Strayer
J.:—
Relief
Requested
The
plaintiff
appeals
against
assessments
made
by
the
Minister
of
National
Revenue
in
respect
of
its
taxation
year
ended
April
9,
1980
(T-602-87),
its
taxation
year
ended
August
31,
1980
(T-690-87),
and
its
taxation
year
ended
August
31,
1981
(T-560-87).
In
respect
of
each
of
these
years
the
plaintiff
seeks
a
reassessment
which
would
permit
the
deduction
from
its
taxable
income
of
a
portion
of
a
dividend
received
in
each
of
these
years
from
a
foreign
affiliate,
the
Bacardi
Corporation
(Bacardi)
which
is
a
Delaware
company
carrying
on
active
business
in
Puerto
Rico.
The
amounts
of
such
claimed
deductions
disallowed
by
the
Minister
are:
$186,161
in
respect
of
the
taxation
year
ended
April
9,
1980;
$324,232
in
respect
of
the
taxation
year
ended
August
31,
1980;
and
$1,214,325
in
respect
of
the
taxation
year
ended
August
31,
1981.
A
further
issue
was
raised
in
T-690-87
concerning
the
tax
treatment
of
a
dividend
received
by
the
plaintiff
from
another
company,
Bacardi
Mexico,
during
the
taxation
year
ended
August
31,
1980.
In
the
Minister's
reassessment
a
portion
of
this
dividend,
$18,778,
was
reassessed
as
a
deduction
from
income
rather
than
as
a
tax
credit.
The
plaintiff
claimed
that
this
amount
should
have
been
treated
as
a
tax
credit.
Counsel
advised
me
at
trial
that
they
were
in
agreement
that
this
amount
should
have
been
allowed
as
a
tax
credit
and
that
I
should
so
order
by
consent
of
the
parties,
allowing
interest
thereon
to
the
plaintiff.
Facts
At
the
opening
of
the
trial
the
parties
indicated
their
agreement
that
these
three
matters
should
be
tried
together,
and
I
so
ordered.
They
had
also
filed
an
agreed
statement
of
facts
and
issues
in
each
of
these
cases.
The
only
evidence
received
was
that
of
an
expert
witness
for
each
party
together
with
exhibits
put
in
through
those
witnesses
or
filed
as
materials
of
which
I
was
obliged
to
take
judicial
notice.
The
plaintiff
is
a
Canadian
corporation.
At
all
relevant
times
it
owned
approximately
12
per
cent
of
the
shares
of
Bacardi.
Bacardi
carries
on
an
active
business
in
Puerto
Rico
in
the
production
and
marketing
of
wines
and
spirits.
Because
the
plaintiff
owned
over
ten
per
cent
of
the
shares
of
Bacardi,
the
latter
would
be
its
”
foreign
affiliate”
within
the
meaning
of
paragraph
95(1)(d)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the"Act").
In
respect
of
each
of
the
taxation
years
in
question,
the
plaintiff
took
the
position
that
it
was
entitled,
under
paragraph
113(1)(a)
of
the
Income
Tax
Act,
to
deduct
a
portion
of
the
dividend
received
from
Bacardi
which
had
been
paid
out
of
the
"exempt
surplus”
of
that
foreign
affiliate.
The
"exempt
surplus”
referred
to
in
that
paragraph
is
defined
by
subparagraph
5907(1)(d)(v)
of
the
Regulations
as
including
"exempt
earnings".
These
"exempt
earnings"
are
defined
in
subparagraph
5907(1)(b)(v)
as
including:
for
the
1976
or
any
subsequent
taxation
year,
each
amount
that
is
included
in
the
exempt
earnings
of
the
affiliate
by
virtue
of
subsection
(10).
Subsection
5907(10)
provides,
that
where
net
earnings
of
a
foreign
affiliate
would
otherwise
be
taxable
in
the
country
where
it
carries
on
business
and
(b)
the
rate
of
the
income
or
profits
tax
to
which
any
earnings
of
that
active
business
of
the
affiliate
are
subjected
by
the
government
of
that
country
is,
by
virtue
of
a
special
exemption
from
or
reduction
of
tax
(other
than
an
export
incentive)
that
is
provided
under
a
law
of
such
country
to
promote
investments
or
projects
in
pursuance
of
a
program
of
economic
development,
less
than
the
rate
of
such
tax
that
would,
but
for
such
exemption
or
reduction,
be
paid
by
the
affiliate,
[Emphasis
added.]
and
the
affiliate
qualified
for
such
exemption
during
the
period
in
question,
then
such
net
earnings
of
the
affiliate
are
to
be
included
in
its
"
exempt
earnings".
Suffice
it
to
say
that
the
issue
here
is
whether
a
certain
tax
exemption
granted
under
Puerto
Rican
law
to
Bacardi
during
the
years
in
question
was
simply
an
exemption
“to
promote
investments
or
projects
in
pursuance
of
a
program
of
economic
development"
within
the
meaning
of
subsection
5907(10),
in
which
case
it
would
be
considered
part
of
the
exempt
surplus
of
the
affiliate
thus
reducing
the
plaintiff's
taxable
income
from
the
Bacardi
dividend,
or
whether
such
exemption
was
also
“an
export
incentive"
in
which
case
it
would
not
form
part
of
the
"exempt
surplus”
of
the
affiliate
and
not
be
deductible
from
the
taxable
income
of
the
plaintiff
in
respect
of
that
dividend.
It
will
also
be
useful
to
note,
although
the
matter
is
not
directly
in
issue,
that
by
virtue
of
subparagraph
5907(1)(b)(iv)
of
the
Regulations,
earnings
of
an
affiliate
resident
in
and
carrying
on
business
in
a
country
listed
in
subsection
5907(11)
would
on
that
basis
alone
be
regarded
as
"exempt
earnings".
Subsection
5907(11)
lists
a
number
of
countries,
essentially
those
having
tax
treaties
with
Canada:
paragraph
(kk)
lists
the“
United
States
of
America,
but
for
greater
certainty,
not
including
its
Territories
.
.
.
.”
Thus
there
is
no
automatic
exemption
for
a
Canadian
corporation
in
respect
of
income
from
earnings
of
an
affiliate
from
its
business
in
Puerto
Rico.
Bacardi’s
position
under
Puerto
Rican
tax
law
is
described
by
the
parties
in
the
agreed
statement
of
facts
as
follows:
5.
Bacardi
has
enjoyed
a
tax
reduction
pursuant
to
Puerto
Rico's
Industrial
Incentive
Act
of
1963
as
amended
(the
Puerto
Rican
Act)
since
Jul
1,
1975
in
relation
to
its
active
business
income
in
Puerto
Rico.
6.
The
Puerto
Rican
Act
was
enacted
as
part
of
a
broad
program
of
industrial
incentives
aimed
at
stimulating
the
establishment
and
growth
of
manufacturing
enterprises
on
the
island.
Bacardi’s
exemption
was
granted
pursuant
to
s.
252a(e)(37),
which
exempts
corporations
which
manufacture,
Distilled
spirits
produced,
rectified
or
otherwise
processed,
casked
or
bottled
in
Puerto
Rico,
for
export
and
shipment
to
the
United
States
if
considered
as
products
of
Puerto
Rico
under
applicable
federal
laws.
As
I
understand
it,
the
quoted
portion
of
the
Puerto
Rico
Industrial
Incentive
Act
of
1963,
as
amended
by
Act
No.
18
of
1975,
constitutes
the
definition
of
a
"designated
article”,
income
from
the
production
of
which
enjoys
a
certain
exemption
under
Puerto
Rican
law.
Bacardi
is
engaged
in
the
production
and
marketing
of
wines
and
spirits
in
Puerto
Rico
and
sells
its
products
in
the
United
States.
Thus
in
the
years
in
question
it
was
entitled
to
certain
exemptions
with
respect
to
income
earned
from
the
production
in
Puerto
Rico
of
distilled
spirits
”
for
export
and
shipment
to
the
United
States”.
The
question
then
which
I
must
determine
is
whether
this
tax
exemption
is,
within
the
meaning
of
paragraph
5907(10(b)
of
the
Income
Tax
Regulations
of
Canada,
"an
export
incentive”.
In
other
words,
is
"
export
and
shipment
to
the
United
States”
as
described
in
the
Puerto
Rican
tax
incentive
an"
export"
within
the
meaning
of
Canadian
income
tax
law?
To
answer
this
question
it
is
necessary,
inter
alia,
to
consider
the
legal
status
of
Puerto
Rico
and
its
relationship
to
the
United
States.
To
assist
me
in
this
consideration,
the
parties
each
called
a
witness
expert
in
such
matters.
The
plaintiff
called
Noel
Gonzâalez,
a
Puerto
Rican
practitioner
also
qualified
to
practice
before
the
U.S.
District
Court
for
the
District
of
Puerto
Rico
and
the
U.S.
Court
of
Appeals
for
the
First
Circuit
(the
relevant
appellate
court
for
Puerto
Rico
in
respect
of
matters
within
the
purview
of
the
federal
courts).
The
defendant
called
as
its
expert
Dr.
José
Trâas
Monge,
a
former
Attorney
General
and
Chief
Justice
of
Puerto
Rico.
Among
the
many
other
functions
which
he
has
performed,
he
was
a
member
of
the
Constitutional
Convention
of
Puerto
Rico
in
1951-52.
From
their
evidence
and
the
other
material
submitted,
I
can
draw
the
following
conclusions
concerning
the
status
of
Puerto
Rico
and
its
relationship
to
the
United
States.
Puerto
Rico
was
a
former
Spanish
colony
which
was
taken
by
conquest
by
the
United
States
during
the
Spanish-American
War.
It
was
ceded
to
the
United
States
by
the
Treaty
of
Paris
in
1898.
While
ruled
initially
by
the
U.S.
military,
a
succession
of
federal
U.S.
laws
gradually
extended
to
it
more
autonomy
culminating
in
1950
in
Public
Law
600,
64
Stat.
ch.
446,
which
authorized
the
people
of
Puerto
Rico,
if
they
approved
of
Public
Law
600
by
a
referendum,
to
call
a
constitutional
convention
to
draft
their
own
constitution.
Such
a
constitution
was
adopted
and
was
submitted
to
the
U.S.
Congress
and
the
President
for
approval,
it
becoming
effective
on
July
25,
1952.
This
constitution
established
the'"Commonwealth
of
Puerto
Rico".
Public
Law
600
provided
that,
on
the
coming
into
force
of
such
a
constitution,
numerous
U.S.
laws
applying
to
Puerto
Rico
would
automatically
be
repealed.
It
also
provided
for
the
continuation
of
a
number
of
U.S.
laws
applying
to
Puerto
Rico
and
these
were
collected
together
into
what
is
now
called
the
Puerto
Rican
Federal
Relations
Act
(1950),
48
U.S.C.A
731
et
seq.
The
parties
agree
that
Puerto
Rico
is
not
a
sovereign
country
in
the
international
sense.
The
plaintiff
filed
a
certificate
(Exhibit
3)
issued
on
behalf
of
the
Secretary
of
State
for
External
Affairs
of
Canada
under
paragraph
14(1)(b)
of
the
State
Immunity
Act,
R.S.C.
1985,
c.
S-18,
which
states
as
follows:
I
certify,
pursuant
to
s.
14(1)(b)
of
the
State
Immunity
Act,
c.
S-18,
RSC,
that
Puerto
Rico
is
an
unincorporated
territory
of
the
United
States
of
America,
and
as
such
is
a
political
subdivision
of
the
United
States
of
America.
By
subsection
14(1)
of
that
Act
such
a
certificate
is
admissible
in
evidence
as
conclusive
proof
of
any
matter
stated
in
the
certificate
with
respect
to
.
.
.
the
question
referred
to
therein,
in
this
case
such
question
being
as
stated
in
paragraph
14(1)(b)
as
to
whether
a
particular
area
or
territory
of
a
foreign
state
is
a
political
subdivision
of
that
state
.
.
.
By
common
law
rules
such
certificates
are
also
conclusive
on
such
questions
(Government
of
the
Republic
of
Spain
v.
S.S.
"Arantzazu
Mendi”,
[1939]
A.C.
256
at
264
(H.
of
L.);
Chateau-Gai
Wines
Ltd.
v.
A.-G.
Canada,
[1970]
Ex.
C.R.
366;
14
D.L.R.
(3d)
411
at
382-84
(D.L.R.
421-22)).
Until
1953
the
United
States
had
made
reports
to
the
United
Nations
under
paragraph
73(e)
of
the
U.N.
Charter
which
requires
members
which
have
or
assume
responsibilities
for
the
administration
of
territories
whose
peoples
have
not
yet
attained
a
full
measure
of
self-government.
.
.
to
transmit
regularly
to
the
Secretary
General
information
relating
to
the
economic,
social,
and
educational
conditions
in
those
territories.
In
January,
1953
the
United
States
notified
the
U.N.
to
the
effect
that
it
would
no
longer
be
appropriate
for
it
to
submit
such
information
on
Puerto
Rico
as
the
Commonwealth
of
Puerto
Rico
had
achieved
a
full
measure
of
local
self-government.
The
U.S.
representative
stated
that
the
authority
of
the
Commonwealth
is
not
more
limited
than
that
of
any
state
and
in
fact
in
certain
aspects
goes
beyond
that
of
the
states.
Puerto
Ricans
enjoy
a
common
citizenship
with
that
of
residents
of
the
United
States:
in
effect
former
Spanish
citizens
who
so
elected,
and
anyone
born
in
Puerto
Rico
after
1898
who
is
not
a
citizen
of
some
other
country,
together
with
their
descendants,
are
all
U.S.
citizens.
There
is
full
freedom
of
movement
for
U.S.
citizens
between
Puerto
Rico
and
the
United
States.
Puerto
Rico
is,
of
course,
represented
abroad
by
the
United
States
and
the
United
States
is
responsible
for
the
defence
of
Puerto
Rico.
The
currency
of
Puerto
Rico
is
U.S.
currency.
Many
provisions
of
the
U.S.
Constitution
apply
in
Puerto
Rico.
Not
all
provisions
apply,
however.
The
United
States
Supreme
Court
developed
the
concept
that
territories
such
as
Puerto
Rico
and
the
Philippines,
both
acquired
pursuant
to
the
Treaty
of
Paris
of
1898,
were
not
"
incorporated
territories"
as
were
Alaska
and
Hawaii.
They
were
"unincorporated"
because
there
had
been
no
commitment
or
intention
ever
to
make
them
states
of
the
United
States.
Having
overcome
the
moral
and
legal
anomalies
of
the
"land
of
the
free”
acquiring
an
empire,
the
U.S.
Supreme
Court
found
only
part
of
the
U.S.
Constitution
to
be
applicable
to
such
territories,
even
excluding
the
application
there
of
part
of
the
Bill
of
Rights.
Notwithstanding
the
adoption
of
the
Commonwealth
Constitution
in
1952,
the
Federal
Relations
Act,
48
U.S.C.
734;
provides
that
the
statutory
laws
of
the
United
States
not
locally
inapplicable,
except
as
hereinbefore
or
hereinafter
otherwise
provided,
shall
have
the
same
force
and
effect
in
Puerto
Rico
as
in
the
United
States
.
.
.
(See
e.g.,
United
States
v.
Gerena
(1986),
649
F.
supp.
1183
(U.S.
D.Ct.,
Conn.))
More
specifically,
the
U.S.
Internal
Revenue
Code
applies
in
Puerto
Rico,
although
it
does
not
impose
income
tax
on
Puerto
Rico
residents
with
respect
to
income
earned
from
Puerto
Rican
sources.
The
Constitution
of
1952
approved
by
the
people
of
Puerto
Rico
was
nevertheless
adopted
under
the
authority
of
U.S.
law.
There
remains
some
debate
as
to
whether
the
plenary
legislative
power
Congress
once
had
over
Puerto
Rico
has
been
modified
by
the
adoption
of
that
Constitution.
There
is
in
effect
a
customs
union
between
Puerto
Rico
and
the
United
States.
This
has
been
created,
not
by
the
U.S.
Constitution,
but
by
U.S.
laws.
As
I
understand
it,
neither
Congress
nor
the
Legislature
of
Puerto
Rico
is
bound
by
the
following
constraints
in
the
U.S.
Constitution
concerning
taxes
on
exports
or
imports:
Article
I,
section
8,
clause
1
which
requires
that
"any
duties,
imposts
and
excises"
levied
by
Congress
shall
be
uniform
throughout
the
United
States”;
Article
I,
section
9,
clause
5
which
prohibits
Congress
from
levying
a
tax
or
duty
on
articles
"exported
from
any
state";
ana
Article
I,
section
10,
clause
2,
which
provides
that
no
state
shall,
without
the
consent
of
Congress,
“lay
any
imposts
or
duties
on
imports
or
exports,
except
what
may
be
absolutely
necessary
for
executing
its
inspection
laws
.
.
.
.”
Congress
through
the
exercise
of
the
commerce
power,
and
freed
of
such
constitutional
constraints,
is
able
to
place
Puerto
Rico
for
customs
purposes
in
a
position
analogous
to
any
other
part
of
the
country,
with
some
differences.
By
federal
law
the
same
duties
are
imposed
on
goods
coming
into
Puerto
Rico
from
other
countries
as
are
imposed
on
goods
coming
into
the
United
States.
Customs
duties
are
collected
by
federal
officers,
but
the
revenues
collected
on
goods
coming
into
Puerto
Rico
are
paid
into
the
Puerto
Rican
treasury.
Goods
from
the
United
States
enter
Puerto
Rico
free
of
duty,
subject
to
the
right
of
Puerto
Rico
to
impose
a
tariff
on
coffee
coming
into
Puerto
Rico
either
from
other
countries
or
from
the
United
States.
(As
coffee
enters
the
United
States
free
of
duty
and
as
Puerto
Rico
wanted
to
protect
its
coffee
industry,
this
exception
was
made
so
that
Puerto
Rico
protective
measures
would
not
be
evaded,
by
transshipment
through
the
United
States,
of
coffee
from
other
countries.)
According
to
the
evidence,
the
only
barrier
to
the
entry
of
Puerto
Rican
goods
into
the
United
States
is
a
quota
imposed
on
sugar
imports.
Puerto
Rico
can
impose
sales
or
other
taxes
on
goods
as
soon
as
they
enter
Puerto
Rico
as
long
as
it
does
not
discriminate
as
between
goods
from
the
United
States
and
locally
produced
goods.
Revenues
from
such
local
taxes
go,
of
course,
to
the
Puerto
Rican
treasury.
Of
more
special
interest
for
present
purposes,
excise
taxes
collected
in
the
United
States
on
goods
originating
in
Puerto
Rico
and
sold
in
the
United
States
are
paid
over
to
the
Puerto
Rican
treasury.
Thus
there
is
a
distinct
revenue
advantage
for
Puerto
Rico
in
having
certain
of
its
goods
sold
in
the
United
States.
Both
expert
witnesses
agreed
that
there
is
free
trade
between
Puerto
Rico
and
the
United
States
except
in
respect
of
the
restrictions
on
coffee
and
sugar
as
described
above.
Issue
The
parties
agree
that
the
issue
is
as
to
whether
the
tax
exemption
or
reduction
to
which
Bacardi
was
entitled
in
the
years
in
question
under
paragraph
252a(e)(37)
of
Puerto
Rico's
Industrial
Incentives
Act
of
1963,
which
exemption
they
agree
was
"to
promote
investments
or
projects
in
pursuance
of
a
program
of
economic
development"
within
the
language
of
subsection
5907(10)
of
the
Income
Tax
Regulations,
was
also
an
"export
incentive"
for
the
purposes
of
that
subsection
and
thus
not
recognisable
as
a
deduction
from
the
plaintiff's
dividend
income.
Conclusions
.This
issue
is,
of
course,
a
question
of
Canadian
law
as
to
the
meaning
of
the
phrase
"other
than
an
export
incentive”
(the
French
version
being”
autre
qu'un
stimulant
à
l'exportation")
as
found
in
paragraph
5907(10)(b)
of
the
Income
Tax
Regulations.
The
two
most
pertinent
Canadian
cases
involving
the
interpretation
of
"goods
exported"
or
"goods
.
.
.
for
export",
expressions
used
there
to
describe
goods
exempted
from
certain
sales
taxes,
both
expressed
the
view
that
"export"
normally
involves
the
transfer
of
goods
from
one
country
to
another
(R.
v.
Gooderham
&
Worts
Ltd.
(1928),
42
O.L.R.
218;
3
D.I.R.
109
(Ont.
H.C.);
H.M.
v.
Carling
Export
Brewing
and
Malting
Co.,
[1930]
S.C.R.
361;
2
D.L.R.
725.
The
first
of
these
cases
cited
in
support
a
decision
of
the
U.S.
Supreme
Court
to
the
same
effect
(Swan
&
Finch
Co.
v.
United
States
(1902),
190
U.S.
143).
None
of
these
cases
involved
the
movement
of
goods
to
another
territory
subject
to
the
same
sovereign
authority
in
an
international
sense.
As
a
starting
point
in
dealing
with
this
novel
problem,
it
is
useful
to
note
some
dictionary
definitions
of
the
verb
"to
export".
According
to
the
Oxford
English
Dictionary,
2nd
ed.
1989,
the
first
meaning
is
"to
carry
(things)
out
of
a
place;
to
take
away;
carry
off."
The
second
meaning,
described
as"commercial
usage”,
is
“to
send
out
(commodities
of
any
kind)
from
one
country
to
another”.
The
dictionnaire
Robert
de
la
langue
française,
(1976)
defines
"exporter"
as
"action
d'exporter;
sortie
de
marchandises
nationales
vendues
à
un
pays
étranger".
It
would
appear
from
these
definitions
that
apart
from
the
literal
meaning
of
its
Latin
roots,
ex
portare,
meaning
to
carry
out
or
away,
the
most
natural
meaning
in
a
commercial
context
for
the
term
“export”
or
"exportation"
is
the
sending
of
goods
from
one
country
to
another,
foreign,
country.
It
is
also
obvious,
however,
that
these
words
are
not
always
used
in
that
sense.
As
counsel
for
the
plaintiff
pointed
out
by
way
of
example,
subsection
92A(2)
of
the
Constitution
Act,
1867
as
amended
by
the
Constitution
Act,
1982,
gives
provincial
legislatures
the
power
to
make
laws
"in
relation
to
the
export
from
the
province
to
another
part
of
Canada"
of
certain
products.
In
that
context
export
is
used
to
cover
shipments
from
one
province
to
another,
but
that
is
made
clear
by
the
text
of
the
Constitution
itself.
While
the
meaning
of
the
words
export"
or
exportation"
in
subsection
5907(10)
would
give
no
difficulty
in
the
vast
majority
of
cases,
and
would
no
doubt
be
taken
to
describe
tax
incentives
designed
to
promote
the
sale
of
a
country's
product
to
another,
foreign,
country,
there
is
a
latent
ambiguity
when
the
term
is
applied
to
the
promotion
of
shipments
from
Puerto
Rico
to
the
United
States.
Lacking
any
other
guides
to
the
proper
interpretation
of
the
regulation,
I
have
sought
to
understand
the
rationale
for
the
distinction
which
the
regulation
makes
between
tax
incentives
designed
to
promote
industrial
development
within
the
country
granting
the
incentive
(which
Canadian
law
will
tolerate
by,
in
effect,
not
taxing
that
incentive)
and
an
incentive
given
by
the
government
of
one
geographic
entity
(to
use
a
neutral
term)
to
promote
the
sale
of
its
local
production
in
another
geographic
entity
(an
incentive
which
will
not
be
respected
by
Canadian
law
and
will
in
fact
be
neutralized
through
our
tax
system
to
the
extent
that
any
proceeds
of
that
tax
incentive
are
received
by
Canadian
taxpayers).
I
asked
counsel
to
assist
me
in
defining
the
rationale.
Both
said
in
effect
that
to
the
extent
that
Canada
respects
tax
incentives
for
industrial
development
within
foreign
countries,
this
was
a
matter
of
not
wishing
to
negative
their
attempts
at
domestic
industrial
development.
Counsel
for
the
plaintiff
described
this
as
a
kind
of
“foreign
aid"
to
developing
countries.
(I
am
not
satisfied
that
the
beneficial
effect
of
subsection
5907(10)
is
confined
to
developing
countries.)
Counsel
for
the
defendant
went
further
in
saying
that
the
refusal
to
recognize
the
tax
exempt
status
of
an
export
incentive
was
to
protect
Canadian
producers
who
would
be
subjected
to
unfair
competition
in
third
countries
to
which
Canada
and
the
country
granting
the
export
incentives
might
wish
to
export.
It
appears
to
me
that
by
these
income
tax
measures
Canada
tolerates
foreign
countries
giving
development
incentives
which
subsidize
sales
to
domestic
markets
of
the
subsidizing
country,
or
even
those
which
subsidize
domestic
and
foreign
sales
indiscriminately.
But
it
expects
its
producers
to
be
able
to
compete
on
an
equal
basis,
free
from
competition
facilitated
by
specific
export
subsidies
by
foreign
governments,
in
third
country
markets
which
both
Canadian
and
other
foreign
producers
should
enter
on
approximately
the
same
terms.
In
short
the
test
is,
is
the
incentive-subsidy
in
whole
or
in
part
for
sales
in
domestic
markets,
or
is
it
specifically
designed
for
sales
in
nondomestic
markets?
In
applying
this
test
it
is
important
to
note
the
provisions
of
the
Canada-
United
States
Free
Trade
Agreement
Implementation
Act,
S.C.
1988,
c.
65.
In
implementing
the
free
trade
agreement
between
Canada
and
the
United
States,
the
Act
defines"United
States"
to
mean
(ibid,
paragraph
2(1)(a))
the
customs
territory
of
the
United
States,
including
the
fifty
states
of
the
United
States,
the
District
of
Columbia
and
Puerto
Rico
.
.
.
If
I
am
correct
that
the
term
"export
incentive"
in
the
Income
Tax
Regulations
has
reference
to
sales
outside
a
single
customs
union
then
the
Canada-United
States
Free
Trade
Agreement
Implementation
Act
identifies
the
relevant
customs
union
for
the
purpose
of
applying
this
test
to
the
United
States
and
Puerto
Rico.
When
Parliament
has
specifically
chosen
to
treat
the
fifty
states
of
the
United
States,
the
District
of
Columbia,
and
Puerto
Rico
as
one
customs
territory
the
term
"export
incentive”
in
the
Income
Tax
Regulations
should
be
given
a
commensurate
meaning
when
applied
to
a
Puerto
Rican
tax
incentive.
Regard
must
also
be
had
to
U.S.
and
Puerto
Rican
law
to
ascertain
how
they
view
the
relationship
between
these
two
entities.
Unfortunately
not
a
great
deal
of
guidance
can
be
had
from
these
sources
for
our
purposes.
It
has
been
held
by
their
courts
that
Puerto
Rico
is
not
a
"foreign
country"
within
the
meaning
of
U.S.
tariff
law.
It
has
been
variously
held
that
goods
coming
from
a
territory
such
as
Puerto
Rico
are
or
are
not
"imports",
although
the
dominant
view
now
appears
to
be
that
they
are
to
be
regarded
as
"imports"
within
the
meaning
of
the
U.S.
Constitution,
especially
Article
1,
section
10,
clause
2
which
prohibits
state
duties
thereon
(See
e.g.,
Hooven
&
Allison
Co.
v.
Evatt
(1944),
324
U.S.
652;
City
of
Farmers
Branch
v.
Matsushita
Electric
Corporation
of
America
(1975),
527
S.W.
Rep.,
2d
Series
768
(Court
of
Civil
Appeals
of
Texas).)
However,
the
very
rationale
for
this
view
illustrates
that
it
is
based
on
the
particularities
of
the
U.S.
Constitution
which
are
of
not
much
assistance
in
resolving
the
present
problem.
It
has
been
concluded
that
Article
I,
section
10,
Clause
2
in
prohibiting
a"
state"
from
imposing
duties
on”
imports
or
exports",
does
not
apply
to
Puerto
Rico
because
it
is
not
a
"state".
Four
judges
of
the
Supreme
Court
of
the
United
States
in
the
Hooven
case
held
that
it
follows
that
Article
I,
section
10,
clause
2
is
intended
to
apply
to
prohibit
duties
on
goods
coming
from
any
part
of
the
world,
be
it
a
foreign
country
or
a
U.S.
territory,
to
which
the
strictures
of
that
clause
do
not
apply.
As
it
does
not
apply
to
unincorporated
territories,
goods
coming
from
Puerto
Rico
(or
the
Philippines
when
it
was
an
unincorporated
territory
of
the
U.S.)
are
"imports"
within
the
meaning
of
that
clause
and
cannot
be
subjected
to
duties
by
any
of
the
incorporated
states.
This
is
not
of
much
assistance
to
me
in
applying
the
Canadian
Income
Tax
Act.
Nor
is
the
statutory
law
of
the
United
States
and
Puerto
Rico
very
helpful
in
indicating
how
those
entities
view
their
inter-relationship.
For
example
section
3
of
the
Federal
Relations
Act,
a
federal
law
which
continues
to
govern
many
matters
including
trade
between
Puerto
Rico
and
the
United
States,
states
That
no
export
duty
shall
be
levied
or
collected
on
exports
from
Puerto
Rico
.
.
.
[Emphasis
added.]
Further
on
it
provides
that
no
discrimination
be
made
[by
Puerto
Rico]
between
the
articles
imported
from
the
United
States
or
foreign
countries
and
similar
articles
produced
or
manufactured
in
Puerto
Rico.
[Emphasis
added.]
Yet
in
section
9
of
the
same
Act
reference
is
made
to
taxes
collected
on
articles
produced
in
Puerto
Rico
and
transported
to
the
United
States
.
.
.
[Emphasis
added.]
In
general
it
may
be
observed
that
U.S.
federal
laws
now
seem
to
avoid
using
the
word
”
import"
to
describe
goods
coming
from
Puerto
Rico
to
the
United
States,
referring
to
them
instead
as
being
"brought
into
the
United
States”,
"coming
to
the
United
States",
or
being
for
"shipment
to
the
United
States".
On
the
other
hand
Puerto
Rican
legislation
frequently
uses
the
term
"export"
to
describe,
compendiously,
shipments
to
the
United
States
and
to
foreign
countries
and
on
occasion
the
term
"export"
is
used
specifically
to
refer
to
shipments
to
the
United
States.
The
most
relevant
example
of
this
is
in
the
wording
of
the
very
tax
exemption
in
question,
paragraph
252(a)(e)(37)
of
its
Industrial
Incentives
Act
which
provides
the
exemption
on
income
earned
from
the
production
of
distilled
spirits
produced
.
.
.
in
Puerto
Rico,
for
export
and
shipment
to
the
United
States.
[Emphasis
added.]
It
would
seem
then
that
there
is
little
clear
guidance
to
be
had
from
the
U.S.
and
Puerto
Rican
legislation
as
to
the
meaning
of
the
term
"import"
or
"export"
in
this
context.
It
is
perhaps
more
useful
to
consider
the
purpose
of
the
Puerto
Rican
tax
exemption
in
question
which
I
do
on
the
basis
of
interpretative
materials
provided
by
the
expert
witnesses.
When
the
exemption
was
adopted
in
1975
it
was
explained
that
for
the
exemption
to
be
earned
it
was
necessary
that
there
be
an
increase
in
production
or
processing
of
distilled
spirits
in
Puerto
Rico
combined
with
their
shipment
and
sale
in
the
United
States.
The
Treasury
Committee
report
to
the
Puerto
Rico
House
of
Representatives
on
both
the
Senate
bill
and
House
bill
in
that
legislature
stated
The
purpose
of
this
measure
is
to
increase
the
revenues
of
the
Treasury
of
Puerto
Rico,
[by]
promoting
the
export
of
distilled
spirits
to
the
United
States
since
the
.
.
.
[federal
tax]
paid
by
our
industry
.
.
.
[on]
such
.
.
.
[exports]
reverts
to
the
general
fund
of
the
Commonwealth
of
Puerto
Rico.
We
recommend
the
measure
because
we
understand
that
this
type
of
exemption
serves
as
an
incentive
to
distillers
in
Puerto
Rico
to
invest
more
resources
in
the
promotion
of
their
sales
in
the
United
States
market,
and
on
the
other
hand
it
induces
other
firms
to
import
distilled
spirits
to
terminate
the
processing
and
bottling
in
Puerto
Rico
with
the
purpose
of
[subsequently]
exporting
[such
products]
to
the
continental
United
States
market.
.
.
.
.
.It
[is]
evident,
that
the
industry
needs
an
incentive
that
stimulates
making
new
investments
in
necessary
facilitites
[sic]
[in
order]
to
continue
achieving
an
adequate
penetration
of
the
continental
[United
States]
market
of
distilled
spirits.
It
is
clear
that
this
was
not
a
typical
export
incentive
to
encourage
domestic
producers
to
sell
outside
of
their
domestic
market
for
the
purpose
of
earning
more
foreign
exchange
or
improving
the
balance
of
payments
of
the
producing
country.
Instead,
it
was
to
promote
sales
within
essentially
a
domestic
market,
a
common
market
including
Puerto
Rico
and
the
United
States
between
which,
with
very
small
exceptions,
there
are
no
customs
duties
or
trade
barriers.
There
is
no
question
of
earning
foreign
exchange
as
these
two
entities
have
a
common
currency
and
the
balance
of
payments
of
Puerto
Rico
forms
part
of
the
balance
of
payments
of
the
United
States
in
terms
of
international
trade.
The
essential
purpose
of
the
tax
incentive
is
thus
not
to
give
Puerto
Rican
producers
an
advantage
in
selling
in
a
non-domestic
market
but
rather
to
increase
the
revenues
of
the
Puerto
Rican
government
by
encouraging
sales
in
the
United
States,
a
domestic
market,
where
the
excise
taxes
collected
will
revert
to
the
Commonwealth
treasury.
It
follows
that
such
a
tax
incentive
is
not
an
”
export
incentive".
I
am
therefore
allowing
these
appeals
and
directing
that
the
Minister
reassess
the
plaintiff's
income
tax
for
each
of
the
years
in
question
on
the
basis
that
the
deductions
previously
disallowed
are
derived
from
the
exempt
earnings
of
the
plaintiff's
foreign
affiliate.
I
am
ordering
interest
to
be
paid
by
the
defendant
in
respect
of
the
reassessment
of
the
Bacardi
Mexico
dividend
because
I
understood
the
parties
to
have
so
agreed.
But
I
am
not
otherwise
ordering
interest
as
it
was
not
sought
in
the
statements
of
claim.
Appeal
allowed.
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