JACKETT,
P.:—These
two
appeals,
which
have
been
argued
on
a
case
stated
by
the
parties
under
Rule
150,
raise
questions
as
to
the
amounts
of
the
foreign
tax
credits
to
which
the
appellant
is
entitled
for
the
1960
and
1961
taxation
years,
respectively,
in
the
computation
of
the
income
taxes
payable
by
it
under
Part
I
of
the
Income
Tax
Act
for
those
years.
There
is,
in
effect,
only
one
problem
to
be
dealt
with,
and
it
is
the
same
for
each
of
the
two
taxation
years.
While
the
facts
are
stated
with
considerable
detail
in
the
stated
case,
I
am
satisfied
that
they
may,
for
the
purpose
of
considering
the.
legal
question
involved,
be
put
in
very
general
terms
that
are
applicable
to
each
of
the
taxation
years
in
question.
The
appellant
was
resident
in
Canada,
had
a
business
in
Canada
from
which
it
had
a
profit
for
the
year,
and
owned
bonds
issued
by
a
company
that
carried
on
business
in
the
United
States
(which
company
happened
to
be
a
wholly-owned
subsidiary
of
the
appellant)
from
which
it
received
the
contractual
interest
in
the
year.
During
the
year,
the
company
paid
interest
on
bonds
that
it
had
issued
in
earlier
years
to
raise
money
(a)
part
of
which
was
used
for
the
purpose
of
earning
income
from
its
Canadian
business,
and
(b)
part
of
which
had
been
used
to
purchase
the
bonds
of
the
United
States
company
to
which
I
have
already
referred.
The
amount
of
interest
received
in
the
year
from
the
United
States
company
in
respect
of
the
United
States
bonds
(in
1960
this
amounted
to
$2,421,165.80)
was
slightly
more
than
the
interest
it
paid
in
the
year
on
that
part
of
its
bonds
the
proceeds
of
which
have
been
used
to
buy
the
United
States
bonds
(in
1960
this
amounted
to
$2,363,966.79).
Borrowing
the
money
to
acquire
the
United
States
bonds
and
acquisition
of
such
bonds
had
two
results
on
the
appellant’s
tax
position
as
it
would
have
been
had
there
been
no
provision
for
foreign
tax
credits
in
the
Canadian
law:
1.
The
appellant
paid
‘‘income
tax”
in
the
year,
as
a
“nonresident”
of
the
United
States,
to
the
United
States
Government
in
an
amount
equal
to
15
per
cent
of
the
gross
amount
of
the
interest
received
from
the
United
States
company.
(For
1960
this
was
$363,174.87.
)
2.
In
the
computation
of
the
appellant’s
income
for
the
year
under
Part
I
of
the
Income
Tax
Act,
it
had
to
bring
in
the
interest
received
from
the
United
States
bonds
on
the
revenue
side
($2,421,165.80
for
1960),
and
it
was
entitled
to
deduct
the
interest
paid
on
the
money
borrowed
to
buy
those
bonds
($2,363,966.79
for
1960)
so
that
its
income
for
the
year
was
increased
by
the
difference
between
those
amounts
($57,199.01
for
1960)
as
a
result
of
having
acquired
the
United
States
bonds.
This
would
have
resulted
in
an
additional
tax
for
the
year
of
about
50
per
cent
of
the
increase
in
the
income
for
the
year
($28,599.50
for
1960)
if
there
had
been
no
foreign
credit.
It
may
therefore
be
seen,
that
the
amount
of
tax
so
paid
in
the
year
to
the
United
States
Government
on
the
interest.
received
from
the
United
States
company
is
substantially
greater
than
the
amount
by
which
the
appellant’s
tax
under
Part
I
of
the
Income
Tax
Act
for
the
year
before
any
foreign
tax
credit
is
deducted
exceeds
the
amount
that
such
tax
would
have
been
if
the
appellant
had
never
bought
the
United
States
bonds.
In
these
circumstances
the
question
is
whether
the
appellant
is
entitled
to
deduct
from
the
tax
otherwise
payable
by
it
under
Part
I
of
the
Income
Tax
Act,
as
a
foreign
tax
credit,
(a)
the
whole
of
the
tax
paid
by
it
to
the
United
States
Government
($363,174.87
for
1960),
or
(b)
a
portion
of
the
income
tax
otherwise
payable
by
it
under
Part
I
computed
by
reference
to
the
relationship
of
the
increase
in
its
Part
I
income
for
the
year
arising
from
having
acquired
the
United
States
bonds
to
the
whole
of
its
Part
I
income
for
the
year
($27,840.76
for
1960).
Substantially
the
same
question
arose
between
the
parties
in
respect
of
earlier
taxation
years
and
it
was
established
by
a
decision
of
the
Supreme
Court
of
Canada
([1959]
S.C.R.
763;
[1959]
C.T.C.
339)
that
the
appellant
was
entitled,
in
respect
of
each
of
those
years,
to
deduct
the
larger
amount.
There
are
differences
between
the
provisions
of
the
Income
Tax
Act
as
it
applies
to
1960
and
1961
and
the
provisions
of
that
Act
as
it
applied
to
those
earlier
years.
I
propose
first
to
consider
the
question
having
regard
only
to
the
statutory
provisions
applicable
to
1960
and
1961,
and
then
to
consider
what
application
the
decision
of
the
Supreme
Court
of
Canada
has
to
the
present
state
of
the
statutes.
While
it
is
probably
not,
strictly
speaking,
necessary
to
do
so,
I
find
so
much
difficulty
in
bearing
in
mind
the
inter-relationships
of
the
various
aspects
of
the
Income
Tax
Act
that
come
into
play,
directly
or
indirectly,
in
forming
an
appreciation
of
the
problem
raised
by
this
appeal
that
I
propose
to
preface
my
examination
of
the
section
by
which
provision
is
made
for
foreign
tax
credits
by
a
brief
review
of
the
general
structure
of
the
Act
in
so
far
as
it
seems
to
me
to
be
relevant.
Part
I
of
the
Income
Tax
Act
imposes
an
‘‘income
tax”
on
the
“taxable
income’’
of
every
person
resident
in
Canada
in
a
taxation
year
and
upon
the
“taxable
income
earned
in
Canada”
of
every
person
who
was
employed
in
Canada
or
who
carried
on
business
in
Canada
in
a
taxation
year
(Section
2).
The
commencement
point
for
determining
the
base
on
which
the
tax
is
imposed
is,
in
each
case,
the
taxpayer’s
‘‘income
for
the
year’’.
[Where
a
person
is
resident
in
Canada,
personal
exemptions,
business
losses,
etc.,
are
deducted
from
‘‘income
for
the
year”
to
obtain
his
“taxable
income’’
for
the
year
(Section
2(3));
and
where
he
is
a
non-resident
person,
to
obtain
his
‘
‘
taxable
income
earned
in
Canada
’
’
for
the
year,
the
reasonably
applicable
part
of
personal
exemptions,
business
losses,
etc.,
are
deducted
from
the
part
of
his
‘‘income
for
the
year”
that
may
reasonably
be
attributed
to
what
he
did
in
Canada
(Section
31).]
This
basic
concept
of
‘‘income
for
the
year’’
is
sometimes
thought
of
as
‘‘world
income’’.
A
taxpayer’s
‘‘income
for
a
.
.
.
year”
is
his
‘‘income
for
the
year
from
all
sources
inside
or
outside
Canada’’.
In
addition
to
income
from
any
other
possible
sources,
it
includes
income
for
the
year
from
the
ordinary
sources,
i.e.,
businesses,
property,
and
offices
and
employments
(Section
3).
In
so
far
as
‘‘income
for
the
year’’
consists
of
income
from
businesses
or
property,
it
is
computed
on
a
profit
basis
(Section
4).
It
is,
however,
a
single
amount
for
any
one
taxpayer
for
any
one
year.*
All
the
revenue
items
(whether
they
are
brought
in
by
virtue
of
business
and
commercial
principles
that
have
been
brought
into
play
by
the
“profit”
concept
or
by
virtue
of
special
provisions
such
as
Section
6)
must
be
brought
in
on
one
side;
all
the
expense
and
other
deductible
items
(whether
they
are
brought
in
by
virtue
of
such
business
or
commercial
principles
or
by
virtue
of
special
provisions
such
as
Section
11)
must
be
brought
in
on
the
other
side;
and
the
deductible
items
must
be
set
off
against
the
revenue
items.
The
net
amount
is
the
taxpayer’s
‘‘income
for
the
year’’.
By
reason
of
the
prominence
of
interest
payments
and
interest
receipts
in
this
case,
it
should
be
noted
at
this
point
that
(a)
Section
6(1)(b)
provides
that,
without
restricting
the
generality
of
Section
3,
amounts
received
or
receivable
in
the
year
as
“interest”
must
be
included
in
computing
a
taxpayer’s
income
for
the
year,
and
(b)
Section
11(1)
(c)
authorizes
the
deduction,
in
computing
a
taxpayer’s
income
for
a
year,
of
an
amount
paid
or
payable
in
the
year
as
‘‘interest’’
on
‘‘borrowed
money”
used
‘‘for
the
purpose
of
earning
income
from
a
business
or
property’’.
While
world
income
for
the
year,
on
a
net
basis,
is
thus
the
commencement
point
for
determining
the
income
tax
for
a
year
payable
under
Part
I
of
the
Income
Tax
Act
to
the
Canadian
Government
by
persons
resident
in
Canada
and
by
non-residents
who
are
employed
in
Canada
or
carry
on
business
in
Canada,
and
all
of
such
taxes
are
computed
at
the
graduated
rates
set
out
in
Part
I,
under
Part
III,
persons
who
are
not
resident
in
Canada
pay,
inter
alia,
an
‘‘income
tax”
at
a
flat
rate
of
15
per
cent
on
every
‘‘amount’’
that
a
person
resident
in
Canada
pays
to
him
as
‘‘interest’’.
The
result
is
that
the
Canadian
Government
levies
(a)
an
income
tax
on
every
resident
of
Canada
computed
by
reference
to
his
world
income,
(b)
an
income
tax
on
every
non-resident
computed
by
reference
to
income
earned
in
Canada,
and
(c)
an
income
tax
on
every
non-resident
computed
by
reference
to
certain
revenue
receipts
from
persons
resident
in
Canada.
Assuming,
therefore,
that
a
Canadian
resident
had
income
sources
in
Canada
and
also
in
a
foreign
country
that
had
a
tax
scheme
similar
to
the
Canadian
tax
scheme,
such
Canadian
resident
would
pay
a
tax
on
his
world
income
to
the
Canadian
Government
and
a
tax
to
the
foreign
government
on
his
income
from
sources
in
that
country.
This
would,
with
some
justification,
be
thought
of
as
‘‘double
taxation”
on
the
income
derived
from
sources
in
the
foreign
country.
The
general
purpose
of
the
foreign
tax
credits
provisions
(Section
41),
as
I
understand
it,
is
to
avoid
any
such
double
taxation
by
allowing
a
person
resident
in
Canada
in
respect
of
the
income
tax
payable
by
him
to
the
government
of
a
foreign
country
where
he
has
income
sources
a
deduction
from
the
tax
otherwise
payable
to
the
Canadian
Government
on
his
world
income.
In
the
light
of
that
very
brief
outline
of
the
background
against
which,
as
I
understand
it,
Section
41
must
be
considered,
I
turn
to
an
examination
of
the
provisions
of
that
section
in
relation
to
the
facts
of
this
case.
Section
41(1)
(which
is
the
only
part
of
Section
41
that
must
be
considered),
as
amended
by
Section
13
of
chapter
43
of
the
Statutes
of
1960,
reads
as
follows:
41.
(1)
A
taxpayer
who
was
resident
in
Canada
at
any
time
in
a
taxation
year
may
deduct
from
the
tax
for
the
year
otherwise
payable
under
this
Part
an
amount
equal
to
the
lesser
of
(a)
any
income
or
profits
tax
paid
by
him
to
the
government
of
a
country
other
than
Canada
for
the
year
(except
any
such
tax
or
part
thereof
that
may
reasonably
be
regarded
as
having
been
paid
by
him
in
respect
of
dividends
received
from
that
country,
by
reason
of
which
he
is
entitled
to
a
deduction
under
subsection
(1)
of
section
28
for
the
year
in
which
they
were
received),
or
(b)
that
proportion
of
the
tax
for
the
year
otherwise
payable
under
this
Part
that
(i)
the
taxpayer’s
income
(A)
for
the
year,
if
section
29
is
not
applicable,
or
(B)
if
section
29
is
applicable,
for
the
period
or
periods
in
the
year
referred
to
in
paragraph
(a)
thereof,
from
sources
in
that
country,
minus
amounts
that
are
deductible
under
subsection
(1)
of
section
28
by
reason
of
dividends
received
from
a
corporation
described
in
paragraph
(d)
of
subsection
(1)
of
section
28
that
were
included
in
computing
his
income
for
the
year
or
such
period
or
periods,
as
the
case
may
be,
from
sources
in
that
country,
is
of
(ii)
the
taxpayer’s
income
(A)
for
the
year,
if
section
29
is
not
applicable,
or
(B)
if
section
29
is
applicable,
for
the
period
or
periods
in
the
year
referred
to
in
paragraph
(a)
thereof,
minus
amounts
that
are
deductible
for
the
year
or
such
period
or
periods,
as
the
case
may
be,
under
section
28.
It
was
common
ground,
during
the
argument
of
these
appeals,
that,
for
the
purposes
of
this
case,
Section
41(1)
may
be
considered
as
though
certain
irrelevant
portions
had
been
deleted
so
that
it
would
read
as
follows
:
(1)
A
taxpayer
who
was
resident
in
Canada
.
.
.
in
a
taxation
year
may
deduct
from
the
tax
for
the
year
otherwise
payable
under
this
Part
an
amount
equal
to
the
lesser
of
(a)
any
income
or
profits
tax
paid
by
him
to
the
government
of
a
country
other
than
Canada
for
the
year
.
.
.,
or
(b)
that
proportion
of
the
tax
for
the
year
otherwise
payable
under
this
Part
that
(i)
the
taxpayer’s
income
(A)
for
the
year
.
.
.
from
sources
in
that
country
.
.
.
(ii)
the
taxpayer’s
income
(A)
for
the
year
.
.
.
It
is
common
ground
in
this
case
that
the
15
per
cent
tax
paid
by
the
appellant
to
the
United
States
Government
in
the
year
is
an
income
.
.
.
tax’’
paid
by
the
appellant
to
that
government
for
the
year
and
is
therefore
an
amount
that
falls
within
the
language
of
paragraph
(a)
of
Section
41(1).
(As
already
indicated,
for
1960,
it
amounts
to
$363,174.87.
)
There
is
no
dispute
as
to
the
amount
of
the
tax
for
the
year
“otherwise
payable
under
this
Part’’
by
the
appellant
within
the
meaning
of
those
words
in
paragraph
(b)
of
Section
41(1).
(For
1960
this
amounted
to
$8,115,929.95.)
It
is
also
common
ground
that
the
amount
of
the
appellant’s
“income
for
the
year’’
as
established
under
the
various
provisions
of
Part
I
before
making
the
deductions
permitted
by
Division
C
for
the
calculation
of
Taxable
Income
is
the
amount
that
is
referred
to
in
subparagraph
(ii)
of
paragraph
(b)
of
Section
41(1).
(For
1960
this
amounted
to
$16,674,223.23.
)
The
problem
that
is
raised
by
the
appeal
is
what
amount
is
indicated
by
the
words
‘‘the
taxpayer’s
income
.
..
for
the
year
.
.
.
from
sources
in
that
country’’
in
subparagraph
(i)
of
paragraph
(b)
of
Section
41(1).
There
is
no
question
that
what
is
referred
to
is
the
amount
of
“the
taxpayer’s
income
for
the
year’’
from
sources
in
the
United
States.
The
appellant
says,
however,
that
those
words
refer
to
the
gross
amount
of
the
interest
received
in
the
year
by
the
appellant
from
the
United
States
company.
The
respondent
says,
on
the
other
hand,
that
those
words
must
be
read
with
subsections
(la)
and
(lb)
of
Section
139
of
the
Act
and
that,
when
so
read,
they
refer
to
the
amount
of
the
interest
so
received
in
that
year
less
the
interest
paid
in
the
year
that
was
deductible
in
computing
income
under
Part
I
for
the
year
to
the
extent
that
that
interest
was
paid
on
monies
that
had
been
borrowed
to
acquire
the
United
States
bonds
in
respect
of
which
the
interest
was
so
received
in
the
year.
The
relevant
parts
of
subsections
(la)
and
(lb)
of
Section
139
read
as
follows:
(la)
For
the
purposes
of
this
Act,
(a)
a
taxpayer’s
income
for
a
taxation
year
from
a
business,
employment,
property
or
other
source
of
income
or
from
sources
in
a
particular
place
means
the
taxpayer’s
income
computed
in
accordance
with
this
Act
on
the
assumption
that
he
had
during
the
taxation
year
no
income
except
from
that
source
or
those
sources,
and
was
allowed
no
deductions
in
computing
his
income
for
the
taxation
year
except
such
deductions
as
may
reasonably
be
regarded
as
wholly
applicable
to
that
source
or
those
sources
and
except
such
part
of
any
other
deductions
as
may
reasonably
be
regarded
as
applicable
to
that
source
or
those
sources;
(lb)
In
applying
subsection
(la)
for
the
purposes
of
sections
31
and
41,
all
deductions
allowed
in
computing
the
income
of
a
taxpayer
for
a
taxation
year
for
the
purposes
of
Part
I,
except
any
deduction
permitted
by
paragraph
(1),
(la),
(o)
or
(t)
of
subsection
(1)
of
section
11
or
section
79B,
shall
be
deemed
to
be
applicable
either
wholly
or
in
part
to
a
particular
source
or
to
sources
in
a
particular
place.
Bearing
in
mind
that
the
only
income
the
appellant
had
in
the
year
from
sources
in
the
United
States
was
interest
from
the
bonds
of
the
United
States
company
and
that
interest
from
bonds
is
income
the
source
of
which
is
‘‘property’’,*
the
applicable
part
of
subsection
(la),
as
I
read
it,
is
as
follows:
a
taxpayer’s
income
for
a
taxation
year
from
.
.
.
property
.
.
.
means
the
taxpayer’s
income
computed
in
accordance
with
this
Act
on
the
assumption
that
he
had
during
the
taxation
year
no
income
except
from
that
source
.
.
.
and
was
allowed
no
deductions
in
computing
his
income
for
the
taxation
year
except
such
deductions
as
may
reasonably
be
regarded
as
wholly
applicable
to
that
source
.
.
.
and
except
such
part
of
any
other
deductions
as
may
reasonably
be
regarded
as
applicable
to
that
source
.
.
.:+
As
interest
on
borrowed
money
is
only
deductible
in
computing
world
income
by
virtue
of
the
special
provision
in
Section
11(
1)
(c),
it
would
be
doubtful
whether
it
could
be
regarded
as
having
any
application
to
a
particular
source
of
income
were
it
not
for
subsection
(lb)
supra,
which
specifically
provides,
inter
aha,
that,
in
applying
subsection
(la)
for
the
purposes
of
Section
41,
such
a
deduction
shall
be
deemed
to
be
applicable
either
wholly
or
in
part
to
a
particular
source.
Having
regard
to
the
provisions
of
Section
ll(l)(c)
which
limit
the
deduction
of
interest
to
interest
on
borrowed
money
used
for
the
purpose
of
earning
income
from
‘‘a
business’’
or
“property”,
and
to
the
fact
that
the
interest
deduction
that
the
respondent
maintains
should
be
set
off
against
the
interest
receipt
in
this
case
is
only
deductible
because
it
is
interest
on
money
that
was
borrowed
to
acquire
the
bonds
which
gave
rise
to
the
interest
receipts,
I
cannot
escape
the
conclusion
that
subsection
(la)
of
Section
139,
read
with
subsection
(lb)
thereof,
defines
the
appellant’s
income
from
the
United
States
bonds
for
a
year,
for
the
purposes
of
Section
41,
to
be
the
amount
that
its
world
income
would
be
for
the
purposes
of
Part
I
of
the
Income
Tax
Act
if
its
only
revenue
receipts
were
the
interest
receipts
from
the
United
States
bonds
and
its
only
deductions
were
the
interest
payments
made
on
the
monies
borrowed
to
purchase
those
bonds.*
This
is
the
method
that
the
respondent
followed
and,
if
the
matter
were
a
matter
of
first
impression
on
a
reading
of
the
Income
Tax
Act
alone,
I
would
conclude
that
he
was
right.
The
matter
is
not,
however,
that
simple,
because
the
subject
of
foreign
tax
credits
is
dealt
with
by
tax
conventions
between
Canada
and
the
United
States
of
America
that
have
been
given
statutory
effect
by
statute.
On
March
4,
1942,
a
Convention
and
Protocol
was
agreed
upon
by
the
two
countries.
The
parts
that
may
have
some
bearing
on
our
problem
appear
to
be
the
following:
CONVENTION
The
Government
of
Canada
and
the
Government
of
the
United
States
of
America,
being
desirous
of
further
promoting
the
flow
of
commerce
between
the
two
countries,
of
avoiding
double
taxation
and
of
preventing
fiscal
evasion
in
the
case
of
income
taxes,
have
decided
to
conclude
a
Convention
and
for
that
purpose
have
appointed
as
their
Plenipotentiaries:
Mr.
Leighton
McCarthy,
K.C.,
Envoy
Extraordinary
and
Minister
Plenipotentiary
of
Canada
at
Washington;
and
Mr.
Sumner
Welles,
Acting
Secretary
of
State
of
the
United
States
of
America;
who,
having
communicated
to
one
another
their
full
powers
found
in
good
and
due
form,
have
agreed
upon
the
following
Articles:
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.
ARTICLE
XI
1.
The
rate
of
income
tax
imposed
by
one
of
the
contracting
States,
in
respect
of
income
derived
from
sources
therein,
upon
individuals
residing
in,
or
corporations
organized
under
the
laws
of,
the
other
contracting
State,
and
not
engaged
in
trade
or
business
in
the
former
State
and
having
no
office
or
place
of
business
therein,
shall
not
exceed
15
per
cent
for
each
taxable
year.
ARTICLE
XV
In
accordance
with
the
provisions
of
Section
8
of
the
Income
War
Tax
Act
as
in
effect
on
the
day
of
the
entry
into
force
of
this
Convention,
Canada
agrees
to
allow
as
a
deduction
from
the
Dominion
income
and
excess
profits
taxes
on
any
income
which
was
derived
from
sources
within
the
United
States
of
America
and
was
there
taxed,
the
appropriate
amount
of
such
taxes
paid
to
the
United
States
of
America.
In
accordance
with
the
provisions
of
Section
131
of
the
United
States
Internal
Revenue
Code
as
in
effect
on
the
day
of
the
entry
into
force
of
this
Convention,
the
United
States
of
America
agrees
to
allow
as
a
deduction
from
the
income
and
excess
profits
taxes
imposed
by
the
United
States
of
America
the
appropriate
amount
of
such
taxes
paid
to
Canada.
PROTOCOL
At
the
moment
of
signing
the
Convention
for
the
avoidance
of
double
taxation,
and
the
establishment
of
rules
of
reciprocal
administrative
assistance
in
the
case
of
income
taxes,
this
day
concluded
between
Canada
and
the
United
States
of
America,
the
undersigned
plenipotentiaries
have
agreed
upon
the
following
provisions
and
definitions:
1.
The
taxes
referred
to
in
this
Convention
are:
(a)
for
the
United
States
of
America:
the
Federal
income
taxes,
including
surtaxes,
and
excess-profits
taxes.
(b)
for
Canada:
the
Dominion
income
taxes,
including
surtaxes,
and
excess-profits
taxes.
2.
In
the
event
of
appreciable
changes
in
the
fiscal
laws
of
either
of
the
contracting
States,
the
Governments
of
the
two
contracting
States
will
consult
together.
3.
As
used
in
his
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;
Chapter
21
of
the
Statutes
of
1942
has
this
Convention
and
Protocol
in
a
Schedule
and
reads
in
part
as
follows
:
2.
The
Convention
and
Protocol
entered
into
between
Canada
and
the
United
States
of
America,
which
are
set
out
in
the
Schedule
to
this
Act,
are
hereby
approved
and
declared
to
have
the
force
of
law
in
Canada.
8.
In
the
event
of
any
inconsistency
between
the
provisions
of
this
Act
or
of
the
said
Convention
and
Protocol
and
the
operation
of
any
other
law,
the
provisions
of
this
Act
and
of
the
Convention
and
Protocol
shall,
to
the
extent
of
such
inconsistency,
prevail.
On
June
12,
1950,
a
new
agreement
was
entered
into
between
the
two
nations
reading
in
part
as
follows
:
ARTICLE
I
The
provisions
of
the
Convention
and
Protocol
between
Canada
and
the
United
States
of
America,
signed
at
Washington
on
March
4,
1942,
are
hereby
modified
and
supplemented
as
follows:
(1)
Article
XV
is
amended
as
follows:
(A)
By
striking
out
of
the
first
paragraph
thereof,
effective
January
1,
1949,
the
following:
“In
accordance
with
the
provisions
of
Section
8
of
the
Income
War
Tax
Act
as
in
effect
on
the
day
of
the
entry
into
force
of
this
Convention,”
and
inserting
in
lieu
thereof
the
following:
“1.
As
far
as
may
be
in
accordance
with
the
provisions
of
The
Income
Tax
Act,”
(B)
By
striking
out
of
the
second
paragraph
thereof
the
following
:
“In
accordance
with
the
provisions
of
Section
131
of
the
United
States
Internal
Revenue
Code
as
in
effect
on
the
day
of
the
entry
into
force
of
this
Convention,”
and
inserting
in
lieu
thereof
the
following:
“2.
As
far
as
may
be
in
accordance
with
the
provisions
of
the
United
States
Internal
Revenue
Code,”
Section
1
of
chapter
27
of
the
Statutes
of
1950
reads
as
follows:
1.
The
Convention
entered
into
between
Canada
and
the
United
States
of
America,
set
out
in
Schedule
A,
is
approved
and
declared
to
have
the
force
of
law
in
Canada,
and
shall
be
deemed
to
be
included
in
and
to
form
part
of
the
Convention
and
Protocol
set
out
in
the
Schedule
to
The
Canada-United
States
of
America
Tax
Convention
Act,
1943.
It
is
common
ground
that
the
15
per
cent
tax
paid
by
the
appellant
to
the
United
States
Government
is
a
Federal
income
tax
within
paragraph
1(a)
of
the
Protocol
to
the
1942
Convention
and
therefore
one
of
the
taxes
“paid
to
the
United
States
of
America’’
to
which
the
first
paragraph
of
Article
XV
of
the
Convention
applies.
As
that
Article
was
found
in
the
1942
Convention,
it
is
clear
that
the
deduction
Canada
agreed
to
allow
at
that
time
was
in
accordance
with
the
provisions
of
Section
8
of
the
Income
War
Tax
Act
as
it
was
on
January
1,
1941,
when
it
read
in
part
as
follows
:
8.
A
taxpayer
shall
be
entitled
to
deduct
from
the
tax
that
would
otherwise
be
payable
by
him
under
this
Act,
(a)
the
amount
paid
to
Great
Britain
or
any
of
its
self-governing
colonies
or
dependencies
for
income
tax
in
respect
of
the
income
of
the
taxpayer
derived
from
sources
therein;
and
(b)
the
amount
paid
to
any
foreign
country
for
income
tax
in
respect
of
the
income
of
the
taxpayer
derived
from
sources
therein,
if
such
foreign
country
in
imposing
such
tax
allows
a
similar
credit
to
persons
in
receipt
of
income
derived
from
sources
within
Canada.
Provided
that
the
Minister
may
in
his
discretion
allow
a
taxpayer
to
deduct
from
the
sum
total
of
his
income
tax
and
excess
profits
tax
the
sum
total
of
the
income
tax
and
excess
profits
tax
paid
to
Great
Britain
or
to
any
of
its
self-governing
dominions
or
dependencies
or
to
any
foreign
country
if
such
foreign
country
in
imposing
taxes
in
respect
of
income
and
excess
profits
allows
a
similar
credit
to
persons
in
receipt
of
profits
derived
from
sources
within
Canada.
2.
Such
deduction
shall
not
exceed
the
same
proportion
of
the
tax
otherwise:
payable
under
this
Act
or
the
sum
total
of
the
income
tax
and
excess
profits
tax
otherwise
payable
under
this
Act
and
The
Excess
Profits
Tax
Act,
1940,
as
provided
for
in
the
proviso
to
subsection
one
of
this
section,
as
that
which
the
taxpayer’s
net
profits
from
sources
within
such
country
and
taxed
therein
bears
to
his
entire
net
profits
from
all
sources,
without
taking
into
account
the
exemptions
provided
by
paragraphs
(c),
(d),
(e),
(ee)
and
(i)
of
subsection
one
of
section
five
of
this
Act
and
by
subsections
two
and
three
of
the
said
section
five.
It
therefore
follows
that
the
words
in
Article
XV
as
it
was
originally
‘‘the
appropriate
amount
of
such
taxes
paid
to
the
United
States
of
America’’
is
the
amount
of
such
taxes
determined
in
accordance
with
Section
8
of
the
Income
War
Tax
Act
as
set
out
above.
Had
the
words
substituted
for
‘‘
In
accordance
with
the
provisions
of
Section
8
of:the
Income
War
Tax
Act
as
in
effect
on
the
day
of
the
entry
into
force
of
this
Convention’’
been
merely
the
words
“
.
.
.
in
accordance
with
the
provisions
of
The
Income
Tax
Act’’,
it
would
have
seemed
clear
enough
that
(a)
the
reference
was
to
the
provision
of
the
Income
Tax
Act
providing
for
a
foreign
tax
credit,
whatever
its
number
might
happen
to
be,
and
(b)
in
view
of
the
deliberate
dropping
of
the
reference
to
the
provision
as
of
a
certain
date,
the
reference
was
to
the
appropriate
provision
of
the
Income
Tax
Act
as
it
might
be
at
the
relevant
time.*
It
is
noteworthy
that
similar
changes
were
made
in
the
parallel
provision
in
Article
XV
dealing
with
a
United
States
foreign
tax
credit.
In
effect,
having
regard
to
the
original
form
of
the
two
parts
of
Article
XV
and
the
nature
of
the
changes
made
in
1950,
it
seems
clear
that
the
parties
were
saying
that,
instead
of
mutual
covenants
to
apply,
to
their
respective
interlocking
tax
systems,
the
foreign
tax
credit
provision
that
had
been
worked
out
by
the
domestic
law
for
all
nations
as
of
a
specified
date,
they
would
mutually
covenant
to
apply
as
between
each
other
whatever
foreign
tax
credit
provision
their
respective
domestic
laws
might
from
time
to
time
adopt
for
all
nations.
This
view
of
the
provision
seems
to
be
reinforced
by
the
addition,
in
1950,
of
the
words
that
were
not
previously
there,
namely,
‘‘As
far
as
may
be’’.
While
these
words
have
no
very
evident
precise
effect,
they
seem
to
be
allowing
for
the
possibility
that
a
time
may
arrive
when
there
will
be
no
provision
of
general
application
in
the
domestic
law
for
foreign
tax
credit,
in
which
event
there
would
be
no
obligation
on
the
contracting
power
to
allow
one
in
respect
of
United
States
Taxes.
If
the
above
were
the
correct
view
of
the
effect
of
Article
XV
of
the
Tax
Convention
as
amended
in
1950
and
as
in
force
and
applicable
to
the
1960
and
1961
taxation
years,
the
Convention
would
not
require
any
alteration
in
the
appellant’s
rights
as
determined
under
Section
41
of
the
Income
Tax
Act
apart
from
the
Convention;
and
the
tentative
conclusion
that
I
have
already
reached
would
not
be
altered
by
the
operation
of
the
statute
giving
the
Convention
the
force
of
law
and
making
it
prevail
when
inconsistent
with
the
Income
Tax
Act.
I
turn
now
to
consider
whether
anything
was
decided
in
I
nt
er
-
provincial
Pipe
Line
Co.
v.
M.N.R.,
[1959]
S.C.R.
763;
[1959]
C.T.C.
339,
that
would
bring
me
to
a
different
conclusion
than
that
which
I
have
reached
by
a
consideration
of
the
statutes
as
a
matter
of
first
impression.
As
already
indicated,
the
facts
giving
rise
to
that
case
were
for
all
practical
purposes
the
same
as
those
upon
which
I
must
decide
these
appeals
and
the
question
that
had
to
be
decided
then
was
the
same
question
that
has
to
be
decided
now.
However,
there
have
been
changes
in
the
Income
Tax
Act,
so
that,
in
form
at
least,
the
questions
of
statutory
interpretation
that
arise
now
are
not
the
same
as
those
that
arose
at
that
time.
In
lieu
of
Section
41
of
the
Income
Tax
Act
as
set
out
above,
which
is
applicable
to
the
1960
and
1961
taxation
years,
Section
38(1)
of
The
1948
Income
Tax
Act,
which
was
applicable
to
some
of
the
years
in
question*
in
the
earlier
case,
reads
as
follows:
38.
(1)
A
taxpayer
who
was
resident
in
Canada
at
any
time
in
a
taxation
year
may
deduct
from
the
tax
for
the
year
otherwise
payable
under
this
Part
an
amount
equal
to
the
lesser
of
(a)
the
tax
paid
by
him
to
the
government
of
a
country
other
than
Canada
on
his
income
from
sources
therein
for
the
year,
or
(b)
that
proportion
of
the
tax
for
the
year
otherwise
payable
under
this
Part
that
(i)
that
part
of
the
taxpayer’s
income
(A)
for
the
year,
if
section
28
is
not
applicable,
or
(B)
if
section
28
is
applicable,
for
the
period
or
periods
in
the
year
referred
to
in
paragraph
(a)
thereof,
from
sources
in
that
country
that
was
not
exempt
from
income
tax
in
that
country
minus
amounts
that
are
deductible
for
the
year
or
such
period
or
periods,
as
the
case
may
be,
under
paragraph
(d)
of
subsection
(1)
of
section
27,
is
of
(ii)
the
taxpayer’s
income
(A)
for
the
year,
if
section
28
is
not
applicable,
or
(B)
if
section
28
is
applicable,
for
the
period
or
periods
in
the
year
referred
to
in
paragraph
(a)
thereof,
minus
amounts
that
are
deductible
for
the
year
or
such
period
or
periods,
as
the
case
may
be,
under
section
27.
The
other
difference
between
the
legislation
applicable
to
1960
and
1961
and
that
applicable
to
the
earlier
years
is
that
subsections
(la)
and
(lb)
of
Section
139
of
the
present
Act,
set
out
above
as
being
applicable
to
the
1960
and
1961
taxation
years,
were
not
in
the
Act
applicable
to
the
earlier
years,
which
did,
however,
have
a
provision
which
appeared
in
The
1948
Income
Tax
Act
as
follows:
127.
(1)
In
this
Act,
(av)
a
taxpayer’s
income
from
a
business,
employment,
property
or
other
source
of
income
or
from
sources
in
a
particular
place
means
the
taxpayer’s
income
computed
in
accordance
with
this
Act
on
the
assumption
that
he
had
during
the
taxation
year
no
income
except
from
that
source
or
those
sources
of
income
and
was
entitled
to
no
deductions
except
those
related
to
that
source
or
those
sources;
and
The
reasons
of
four
of
the
five
judges
for
the
judgment
of
the
Supreme
Court
of
Canada
in
1959
were
delivered
by
Judson,
J.
As
I
appreciate
his
reasons
for
holding
that
the
appellant
was
entitled,
by
virtue
of
Section
38
of
The
1948
Income
Tax
Act,
to
a
foreign
tax
credit
equal
to
the
full
amount
of
the
15
per
cent
tax
paid
to
the
United
States
Government,
they
are
contained
in
that
part
of
his
judgment
that
reads
as
follows:
The
appellant
is
a
Canadian
company.
It
did
pay
a
15
per
cent
withholding
tax
to
the
United
States
on
income
from
sources
therein.
To
deprive
the
appellant
of
the
right
to
the
tax
deduction
it
is
necessary
to
substitute
for
“on
his
income
from
sources
therein”
the
words
“on
his
profits
from
sources
therein”
and
I
do
not
think
that
Section
4
affords
the
statutory
basis
for
such
a
substitution.
First,
Section
4
is
expressly
made
subject
to
the
other
provisions
of
Part
I
of
the
Act.
One
of
these,
affecting
the
matter,
is
Section
6(b),
which
provides:
“6.
Without
restricting
the
generality
of
section
3,
there
shall
be
included
in
computing
the
income
of
a
taxpayer
for
a
taxation
year
(b)
amounts
received
in
the
year
or
receivable
in
the
year
(depending
upon
the
method
regularly
followed
by
the
taxpayer
in
computing
his
profit)
as
interest
or
on
account
or
in
lieu
of
payment
of,
or
in
satisfaction
of
interest;”
Section
6(b)
imperatively
requires
that
the
whole
of
the
interest
from
United
States
sources
must
be
brought
into
account
in
the
computation
of
income
and
on
the
other
side
of
the
account
there
is
a
deduction
that
must
be
allowed
under
Section
11(1)
(c)
for
interest
on
“borrowed
money
used
for
the
purpose
of
earning
income
from
a
business
or
property”.
This,
in
fact,
is
what
has
actually
happened.
The
full
interest
receipt
has
been
brought
into
account
and
the
full
interest
payment
has
been
claimed
and
allowed
as
a
deduction
without
allocation,
but,
for
the
purpose
of
denying
the
appellant
the
right
to
the
tax
credit
under
Section
38(1),
a
subsidiary
calculation
has
been
made
within
this
framework
for
the
purpose
of
showing
that
when
the
allocable
expense
is
set
against
the
United
States
interest
receipt,
there
is
no
profit
on
this
branch
of
the
appellant’s
activity
and,
consequently,
no
right
to
a
tax
credit.
I
can
see
no
basis
for
any
allocation
of
the
appellant’s
borrowings
to
its
investment
in
its
subsidiary
for
the
purpose
of
producing
this
result
under
Section
38(1).
The
appellant’s
borrowings
and
the
interest
paid
thereon
were
related
to
the
business
as
a
whole
and
no
part
of
the
borrowings
and
the
interest
paid
thereon
can
be
segregated
and
attributed
to
the
investment
in
the
subsidiary.
The
interest
paid
by
the
appellant
to
its
own
bondholders
was,
under
Section
11(1)
(c),
a
deduction
given
to
the
appellant
for
the
purpose
of
computing
its
income
from
all
sources.
Sections
3
and
4
of
the
Act
do
not
require
a
separate
computation
of
income
from
each
source
for
the
taxpayer
is
subject
to
tax
on
income
from
all
sources.
The
deduction
against
income
given
by
Section
11
(1)
(c)
is
attributable
to
all
sources
of
income
and
there
is
no
authority
to
break
it
up
and
relate
various
parts
of
the
deduction
to
various
sources.
For
this
reason
I
do
not
regard
the
interest
paid
and
claimed
and
allowed
as
a
deduction,
as
being
related
to
the
source
of
the
United
States
interest
receipt
in
this
case,
and
consequently,
Section
139(1)
(az),
formerly
Section
127(1)
(av)
of
The
191/.8
Income
Tax
Act,
does
not,
in
my
opinion,
authorize
the
allocation
which
the
Minister
has
made
in
this
case.
Returning
then
to
Section
38(1),
my
conclusion
is
that
the
appellant
has
paid
a
tax
on
income
to
the
United
States
from
sources
therein
and
that
its
right
to
the
foreign
tax
deduction
cannot
be
destroyed
by
this
unauthorized
and
artificial
attribution
of
an
offsetting
expense
which
tends
to
show
that
there
has
been
no
profit
from
the
source.
In
the
present
appeal
no
problem
arises
under
paragraph
(a)
of
Section
41(1),
which
refers
to
‘‘any
income
.
.
.
tax
paid
by
him
to
the
government
of
a
country
other
than
Canada.’’
It
is
conceded
that
the
15
per
cent
tax
paid
on
gross
interest
receipts
to
the
United
States
Government
falls
within
those
words.
In
the
earlier
case,
Judson,
J.
only
found
it
necessary
to
consider
the
effect
of
the
corresponding
paragraph
of
Section
38(1)
and
did
not
find
it
necessary
to
deal
with
the
effect
of
paragraph
(b)
of
that
subsection.
However,
the
words
in,
paragraph.
(a)
of
Section
38(1)
that
had
to
be
considered
were
‘‘tax
paid
...
to
the
government
of
a
country
other
than
Canada
on
his
income
from
sources
therein’’
which
would
seem
to
include,
in
substance,
the
same
concept
which
gives
difficulty
here
in
Section
41(l)(b)(i),
namely,
‘‘The
taxpayer’s
income
.
'.
.'
for
the
year
.
.
from
sources
in
that
country.
”
The
difference,
as
I
see
it,
between
the
problem
dealt.
with
by
the
Supreme
Court
of
Canada
i
in
1959
and
that
which
I
have
to
deal
is
this:
Interest
from
bonds
is
in
itself
income
apart
from
some
special
statutory
direction.
Even
a
definition
of
income
as
“profit”
would
not
permit
a
setting
off
of
interest
on
money
borrowed
to
acquire
the
bonds
because
such
interest
is
not
deductible
in
computing
profit
in
the
absence
of
special.
statutory
direction.
(See
Bennett
and
White
Construction
Co.
Ltd.
v.
M.N.R.,
[1949]
S.C.R.
287;
[1949]
C.T.C.
1.
The
special
direction
in
Section
127(1)
(av)
did
not
authorize
the
setting
off
of
such
interest
payments
for
the
reasons
given
by
Judson,
J.
in
the
passage
quoted
above.
Here
subsection
(la)
of
Section
139,
when
read
with
subsection
(lb)
thereof,
specifically
requires,
in
effect,
that
such
interest
be
set
off
for
the
purpose
of
determining
the
taxpayer’s
income
for
the
year
from
these
United
States
bonds
for
the
purposes
of
Section
41.
For
the
above
reasons,
I
conclude
that
there
is
nothing
in
the
1959
judgment
of
the
Supreme
Court
of
Canada
that
affects
in
any
way
the
conclusion
that
I
have
already
set
out
as
to
the
effect
of
the
Income
Tax
Act
as
applicable
to
the
1960
and
1961
taxation
years.
The
remaining
question
is
whether
the
judgment
of
the
Supreme
Court
of
Canada
constrains
me
to
come
to
a
different
conclusion
as
to
the
effect
of
the
legislation
giving
the
Convention
the
force
of
law
on
the
facts
of
this
case
for
‘the
1960
and
1961
taxation
years.
The
material
part
of
the
reasons
delivered
by
Judson,
J.
reads
as
follows
:
I
have
no
doubt
that
the
15
per
cent
withholding
tax
was
properly
payable
under
the
laws
of
the
United
States
and
Art.
XI
(1)
of
the
Canada-U.S.
Reciprocal
Tax
Convention
in
respect
of
income
derived:
from
sources
in
the
United
States
and
that
this
withholding
tax
is
a
tax
on
income
not
profits.
Article
XI
(1)
reads
as
follows:
/‘(I).
The.
rate
of.
income
tax
imposed
by
one
of
the
contracting
States,
in
respect
of
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
per
cent
for
each
taxable
year.”
Nevertheless,
the
judgment
holds
that
the
appellant’s
income
from
United
States
sources
is
nil
notwithstanding
the
obvious
fact
of
these
large
interest
receipts.
These
are
not
industrial
and
commercial
profits
and,
as
such,
allocable
in
accordance
with
Art.
I
of
the
Convention.
Indeed,
by
Art.
II,
interest
is
expressly
excluded
from
industrial
and
commercial
profits
and
is
left
to
be
dealt
with
on
an
income,
not
a
profits’
basis
by
Art.
XI
(1)
above
quoted.
I
am
therefore
of
the
opinion
that
the
denial
of
this
foreign
tax
deduction
is
not
only
contrary
to
Section
38(1)
of
the
Act
but
also
offends
Art.
XV(1)
of
the
Convention,
which
reads:
“(1)
As
far
as
may
be
in
accordance
with
the
provisions
of
The
Income
Tax
Act,
Canada
agrees
to
allow
as
a
deduction
from
the
Dominion
income
and
excess
profits
taxes
on
any
income
which
was
derived
from
sources
within
the
United
States
of
America
and
was
there
taxed,
the
appropriate
amount
of
such
taxes
paid
to
the
United
States
of
America.”
On
my
reading
of
the
Tax
Convention,
I
should
have
also
reached
the
conclusion
that
the
denial
of
the
foreign
tax
deduction
for
the
earlier
years
as
authorized
by
Section
38(1)
of
the
Act
also
offended
Article
XV
(1)
of
the
Convention.
As
indicated,
however,
as
it
seems
to
me,
when
the
Income
Tax
Act
expressly
limits
the
foreign
tax
deduction
in
respect
of
taxes
paid
to
foreign
governments
generally
to
an
amount
that
is
less
than
the
full
amount
paid
to
the
foreign
government,
it
is
only
the
lesser
amount
that
the
Canadian
Government
has
bound
itself,
by
Article
XV(1),
to
allow
in
the
case
of
taxes
paid
to
the
United
States
Government.
It
is
only
‘‘the
appropriate
amount
of
such
taxes
paid
to
the
United
States
of
America”
that
is
has
agreed
to
allow
as
a
deduction
‘‘
As
far
as
may
be
in
accordance
with
.
.
.
The
Income
Tax
Act’’.
I
have
to
admit
that
it
is
not
at
all
clear
to
me
that
the
Supreme
Court
of
Canada
has
viewed
Article
XV
(1)
as
I
do.
On
the
other
hand,
the
problem
that
I
have
had
in
applying
the
provisions
of
Article
XV
was
not
before
that
Court
and
I
do
not
find
in
its
judgment
any
indication
as
to
what
effect
would
have
been
given
to
that
provision
in
these
circumstances.
If
I
found
in
the
judgment
of
the
Supreme
Court
of
Canada
an
indication
as
to
how
the
Article
should
be
applied
in
these
circumstances,
I
would,
of
course,
be
relieved
of
any
duty
to
do
anything
but
apply
it.
As
I
do
not
find
in
that
judgment
any
such
indication,
I
must
give
the
Article
the
application
that,
unaided
by
authority,
I
understand
it
to
have.
I
accordingly
conclude
that
the
Convention
and
the
legislation
giving
it
the
force
of
law
do
not
change
the
result
that
I
reach
under
the
Income
Tax
Act.
Having
regard
to
the
terms
of
the
stated
case,
which
contains
an
agreement
as
to
the
judgment
that
is
to
be
delivered
depending
on
the
conclusion
reached
by
the
Court,
the
appeals
are
dismissed
with
costs.