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Docket: 2000-674(IT)G
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BETWEEN:
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KINGUK TRAWL INC.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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____________________________________________________________________
Appeals heard on common evidence with the
appeals of Farocan Incorporated (Successor to Aqviq Trawl Incorporated) (2000-671(IT)G)
on October 14, 2003, at Halifax,
Nova Scotia.
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Before: The
Honourable Justice T.E. Margeson
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Appearances:
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Counsel for the
Appellant:
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Edwin C. Harris
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Counsel for the
Respondent:
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John P. Bodurtha
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____________________________________________________________________
JUDGMENT
Further to my Judgment
and Reasons for Judgment issued on January 22, 2002, and further to the
decision of the Federal Court of Appeal referring this matter back to the Tax
Court of Canada for determination of the portion of the interest credited by
the Appellant to Uhrenholt that properly relates to the business carried on by
it in a foreign country pursuant to clause 212(1)(b)(iii)(E) of the Income
Tax Act;
And further to oral and
written submissions by both parties, the Court orders as follows:
(1)
The portion of the Appellants'
total interest expenses for the years in question that is subject to
withholding tax be calculated in accordance with the formula agreed to by the
parties;
(2)
For the purpose of the formula,
qualifying expenses incurred outside of Canada, and deemed to have been
incurred in the course of carrying on a business in a country other than
Canada, consist of packaging expenses, supplies and services for the vessels in
foreign ports, and half of the legal expenses for the years in question;
(3)
The interest on the unpaid
withholding tax that is determined by the application of the formula be
calculated in the manner agreed to by the parties; and
(4)
The Appellants are entitled to
one set of costs in respect of these proceedings.
Signed at Ottawa,
Canada, this 14th day of November 2003.
Margeson,
J.
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Docket: 2000-671(IT)G
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BETWEEN:
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FAROCAN INCORPORATED,
(Successor to Aqviq Trawl Incorporated),
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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____________________________________________________________________
Appeals heard on common evidence with the
appeals of Kinguk Trawl Inc. (2000-674(IT)G) on October 14, 2003,
at Halifax, Nova Scotia.
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Before: The
Honourable Justice T.E. Margeson
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Appearances:
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Counsel for the
Appellant:
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Edwin C. Harris
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Counsel for the
Respondent:
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John P. Bodurtha
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____________________________________________________________________
JUDGMENT
Further to my Judgment
and Reasons for Judgment issued on January 22, 2002, and further to the
decision of the Federal Court of Appeal referring this matter back to the Tax
Court of Canada for determination of the portion of the interest credited by
the Appellant to Uhrenholt that properly relates to the business carried on by
it in a foreign country pursuant to clause 212(1)(b)(iii)(E) of the Income
Tax Act;
And further to oral and
written submissions by both parties, the Court orders as follows:
(1)
The portion of the Appellants'
total interest expenses for the years in question that is subject to
withholding tax be calculated in accordance with the formula agreed to by the
parties;
(2)
For the purpose of the formula,
qualifying expenses incurred outside of Canada, and deemed to have been
incurred in the course of carrying on a business in a country other than
Canada, consist of packaging expenses, supplies and services for the vessels in
foreign ports, and half of the legal expenses for the years in question;
(3)
The interest on the unpaid
withholding tax that is determined by the application of the formula be
calculated in the manner agreed to by the parties; and
(4) The Appellants are entitled to one set of
costs in respect of these proceedings.
Signed at Ottawa,
Canada, this 14th day of November 2003.
Margeson,
J.
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Citation: 2003TCC842
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Date: 20031114
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Docket: 2000-674(IT)G
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BETWEEN:
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KINGUK TRAWL INC.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
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AND
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Docket: 2000-671(IT)G
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BETWEEN:
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FAROCAN INCORPORATED,
(Successor to Aqviq Trawl Incorporated),
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Margeson,
J.
[1] These
matters were referred back to the Tax Court of Canada for determination of the
portion of the interest credited by the Appellants to Uhrenholt that properly
relates to the business carried on by them in a foreign country pursuant to
clause 212(1)(b)(ii)(E) of the Income Tax Act ("Act").
[2] The Federal
Court of Appeal also directed that there should be one set of costs in the
Federal Court of Appeal and in the Tax Court of Canada. At the time of the
submissions following the decision of the Federal Court of Appeal the parties
indicated that the formula for calculating the portion of the interest expense
that was subject to withholding tax was agreed upon and that formula for each
year was (1 – B/C) A = D.
[3] By that
formula, A is the total interest expense credited to Uhrenholt; B is the total
of "embedded expenses" and qualifying "expenses incurred outside
Canada"; C is the total credits to the inter-company account of the
Appellant in question plus the "embedded expenses"; and D is the
interest subject to withholding taxes, not being exempt under clause 212(1)(b)(iii)(E)
of the Act.
[4] The
withholding tax is 15 per cent of D.
[5] At the
subsequent hearing the parties agreed on the amounts to be included in the
application of the formula except for the portion of "expenses incurred
outside Canada" that can reasonably be regarded as having been incurred
"in the course of carrying on a business in a country other than
Canada". The result of the decision of the Federal Court of Appeal was to
establish that the Appellants were carrying on part of their business "in
a country outside Canada".
[6] The
expenses in question consisted of:
(1)
Supplies and services for
vessels while in foreign port.
(2)
Vessel insurance.
(3)
Packaging supplies.
(4)
Vessel, engine, and factory
maintenance and other.
(5)
Protection and indemnity
insurance.
(6)
Fishing gear.
(7)
Fuel and lube oil.
(8)
Crew travel.
(9)
Legal and professional.
[7] In
submissions before the Tax Court of Canada at the time of trial, counsel for
the Respondent agreed to accept all of the packaging expenses and half of the
legal expenses, but would not accept any of the other expenses, in the
foregoing list.
[8] At the time
of submissions following the Federal Court of Appeal decision, the Appellants
were prepared to accept the Respondent's position with one exception:
"Supplies and Services for Vessel in Foreign Port". Counsel for the
Appellants submitted that these expenses should also be accepted as
representing expenses incurred in the course of carrying on business in a
country other than Canada. In essence, his position in this matter was that
they were incurred in carrying on business outside of Canada.
[9] It was the
Appellants' submission that during the period in question, the two vessels,
Aqviq and Kinguk, left Canada to land catch and to be repaired in Greenland and
also went to Denmark for major repair and refit.
[10] He further
submitted that the Federal Court of Appeal in this decision established that
the selling aspects of the Appellants' business were carried on, through their
agent, outside Canada. Therefore, it was submitted that, by reason of the need for
the vessels to go to Greenland and Denmark in the course of carrying on the
fishing aspect of their business, that aspect of their business was, in part,
also carried on in one or more countries other than Canada. Part of the
business that involved the operation of the vessels took place, and therefore
was carried on, in countries outside Canada.
[11] Counsel
further submitted that the decision of the Federal Court of Appeal must be
taken to have rejected the Respondent's argument that, where the most significant
aspects of a business are carried on in a country, all of the business must be
regarded as being carried on there.
[12] Counsel
referred to the decision of the Federal Court of Appeal herein, at paragraphs
39 to 42. In particular he relied upon the findings in London Life Insurance Company v. The Queen, 87 DTC 5312 (Trial Division) and The Queen v. London Life Insurance Company, 90 DTC 6001 (Appeal Division – London Life) in support of his proposition that the cost of "Supplies and
Services for Vessel in Foreign Port" were expenses incurred in the course
of carrying on business in a country other than Canada. All of these
expenditures were related to an essential part of the fishing operation of the
Appellants.
Argument on behalf of the Respondent
[13] Counsel for
the Respondent asked the following question: "What was the purpose of the
payments? What did the payments relate to? Further, do the expenses in issue
relate to catching the fish or selling the catch?"
[14] It was
argued that just because the activities were an essential part of the fishing
operation, this does not mean that the Appellants were "carrying on a
business outside of Canada".
[15] To
reiterate, they are an essential part of the fishing operation but they do not
amount to "carrying on a business".
[16] Counsel
agreed, as indicated before, with points (1) and (3) of the Appellants'
submission and all of point (2) with the exception of the supplies and services
for the vessel while in a foreign port.
[17] It was the
position of counsel for the Respondent that there are two main actions of the
Appellants in this case: (1) the selling in Denmark and (2) the catching in
Canada. As of needs be, the items in issue must relate to the catching in
Canada because they do not relate to the selling in Denmark and therefore these
expenses do not qualify for the exemption.
[18] Further,
counsel argued that the Respondent should have its costs of this proceeding
because this is a new proceeding and is not covered by the judgment of the Federal
Court of Appeal.
[19] In reply,
counsel for the Appellants said that there is no jurisdiction to give costs to
the Respondent in this case. According to the decision of the Federal Court of
Appeal, there is to be one set of costs in these proceedings and the Appellants
should be entitled to costs incurred at this time.
[20] Further, it
was counsel's position that fishing involved not only harvesting fish but also
the other operations including operations which led to the expenses in
question. They landed the catch in a foreign country. This was an integral part
of the fishing business in general, being carried on outside of Canada. These
actions were not "de minimis".
[21] The Federal
Court of Appeal did not address the issue of what business was carried on
outside of Canada. However, the actions which led to the expenses in issue were
not incidental to a business being carried on outside of Canada, but were an
essential part of the business of the company, which was fishing and this
business has been carried on outside and inside Canada.
Decision
[22] The point
made by counsel for the Respondent that the expenses in question did not relate
to the selling is a neat point but the Court is satisfied that it interprets
the decision of the Federal Court of Appeal too narrowly. The Federal Court of
Appeal decided without question that some aspects of the operations of the
Appellants were carried on outside of Canada even though they did not specify
what the business was that was being carried on outside of Canada. In paragraph
42 of the decision the Court stated as follows:
Indeed, the whole of the
sales functions, from the marketing of the catch to the making of the
contracts, was conducted by Uhrenholt. Having regard to the fact that selling
the catch was an essential component of the appellants' business and that these
activities took place in Denmark and perhaps elsewhere, I conclude that they
were carrying on business in a foreign country within the meaning of
clause 212(1)(b)(iii)(E) of the Act.
[23] In
referring to London Life Insurance
Company, supra, as they did, they
indicated that the activities of Uhrenholt appeared to go beyond the extent of
operations present in that case, where the agent was only responsible for
conducting a portion of the sales functions. In making expenditures for
supplies and services for the vessels in foreign ports, Uhrenholt, as agent for
the Appellants, was going even further than what the Federal Court of Appeal
had in mind in reference to the selling aspects of Uhrenholt. Yet, there can be
no doubt that these extra activities were nonetheless an essential part of the
business of the Appellants, which was in general, fishing and selling of the
catch. One can hardly see how one could have carried on the business of fishing
and the selling of the fish as carried on in this case without expending the
amounts in issue here.
[24] This Court
rejects the argument put forward on behalf of the Respondent that since these
expenditures clearly do not relate to the selling of the fish, they must
clearly relate to the catching of the fish in Canada. According to this
conclusion the Court would have to decide that the Appellants were carrying on
two or three different businesses, i.e. catching the fish, selling the fish,
preparing the vessels and supplying the vessels. However, what the Appellants
were involved in was a fishing operation, which included a number of different
and essential parts.
[25] One of
these parts required them to pay expenses for supplies and services for the
vessels in foreign ports. These expenditures related to carrying on a business
in a country other than Canada.
[26] In the end
result the Court orders that:
(1)
The portion of the Appellants'
total interest expense for the years in question that is subject to withholding
tax be calculated in accordance with the formula agreed to by the parties;
(2) For the purpose of the
formula, qualifying expenses incurred outside of Canada, and deemed to have
been incurred in the course of carrying on a business in a country other than
Canada, consist of packaging expenses, supplies and services for the vessels in
foreign ports, and half of the legal expenses for the years in question;
(3) Interest on the unpaid
withholding tax that is determined by the application of the formula be
calculated in the manner agreed to by the parties; and
(4) The Appellants are entitled
to one set of costs in respect of these proceedings.
Signed at Ottawa, Canada this 14th day of
November 2003.
Margeson,
J.
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