United States of America v. Harden, , [1963] CTC 91, 63 DTC 1094

SHEPPARD, J.A.:—This appeal is by the plaintiff from an order of Maclean, J. in chambers of May 26, 1961, setting aside the writ of summons and subsequent proceedings with costs.

The facts follow:

On June 10, 1957, the plaintiff brought action against the defendant in the United States district court for the southern district of California, central division, for internal revenue taxes (income taxes) alleged due by the defendant under the laws of the United States of America—for the year 1945, $264,117.23 and for the year 1946, $603,844.78—under assessments made by the Commissioner of Internal Revenue. The defendant, by her answer, put the facts in issue. As a result of pre-trial hearings, the defendant consented to judgment in the amount of $602,110.79 and formal judgment was entered on March 13, 1961, for that amount. On March 20, 1961, the plaintiff brought action on that judgment in the Supreme Court of British Columbia and the defendant moved to set aside the writ of summons and proceedings on the ground that the Court had no jurisdiction to enforce directly or indirectly the revenue laws of a foreign state. After preliminary objection, it was agreed that the motion be dealt with as a motion for Judgment, and, after argument, the learned chamber judge held:

“It seems to me dealing with the defendant’s first point that a judgment for taxes should be dealt with in no different way under the rule as stated by Dicey than a bare claim for taxes, that this matter has been authoritatively dealt with in several cases.

It is clear in this case that the ‘substance of the claim’ is foreign taxes and it follows that the fact that the claim presently appears in the form of a judgment does not entitled it to any different consideration it would have received in the form of a foreign tax assessment.”

and thereupon set aside the writ of summons and subsequent proceedings. The plaintiff has appealed on the ground that the judgment of the district court, being that of a court of competent jurisdiction, is enforceable in this province, that is, that the original claim for income tax has disappeared in the judgment, giving rise to a promise to pay, and, in the result, the action is not one to enforce directly or indirectly the revenue of a foreign state.

There appears to be not so much difficulty in the application of the principle as there is difficulty in the statement of it. As a matter of public policy, the Court will not enforce directly or indirectly the revenue laws of a foreign country: Dicey on Conflict of Laws, 7th ed., p. 159. Difficulty has arisen from time to time in declaring the exclusion so as to cover new circumstances.

In Sydney Municipal Council v. Bull, [1909] 1 K.B. 7; 78 L.J.K.B. 45, the council sued the defendant in England for municipal rate in Australia, and Grantham, J. dismissed the action and said at p. 12:

“Some limit must be placed upon the available means of enforcing the sumptuary laws enacted by foreign States for their own municipal purposes . .. The action is in the nature of an action for a penalty to recover a tax; it is analogous to an action brought in one country to enforce the revenue laws of another. In such cases it has always been held that an action will not lie outside the confines of the last-mentioned State.”

In Cotton v. Reg., [1914] A.C. 176; 5 W.W.R. 662, Lord Moulton, in delivering the judgment of the Judicial Committee, said at p. 195 :

“There is no accepted principle in international law to the effect that nations should recognize or enforce the fiscal laws of foreign countries, . . .”

In In re Visser; Queen of Holland v. Drukker, [1928] Ch. 877 ; 97 L.J. Ch. 488, Tomlin, J. said at p. 884:

“My own opinion is that there is a well recognized rule, which has been enforced for at least 200 years or thereabouts, under which these Courts will not collect the taxes of foreign States for the benefit of the sovereigns of those foreign States; and this is one of those actions which these Courts will not entertain.’’

Also, the courts will not entertain an action bronght by an individual which will indirectly have the effect of enforcing the revenue laws of a foreign country.

In Peter Buchanan Ltd. and Macharg v. McVey, [1955] A.C. 516n (Eire) the Buchanan company was incorporated as a private company under the Imperial Companies Act, with its head office in Scotland, where it engaged in the wine and spirits business : McVey was the registered owner of all outstanding shares but one which was vested in Miss Farquharson but of which MeVey was the beneficial owner, and they constituted the directors. The value of the stock-in-trade of that company increased in value and the company borrowed to the approximate inflated value from banks in Scotland against charges on the stock-in-trade and transferred the funds to Ireland and informally paid them to McVey as a shareholder. Retroactive legislation of the Imperial parliament made the company liable to income tax. On petition by the Tax Commissioners, winding-up was ordered and a liquidator appointed; the liquidator then sued McVey in Ireland on the ground of his breach of trust in taking those funds from the company. The defendant contended that the only person who would benefit by the action was the Imperial government, in that the sole creditor of the company was amply secured by the charges on the stock-in-trade in Scotland and hence the action, though brought by the liquidator, would indirectly have the result of enforcing the revenue laws applicable in Scotland. The action was dismissed on the ground that the object was the enforcement of a foreign revenue law. Kingsmill Moore, J., the trial judge, considered the effect of the various decisions, and said at p. 526n :

“These decisions establish that the courts of our country will not enforce the revenue claims of a foreign country in a suit brought for the purpose by a foreign public authority or the representative of such an authority, and that, even if a judgment for a foreign penalty or debt be obtained in the country 1 in which it is incurred, it is not possible successfully to sue in this country on such judgment. They do not expressly go further, though some of the dicta suggest that there may be a principle that our courts will not lend themselves directly to the collection of a foreign tax and will not entertain a suit which is brought for that object. Such a wide extension is also suggested by the authorities which establish that our courts will not entertain an action for the enforcement of a penalty imposed by the laws of a foreign State, a principle which seems to have been the parent of the rule as to not enforcing foreign revenue claims.’’

And at p. 527n said:

“Those cases on penalties would seem to establish that it is : not the form of the action or the nature of the plaintiff that

- must be considered, but the substance of the right sought to be enforced ; and that if the enforcement of such right would even indirectly involve the execution of the penal law of another State, then the claim must be refused. 1 cannot see why the same rule should not prevail where it appears that the enforcement of the right claimed would indirectly involve the execution of the revenue law of another State, and serve a revenue demand.”

And at p. 529n said :

‘‘Nor is modern history without examples of revenue laws used for purposes which would not only affront the strongest feelings of neighbouring communities but would run counter to their political aims and vital interests. Such laws have been used for religious and racial discrimintations, for the furtherance of social policies and ideals dangerous to the security of adjacent countries, and for the direct furtherance of economic warfare. So long as these possibilities exist it would be equally unwise for the courts to permit the enforcement of the revenue claims of foreign States or to attempt to discriminate between those claims which they would and those which they would not enforce. Safety lies only in universal rejection. Such a principle appears to me to be fundamental and of supreme importance.

If I am right in attributing such importance to the principle, then it is clear that its enforcement must not depend merely on the form in which the claim is made. It is not a question whether the plaintiff is a foreign State or the representative of a foreign State or its revenue authority. In every case the substance of the claim must be scrutinized, and if it then appears that it is really a suit brought for the purpose of collecting the debts of a foreign revenue it must be rejected. Mr. Wilson has pressed upon me the difficulty of deciding such a question of fact and has replied on ‘ratio mentis acervv’. For the purpose of this case it is sufficient to say that when it appears to the court that the whole object of the suit is to collect tax for a foreign revenue, and that this will be the sole result of a decision in favour of the plaintiff, then a court is entitled to reject the claim by refusing jurisdiction.’’

That judgment was affirmed on appeal and was also approved by Lord Keith of Avonholm in Gov’t. of India, Ministry of Finance v. Taylor, [1955] A.C. 491 at 510.

The plaintiff concedes the principle that no action will lie in Canadian courts by or on behalf of a foreign state to recover taxes payable under its revenue laws, but contends that principle does not apply once the state has recovered judgment for the taxes in its domestic courts and sues on that judgment in Canada. If the plaintiff’s submission is sound, a foreign state, having recovered judgment in its own courts for taxes that it could not recover directly in Canadian courts, could then sue and recover in Canadian courts on that judgment no matter how offensive the tax might be to Canadian sovereignty or how injurious to Canadian economy. The reasons which require Canadian courts to reject claims by or on behalf of foreign states for taxes due under their revenue laws likewise require Canadian courts to reject claims of foreign states upon judgments recovered in their courts for such taxes. It is the duty of our courts to go behind the foreign judgment to see if in substance it is one for foreign taxes; that right and duty to go behind a foreign judgment is established by the highest authority.

In Huntington v. Attrill, [1893] A.C. 150, the plaintiff recovered judgment in New York on a statute of the state which imposed a liability for false representations and then brought action on the judgment in Ontario. The defendant pleaded that the judgment was for a penalty imposed by the laws of the State of New York and was not to be enforced by the courts of Ontario. Lord Watson, in delivering the judgment for the Privy Council, said at p. 155 :

“Their Lordships cannot assent to the proposition that, in considering whether the present action was penal in such sense as to oust their jurisdiction, the Courts of Ontario were bound to pay absolute deference to any interpretation which might have been put upon the Statute of 1875 in the State of New York. They had to construe and apply an international rule, which is a matter of law entirely within the cognisance of the foreign Court whose jurisdiction is invoked. Judicial decisions in the State where the cause of action arose are not precedents which must be followed, although the reasoning upon which they are founded must always receive careful consideration, and may be conclusive. The Court appealed to must determine for itself, in the first place, the substance of the right sought to be enforced; and, in the second place, whether its enforcement would, either directly or indirectly, involve the execution of the penal law of another State. Were any other principle to guide its decision, a Court might find itself in the position of giving effect in one case and denying effect in another, to suits of the same character, in consequence of the causes of action having arisen in different countries; or in the predicament of being constrained to give effect to laws which were, in its own judgment, strictly penal.’’

And after citing Wisconsin v. Pelican Insur. Co. (1887), 127 U.S. 239, 265, said at p. 157:

‘In delivering the judgment of the bench, Mr. Justice Gray, after referring to the text books, and the dictum by Chief Justice Marshall already cited, went on to say:

‘The rule that the Courts of no country execute the law of another applies not only to. prosecutions and sentences for crimes and misdemeanours, but to all suits in favour of the State for the recovery of pecuniary penalties for any violation of statutes for the protection of its revenue or other municipal laws, and to all judgments for such penalties. ’

Their Lordships do not hesitate to accept that exposition of the law, which, in their opinion, discloses the proper test for ascertaining whether an action is penal within the meaning of the rule. ’ ’

The Ontario court had no difficulty in going behind the New York judgment to ascertain if it were based on a claim which should not be enforced in that court, and the capacity to go behind the judgment in the case of penalties imposed also applies in the case of foreign revenue laws, as both come within the rule enunciated by Gray, J. in Wisconsin v. Pelican Insur. Co., supra, and adopted by the Judicial Committee as the proper rule of law for these courts.

There is no difficulty i in going behind a foreign personal judgment to ascertain the nature of the claim on which it was based. in Walker v. Witter (1778), 1 Doug, K.B. 1; 99 E.R. 1, Lord Mansfield, C.J. said at p. 5 :

“Foreign judgments are a ground of action everywhere, but they are examinable, . . .’’

Moreover, foreign personal judgments operate here as a simple contract between the parties: Hall v. Odber (1809), 11 East 118; 103 E.R. 949, Lord Ellenborough, C.J., at p. 124, Grose, J. at p. 125, Bayley, J. at p. 126. The principle of merger does not apply to a foreign judgment: Bank of Australasia v. Harding (1850) 9 C.P. 661, Wilde, C.J. at p. 687, Cresswell, J. at p. 688, and the right to sue on the original cause remains, Cresswell, J. at p. 688, as a foreign judgment merely operates as a simple contract and an action thereon is barred by the Statute of Limitations as are other simple contracts.

In speaking of the effect of a foreign judgment in Smith v. Nicholls (1839), 5 Bing N.C. 208, Bosanquet, J. said at p. 223:

“Although it may amount to accord, it does not constitute satisfaction, and cannot be a bar to a suit for the original cause of complaint.’’

And in Hall v. Odber, supra, Lord Ellenborough said at p. 124 :

“. . . they are but evidence of the debt; they do not bar or stay an action on simple contract.’’

Hence, the effect of a foreign judgment to be here enforced must be viewed in the light of the laws of this province: Here the foreign judgment operates neither by merger nor by satisfaction and the original cause of action remains to be enforced by action equally as if there were no foreign judgment, and on that original cause of action the foreign judgment is merely evidence or an implied promise to pay.

It follows that the enforcement of this foreign judgment is an enforcement of the original cause of action, that is, a claim on behalf of a foreign state to recover taxation due under its law, and such action is unenforceable in the courts of this province : Gov’t. of India, Ministry of Finance v. Taylor, supra; Sydney Municipal Council v. Bull, supra, and, further, the Court is here asked to enforce directly such a claim for the benefit of the foreign state imposing the tax, which is contrary to Peter Buchanan Ltd. and Machar g v. McVey, supra.

The appeal should be dismissed.

Judgment accordingly.