Date: 20080915
Docket: A-503-07
Citation: 2008 FCA 260
CORAM: LÉTOURNEAU
J.A.
NOËL
J.A.
TRUDEL
J.A.
BETWEEN:
HUGH WILLIAM PERRY, IN HIS CAPACITY OF
TRUSTEE OF THE 2005 ROBERT JULIEN FAMILY
DELAWARE DYNASTY TRUST
Appellant
and
CANADA (THE MINISTER OF NATIONAL REVENUE)
and
CANADA REVENUE AGENCY
Respondents
REASONS FOR JUDGMENT
NOËL J.A.
[1]
This is an appeal
from a decision of Gibson J. of the Federal Court (the Applications Judge),
dismissing an application for judicial review and relief in the nature of mandamus
(the application) to have the residence of the 2005 Robert Julien Family
Delaware Dynasty Trust (the Trust) determined pursuant to paragraph 4 of
Article IV of the Convention Between Canada and the United States of America
With Respect to Taxes on Income and on Capital signed
at Washington on September 26, 1980, as amended (the Convention).
[2]
The Applications
Judge dismissed the application on grounds that it was time-barred given that
it had been brought 18 months after the Canadian Revenue Agency’s (the CRA’s)
first refusal to settle the residence of the Trust in accordance with Article
IV of the Convention, and that it was premature as the provision of the
Canadian Income Tax Act, R.S.C. 1985 (5th
Supp.), c. 1, (the ITA), which would deem the Trust to be a resident of Canada, had yet to be (and has still not been) enacted.
[3]
In support of the
appeal, Hugh William Perry, in his capacity as trustee (the appellant),
contends that no time limit applies in this case since what is alleged is a
continuous failure to perform a public duty. Furthermore, the Applications
Judge erred in holding that the request for determination of residency pursuant
to the Convention was solely based on the proposed amendment to section 94 of
the ITA and was therefore premature. According to the appellant, the request
also contemplates dual residency under the current section 94 of the ITA.
[4]
It is only necessary
to address the second argument raised by the appellant in order to dispose of
the appeal. The salient facts against which to assess this argument are as
follows.
[5]
The
existing section 94 of the ITA sets out rules that deem a non-resident trust to
be a Canadian resident and that deem its taxable income to be the total of its
Canadian source income or foreign accrual property. In particular, the section
applies if a non-resident trust has acquired property from a person resident in
Canada and where the non-resident trust has one or more beneficiaries (referred
to as “persons beneficially interested in the Trust” that are resident in
Canada). Notably, a person who might become beneficially interested at a future
time as a result of the exercise of any discretion under the Trust is deemed to
be a person beneficially interested. Subparagraph 248(25)(b)(ii) provides:
|
(25) For the purposes of this
Act,
(b) … a particular person or
partnership is deemed to be beneficially interested in a particular trust at
a particular time where
ii) because of the terms or conditions of the particular
trust or any arrangement in respect of the particular trust at the particular
time, the particular person or partnership might, because of the exercise of
any discretion by any person or partnership, become beneficially interested
in the particular trust at the particular time or at a later time,
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(25) Les règles suivantes
s’appliquent dans le cadre de la présente loi :
b) […] une personne ou société de
personnes donnée est réputée avoir un droit de bénéficiaire dans une fiducie
à un moment donné dans le cas où, à la fois :
(ii) en raison des modalités
de la fiducie ou de tout arrangement la concernant à ce moment, la personne
ou société de personnes donnée pourrait acquérir un droit de bénéficiaire
dans la fiducie à ce moment ou ultérieurement en raison de l’exercice d’un
pouvoir discrétionnaire par une personne ou une société de personnes,
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[6]
The
proposed section 94 of the ITA provides that if a Canadian resident contributes
property to a non-resident trust, then the trust is deemed to be resident in
Canada for certain purposes and the contributor, the trust and any Canadian
beneficiaries may be jointly and severally or solidarily liable to pay Canadian
tax on the world-wide income of the trust.
[7]
Concerned
with the possibility that the Trust would be deemed to be a Canadian resident
pursuant to the ITA, the appellant, through his counsel, by letter to the CRA
dated February 23, 2005, requested that the residence of the Trust be settled
pursuant to paragraph 4 of Article IV of the Convention. Paragraph 4 of Article
IV of the Convention reads as follows:
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IV(4.) Where by
reason of the provisions of paragraph 1 an estate, trust or other person
(other than an individual or a company) is a resident of both Contracting
States, the competent authorities of the States shall by mutual agreement
endeavor to settle the question and to determine the mode of application of
the Convention to such person.
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IV 4. Lorsque,
selon les dispositions du paragraphe 1, une succession, une fiducie ou une
autre personne (autre qu'une personne physique ou une société) est un
résident des deux États contractants, les autorités compétentes des États
contractants s'efforcent d'un commun accord de trancher la question et de
déterminer les modalités d'application de la Convention à ladite personne.
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[My emphasis]
[8]
Article
IV(1) defines the term “resident of a Contracting State” as follows:
|
1.
For the purposes of this Convention, the term "resident of a Contracting
State" means any person who, under the laws of that State, is liable to
tax therein by reason of his domicile, residence, place of management, place
of incorporation or any other criterion of a similar nature, but in the
case of an estate or trust, only to the extent that income derived by such
estate or trust is liable to tax in that State, either in its hands or in the
hands of its beneficiaries.
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1.
Au sens de la présente Convention, l'expression «résident d'un État
contractant» désigne toute personne qui, en vertu de la législation de cet
État, est assujettie à l'impôt dans cet État, en raison de son domicile, de
sa résidence, de son siège de direction, de son lieu de constitution ou de
tout autre critère de nature analogue mais, dans le cas d'une succession ou
d'une fiducie, seulement dans la mesure où les revenus que tire cette
succession ou cette fiducie sont assujettis à l'impôt dans cet État, soit
dans ses mains soit dans les mains de ses bénéficiaires.
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[My emphasis]
[9]
The
relevant portions of the February 2005 letter state (Appeal Book, Tab. 4, p.
69):
We hereby
request that the residence of the Trust be settled in accordance with paragraph
4 of Article IV of the Convention Between Canada and The United States of
America With Respect to Taxes on Income and on Capital Signed on September 26,
1980, as Amended by the Protocols Signed on June 14, 1983, March 28, 1984,
March 17, 1995 and July 29, 1997 (the Convention).
The Trust is
an irrevocable discretionary trust settled pursuant to a trust agreement dated
February 1, 2005 among Mrs. Delia Moog as Grantor, Mr. Hugh William Perry as
Initial Trustee and Christiana Bank & Trust Company as Initial
Administrative Trustee (the Trust Agreement), a copy of which is attached for
your review.
….
The Trust
does not own any taxable Canadian property and does not carry on business in Canada.
The Trust's income solely originates from sources within the United
States. The Trust has no plan to own taxable Canadian property, to carry
on business in Canada or to have any income from Canadian sources.
The Trust is
a United States person within the meaning of section 7701(a)(30) of the Internal
Revenue Code because a court within the United States is able to exercise
primary supervision over the administration of the Trust pursuant to Section
8.1 of the Trust Agreement and a United States person (Mr. Perry) has the
authority to control all substantial decisions of the Trust. As a United
States person, the Trust is subject to tax in the United States on its
worldwide income and is therefore a resident of the United
States for the purposes of the Convention.
Although
the Trust does not have any Canadian beneficiary, the Trust is likely deemed to
be a person resident in Canada for certain purposes under subsection 94(1) of
the Income Tax Act (ITA) because the Trust acquired property from a
Canadian resident (Mrs. Moog) and persons resident in Canada not dealing at
arm's length with Mrs. Moog might become beneficially interested in the Trust
as a result of the exercise of the power of appointment in Section 5.1(kk) of
the Trust Deed.
On
October 30, 2003, a Notice of Ways and Means Motion to amend provisions of the
ITA relating to the taxation of non-resident trusts and foreign investment
entities (the "Proposed Rules") was tabled in the House of Commons. If
and when the Proposed Rules come into force, they will retroactively apply to
trust taxation years that begin after 2002. Because the Trust received a
contribution of property from a Canadian resident (Mrs. Moog), the Trust would
be deemed to be resident in Canada for certain
purposes under subsection 94(3) of the Proposed Rules.
…
In our view,
the Trust should not be subject to tax in Canada solely
because it received property from a Canadian resident who is not and cannot
become a beneficiary thereof.
…
The
case at hand is clearly not the type of planning that the Department of Finance
was attempting to curb when it introduced the Proposed Rules.
Therefore, the relief sought would not contravene any tax policy objective.
[My emphasis]
[10]
After being advised
by the CRA, by letter dated June 17, 2005, that the Canadian competent
authority, would not endeavour to settle the issue of double residency under the
proposed section 94 of the ITA (Appeal Book, p. 74), the appellant sought the
assistance of the Internal Revenue Service (the IRS), the United States
competent authority. The IRS contacted the CRA with the view of discussing the
issue, but was eventually advised by CRA as follows (Appeal Book, p. 419):
Section 94 of the Income
Tax Act (the Act) contains anti-abuse rules that are designed to prevent
the use by taxpayers of non-resident trusts to avoid Canadian tax. Bill C-33,
which is currently before Canada’s Parliament, is proposing amendments to
ensure that the objectives of Section 94 are met. Under the new rules, a
non-resident trust will be regarded as Canadian resident trust if a contributor
to the trust is a Canadian resident or if there is a Canadian resident
beneficiary. These changes are proposed to apply to taxation years that begin
after 2006. As a result of the changes, trusts that might have previously been
determined to be resident in only one State may now be dual resident under the
Treaty.
Section 94 is designed
to encourage fair and neutral outcomes that protect the Canadian tax base. As
such, Canadian tax policy officials do not want to invite any circumvention of
the Section 94 rules. In light of this imperative, we have not been able to
satisfy ourselves that it would be prudent to cede Canada’s taxation rights
through the Competent Authority process under Article IV(4).
[11]
The appellant
subsequently brought the underlying application before the Federal Court
seeking inter alia to compel the CRA to endeavour to settle the
residence of the Trust through competent authority negotiations pursuant to paragraph
4 of Article IV of the Convention.
[12]
As previously
mentioned, the Applications Judge dismissed the application on the ground that
it was time-barred and that in any event the application was premature given
that it pertained to a provision of the ITA (proposed section 94) which had yet
to be enacted.
Analysis
and Decision
[13]
As to the first
ground, I agree with counsel for the appellant that his application can
possibly be viewed as an attack on CRA’s ongoing failure to perform a statutory
duty, and that as such, it is not subject to the 30-day limitation under
subsection 18.1(2) of the Federal Courts Act (Compare Krause v.
Canada, [1999] 2 F.C. 476 (F.C.A.) per Stone J.A. at paras. 24 and 25). I
now turn to the second ground.
[14]
As I understand the
position of the appellant, no challenge is directed against the Applications
Judge’s conclusion that it would be inappropriate to require the CRA to
endeavour to settle the residence of the Trust under a provision of the law
that has yet to be adopted by Parliament. Rather, the position is that the
Applications Judge overlooked evidence which shows that the residence of the
Trust under the existing subsection 94(1) of the ITA was also in issue.
[15]
In this respect, the
appellant relies on a letter from the IRS, a copy of which is attached to the
reasons of the Applications Judge as Appendix D, which according to the
appellant indicates that subsection 94(1) currently in force was discussed
during a meeting which took place on July 11, 2006 between the CRA and the IRS:
Further, we were advised
at this meeting that the Canadian Ministry of Finance had specifically removed
this case and all others like it: we assume cases under section 94(1) and
94(3) of the Income Tax Act (Canada), from competent authority negotiations. In other words we are
advised that his case will not be considered for resolution by the Canadian
Competent Authority.
[Emphasis
by appellant]
[16]
However,
as counsel for the respondents points out, this statement which was made by an
IRS official some four months after the meeting in question took place is based
on an assumption as to the position adopted by CRA officials during the
meeting. The transcript of the notes taken during that meeting suggests that
the subject matter was limited to proposed section 94 (Appeal Book, pages 206,
207). I note in particular the fact that the issue for discussion is described
as “Non-Resident Trusts and Proposed Section 94 of the Income Tax Act” (idem).
[17]
Although
the matter is not entirely free from doubt, it cannot be said that the
Applications Judge overlooked evidence or committed a palpable and overriding
error when he held that the appellant was seeking relief under proposed section
94, rather than section 94 as it reads today (Reasons, para. 25). This
conclusion was open to the Applications Judge on the record before him.
[18]
In any
event, there would have been no basis for invoking Article IV(4) of the Convention
with respect to current section 94 even if that had been the intention. Pursuant
to Article IV(1) of the Convention, the term “resident of a Contracting State”, in the case of a Trust is restricted
to a “trust … liable to tax in that State, either in its hands or in the hands
of its beneficiaries”. Liability for tax under current section 94 is restricted
to income derived from a Canadian source, or foreign accrual property income. In
this case, it is acknowledged that the Trust has no Canadian source income, and
there is no suggestion that the Trust has foreign accrual property income.
[19]
As there
is no existing liability to tax under current section 94, the appellant Trust
is not a resident of Canada pursuant to Article IV(I) and therefore not a dual
resident under Article IV(4) of the Convention. It follows that no dual residency
issue arises under Article IV(4) of the Convention with respect to the current section
94.
[20]
I would
dismiss the appeal with costs.
“Marc
Noël”
“I
agree.
Gilles Létourneau J.A.”
“I
agree.
Johanne
Trudel J.A.”
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