Euramca International Company Limited v. Minister of National Revenue, [1985] 1 CTC 2038, 85 DTC 57

Taylor, TCJ:—This is an appeal heard in Toronto, Ontario on September 20, 1984 against an income tax assessment for the year 1978 in which the Minister of National Revenue assessed tax as follows:

. . . a payor is required, on behalf of the payee, to deduct tax from an amount paid to a non-resident and remit same to the Receiver General for Canada pursuant to subsection 215(1). Where such a tax has not been deducted and remitted, the payer, herein, the Appellant, is liable to the Receiver General for the tax owing, pursuant to subsection 215(6) of the Act.

The notice of appeal in its essential parts read:

— The Appellant is a private Ontario corporation having its head office in the City of Hamilton.

— Mr Leonard Duval, a citizen of the USA, was at all material times an employee, principal shareholder, director and officer of the Appellant.

— Although Mr Leonard Duval was ordinarily resident in the USA, he was in 1978 required to spend 56 days in Canada performing his duties as an employee of the Appellant; and, pursuant to the provisions of section 2(3) of the Income Tax Act of Canada, he filed a tax return with Revenue Canada Taxation and paid income tax on that portion of his total income that was earned in Canada.

— The Appellant’s fiscal year end is November 30th and prior to the Appellant’s fiscal year ended November 30th, 1978, the sum of $61,019.18 was advanced to Mr Leonard Duval by way of a loan to him as a shareholder of the corporation. To date, however, that shareholder loan has not been repaid in full to the Appellant.

— The Appellant relies inter alia, upon section 2 and subsections 15(2), 115(l)(a)(ii), 212(2) and 214(3) of the Income Tax Act, RSC 1952, Chapter 148 as amended.

— The Appellant submits that in the circumstances, non-resident tax can only be levied against the Appellant with respect to the shareholder’s loan to Leonard Duval if subsection 214(3) applies to deem the amount of the loan to have been paid to Leonard Duval as a dividend.

— The Appellant further submits that subsection 214(3) is not applicable where Part I of the Income Tax Act is applicable.

— The Appellant further submits that Part I of the Income Tax Act is applicable since Leonard Duval is required by subsection 2(3) to pay an income tax upon his taxable income earned in Canada determined in accordance with Division D.

— The Appellant further submits that, since Part I of the Income Tax Act is applicable, subsection 214(3) is inapplicable and that, as against the Appellant, non-resident tax is not exigible.

For the respondent, the material facts and assumptions were:

— the facts hereinbefore admitted;

— prior to November 30, 1978, the Appellant’s fiscal year end, the Appellant advanced by way of shareholder loan to Mr Duval $61,019.18, of which $52,921.21 was outstanding on December 1, 1979;

— Mr Duval was required to pay a non-resident tax on said sum of $52,921.21 advanced to him by way of a shareholder loan;

— A non-resident of Canada is required to pay an income tax on taxable income earned in Canada, as provided in subsection 2(3) and Part I of the Act, and that the taxable income earned in Canada by a non-resident shall be determined in accordance with Division D of Part I of the Act. It is submitted that there shall be, in addition, a tax paid on income from Canada earned by non-resident persons, determined in accordance with Part XIII of the Act.

— . . . the provisions of Part I and XIII are not mutually exclusive but must be read together in order to determine the tax liability of a non-resident.

— “. . . Division D does not include in ‘taxable income earned in Canada’, as defined in subsection 2(3), an amount taxable under subsection 15(2). Thus, unpaid shareholder loans are not subject to Part I tax with the result that, to such extent, Part I is inoperative.

— . . . paragraph 214(3)(a) of the Act deems a shareholder loan received by a nonresident to have been received as a dividend from a corporation resident in Canada, as if Part I were applicable, and that a non-resident is taxable thereon pursuant to subsection 212(2) of the Act y

— The Respondent relies, inter alia, upon subsections 212(1), 212(2), 214(1), paragraph 214(3)(a), subsections 215(1) and 215(6) of the Income Tax Act, RSC 1952, Chapter 148 as amended (the “Act”).

There was no dispute regarding the facts of the case, and argument centred largely around the contention of counsel for the appellant that Part I of the Income Tax Act was applicable to the issue. Paragraph 214(3)(a) of the Act reads:

Deemed payments. For the purpose of the Part,

(a) where section 15 or subsection 56(2) would, if Part I were applicable, require an amount to be included in computing a taxpayer’s income, that amount shall be deemed to have been paid to the taxpayer as a dividend from a corporation resident in Canada;

The interpretation placed by counsel for the appellant on the critical phrase “if Part I were applicable”, was (and I quote) “To me, to have any meaning, that means that but for the deeming provision here Part I would not have application in this situation”. The position of counsel for the respondent was (and I quote) “. . . that the shareholder, the non-resident person, is not liable for tax under subsection 15(2) of the Income Tax Act”.

As I understand it, there is no dispute between the parties that the amount at issue would be included in income, if, the taxpayer were a resident of Canada, and paid tax as such a resident. It appears to me that a non-resident required to pay taxes in Canada, does so only on the basis of including in his income, items covered in section 115 of the Act, and I do not see that amounts arising out of the provision of section 15 of the Act, are included in section 115. Such amounts (section 15), in my view, have been purposely excluded from the income of nonresidents, by Parliament. However, as indicated by the respondent, subsection 214(3) of the Act provides the basis of taxation in this matter, and such amounts do not escape tax. The Minister is entitled to receive from the appellant, Eu- ramca International Company Limited the payment referenced under subsection 215(1) of the Act, and furthermore as referenced under subsection 215(6) of the Act, the tax is payable now by this appellant.

The appeal is dismissed.

Appeal dismissed.