Sidney S Fletcher v. Minister of National Revenue, [1977] CTC 2256, [1977] DTC 185

The Assistant Chairman:—The appellant appealed to this Board from a reassessment for tax relating to the 1973 taxation year. There is no dispute as to the quantum of the income involved; the sole difference between the parties is the quantum of tax on that income. The facts in the case are not in dispute and, in effect, the respondent admitted substantially all the allegations of fact in the Notice of Appeal.

The agreed facts are as follows:

1. During the 1972 and 1973 taxation years, the appellant, a Canadian resident, made gifts of certain shares in Simpsons Limited, a taxable Canadian corporation, to his two nieces in the United Kingdom. Such shares were to be held in trust by his nieces for six of their children all of whom were under the age of 18 in 1972. One child attained age 18 in 1973.

2. In each of the years 1972 and 1973, the appellant duly reported the gifts referred to in paragraph (1) hereof for Ontario gift tax purposes and for capital gains purposes.

3. In 1973, the dividends on the shares referred to in paragraph (1) hereof amounted to $962.50.

4. In the 1973 taxation year, the appellant included the said dividends in his income pursuant to subsection 75(1) of the Income Tax Act.

5. By a Notice of Re-Assessment dated the 22nd day of May, 1975, the Minister of Revenue Canada included the said dividends of $962.50 in the appellant’s income. He also added the gross-up provided under paragraph 82(1)(b) of the Income Tax Act and allowed the dividend tax credit under section 121 of the Income Tax Act. This increased the total tax payable by the appellant for the 1973 taxation year by $307.79.

6. On the 18th day of June, 1975, a Notice of Objection with respect to the Re-Assessment referred to in paragraph 5 hereof was filed pursuant to the provisions of section 165 of the Income Tax Act.

7. On the 9th day of January, 1976, the appellant was notified that the above-mentioned Re-Assessment had been confirmed.

The respondent takes the position that the income of the appellant was properly computed by him as subsection 75(1) of the Income Tax Act, as amended by SC 1970-71-72, c 63, deems the income from property transferred to a person who is under 18 years of age to be the income of the transferor. The amount of $962.50 was the amount of the dividend paid in 1973 to the trustees for the benefit of persons who were under 18 years of age.

The appellant relies on an Act entitled “An Act to implement agreements for the avoidance of double taxation with respect to income tax between Canada and Trinidad and Tobago, Canada and Ireland, Canada and Norway and Canada and the United Kingdom, and to implement a supplementary income tax convention between Canada and the United States of America'’ which is chapter 75 of the Statutes of Canada 1966-67 and the Agreement thereto. He contends that because of subsections 11(1) and (2) of that Act, and Article 9(3) of the Agreement, the dividends are to be taxed pursuant to the Agreement and not the Income Tax Act. Said subsections (1) and (2) read as follows:

11.(1) The Agreement entered into between the Government of Canada and the Government of the United Kingdom of Great Britain and Northern Ireland, set out in Schedule IV, is approved and declared to have the force of law in Canada during such period as, by its terms, the Agreement is in force.

(2) In the event of any inconsistency between the provisions of this Part, or the Agreement, and the operation of any other law, the provisions of this Part and the Agreement prevail to the extent of the inconsistency.

The portions of the Agreement referred to in the submission were as follows:

AN AGREEMENT BETWEEN THE GOVERNMENT OF CANADA AND THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS

The Government of Canada and the Government of the United Kingdom of Great Britain and Northern Ireland,

Desiring to conclude an Agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and Capital gains,

Have agreed as follows:

Article 9

(3) The Canadian tax on dividends derived from a company which is a resident of Canada and which are beneficially owned by a resident of the United Kingdom shall not exceed 15 per cent of the gross amount of the dividends.

Counsel for the appellant first of all pointed out that there was an inconsistency between subsection 75(1) of the Income Tax Act which required that dividends, in the circumstances of this case, be included in the income of the appellant and be taxed in the usual way, and Article 9(3) of the Agreement which says that dividends from a company which is a resident of Canada and beneficially owned by a resident of the United Kingdom shall have a Canadian tax of not exceeding 15% of the gross amount of the dividend. Counsel submitted that, since there is an inconsistency between subsection 75(1) of the Income Tax Act and Article 9(3) of the Agreement, said section 11 comes into play because of subsection (2) which reads

in part: “the provisions of this Part and the Agreement prevail to the extent of the inconsistency’’. It was submitted that Article 9(3) does not say who is taxed but rather in what circumstances the tax on the dividends shall not exceed 15% of the gross amount of the dividend. To confirm that his submission was correct that dividends in the circumstances shall not be taxed in excess of 15%, the appellant’s counsel referred to Article XI of the Canada-US Tax Convention which reads as follows:

Article XI

1. The rate of income tax imposed by one of the contracting States, in respect of income (other than earned income) derived from sources therein, upon individuals residing in, or corporations organized under the laws of, the other contracting State, and not having a permanent establishment in the former State, shall not exceed fifteen per centum for each taxable year.

It was pointed out that that Article refers to . . individuals residing in . . . the other contracting State . . .”. Such is not the case in the present appeal. It (Article 9(3)) just states that the tax on the dividend shall not exceed 15% and, therefore, the appellant should only pay a tax of 15% on those dividends in addition to the tax on his other income (not including those same dividends) at the regular rates. Counsel for the appellant referred to two cases, both of which differentiate between the property chargeable and the oerson liable to be charged. The first case was Williams v Singer, 7 TC 387 at 413, when he quoted the reasons of Lord Wrenbury:

The Appellants, however, seek to find in words of enlargement of the income charged an enactment affecting the characteristics of the person chargeable. I do not think that is the effect of Section 5 of the Act of 1914. The two things are quite distinct; the property chargeable is one thing, the person liable to be charged is another.

The second case also referred to the Williams case and made a further comment with respect to “deeming’’, which word is used in subsection 75(1). The case is Perry v Astor, 19 TC 255, and the quote is from Lord Macmillan at page 290:

The result of the process of “deeming” which the Section directs is, in my opinion, not to bring into tax income not previously chargeable but to substitute one person for another as the person liable to be charged in respect of income already chargeable. To justify reading the Section as on the one hand imposing a charge on income not at present subject to charge and on the other hand as exempting from charge altogether income which is at present chargeable—for that is the result of the Crown’s contention—would, in my view, require much more express and precise language than the Section contains.

The position taken by the counsel for the respondent was that the reassessment was properly made and the Agreement had no application to the case under appeal (nor did the enabling legislation) as, in so far as the appellant was concerned, there was no double taxation imposed which should be avoided. If the enabling Act and the Agreement have no application to the case, then there is no conflict and consequently no basis for the appellant’s position. Hence the reassessment was correctly made.

As I view the matter, first, the income of the appellant must be determined in accordance with the provisions of the Income Tax Act. On the facts of the case it is clear that the appellant transferred property indirectly to persons who, at the end of 1973, were under the age of 18 years. That transferred property in 1973, according to the facts, provided income in the amount of $962.50. The appellant at all times in 1973 was resident in Canada. Subsection 75(1) of the Income Tax Act then states that the “income . . . shall . . . be deemed to be income . . . of the transferor and not of the transferee”. That section makes it clear that the dividends paid on the transferred shares which went to persons under 18 years of age are the income of the appellant, and so are to be included in computing the appellant’s taxable income for the year. This is what the respondent has done.

It is clear that, were there no Agreement, the dividends in question would be added to the income of the appellant and he would be taxed on his total income as is provided by the Income Tax Act on the progressive rate basis. However, it is equally clear that Article 9(3) of the Agreement states that the Canadian tax in a given set of circumstances will not exceed 15% of the gross amount of the dividends. Do the facts of this case fit the requirements of that Article? The requirements are: (a) the dividends are derived from a company which is a resident of Canada; and (b) (the dividends) are beneficially owned by a resident of the United Kingdom. It is admitted that the paying company was a “taxable Canadian corporation” and that the beneficiaries of the trust were the children of the appellant’s two nieces in the United Kingdom. It appears to me that the dividends in question are within the ambit of Article 9(3). Such being the case, there is an “inconsistency” between the provisions of the said Agreement and the Income Tax Act; consequently, pursuant to said subsection 11(2) “the provisions of the Agreement prevail to the extent of the inconsistency”. Hence the dividends in question should be assessed in accordance with Article 9(3), namely, at 15%, which is how the appellant computed his tax.

In the result, the appeal will be allowed and the reassessment referred back to the respondent for reassessment in accordance with these reasons.

Appeal allowed.