Tara Exploration and Development Company Limited v. Minister of National Rev Enue _, [1970] CTC 557, [1970] DTC 6370

JACKETT, P.:—This is an appeal from assessments under Part I of the Income Tax Act for the 1965 and 1966 taxation years, in which the question is whether the respondent erred in assessing the appellant, a company incorporated under the laws of Ontario, on the basis that it had a taxable income for those years by reason of profits that it made on a purchase of shares in Gortdrum Mines Limited and the resale of those shares partly in the 1965 taxation year and partly in the 1966 taxation year.

There is no dispute as to whether the appellant made the profits in question or as to the amounts thereof.

The first problem to be solved is whether, looking only at Part I of the Income Tax Act, the profits in question are subject to tax. To resolve this problem, the following questions must be answered:

(a) Were the profits in question profits from a “business” within the meaning of that word as used in the Income Tax Act, as the respondent contends, or were they profits from realization of an investment of a capital nature, as the appellant contends, and

(b) Is the appellant subject to Part I of the Income Tax Act in respect of the two years in question, either

(i) because the appellant was resident in Canada in those years so as to have been taxable under Part I by virtue of Section 2(1) of the Income Tax Act, as the respondent contends, and the appellant disputes, or

(ii) because the appellant ‘‘carried on business,in Canada”

in those years so as to be taxable under Part I by virtue of Section 2(2) of the Income Tax Act, as the respondent contends and the appellant disputes.

If the answers to these questions are such that the assessments could be supported under Part I of the Income Tax Act, if that Act were the only law involved, the further problem will have to be solved as to whether the profits in question are ‘‘not subject to Canadian tax’’ by virtue of paragraph 1 of Article III of the agreement between Canada and Ireland that is set out in the Schedule to the Canada-Ireland Income Tax Agreement Act, 1955 (S.C. 1955, ce. 10) read with the provisions of that statute.

I turn first to the question whether the profits in question were profits from a “business” within the meaning of Section 139 (1)(e) of the Income Tax Act, which reads:

(e) “business” includes a profession, calling, trade, manufacture or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade but does not include an office or employment;

If they were profits from a ‘‘business’’ then they are, for the purposes of Part I of the Income Tax Act, part of the appellant’s “income”, for the respective years in which they were made, by virtue of Section 3 of the Income Tax Act, which reads:

3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year from all sources inside or outside Canada and, without restricting the generality of the foregoing, includes income for the year from all

(a) businesses,

(b) property, and

(c) offices and employments.

During the years in question, the appellant’s sole business was that of exploring for minerals in Southern Ireland and it had raised capital on the Canadian market for this purpose, some of which in 1964 had not yet been put to work in that business. The profits in question were made by the appellant by using some of that capital to acquire shares in a company (Gortdrum) that had just been incorporated to develop an Irish mining property adjoining its own mining properties* [1] and by selling such shares at a profit. During the argument, two facts stood out in my view, on the evidence, viz.: (a) because the appellant and Gortdrum had interlocking directorates, the appellant was in a position to know that the shares that it was. purchasing were a good speculation, and (b) the money used: was money that the appellant, had acquired for use in its mining business and it could not have intended to retain the shares for more than a very short. time. When questioned by. the Court about the latter fact, counsel for the appellant did not press his submission that the purchase was an investment of a capital nature and not ‘‘a adventure or concern in the nature of trade’’. Having regard to the view that I had tentatively formed that, on the facts, the profits were from an adventure in the nature of trade within the sense of that phrase as established by a long line of decisions and the fact that counsel for the appellant did not press his argument to the contrary, I informed counsel for the respondent that I did not require argument from them on that question.* [2] Unfortunately, I did not have in mind, in connection with the facts of this case, until I camé to prepare these reasons for judgment, the decision of the Supreme Court of Canada in Irrigation Industries Limited v. M.N.R., [1962] S.CR. 346; [1962] C.T.C. 215.

The distinction, if there be one, between the facts of this case and the facts of the Irrigation Industries case, in so far as the question of adventure in the nature of trade is concerned, is not obvious. Unless, therefore, I am shown some valid reasons why I am not bound to follow that decision, I must hold that there is no adventure in the nature of trade here. On the other hand, having told counsel for the respondent that. they ‘were not required to address the Court on that question, I cannot decide the question against the respondent without re-opening the argument for the purpose of giving; ‘them an opportunity of showing why this Court is not bound to apply. the Irrigation Industries decision (supra) to the facts of this case.

However, as will hereafter appear, the outcome of the appeal will be the same no matter how I decide the adventure in the nature of trade question. It is unnecessary, therefore, for me to put the parties to the expense of a second argument. My discussion of the questions remaining to be decided will proceed on the basis that I have decided that there was an adventure in the nature of trade, but it must be understood that I am making no finding on that point.

The next two questions are raised by Section 2 of the Income Tax Act, the provision by which the income tax described by Part I of the Act is imposed or, in other words, the charging section. Section 2. reads as follow :

2. (1) An income tax shall be paid as hereinafter. required upon the taxable income for each taxation year of every person resident in Canada at any time in the year.

(2) Where a person who is not. taxable under subsection (1) for a taxation year

(a) was employed in Canada at any time in the year, or

(b) carried on business in Canada at any time in the year, an income tax shall be paid as hereinafter required upon his taxable income earned in Canada for the year determined in accordance with Division D.

(3) The taxable income of a taxpayer for a taxation year is his income for the year minus the deductions permitted by Division C.

Obviously, unless the. appellant falls under subsection (1) or subsection (2) of Section 2 for the taxation years in question, it is not subject to income tax under Part I of the Income Tax Act and does not have to rely on any special exemption by virtue of the agreement between: Canada and Ireland.

With reference to Section 2(1), I find as a. fact that, during the taxation years in question, “the central management ‘and control’’ of the appellant was in Ireland and was not in Canada. The general manager and other active officers of the company were resident in Ireland and had their offices there. The directors and corporate officers of the company lived there or in Northern Ireland. Ireland was the seat of the actual management and control and I cannot distinguish the case in principle from the decision in The King v. British Columbia Electric Railway Company, Limited, [1945] Ex. C.R. 82, per Thorson, P. at 86 et seq.-, [1945] C.T.C. 162, that the defendant there was resident in Canada, which decision is reinforced by the views expressed in the Judicial Committee in the same case ([1946] A.C. 221, per Viscount Simon at 537-38; [1946] C.T.C. 224). It is true that the appellant in this case had some business affairs in Canada, and, to that extent, the facts in this case differ from the facts in the British Columbia Electric case. The material fact is, however, the same, in my view. Notwithstanding that, in consequence of its Ontario incorporation, it had a ‘head office’’ in Toronto together with corporate books, etc., and held certain corporate meetings. there, notwithstanding that, through an arrangement with an associated company, it received and made payments in Canada and had a bank account in Canada, notwithstanding that its directors and officers came to Canada on occasion on the business of the appellant and of other companies in which they were interested, notwithstanding that it raised its capital in Canada and used the services of a Canadian solicitor and Canadian auditors, and notwithstanding that it embarked on certain business adventures in Canada, the evidence in my view establishes that the ‘‘central management and control’’ of the appellant was in Ireland and was neither in Canada nor divided between Canada and Ireland.* [3]

T‘ue final question, in so far as the Income Tax Act is concerned, is whether the appellant ‘‘carried on business’’ in Canada in the taxation years in question so as to be taxable by virtue of Section 2(2) of that Act. To appreciate the problem that is raised, Section 2(2) should be read with Section 3 and Section 31(1) in the light of Section 139(1)(e). Those provisions read as follows :

2. (2) Where a person who is not taxable under subsection (1) for a taxation year

(a) was employed in Canada at any time in the year, or

(b) carried on business in Canada at any time in the year,

an income tax shall be paid as hereinafter required upon his taxable income earned in Canada for the year determined in accordance with Division D.

3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year from all sources inside or outside Canada and, without restricting the generality of the foregoing, includes income for the year from all

(a) businesses,

(b) property, and

(c) offices and employments.

31. (1) For the purposes of this Act, a non-resident person’s taxable income earned in Canada for a taxation year is

(a) his income for the year from all duties performed by him in Canada and all businesses carried on by him in Canada, minus

(b) the aggregate of such of the deductions from income permitted for determining taxable income as may reasonably be considered wholly applicable and of such part of any other of the said deductions as may reasonably be considered applicable.

139. (1) In this Act,

(e) “business” includes a profession, calling, trade, manufacture or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade but does not include an office or employment;

For the purpose of this discussion, I assume that the purchase and sale of Gortdrum shares was an ‘‘adventure . . . in the nature of trade’’ so as to be a ‘‘business’’ within the meaning established by Section 139(1) (e). It follows that profits therefrom must be included, for the purposes of Part I of the Income Tax Act, in computing the appellant’s ‘‘income’’, for each of the years in which such profits were made.

For the purpose of the question that arises concerning Section 2(2), I make two further findings of fact, namely :

1. The adventure in the nature of trade from which the profits in question arose took place in Canada. The shares were bought in Canada by a broker acting for the appellant and were sold in Canada by a broker acting for the appellant. This, in my opinion, establishes that the ‘‘adventure’’ was in Canada even though the appellant was a corporation resident outside Canada. (In my opinion, the fact that the officer of the appellant who communicated the appellant’s instructions to the broker came to Canada to do so is irrelevant. )

2. Thé adventure in the nature of trade by which the appellant made the profits in question did not in itself constitute ‘‘carrying on business in Canada’’, within the ordinary meaning of the words ‘‘carrying on business’’ and was not ‘a part of a larger activity that falls within those words. It was an isolated transaction and it was not a part of the “business” for which the appellant had raised its capital or that it was actually carrying on.* [4]

On these facts, the question arises as to whether Section 139(1) (e) operates, not only to enlarge the definition of income in Section 3 to include profits from certain adventures, but also to enlarge the ‘concept of “carrying on business” in the charging section to make non-residents subject to Canadian income tax when they have not actually been carrying on business in Canada but have had only an adventure in the nature of trade consisting of an isolated purchase and sale transaction that was carried out in Canada through brokers.

As far as I can recall, the statutory definition of ‘business that operates to make it include an “ adventure or concern in the nature of trade” has heretofore been used freely to expand the profits in respect of which a person resident in Canada ‘is taxable but. has never heretofore been used to apply Part I of the Income Tax Act to non-resident persons who do not, in fact, carry on business in Canada.

In so far as it is used for the purpose of expanding the profits in respect of which residents of Canada are taxable, it does no more than that which its predecessor statute, the Income War Tax Act, did. See Section 9(1) (a) and (d) and 9(2)* [5] which taxed persons residing or resident in Canada or carrying on business in ‘Canada on “income”, which was defined by Section 3(1)f [6] to mean the “annual net profit or gain’’ from specified sources.such as a ‘‘business’’ and to include inter alia “the annual profit or gain from any other source’ [7]

While there was ‘no special reference in the Income War Tax Act to an adventure or concern in the nature of trade and there was no statutory definition in the Act of the word ‘‘business’’ to the same effect as Section 139(1) (e), nevertheless a profit from.an adventure or concern in the nature of trade was treated as ‘‘a profit or gain from any other source’’ within those words in Section 3 so that a Canadian resident was taxed in respect of such profits.

It follows that if, by virtue of Section 139(1)(e) of the Income Tax Act, a non-resident person who has made a profit from an adventure in the nature of trade in Canada is to be deemed to have carried on business in Canada” for the purpose of the charging provision in Section 2(2) of that Act, that statutory definition will have gone beyond making explicit the scope of the income” in respect of which residents were taxable under the old law and will have brought within the charging provisions of the new law a group of non-resident persons who were not previously subject to Canadian income tax law.

Nevertheless, if, properly understood, the statute has the effect of casting its net over a group of non-resident persons who would not have been subject to the Income War Tax Act, effect must be given to it.

Having revealed the possibly irrelevant background against which I see the matter, I turn to the problem of statutory interpretation involved, which is. Whether Section 2(2) can be read as. requiring an income tax to be paid, not only upon the taxable income of a non-resident person who actually ‘ carried on business in Canada” in a taxation year, but also on the taxable income of a non-resident person who carried on’’ an “adventure . . . in the nature of trade’’ in Canada in a taxation year. In other words, does Section 139(1) (e) permit the substitution of the words ‘‘adventure . . . in the nature of trade’’ for the word business” in Section 2(2) as well as in Section 3?

In considering this question, it is worthy of note that the Income Tax Act does contain a provision that provides that, where a non-resident person does certain things in Canada, he shall be deemed to have been carrying on business in Canada”. See Section 139(7) of the Income Tax Act which reads as follows:

139. (7) Where, in a taxation year, a non-resident person

(a) produced, grew, mined, created, manufactured, fabricated, improved, packed, preserved or constructed, in whole or in part, anything in Canada whether or not he exported that thing without selling it prior to exportation, or

(b) solicited orders or offered anything for sale in Canada through an agent or servant whether the contract or transaction was to be completed inside or outside Canada or partly in and partly outside Canada,

he shall be deemed, for the purposes of this Act, to have been carrying on business in Canada in the year.

It has never been suggested to my knowledge that an isolated purchase and sale falls within this subsection.

With great doubt as to the correctness of my conclusion, I am of opinion that Section 139(1) (e) does not operate to make a non-resident person subject to Canadian income tax in respect of a profit from an adventure that otherwise does not amount to, and is not part of, a “business”. With considerable hesitation, I have concluded that the better view is that the words “carried on’’ are not words that can aptly be used with the word ‘‘adventure’’. To carry on something involves continuity of time or operations such as is involved in the ordinary sense of a “business”. An adventure is an isolated happening. One has an adventure as opposed to carrying on a business.

My conclusion is, therefore, that the appeal succeeds on the ground that the appellant does not fall within the charging section of the Income Tax Act.

Inasmuch as I have reached my conclusion concerning the proper interpretation of Section 2(2) of the Income Tax Act with considerable doubt, I deem it proper that I should also reach a conclusion as to the effect of the Canada-Ireland Income Tax Agreement Act, 1955 in the circumstances of this appeal on the assumption that the appellant is subject to Part I of the Income Tax Act in respect of the profits in question.

The appellant’s claim for exemption under the Canada-Ireland Income Tax Agreement Act, 1955 is based on Article III of the Canada-Ireland Agreement set out in the Schedule to that statute, which article operates to cut down the operation of the Income Tax Act by virtue of Section 3 of the 1955 Act, which reads as follows:

3. In the event of any inconsistency between the provisions of this Act, or the Agreement, and the operation of any other law, the provisions of this Act and the Agreement prevail to the extent of the inconsistency.

Paragraph 1 of Article III of the Agreement, upon which the appellant relies, reads as follows:

1. The industrial or commercial profits of an Irish enterprise shall not be subject to Canadian tax unless the enterprise is engaged in trade or business in Canada through a permanent establishment situated therein. If it is so engaged, tax may be imposed on those profits by Canada, but only on so much of them as is attributable to that permanent establishment.

The expression “Irish enterprise” in Article III has a meaning that must be found by referring to Article II, paragraph 1(g), Which reads, in part:

(g) The terms “Irish enterprise” and “Canadian enterprise” mean respectively an industrial or commercial enterprise or undertaking carried on by a resident of Ireland, and an industrial or commercial enterprise or undertaking carried on by a resident of Canada; . . .

and to Article II, paragraph 1(e), which reads, in part:

(e) The terms “resident of Ireland” and “resident of Canada” mean respectively any person who is resident in Ireland for the purposes of Irish tax and not resident in Canada for the purposes of Canadian tax and any person who is resident in Canada for the purposes of Canadian tax and not. resident in Ireland for the purposes of Irish tax; a company shall be regarded as resident in Ireland if its business is managed and controlled in Ireland and as resident in Canada if its business is managed and controlled in Canada.

A problem of interpretation arises. in applying paragraphs (e) and (g) of Article II to determine what the first sentence of paragraph 1 of Article III means in relation to a “company”. The following steps are involve :

(a) by virtue of the second part of paragraph (e), a “company” is resident in Ireland “if its business is managed and controlled:in Ireland’’ and is resident in Canada ‘‘if its business is managed and controlled in Canada’’; and, as a matter of deduction, it is not resident in one of those countries if its business 1S not managed and controlled : n such country : 7

(b) applying step #a to the first part of paragraph (e), a “company” is a “resident of Ireland” if its business is managed and controlled in Ireland and is not managed and controlled in Canada ;

(e) applying step #b to paragraph (g). the term ‘‘Irish enterprise”, Where a company is concerned, means “an industrial or commercial enterprise or undertaking’’ carried on by a company whose business is managed or controlled in Ireland and is not managed or controlled in Canada;

; (d) applying step #c to the first sentence of paragraph 1 of

Article III, we find that the rule laid down thereby is, in effect, in so far as it is applicable to the facts of this appeal, as follows:

The . . . commercial profits of a commercial enterprise or undertaking carried on by a company whose business is managed or controlled in Ireland and is not managed or controlled in Canada shall not be subject to Canadian tax unless the enterprise or undertaking is engaged in business in Canada through a permanent establishment situated therein.

The first question to be decided to solve the question whether the appellant has a defence by virtue of the Canada-Ireland Agreement is whether the words prior to the unless” clause are applicable to the facts as they have been placed before the Court.

If, as I assume for the purposes of this part of my judgment, the words carry on’’ an adventure in the nature of trade are apt to include the appellant’s share transactions in Canada, it follows that the words in Article III, “commercial enterprise or undertaking carried on” by a company are apt to include those transactions. The respondent does not challenge this.

What the respondent says with reference to the words in Article III prior to the word ‘‘unless’’ is that, if the appellant was resident in Ireland at the relevant time, it was also resident in Canada, and, therefore, was not a “resident of Ireland” within paragraph (e) of Article II. I agree that that result would follow if I found the facts to be as the respondent contends, but I do not so find the facts. For the reasons already given in connection with Section 2(1) of the Income Tax Act, I find that the appellant’ s business was, at the relevant time, managed and controlled in Ireland and was not managed and controlled in Canada.

It follows that the profits in question are not subject to Canadian tax unless, applying the words of paragraph 1 of Article III commencing with the word ‘‘unless’’, the ‘‘enterprise or undertaking” carried on by the appellant is engaged in trade or business in Canada through a ‘‘permanent establishment” situated in Canada and the profits in question are ‘‘attributable to that permanent establishment’’. The respondent contends that the words of paragraph 1 of Article III beginning with “unless’ ’ apply to the profits in question.

The expression ‘‘permanent establishment’’ in Article III has a meaning that must be found by referring to Article II, paragraph 1(h), which reads:

(h) The term “permanent establishment” when used with respect to an enterprise of one of the territories, means a branch or other fixed place of business, but does not include an agency unless the agent has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of the enterprise or has a stock of merchandise from which he regularly fills orders on its behalf. In this connection—

(i) An enterprise of one of the territories shall not be deemed to have a permanent establishment in the other territory merely because it carries on business dealings in that other territory through a bona fide broker or general commission agent acting in the ordinary course of his business as such;

(ii) The fact that an enterprise of one of the territories maintains in the other territory a fixed place of business exclusively for the purchase of. goods or merchandise shall not of itself constitute that fixed place of business a permanent establishment of the enterprise;

(iii) The fact that a company which is a resident of one of the territories has a subsidiary company which is a resident of the other territory or which carries on a trade or business in that other territory (whether through a permanent establishment or otherwise) shall not of itself constitute that subsidiary company a permanent establishment of its parent company.* [8]

I find as a fact that the appellant had a “permanent” arrangement with a related company for the use of space and employees of the related company in Ontario to meet the requirements of the Ontario company laws and had a bank account in Toronto which was used to receive and make payments in Canada through services provided by the related company. In one sense, the appellant was engaged “ in . . . business in Canada ’ ’ through this arrangement. It was complying with the statutory requirements for its continued existence as a corporation. It certainly was collecting and paying money received from share issues and related to adventures. It might even have been using this arrangement to raise money on the Toronto market, although I do not think that this has been established. I am not satisfied, however, that the appellant was ‘‘engaged in trade or business in Canada through a permanent establishment situated therein” within the meaning of those words in paragraph 1 of Article III. I am of the view that those words refer to an ‘‘establishment’’ in Canada where there are persons with authority to carry on some part of the taxpayer’s money-making activities. In any event, I am of the opinion that the profits in question here are not ‘‘attributable’’ to the ‘‘permanent’’ arrangement that the appellant had in Canada. Those profits arose from a purchase and sales that were made as a result of decisions taken by persons whose permanent situs was in Ireland where they embodied the management and control of the appellant and those persons did not become part of the ‘‘permanent’’ arrangement in Canada merely because some of them were in Canada when some of the decisions were made and the brokers were instructed.

For the above reasons, the appeal will be allowed with costs and the assessments appealed from will be referred back to the respondent for re-assessment on the basis that the profits in question are not subject to tax under Part I of the Income Tax Act.