Citation: 2011TCC181
Date: 20110331
Docket: 2010-1529(IT)APP
BETWEEN:
M.P.N. HOLDINGS LTD.,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Sheridan J.
[1]
The Applicant, M.P.N.
Holdings Ltd. (“MPN Holdings”), is applying for an extension of time within
which to appeal the Notice of Confirmation
of the Minister of National Revenue of its 2001 and 2002 taxation years. The
application in respect of the 2003 taxation year was withdrawn at the hearing.
[2]
The Applicant made its application
within the time permitted under paragraph 167(5)(a) of the Income Tax
Act. It remains only for the Applicant to satisfy the criteria for the
granting of an extension under paragraph 167(5)(b):
167(5) No order
shall be made under this section unless
…
(b)
the taxpayer demonstrates that
(i) within the time otherwise limited by section 169 for
appealing the taxpayer
(A) was unable to act or to instruct another to act in the
taxpayer’s name, or
(B) had a bona fide intention to appeal,
(ii)
given the reasons set out in the application and the circumstances of
the case, it would be just and equitable to grant the application,
(iii)
the application was made as soon as circumstances permitted, and
(iv)
there are reasonable grounds for the appeal.
[3]
Even if the Applicant
is able to satisfy the above criteria, there is the further issue of whether
the Applicant waived its right to appeal.
Facts
[4]
After a lengthy audit
and negotiation period, on March 30, 2007, the Applicant duly signed
a document entitled “Waiver of Objection
Rights” (“Waiver”), the full text of which reads:
Canada Revenue
Agency (CRA) and MPN Holdings Ltd. (the “Declarant”) have agreed upon how one
or more audit issues should be (re)assessed as outlined in the CRA’s final
letter dated March 15, 2007 itemized as follows:
a.
Foreign Accrual Property Income from Arden Investments Inc. earned in
2001 as a result of ownership of a 25% participating percentage
b.
Reduction in interest expense in Fiscal 2001, 2002, 2003
c.
Directors fees disallowed in Fiscal 2001, 2002, 2003
d.
Part XIII on consulting fees paid to Arden Advisors LLC
in 2001, 2002, 2003 [Emphasis added.]
e.
Capitalization of a portion of the consulting fees to capital assets and
eligible capital expenditures in 2001, 2002, 2003
f.
Interest waived for period March 1, 2004 to August 31, 2005 on any
additional Part I or Part XIII Income Tax for the 2001, 2002, 2003 fiscal
periods
|
|
2001
|
2002
|
2003
|
|
Foreign
accrual property Income
|
$
258,414
|
$
-
|
$
-
|
|
Reduction
in interest expense
|
$
111,612
|
$
284,908
|
$
301,730
|
|
Consulting
fee capitalized
|
$
270,937
|
$
284,058
|
$
265,636
|
|
Directors
fees disallowed
|
$
244,377
|
$
538,000
|
$
369,782
|
|
|
|
|
|
|
Net Change
|
$
885,340
|
$
1,106,966
|
$
937,148
|
|
|
|
|
|
|
Part
XIII on consulting fees
[Emphasis
added.]
|
$
90,854
|
$
142,029
|
$
138,818
|
The
taxpayer reserves the right to object to the Part XIII if any retroactive
change is made to the Canada-US tax convention to provide relief to Limited
Liability Companies within the time allowed to file an objection. [Emphasis
added.]
The Declarant
waives the right to object to the CRA’s (re)assessment of the above‑itemized
audit issue(s) for the pertinent taxation period(s).
The Declarant
acknowledges that:
1.
the impact of the provisions of subsection 165(1.2) of the Income Tax
Act or subsection 301(1.6) of the Excise Tax Act, as applicable;
·
have been explained; and
·
are understood to mean that no further recourse, including
objection and appeal rights to any authority with respect to the (re)assessment
of the above referenced issue(s) by the CRA is available upon signing this
waiver document;
2.
additional tax, interest and/or penalty, as applicable in addition to
that which had previously been (re)assessed, may result from the CRA’s (re)assessment
of the issues itemized above in accordance with the CRA’s final letter referred
to above; and
3.
this document is being freely and voluntarily signed.
[5]
On May 22, 2007, the
Minister issued Notice of Reassessment under paragraph 212(1)(a) of Part XIII of the Act for
the withholding tax, together with interest and penalties thereon, for
management fees paid by the Applicant to a non‑resident corporation,
Arden Advisors LLC.
[6]
On August 16, 2007, the Applicant through
counsel filed a Notice of Objection in respect of the Part XIII assessment on
the following grounds:
The taxpayer
says that the reassessments are incorrect and should be reversed for the
following reasons:
1. Arden Advisors LLC, a Limited Liability Corporation, incorporated
in the United States, did not have a permanent establishment in Canada and
Article VII of the Canada-US Tax Convention therefore precludes Canada from
imposing any withholding taxes on the management fees paid by the taxpayer to
Arden Advisors LLC. CRA relies upon The Queen v. Crown Forest Industries
Limited 95 DTC 5389 (SCC) for the position that Limited Liability
Corporations are not a resident of the U.S. for Treaty purposes and not
eligible for Treaty relief, since they are not liable to tax under the U.S. Internal
Revenue Code. This position is inconsistent with CRA’s position that U.S.
S-Corps are permitted Treaty relief even though they elect not to be taxed
under the Internal Revenue Code. Further, it is the position of CRA that with
respect to U.S. partnerships, the partners are the beneficial owners of the
income, and therefore CRA looks through the partnership to allow a partner who
is resident in the US to claim the benefit of the Canada-US Convention on his
share of the partnership income. For instance, see CRA documents 9713120 and
2002-0133747. Given that for US tax purposes, a limited liability corporation
is classified as a partnership if it has two or more members, there is no basis
to suggest that the intent of the contracting states is other than to accord a
limited liability company the same treatment given a partnership under the
Convention. Further, the CRA’s position ignores the fact that the Crown Forest
decision states that tax conventions must be interpreted by reference to the
purpose and intention of the parties to the convention. Both Canada and the
U.S. apply the Convention to entities that are not generally subject to tax –
for instance, see paragraph 1 of Article IV of the Canada – U.S. Tax Convention
as to the non‑taxable entities included as a “resident”. The taxpayer
submits that, since Arden Advisors LLC’s connecting characteristics with the
U.S. are fundamentally the same as the entities that are eligible for Treaty
relief, it does fall within the application of the Canada – U.S. Tax Convention.
2. In the alternative, the taxpayer states that it
understands that amendments to the Canada-US Tax Convention will be announced
shortly and said amendments will provide treaty protection to LLC’s.
Furthermore, the taxpayer understands that these amendments made (sic) be
made to apply retroactively to the years in issue. Therefore, the taxpayer
requests that this notice of objection be held in abeyance pending the
amendments to the Convention.
[7]
In September 2007, the amending
protocol for the Canada-U.S. Income Tax Convention was signed; the
amendments were ratified by Parliament in December 2007 to come into effect in
January 2011. There is no dispute that the amendments ultimately made were
prospective in their application.
[8]
On February 2, 2009, the Minister
issued a Notice of Confirmation in respect of the Notice of Objection filed by the
Applicant.
[9]
Some 14 months later, on April 8,
2010, the Tax Court of Canada issued its decision in TD Securities (USA) LLC
v. The Queen, 2010 TCC 186,
one effect of which was to overturn, for the first time, the long-standing
position of the Canada Revenue Agency that limited liability corporations were
not “liable to tax” in the United States and therefore, not residents of the
United States for the purposes of or entitled to benefits under the Canada-U.S.
Income Tax Convention. The Notice of Appeal in TD Securities had
been filed on July 17, 2008; the Reply to the Notice of Appeal was filed on
October 22, 2008, more than three months before the issuance of the Applicant’s
Notice of Confirmation on February 2, 2009.
[10]
The Applicant happened to learn of
the TD Securities decision approximately a week after its release
through a professional tax news publication. On May 3, 2009, a day before the
expiry of the time permitted to seek an extension of time to file a Notice of
Appeal under subsection 167(5), the Applicant made this application.
Analysis
[11]
Turning first to paragraph 167(5)(b),
the law is clear that no application may be granted unless the taxpayer can
satisfy all of the criteria; Dewey v. Her Majesty the Queen, [2004]
2 C.T.C. 311 (F.C.A.). Having heard the testimony of Warren Greenspoon,
the directing mind of the Applicant, and read the materials filed, I am not
persuaded that the Applicant can demonstrate the first of the requirements
under paragraph 167(5)(b): that within the 90 day-period after the
issuance of the Notice of Confirmation on February 2, 2009 it was either unable
to act or to instruct another to act in its name; or that it had a bona fide
intention to appeal. Mr. Greenspoon was a direct and candid witness; on cross-examination,
his answers in respect of the paragraph 167(5)(b)(i) factors are set out
below:
Q And as you have already advised the Court, M.P.N. did not
appeal within 90 days after receiving this notice of confirmation, is that
right?
A That’s
correct.
Q You
weren’t missing any necessary documentation to appeal, were you?
A No.
Q It wasn’t your emotional or psychological state that
prevented you from appealing?
A No.
Q Nor
was it your physical state that prevented you from taking any action?
A No.
Q In fact, the reason M.P.N. didn’t appeal within 90 days
after receiving this confirmation is because it was believed that an appeal
would not be successful, isn’t that right?
A We believed that it would be extremely difficult, we
believed that it would be extraordinarily expensive, and we believed that given
CRA’s longstanding position with regard to treaty benefits to LLCs that it
would, it was going to be an enormous challenge.
Q So you essentially weighed the considerations and chose not
to appeal, is that right?
A That’s
correct.
Q And it is only once the TD Securities case came out
that M.P.N. decided to appeal, correct?
A That
is correct.
[12]
While I accept that the Applicant
never agreed and continues to disagree with the Minister’s interpretation of
the Canada-U.S. Income Tax Convention, it is clear from the above
passage that the Applicant did not intend to avail itself of its right to
appeal within the 90-day period following the Confirmation. Counsel for the Applicant
contended that the cost of litigation, like a mental or physical impairment,
could be a reason for being “unable to act” within the meaning of subparagraph
167(5)(b)(i). While that might be so in certain circumstances, the
present case is not one of them. The evidence shows that the Applicant
considered its options and chose not to act; the anticipated cost of appealing
and its belief that success was unlikely provided the basis for what was a
decision not to act. From this it follows that the Applicant is equally unable
to demonstrate that it had a bona fide intention to appeal under the
alternate criterion of subparagraph 167(5)(b)(i) of the Act.
The event that triggered the Applicant’s intention to appeal was the issuance
of TD Securities on April 8, 2010 and its anticipated effect on the
interpretation of the Canada-U.S. Income Tax Convention.
[13]
Given my finding in respect of
subparagraph 167(5)(b)(i), it is not necessary to consider the other
criteria. However, even if the Applicant were able to satisfy paragraph 167(5)(b),
it seems to me that the wording of the Waiver is sufficiently clear to bar the
Applicant from appealing the Notice of Confirmation in respect of the Part XIII
issue.
[14]
The validity of the Waiver itself
is not in dispute. The Applicant challenges only the interpretation of the
clause pertaining to the waiver of its rights to object and appeal. On
cross-examination Mr. Greenspoon said that when signing the Waiver, he
understood it to mean that “any change” to the Canada-U.S.
Income Tax Convention, including a
change in its interpretation, would be sufficient to trigger the Applicant’s
right to object or appeal. Counsel for the Applicant correctly noted that the
Waiver was drafted by the Respondent and argued that any ambiguity ought to
weigh in the Applicant’s favour.
[15]
Balanced against this
consideration, however, is the fact that the Applicant was ably represented by
counsel throughout the lengthy period of negotiations leading up to and
including the signing of the Waiver. The Waiver documented the parties’
agreement as to how the Applicant would be reassessed in respect of the issues
itemized therein, including the “Part XIII on consulting fees”. The amounts set
out in the Waiver were ultimately assessed as agreed for the 2001 and 2002
taxation years. The Applicant had agreed not to object to those
reassessments subject only to the proviso that if “any retroactive change is
made to the Canada‑U.S. tax convention to provide relief to Limited
Liability Companies within the time allowed to file an objection”. The
Applicant further acknowledged that subsection 165(1.2) of the Act had
been explained and that it understood that upon signing the Waiver “no further
recourse, including objection and appeal rights to any authority … is
available” in respect of the reassessments. At the time the Waiver was signed, the
Applicant’s hopes of challenging the Part XIII reassessment were pinned
exclusively on the possibility of prospective amendments to the Convention.
The Notice of Appeal in TD Securities was not filed until over a year
after the Waiver was signed. As of March 30, 2007, neither party was
anticipating the outcome of that appeal or the effect it would ultimately have
on the Canada Revenue Agency’s historical position on the interpretation
of the Canada-U.S. Income Tax Convention.
[16]
In these circumstances, I am not
persuaded that the Waiver is ambiguous, especially in view of the way in which
the Notice of Objection to the Part XIII reassessment was drafted. Mr.
Greenspoon testified that at the time the Applicant objected to the Notice of
Reassessment, he was not aware of the exact nature of the proposed amendments
to the Convention. While that may be true of Mr. Greenspoon
personally, the understanding of the Applicant at the time the Notice of
Objection was filed is clearly expressed in the wording of the
alternate ground of the objection:
… the taxpayer
[Applicant, in the present matter] states that it understands that amendments
to the Canada-U.S. Tax Convention will be announced shortly and said amendments
will provide treaty protection to LLC’s. Furthermore, the taxpayer understands
that these amendments made (sic) be made to apply retroactively to the
years in issue. Therefore, the taxpayer requests that this notice of objection
be held in abeyance pending the amendments to the Convention.
[17]
As it turned out, the amendments
to the Canada-U.S. Income Tax Convention were prospective in application
and furthermore, did not come into effect until well beyond the period for
filing a Notice of Objection. Thus, the conditions upon which the Applicant’s
right of appeal hinged in respect of the Part XIII reassessment never came into
existence. Counsel for the Applicant submitted that the fact that the
Respondent considered and disposed of the Notice of Objection filed in respect
of the Part XIII reassessment by issuing a Notice of Confirmation ought to bar
the Minister from now saying the Applicant had given up its right to appeal
that issue. While it seems to me that it would have been procedurally tidier
for the Minister to have rejected the Notice of Objection rather than to have
issued a Notice of Confirmation in respect of it, I do not see how having done
so would alter the substantive effect of the Waiver. The alternate ground of
the Notice of Objection was the possibility that the proposed amendments would
work in the Applicant’s favour; it was with that in mind that the Applicant
requested an abeyance pending their ratification. This request was apparently
respected by the Minister as it was not until the prospectively effective amendments
were in place that the Notice of Confirmation was issued.
[18]
For the reasons set out above, I
regret to say the Applicant’s application for an extension of time to appeal
under paragraph 167(5)(b) of the Income Tax Act must be
dismissed. Each party shall bear its own costs.
Signed at Ottawa, Canada, this 31st day of March 2011.
“G. A. Sheridan”
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