s brother acted on behalf of himself and the other three partners in acquiring this property. The appellant said that he and his brother were desirous of diversifying their holdings and felt that it would be a good idea to acquire investments outside the United States. One of the partners, Abed, had a brother in the real estate business in Montreal and this purchase was recommended by the members of Abed’s real estate firm (specifically either by one Koslov or by Albert Abed).

The appellant had never seen Lot 128 either before or after purchase, being content to rely on his brother’s judgment. He described himself as a “silent partner” in this venture. The same can be said for the other two partners. It is clear that the appellant’s brother was “in charge” so far as this purchase and sale was concerned. At time of purchase, Lot 128 was raw land. The appellant says that at time of purchase the partners had no specific intention of any kind with respect to subject land. He testified that “we bought it as an investment”. The land was not developed or used in any way after acquisition. The four partners contributed each year their share of the taxes and the mortgage payments.

In 1959 one Keyes, an employee of Morgan Realties Limited, Montreal, approached appellant’s brother about the possible sale of the balance of Lot 128 (a small portion thereof had been expropriated by the Metropolitan Commission of Montreal in 1957 for street widening, the compensation therefor amounting to some $33,000). Keyes advised Saleh Masri that this area formed part of a large-scale commercial development being planned. After considerable negotiations, Lot 128 was sold in May of 1960 to a Quebec corporation, 218 Inc, for some $913,000, being payable $276,000 in cash, and the balance being secured by a mortgage back to the vendors from the purchaser. The partners paid a commission totalling $47,000 ($41,000 to Keyes and $6,000 to Albert Abed, the brother of partner Heskel Abed). The appellant says it was his idea to pay at least a partial commission to Albert Abed, because while Keyes was their main selling agent, Albert Abed, in the appellant’s view, also contributed to the sale and was therefore entitled to at least a partial commission for his efforts. Appellant’s brother said that they felt morally obligated to Albert Abed because “he found the property for us”.

Following the same pattern, the four partners acquired additional property in the City of Montreal and suburbs as follows:

(a) On October 25, 1955, Lots 105 and 106 in Pointe Claire — for a purchase price of $356,000, payable one-half in cash, and the balance payable in five equal annual instalments, interest at 5%.

(b) On May 2, 1957, Lot 107 in Pointe Claire for a purchase price of $180,000 cash.

Here again, the same four partners acquired said Lots 105, 106 and 107 excepting that the percentage participation was different than in the first acquisition. The purpose was the same as previously, no ’specific intention to build or develop, simply an intention to hold. Again the property purchased was raw land.

Lots 105 and 106 were sold in parts in 1963, 1964 and 1966 at profits totalling approximately $416,000.

Lot 107 was also sold in parts in 1965, 1966 and 1967 at profits totalling approximately $64,000.

The appellant had a 25% interest in Lot 128 and a 22.5% interest in Lots 105, 106 and 107. It is his share of these profits that form the subject matter of this appeal.

After consideration of the evidence, I have no difficulty in concluding that subject acquisitions of land were speculations and that the partners were in the business of buying and selling land. All of subject land was raw land at date of acquisition and also at date of sale. No income was derived therefrom. The partners had to pay the taxes and the mortgage interest from their own resources; the only prospect of profit in the venture was to resell; the partners operated in a manner similar to the way in which traders in real estate carry on business; they acquired their land through real estate agents and they sold it through real estate agents, commissions being paid on the sales; “for sale” signs were placed on some of the properties by the agents with the knowledge and approval of Saleh Masri, who acted throughout on behalf of the other partners.

It is apparent from the evidence of the appellant and his partner that the properties were purchased with an intention to resell at a profit and, of course, this is what happened. The properties were in fact resold at a substantial profit.

If this were the only question to be decided in this appeal, I would have no hesitation in holding that subject transactions were trading transactions and that this appellant is taxable on his share of the profits from said transactions.

However, appellant’s counsel submits that appellant was neither a resident of Canada within the meaning of subsection 2(1) of the Income Tax Act nor did the appellant carry on business in Canada Within the meaning of subsection 2(2) of the Income Tax Act. The respondent, dn the pleadings, admits that the appellant is not and never has been a resident of Canada. Thus, subsection 2(1) which applies only to residents of Canada has no application to the facts of this case. However, subsection (2) of section 2 reads as follows:

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

(a) ...

(b) carried on business in Canada at any time in the year an income tax shall be paid as hereinafter required upon his taxable income earned in Canada for the year determined in accordance with Division D.

This question was carefully discussed by President Jackett (as he then was) in the case of Tara Exploration and Development Company Limited v MNR, [1970] CTC 557; 70 DTC 6370. In that case, the appellant was incorporated in Ontario where it had raised capital for the purpose of carrying on its sole business of exploring for minerals in Ireland. In issue was whether a profit realized from a short term deployment of temporarily unused capital in shares of a Canadian mining company (bought and sold in Canada) was subject to tax in Canada. The general manager and other active officers of the company were resident in Ireland and had their offices there. The directors and corporate officers of the company lived there or in Northern Ireland. Notwithstanding its incorporation in Ontario; the maintenance of corporate books at a “head office” in Toronto; a bank account, solicitors and an auditor in Toronto; occasional visits to Canada of its directors and officers; the raising of capital in Canada and certain business ventures embarked on in Canada, the learned President held on the above facts, that its central management and control was in Ireland.

In discussing the application of subsection 2(2) to the facts of that case, the learned President said at page 567 [6376] of the judgment:

With great doubt as to the correctness of my conclusion, I am of opinion that Section 139(1)(e) does not operate to make a non-resident person subject to Canadian income tax in respect of a profit from an adventure that otherwise does not amount to, and is not part of, a “business”. With considerable hesitation, I have concluded that the better view is that the words “carried on” are not words that can aptly be used with the word “adventure”. To carry on something involves continuity of time or operations such as is involved in the ordinary sense of a “business”. An adventure is an isolated happening. One has an adventure as opposed to carrying on a business.

A reading of the learned President’s judgment in full makes it clear that he concluded as he did because in his case, the “adventure” was an isolated happening, no continuity of time or operations was involved.

In the case at bar, we do not have an isolated adventure in the nature of trade as in Tara (supra) nor do we have a transaction that was not a part of the “business” which the appellant was actually carrying on as in Tara (supra).

The facts of this case reveal a far different situation than the “isolated transaction” situation of Tara (supra). The purchases and sales which form the subject matter of this appeal related to Lot 128, and Lots 105, 106 and 107 in the Parish of Pointe Claire. However, the appellant and his partners also acquired in 1955, Lot 196 in the Parish of St Laurent containing between 3 and 4 million square feet. Apparently they still own this property and it has not been developed. Accordingly, in the case at bar, we have, over a fairly lengthy period of time, an acquisition and a disposition of parcels of land. The area of land, in terms of development property is large, the dollar amounts involved are large. To me, this is a far cry from the “isolated transaction” of the Tara case (supra) and would, in itself, be sufficient to distinguish the case at bar from Tara (supra). Additionally, one cannot ignore subsection 139(7) of the Income Tax Act which provides as follows:

139. (7) Where, in a taxation year, a non-resident person

(a) produced, grew, mined, created, manufactured, fabricated, improved, packed, preserved or constructed, in whole or in part, anything in Canada whether or not he exported that thing without selling it prior to exportation, or

(b) solicited orders or offered anything for sale in Canada through an agent or servant whether the contract or transaction was to be completed inside or outside Canada or partly in and partly outside Canada,

he shall be deemed, for the purposes of this Act, to have been carrying on business in Canada in the year.

I have the view that paragraph 139(7)(b) is wide enough to cover the facts of this case where it is clear that the appellant, along with his partners, offered their real property for sale in Canada through real estate agents, knew that said agents were in fact advertising said property for sale by erecting “for sale” signs on the property, and, on consummation of said sales, paid their agents a commission for said sales.

I therefore hold that the appellant, a non-resident, was, during the relevant period, carrying on business in Canada within the meaning of paragraph 2(2)(b) of the Income Tax Act.

That, however, is not an end of the matter. It is also necessary to consider the effect of the Canada-US Tax Convention signed on March 4, 1942 and made applicable as and from January 1, 1941 in the circumstances of this appeal on the assumption that the appellant is subject to Part I of the Income Tax Act in respect of the profits in question.

Articles I and II of said Convention read as follows:

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.

ARTICLE II

For the purposes of this Convention, the term “industrial and commercial profits” shall not include income in the form of rentals and royalties, interest, dividends, management charges, or gains derived from the sale or exchange of capital assets.

Subject to the provisions of this Convention such items of income shall be taxed separately or together with industrial and commercial profits in accordance with the laws of the contracting States.

For a proper consideration of said Articles, it is also necessary to have reference to the following definitions referred to in the Protocol to the Convention:

3. As used in this Convention:

(a) the terms “person”, “individual” and “corporation”, shall have the same meanings, respectively, as they have under the revenue laws of the taxing State or the State furnishing the information, as the case may be;

(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. The use of substantial equipment or machinery within one of the contracting States at any time in any taxable year by an enterprise of the other contracting State shall constitute a permanent establishment of such enterprise in the former State for such taxable year.

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

Learned counsel for the respondent submits that, on the basis of the above Articles and definitions, the Canada-US Tax Convention does not apply to the facts of this case. His submission is that I should find that this appellant’s venture in Canadian real estate was, in fact, a “Canadian enterprise” and not a “US enterprise” at all by virtue of the above definitions. On this basis, he argues the Tax Convention would not apply at all since by Article I, the Convention applies only to relieve an enterprise of one contracting state from taxation by the other contracting state.

In support of his submission that appellant’s “enterprise” was not a US enterprise, he refers to the definition of “enterprise” in section 3(b) of the Protocol which includes a partnership. Thus, he submits that the “enterprise” here is the partnership of four which acquired the Canadian property and he says further that this “enterprise” was not carried on in the United States as contemplated by section 3(d) of the Protocol.

With deference, I am unable to agree with this submission. We are here concerned with the appellant as an individual, not as a member of a partnership. In the words of Thurlow, J in McMahon v MNR, [1959] CTC 166 at 171; 59 DTC 1109 at 1111:

. . . Only the appellant has been assessed, only his shares of the profit have been brought into the computation of his income, and only he is liable for the tax so determined.

Thus, when the definitions in section 3 of the Protocol are applied to these facts, it must be remembered that the “enterprise” in question is the appellant's enterprise, not the partnership’s enterprise.

In this case, the appellant had no office or place of business in Canada, no telephone listing, no bank account for most of the relevant period. He lived in New York State, everything was looked after in New York at his office at 150 Broadway Avenue where his books and records were kept.

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).

Even acceding to respondent’s contention that the entity to be here considered is the partnership itself, I fail to see how this partnership meets the definition of Canadian enterprise as contained in section 3(e) of the Protocol. A requirement of said subsection is a “partnership . . . created or organized in or under the laws of Canada”.

In this case, there was no evidence whatsoever of any partnership being organized under the laws of Canada or any province thereof. In fact, there was no evidence of an agreement in writing at all covering the Canadian venture. The partners lived in New York, they did their business in New York, the title to the Canadian land was all taken either in the name of one or more of the partners as individuals or in the name of a New York corporation wholly owned by one or more of the partners.

I have the firm view that regardless of whether the Canadian venture is looked at as merely a part of the appellant’s total enterprise or as a separate partnership in itself, it can by no means be considered a Canadian enterprise within the meaning of the Protocol.

Then, learned counsel for the respondent argued that even if I had the view that the “enterprise” in question was a United States enter- prise, that, on the evidence, said “enterprise” had a “permanent establishment” in Canada and that, accordingly, under Article I, the profits from that permanent establishment in Canada were taxable in Canada.

It seems to me that, on this point, the Tara case (supra) is clear authority against the respondent. The case at bar is even stronger on its facts against respondent’s contention that was Tara (supra).

Here, all management and executive decisions concerning appellant’s business and, for that matter, the so-called partnership, were taken in New York; there were no employees in Canada; no office in Canada; no person resident in Canada having authority to contract or conduct business on behalf of the appellant or the partnership; all documentation regarding the acquisition and sale of the Canadian property was executed in New York; all instructions concerning the property came from New York; appellant and the partnership acted in Canada only through commission agents and brokers. Counsel for the respondent sought to attach significance to the fact that in the course of the Canadian land venture, the partners used the services of two town planners, a land surveyor, two brokers, two law firms and a notary. In my view, these circumstances strengthen my conviction that the appellant cannot be said to have a “permanent establishment in Canada” because all of the above noted agents have one thing in common, they are independent agents, not employees, performing services on a fee for service basis. In my view, the nature of their relationship to the appellant and the partnership is clearly covered and contemplated in the third paragraph of section 3(f) of the Protocol quoted earlier herein.

I have therefore concluded that Article I applies in this case with the result that this appellant is not taxable in Canada even though, but for said provisions of the Tax Convention and Protocol he would have been taxable in Canada. By section 3 of the Canada-US Tax Convention Act, 1943, the terms of said Convention and Protocol have the force of law in Canada and must prevail over any other law to the extent of any inconsistency therewith.

For the foregoing reasons, the appeal will be allowed with costs and the assessments appealed from will be referred back to the respondent for reassessment on the basis that the profits in question are not subject to tax under the Income Tax Act.