A W Prociuk (orally: June 13, 1975):
1 The appellant, Sudden Valley Inc, an American corporation, appeals from the respondent's assessment dated August 7, 1973 in respect of the taxation years 1969 to 1972 inclusive, wherein the appellant was assessed with respect to a 15% non-resident tax on amounts paid or credited to it as interest by residents of Canada, pursuant to paragraph 106(1)(b) of the former Income Tax Act, in respect of the taxation years 1969 to 1971 inclusive, and paragraph 212(1)(b) of the current Income Tax Act in respect of the taxation year 1972.
2 The appellant's ground of appeal is that during the relevant taxation years it was carrying on a business in Canada, and therefore it is subject to pay income tax under Division D, pursuant to the provisions of paragraph 2(2)(b) of the former Income Tax Act and paragraph 2(3)(b) of the current Income Tax Act, as well as under subsection 139(7) and paragraph 253(b) of the respective Acts, wherein the extended meaning of the phrase “carrying on business” is defined. Subsection 214(3) of the current Income Tax Act and subsection 805(1) of the Income Tax Regulations come into play if it cannot be determined what portion of the income can be attributed to the alleged business carried on by the appellant in Canada.
3 For convenience, I cite the above sections of the applicable legislation, and it will be observed that the wording and effect of these sections in each Act is pretty much the same.
4 The relevant sections read as follows:
2. (2) Where a person who is not taxable under subsection (1) for a taxation year2. (3) Where a person who is not taxable under subsection (1) for a taxation year139. (7) Where, in a taxation year, a non-resident person253. Where, in a taxation year, a non-resident person214. (13) The Governor in Council may make general or special regulations, for the purposes of this Part, prescribing(a) who is or has been at any time resident in Canada,
(b) where a person was resident in Canada as well as in some other place, what amounts are taxable under this Part, and
(c) where a non-resident person carried on business in Canada, what amounts are taxable under this Part or what portion of the tax under this Part is payable by that person.
805. (1) Where a non-resident person, other than a registered non- resident insurance company, carries on business in Canada he shall be taxable under Part III of the Act on all amounts otherwise taxable under that Part except that part of his income that may reasonably be attributed to the business carried on by him in Canada.
5 The principal issue, of course, is: Was the appellant carrying on a business in Canada during the taxation years under appeal?
6 Sudden Valley Inc, of Bellingham, Washington, USA, was incorporated, pursuant to the laws of the State of Washington, on October 8, 1968 to acquire and develop a recreational area known as Sudden Valley on the shores of Lake Whatcom, in the State of Washington, located approximately 7 miles south-east of Bellingham, and 75 miles from Vancouver, British Columbia, being an area of approximately 1,850 acres, subdivided originally into some 3,800 lots, for sale to anyone interested in owning a lot in this exclusive resort area.
7 According to Roger Ufkes, presently vice-president of Sudden Valley Inc, it was originally intended to direct the sales campaign to the residents of Seattle, Washington, but when Boeing Industry folded up in 1969 Seattle became an economically depressed area, and the appellant turned its attention to the Greater Vancouver area where it hoped to attract Canadian buyers. Its campaign consisted of attractively prepared packages of coloured slides, beamed into Vancouver by television cable, brochures distributed from fair booths and shopping malls, and some sent to Canadian residents. (See Exhibit R-1.) Advertising in Canadian magazines and newspapers was also resorted to in the relevant years, and the placing of attractively designed pictures like the one that appeared in the May-June 1975 issue of a Canadian magazine entitled “Westworld” (Exhibit A-1).
8 The Board was treated to a series of coloured slides projected on three screens, with sound and appropriate commentary, and to some radio advertising commercials which were used for viewing in the Greater Vancouver area.
9 Learned counsel for the respondent pointed out that nowhere in the said advertising was there any mention of offering land for sale, or any words from which one could reasonably infer that a sale was intended. In all cases it was a gracious invitation to come to Sudden Valley for a visit. Apparently, the area is securely guarded and a visitor requires a gate pass to be able to enter. Gate passes with an accompanying invitation were distributed quite liberally, and many Canadians visited the area.
10 Mr Ufkes testified that his company spent about $1 million in advertising, and has succeeded in selling, to date, approximately $35 million worth of land to Canadians. Approximately 80% of the total sales were to Canadian residents. Most purchases required a down-payment of 10% to 15%, and the balance was payable under an agreement for sale or a mortgage over a period of 10 years, with interest between 8% and 10%, depending on the size of the down-payment.
11 The appellant had no licence to sell in Canada, and no sales, as I find from the evidence, actually took place in Canada. No offers were made in Canada, nor any orders secured or initiated. Whenever Canadians visited Sudden Valley and became interested in acquiring property there, a sales contract was drawn up and executed in the sales office in the State of Washington. Payments under agreements for sale or mortgages were made to the appellant at its address in the State of Washington. It is the interest portion paid on these transactions that is the subject matter of this appeal. When asked specifically whether there was at least one contract executed in Canada, Mr Ufkes said: “No; I know of none.” Later he stated that a Canadian entity was incorporated under the name of Sudden Valley Investments Ltd as a shell for directing people to Sudden Valley tours, and also to receive complaints. It had no power to transact any business, to offer anything for sale, nor to initiate any transactions; and no power to accept payments in Canada on any transactions made in the State of Washington. However, no documentary evidence was filed to establish the exact purpose for which this entity was incorporated, apart from the oral testimony that was given.
12 Exhibit R-2 is a circular that was mailed to Canadian property owners, that is, to Canadians who had already purchased property in Sudden Valley. I refer to paragraphs 3 and 4 of page 1, which read as follows:
As a Public Relations Representative, we know you'll want to acquaint others interested in recreation land with Sudden Valley. It's really quite easy ... and very profitable. Just talk to friends, neighbors, relatives, etc, and set up appointments to visit Sudden Valley with you. On arrival at the Valley you will introduce your friends to your Sales Representative who will show them the beauty of the Valley in a conducted tour that requires about 45 minutes.
TOUR FEE ... a fee of $15.00 Monday to Friday and $10.00 on Saturdays, Sundays and Holidays will be paid to you for every qualified customer you bring to Sudden Valley whether or not they purchase property. A qualified tour guide is of legal age, employed and accompanied by the wife or husband, if married. This fee is intended to defray travel expenses and is limited to each trip even though more than one couple may be brought at a time.
13 The tenor of the oral testimony in support of the appeal was that the appellant company was doing business in Canada and therefore is not subject to non-resident tax. Mr Ufkes confirmed, in his evidence, that the appellant never filed income tax returns with the Department of National Revenue in respect of the taxation years under appeal.
14 Viewing the evidence in its totality, I have no difficulty in finding that much sophisticated advertising was done in this part of Canada but, at most, it consisted only of extending an invitation to visit Sudden Valley: the actual offer for sale, and the business transaction emanating therefrom was performed in the State of Washington, and not in Canada.
15 Accordingly, in my opinion, the appellant was properly assessed by the respondent, and the appeal is dismissed.
Email this Content