The Canam Manac Group Inc., (Formerly Pitt Steel Limited) v. Minister of National Revenue, [1986] 2 CTC 2067, 86 DTC 1508

Sarchuk, T.C.J.:— This appeal arises from an assessment of income tax with respect to the appellant’s 1978 taxation year. In that year the appellant, on behalf of its shareholders, paid or credited the sum of $79,582, to Thyssen Handelsunion A.G. a non-resident company in Dusseldorf, Federal Republic of Germany. The respondent assessed tax of $11,937 on the basis that the appellant failed to deduct and remit the 15 per cent non-resident tax as required by the provisions of subsection 215(1) of the Income Tax Act with the result that the appellant is liable to pay, as tax under Part XIII on behalf of the non-resident person, the whole of the amount that should have been deducted and withheld.

The appellant was also assessed interest on the amount of tax so assessed. The respondent now concedes that no interest was payable on this amount.

Subsections 215(1) and (6) of the Income Tax Act provide, inter alia:

215. (1) When a person pays or credits or is deemed to have paid or credited an amount on which an income tax is payable under this Part, he shall, notwithstanding any agreement or any law to the contrary, deduct or withhold therefrom the amount of the tax and forthwith remit that amount to the Receiver General of Canada on behalf of the non-resident person on account of the tax and shall submit therewith a statement in prescribed form.

(6) Liability for tax. Where a person has failed to deduct or withhold any amount as required by this section from an amount paid or credited or deemed to have been paid or credited to a non-resident person, that person is liable to pay as tax under this Part on behalf of the non-resident person the whole of the amount that should have been deducted or withheld, and is entitled to deduct or withhold from any amount paid or credited by him to the non-resident person or otherwise recover from the non-resident person any amount paid by him as tax under this Part on behalf thereof.

The facts upon which this appeal is to be determined are sparse. What is known is that in 1976, 60 per cent of the issued shares of the appellant were owned by Messrs. Kerney, Jobin and Coons (Kerney et al.), while the re- maining 40 per cent was owned by Stahlunion (Canada) Ltd., a wholly- owned subsidiary of Thyssen Handelsunion A.G. At all relevant times Stahlunion had no employees in Canada. It was described as a shell company carrying on no business aside from its investment in the appellant and another company, Thyssen Canada Ltd.

On July 9, 1976, Kerney et al. purchased the 40 per cent interest of Pitt Steel Ltd. which was owned by Stahlunion. Pursuant to the terms of the agreement (Ex. A-2) the purchase price of $1,107,000 was to be paid by way of two promissory notes both without interest. The first for $275,000 was to become due and payable on September 30, 1976, and the second, for the balance of the purchase price, on December 31, 1976. When Kerney et al. were unable to pay the amount due on December 31, 1976, an extension of time was sought. This request for additional time was made to the parent, Thyssen Handelsunion A.G., and not to Stahlunion.

Evidence relating to the circumstances in which the extension was sought and the payments were ultimately made was elicited from Mr. Alexander Kerney. In addition to his interest in the appellant Kerney was the president of Thyssen Canada Ltd. a wholly-owned subsidiary of Stahlunion. His business affairs and those of Thyssen Handelsunion A.G. have been intertwined since the early 19605. Kerney was personally acquainted with the senior officers of Thyssen Handelsunion A.G. As a result it was somewhat surprising that his evidence with repect to these transactions provided so little enlightenment.

Kerney testified that the request for an extension was made verbally to Thyssen Handelsunion A.G. and that in due course he received a telex from its chief financial officer, “Waelter”, the relevant portion of which reads:

We can agree to the extension of the payment dates of the purchase price of Pitt Steel only if we receive the conditions as required by the market. At present the conditions are the securing of the foreign exchange rate because the purchase amount in the final stage will be transferred to Germany as dividends. Therefore in case Pitt Steel is not able to pay on the due date of 31.12.1976 the amount of Can. $925,000 we are willing to extend the due date up to 30.6.1977 under the following conditions:

1. Interest according to the Canadian interest rates which 9. /2 p.a.

2. Payment of the cost for the foreign exchange for the amount which will be transferred to Germany. These expenses amount at present to approximately DM 18,000.

With kindest regards,

Waelter

These terms were accepted. On July 27, 1977, a payment of $900,000 Canadian was made by Kerney et al. to the Mercantile Bank of Canada in Montreal for the credit of First National City Bank, Frankfurt, Germany, in favour of Thyssen Handelsunion A.G. Kerney testified that this payment represented the balance due on account of the purchase of the shares in the appellant from Stahlunion.

On July 14, 1978, the sum of $79,593 was transferred by the Bank of Montreal from the account of Pitt Steel Ltd. to the Mercantile Bank of Canada in favour of the City Bank, Frankfurt, on behalf of Thyssen Handelsunion A.G. According to Kerney this represented the interest payment required by the terms of the extension agreement which was paid by the appellant on behalf of its shareholders Kerney, Jobin and Coons.

Stahlunion was not approached or consulted by Kerney at any time in relation to these arrangements. Furthermore, both of the foregoing pay- ments were made directly to Thyssen Handelsunion A.G. because, as Ker- ney stated:

That was probably the instruction which was received from Thyssen where the amount should be paid.

Although there were instances when debts owing by the appellant to Stahlunion were paid to it, the instructions to pay these amounts to Thyssen Handelsunion A.G. were neither surprising nor unusual. Kerney testified:

A. Naturally being so close in contact with Thyssen, many transfers took place for different reasons for payment for deliveries or whatever. It was nothing unusual. Stahlunion is only a shell, nobody is there, no officers, no employees. All the instructions always came from Germany.

Q. Were you surprised that they directed the payment to a bank account in favour of Thyssen Handelsunion rather than Stahlunion? You knew that the interest was only to Stahlunion?

A. Not really, because, again, I was not aware of what kind of financial arrangement existed between Stahlunion and Thyssen Handelsunion, so there could be some arrangements which I was not aware. [Emphasis added.]

There is no reference in the telex to Stahlunion or to the purchasers Kerney et al. In fact the extension was granted in the event “Pitt Steel is not able to pay on the due date. .. .” On the evidence before the Court it is reasonable to infer that some discussions preceded this telex and that arrangements which were satisfactory to all parties had been made, since Kerney and the other purchasers were satisfied that by complying with the telexed instructions the liabilities they incurred in respect of the purchase of the shares would be fully discharged.

The respondent's position is that on the evidence available at the time of assessment he assumed that the amount “was paid or credited to the nonresident on account, or in satisfaction of, interest owing to the nonresident". In the alternative, “if the amount was not interest owing to the non-resident it was paid on account, or in satisfaction of, taxable dividends owing to the non-resident by its Canadian subsidiary and the appellant forwarded this amount on behalf of the said subsidiary". The amounts received by Thyssen Handelsunion A.G. were taxable, either as interest pursuant to paragraph 212(1)(b) of the Act or as taxable dividends pursuant to subsection 212(2) of the Act. Counsel for the respondent submitted that the assessment was correct and must stand unless evidence is adduced to show that the payments were not on account of dividends or interest.

Counsel for the appellant argued that the balance of the purchase price for the shares was due to the Canadian corporation Stahlunion and that the payment to Thyssen Handelsunion A.G. was made on account of interest allegedly owing to Stahlunion. As such it was not subject to withholding tax pursuant to the provisions of the Income Tax Act. It was submitted that the respondent could only be correct in assuming that the amount paid was interest owing to Thyssen Handelsunion A.G. if there had been an assignment of the debt by Stahlunion to its German parent. Counsel argued that there was no evidence before the Court that such an assignment was made. The purchase agreement specifically prohibited an assignment without the consent of all parties and Kerney's evidence was that he had no knowledge of any such assignment. Appellant’s counsel also relied on the language of the telex which stated that in the final stages of the transaction the price paid for the Pitt Steel shares is to be transferred to Germany as dividends. This wording was alleged to be inconsistent with the existence of an assignment of the purchasers' obligation to Thyssen Handelsunion A.G. Counsel contended that these facts establish that no interest was owing to the nonresident company, Thyssen Handelsunion A.G.

With respect to the alternative assumption counsel for the appellant submitted that there was no factual basis upon which one could conclude that the payment to Thyssen Handelsunion A.G. was made on account of or in satisfaction of taxable dividends owing to the non-resident by its Canadian subsidiary Stahlunion or that the appellant forwarded the amount in issue on behalf of the said subsidiary.

Counsel's argument was as follows:

I wish to submit that if in fact the payment was a dividend, that if in fact Stahlunion did declare a dividend to Germany of this amount, that the Minister, when auditing Stahlunion (Canada), and as it had access to its books and records which we did not, that if in fact there was a dividend there would have been some evidence on the books and records of Stahlunion (Canada) which the Minister could have brought forth or indicated to us.

With respect to the telex counsel submitted:

My interpretation of the telex, is that the parent is indicating that the purchase amount, being the $1 million or the $900,000.00 balance, is to be transferred in the final stage as a dividend, but that does not link the payment of the interest by Pitt to a payment of dividend. First of all, it does not link the purchase amount to the payment of interest. It just says the purchase amount, which I submit is simply the principal amount, and secondly, it does not link a payment of dividend.

The respondent has, in his reply to the notice of appeal, clearly set forth the assumptions upon which the assessment appealed from was based. The result is that every such fact found or assumed by the respondent must be accepted as it was dealt with by him unless questioned. When it is challenged the onus to demolish that basic fact rests with the appellant. Roderick W. S. Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195.

The onus can be met in a number of ways. Cattanach, J, in M.N.R. v. Pillsbury Holdings Limited, [1964] C.T.C. 294; 64 D.T.C. 5184, said at 302 (D.T.C. 5188):

. . . The respondent could have met the Minister’s pleading that, in assessing the respondent, he assumed the facts set out in paragraph 6 of the Notice of Appeal by:

(a) challenging the Minister’s allegation that he did assume those facts,

(b) assuming the onus of showing that one or more of the assumptions was wrong, or

(c) contending that, even if the assumptions were justified, they do not of themselves support the assessment.

The appellant in this case chose to adduce evidence in an attempt to demonstrate that the payments made were not on account of interest or dividends and that the respondent's assumptions were wrong.

Since interest is compensation related to the use or retention of a sum of money belonging to another, and since on the face of it the purchases owed money to Stahlunion and not to Thyssen Handelsunion A.G., counsel for the appellant argued that the interest referred to in the telex could only be interest payable to Stahlunion. In my view the evidence adduced does not support that proposition. The purchase agreement did not provide for any interest to be paid to Stahlunion and the extension of time was not granted by Stahlunion. Although Clause 12 of the purchase agreement (Ex. A-2) prohibited its assignment it is a fact, admitted by Kerney, that the payment made to Thyssen Handelsunion A.G. was intended to and did satisfy the whole of the purchasers' liability arising from that agreement. There is absolutely no doubt that Kerney and his associates accepted the authority or right of Thyssen Handelsunion A.G. to “collect” the debt, to grant the extension of time for payment and to set terms, in this case the payment of interest, for that grant.

It is not unreasonable to conclude from these facts and from the conduct of the purchasers that some arrangement had been effected between Kerney et al., Stahlunion and Thyssen Handelsunion A.G. In my view if an assignment was required to ensure that the payment being made fully discharged the purchasers' obligation to Stahlunion an inference can be drawn that one existed. I have difficulty with the alternative conclusion which is that three astute businessmen paid a large sum of money to a non-resident corporation without such assurance.

With respect to the alternative assumption the telex is prima facie evidence that at some future point in time it was intended that all sale proceeds be patriated to Germany as dividends. The payment was made by the appellant after it was put on notice by this telex. Kerney's testimony was:

Q. The terms of the extension of time for payment, they were set by the officers of Thyssen in Germany.

A. Yes.

Q. As (I) understand it, you were advised that at some point this money was being transferred or would be paid to Germany by way of dividends?

A. No, that’s only in the letter that indicates the reason why they are asking to secure the exchange rate because they hoped they will get the money, declare dividends, and the money will go over.

Q. Do you have a copy of that telex?

A. Yes.

Q. It is saying, at present the conditions are the securing of the foreign exchange rate because the purchase amount in the final stage will be transferred to Germany as dividends.

A. Yes.

Q. That was where your knowledge of some transference to Germany as dividends came to your mind.

A. Yes.

No evidence was adduced to contradict that fact other than Kerney's statement that “I never was involved and aware about what they wanted to do with moneys received in Canada”.

The argument advanced on behalf of the appellant is no more than an assertion that “there is no evidence to indicate what the nature of the payment was”. This is tantamount to saying that it is incumbent upon the respondent to prove that the payment was made on account of interest or dividends. Clearly that would be a reversal of the traditional onus and counsel for the respondent was quite correct in resisting it strenuously.

I have concluded, on the evidence before me, that the respondent was entitled to make the assumptions of fact that he did. Unless there is evidence that establishes on a balance of probabilities that the payment was not on account of interest or dividends it is subject to withholding tax. The evidence adduced by the appellant is vague and imprecise and fails to satisfy me that the respondent's assumptions were wrong.

Counsel for the appellant also contended that even if the payment could be characterized as having been made on account of dividends it should not be liable for the tax. It was submitted that subsection 215(2) of the Act applied in these circumstances, and that this subsection “should be interpreted not to apply to a paying agent when that paying agent has no knowledge of the nature of the payment”. Counsel alleged that the appellant had no knowledge of the nature of the payment and therefore it could not be required to deduct or withhold the amount of the tax from the payment.

I do not agree. Section 215 cannot be read so as to make the withholding section applicable only if the person who pays or credits an amount to a non-resident does so with the knowledge that the amount is taxable in the hands of the non-resident. It is distinguishable from other non-resident withholding provisions such as paragraph 116(5)(a) where specific limits are placed on potential liability. The standard imposed by section 215 is consistent with the intent of the legislation. When a person is paying an amount to a non-resident he is put on guard by the provisions of that section. If he is not certain of the nature of the payment then it is up to him to withhold the appropriate amount. The non-resident may not be pleased with this action and may indeed argue that the amount received is not taxable in its hands. In such case the non-resident may apply to the respondent pursuant to the provisions of subsection 227(6) to have the tax deducted or withheld repaid to it. If the respondent disagrees then the matter comes before the courts. When this procedure is followed the person withholding or deducting a sum of money is protected by the provisions of subsection 227(1) from any action against him even though such intended compliance was in error. In this case if there was a concern about the proper characterization of this payment the telex was explicit enough to have put the taxpayer on guard.

Although I have substantial reservations about the applicability of subsection 215(2) in the circumstances of this case, is not necessary for me to further consider this matter in view of the foregoing conclusion.

At trial the respondent conceded that no interest was payable on the tax assessed, and as a result the appeal is allowed and the matter is referred back to the repondent for reconsideration and reassessment on that basis. In all other respects the appeal cannot succeed.

The appellant is not entitled to costs.

Appeal allowed in part.