Mountain Place Limited v. Minister of National Revenue, [1978] CTC 2878

Roland St-Onge:—The appeal of Mountain Place Limited came before me on June 19, 1978, at the city of Montreal, Quebec, and the issue is whether the appellant company has failed to withhold the amount of tax payable on payment made to a non-resident.

The appellant contends that the amount of some $18,000 paid to Neue Heimat International (hereinafter referred to as NHI) during the 1972 taxation year was not interest paid or credited to a non-resident but an advance by Mountain Place Limited to NHI and that this advance was reimbursed.

On the other hand, the respondent contends the following:

2. In assessing the appellant for his 1972 taxation year the respondent proceeded on the following assumptions of facts:

a) The appellant .is a subsidiary of Neue Heimat International (hereinafter referred to as NHI) a non resident company, its principal place of business being located in Hamburg, in the German Federal Republic.

b) In the course of appellant’ s 1970 taxation year, NHI loaned to appellant an amount of $2,242,498.01 in Canadian dollars or 7,825,659.26 in deutsche marks.

c) In the course of appellant’s 1971 taxation year, appellant paid to NHI $120,094.10 as interest owing on the loans described in paragraph 2(b) of the reply to notice of appeal.

d) Appellant remitted $102,079.98 in Canadian dollars to NHI and withheld $18,014.12 as taxes payable under Part XIII of the Income Tax Act by the non-resident on the interest paid to it by a Canadian resident and remitted that amount to respondent.

e) During the 1972 taxation year, NHI expressed dissatisfaction in being liable for Canadian tax and asked appellant to be compensated for the tax levied by the Canadian authorities and withheld by appellant.

f) During the 1972 taxation year, appellant paid NHI $18,014.12 but failed to withhold any tax payable under Part XIII.

g) By notice of assessment dated January 16, 1976, the respondent assessed the appellant for an amount of $2,702.12 representing the 15% withholding tax and $837.57 as penalties and interest.

Called on behalf of the appellant company, Mr Whiteman, a chartered accountant for the company since 1965, corroborated most of the facts alleged by the respondent and explained the following:. NHI owned 50% of the shares in the appellant company, but the appellant shareholder did not know the share structure of the German company. Because of distance and language difficulties, it took a long time to know if the German company was a taxable corporation.

The appellant company wanted to keep good relations with the German company and decided to pay the $18,000 but the said amount was considered as account receivable in the appellant company’s books. The appellant company did not want to pay a higher rate of interest to the German company.

After a meeting in 1975 with Mr Viranyi, Inspector for the Department of National Revenue, the amount of $18,000 was reimbursed by the German company and the account receivable was cleared out in the appellant company’s books.

Mr Albert Chrique, comptroller for the appellant company, testified that the $18,000 which was to be reimbursed in the near future was received and deposited by the appellant company on October 6, 1976; that it took a long time for the appellant to be reimbursed because it was difficult to have information from NHI and that after this incident in 1972, the appellant company decided to borrow the necessary financing from the Banque Canadienne Nationale. The German company became a collateral, and in 1972, the amount of $120,000 was the last payment of interest paid by the appellant company to the German company.

Counsel for the appellant argued that the $18,000 was not a payment of additional interest but an advance by the appellant company to keep good business relations with the German company; that the $18,000 had to be paid by someone, and in 1976, the German company decided to reimburse the said amount; that the cases referred to by the respondent do not apply because, in those cases, the tax was not remitted to the Minister whereas, in the case at bar, the respondent received some $18,000.

Counsel for respondent referred to the various sections of the Income Tax Act to say that with respect to the $18,000 the appellant did not fall within any of the exceptions, that ignorance of the law was not an excuse and that the amount was reimbursed four years later and only after the meeting with Mr Viranyi.

According to the evidence adduced, it is obvious that the appellant company never wanted to pay a higher rate of interest than the one agreed upon by the two companies in 1971, and when NHI expressed dissatisfaction at being liable for Canadian tax, the appellant company, instead of negotiating a new rate of interest with the German company, decided to borrow from the Banque Canadienne Nationale in Canada and the German company agreed to guarantee the loan.

This shows that there was never any intention by the appellant company to pay a higher rate of interest to the German company; consequently, this type of payment of $18,000 in 1972 cannot be branded as interest payment. However, the appellant company alleged that this payment was an advance of money and consequently a loan to the German company.

Section 15 of the Income Tax Act says that a loan has to be reimbursed within a year; if not, it is deemed to be a dividend paid to a shareholder. The German company was a shareholder of the appellant company and took some four years to reimburse the appellant.

By virtue of subsection 212(2) of the new Act.

Every non-resident person shall pay an income tax of 25% on every amount that a corporation resident in Canada pays or credits, or is deemed by Part I to pay or credit, to him as, on account or in lieu of payment of, or in Satisfaction of a taxable dividend . . .

Consequently, for these reasons, the appeal is dismissed.

Appeal dismissed.