Section 115

The taxpayer was employed by Glencore International AG (“GI”) or a subsidiary from November 1991 to December 2006, with his employment in Australia commencing in 2002 when he also became an Australian resident. In 1994, GI granted him rights to share in future consolidated net income, which initially were labelled as "GIs" and subsequently ((in a replacement agreement) as Profit Participation Units, or “PPUs.” After finding that the "Amount" (totalling U.S.$160 million) paid or to be paid to the taxpayer after his terminiation of employment pursuant to the PPUs was income to him, Kenny and Roberston JJ rejected the taxpayer's alternative argument that the Amount should be apportioned between an exempt and taxable amount based on the respective number of days of foreign and Australian service, stating (at paras. 100, 102, 104):

Section 23AG(1) exempts only foreign earnings derived by a taxpayer from foreign service engaged in by him… .

[N]o part of the Amount can be accurately characterised as earnings “derived … from … foreign service”, as opposed to earnings derived from foreign and Australian service. …

[T]he Amount was incapable of apportionment as between earnings from foreign service, on the one hand, and earnings not from foreign service on the other because the agreed method of calculating that Amount did not allow for that distinction to be made. The Amount was incapable of being calculated on a per diem basis as the appellant proposed. The appellant’s entitlement to the Amount depended on his allocation of vested PPUs…and GI’s profits during particular periods... . The calculation was made irrespective of the days on which the appellant was employed at any particular place. [emphasis in original]

The taxpayer's exercise of stock options while he was resident in China gave rise to taxable income in Canada because he had received those stock options while he was a Canadian resident in the course of his employment there.

The taxpayer was a Barbados-resident Canadian citizen who worked as a pilot for Air Canada. His pay was based predominantly on flight time. He calculated his income from employment performed in Canada on the following bases:

• 10% of the income earned on flights between Toronto and Vancouver, based on a purported 90% of flight time spent in U.S. airspace.
• A percentage on Canadian international flights based on the ratio of the time spent in Canadian airspace to the total time, flying or not, between embarking and disembarking in Canada. (The taxpayer claimed that he was responsible for managing his craft while out of Canada, and that sleep was a part of his obligations.)
• 0% of all other income, including training and disability payments.

McArthur J rejected the taxpayer's income allocations. Air Canada paid its pilots based on flight time, and therefore the Minister's allocation of the taxpayer's duties based on flight time was more reasonable than the taxpayer's allocation based on total time spent abroad. Affirming that finding, Mainville JA stated (at para. 25):

The appellant has failed to show why we should disregard the method set out in the collective agreement [between Air Canada and its pilots] in order to favour a method which is largely based on non-remunerated wait time and layover time.

The 90% allocation of Toronto-Vancouver flight time to US airspace was not credible. Lacking any better method, McArthur J adopted the allocations arrived at in Sutcliffe, which used Air Canada's average flight path and took the percentage of the path length in U.S airspace - 49% for Toronto to Vancouver, and 31% for the return trip. This method assumed a constant air speed and no deviation from the standard flight path, and the taxpayer cast doubt on both assumptions. However, no better method was established.

In affirming that, in accordance with Sutcliffe, the disability payments should be allocated in the same proportion as flight income, Mainville JA stated (at para. 33):

The fact that subparagraph 115(1)(a)(i) refers to incomes from duties or offices and employments performed by the non-resident persons in Canada does not exclude from the scope of that paragraph the benefits and amounts referred to under subsection 6(1) of the Act. Rather, the words "duties" and "performed" are simply used in this context to distinguish between incomes earned from offices or employments in Canada from those earned outside Canada.

The taxpayer was a U.S. resident who was employed by Air Canada as a pilot on domestic flights (between Toronto and other Canadian cities) and international flights (between Toronto and U.S. cities). His income from performing or exercising his employment in Canada was to be determined by reference to the estimated portion of his flights that occurred in the U.S. (including domestic flights that traversed U.S. airspace). Sickness and vacation pay, which should be viewed as part of his remuneration, should be apportioned on the same basis.

A non-resident Canadian Football League football player was entitled to have the portion of his employment income that was not subject to Canadian income tax calculated on the basis of the ratio of games played in Canada to the number of games played both in Canada and the United States, rather than on the basis of the number of days spent in the respective jurisdictions in the course of his employment, given that his employment contract provided that he would be paid only for games played (with the exception of token amounts received for a training camp), unless he did not play because of a game injury.

In determining the level of employment income "attributable to duties performed outside the United Kingdom", reference should be had to the amount allocated to overseas employment by the taxpayer's employment contract. If there is no allocation in the contract, then an apportionment generally should be made on the basis of the number of days spent abroad performing his duties. [C.R.: 126(1)]

Two Caymans investment LPs, whose limited partners were mostly U.S. residents, realized income-account gains from the disposal, pursuant to an Australian Scheme of Arrangement, of shares of significant shareholdings in a TSX-listed Australian corporation (Talison Lithium) which, through a grandchild corporation, held mining leases in Australia and carried out an operation there of mining lithium ores and processing them. Pagone J found that the gains were income derived from an Australian source - notwithstanding that significant decisions were made outside Australia by the general partner’s investment committee and that the manager was outside Australia - given the Australian location of the business and assets, occasioned substantial activities in Australia that were an integral part of the investment, its management, and the guidance and assistance provided by partnership representatives on the Talison Lithium board and in light of other functions performed.

In affirming this finding, the Full Court stated (at paras. 64-65):

What bound the respondents to dispose of their shares and interests in Talison Lithium was not the entry into a contract of sale overseas but the convening of the scheme meeting, the approval at that meeting of the scheme of arrangement, the approval of that scheme by the Court, and the lodging of the order of the Court with the Australian Securities and Investment Commission … .

Here, each respondent’s “enforceable right” to the proceeds of the sale of the interests and shares in Talison Lithium arose from the scheme of arrangement. That arrangement took place in Australia, and accordingly, because the scheme was the “proximate” origin of the profits earned, and because of the other connections with Australia summarised by the primary judge … including the location of the mine in Western Australia, those profits had a source in Australia. At the very least, it was open to his Honour so to conclude.

Two Caymans investment LPs (“RCF IV” and RCF V”) whose limited partners were mostly U.S. residents, realized gains from the disposal of shares of significant shareholdings in a TSX-listed Australian corporation (Talison Lithium) which, through a grandchild corporation, held mining leases in Australia and carried out an operation there of mining lithium ores and processing them. The significant gains realized by RCF IV and RCF V in disposing of these investments consistently with their modus operandi which was (per the oral evidence) to “go in, make the investment, improve the performance of the company concerned and then seek to exit within three to six years after that time, having made a profit” (para. 32) were realized on income account. In further finding that such gains were income derived from an Australian source, Pagone J first noted (at para. 52) the RCF LPs’ submissions that significant decisions were made outside Australia by the general partner’s investment committee and that the manager was outside Australia, and then stated (at para. 53):

The fact that the business and assets were in Australia might not of itself be sufficient to make Australia the ultimate source of the gain derived upon the disposal of the shares, but the location in Australia of the business and assets, and the nature and extent of the business and assets, occasioned substantial activities in Australia that were an integral part of the investment, its management, and its ultimate profitable disposal. …

An element of the investment strategy of the RCF IV and RCF V partnerships was for members of the RCF Management team to occupy positions on boards of the companies in which RCF invested to guide management and to contribute to an increase in the value of the investments which were intended to be sold at a profit. That function was performed by employees in the Perth office … .

Respecting the statutory reference to income derived “directly or indirectly,” he stated (at para. 51):

The Commissioner submitted that the phrase directs attention “not merely to the proximate origin of the income, but also to those acts or matters which constitute contributory causes to the generation of income”, however, the adverbial phrase quantifies the word “derived” in the section rather than the word “source”. It can be accepted that non-proximate contributory causes may be relevant to ascertain the source of derivation but the adverbial phrase does not lessen or reduce the need to find that that which was derived was from an Australian source.

The taxpayer was found to be carrying on business in Canada on the basis that through a Canadian mandatory it offered for sale, in Canada, Costa Rican plantation lots and solicited orders for services to be provided by it in connection with the sold lots, with each investor paying an overall amount in connection with the transactions which constituted an "indivisible whole" (p. 519). Although s. 115(1)(a)(ii) required a reasonable allocation of revenue and deductions, the Minister had assessed on the basis that all the revenues and expenses were applicable to Canada, and the appellant had provided no evidence of any kind whatsoever that would permit the allocation of a portion of the revenues and expenses to Costa Rica.

The taxpayer (a company incorporated in Hong Kong) underwrote the sale of apartment units in a building erected in mainland China pursuant to an underwriting agreement entered into in China. Because the marketing of the apartments took place in Hong Kong, and all but two of the apartments were sold to Hong Kong purchasers, the profits of the taxpayer were found to arise in Hong Kong.

Before finding that film revenues of the U.S. taxpayer were reasonably attributable to its Canadian distributorship business notwithstanding they were also attributable to U.S. movie production, so that they would be exempted under Reg. 805 from Part XIII tax, Addy J stated:

Its film distribution activities and the advertising activities and public relations promotions connected with them are the equivalent of the sales and the sales promotion activities of a manufacturer who produces goods for sale. The distribution of the product results in the generation of income and profits which of course is the ultimate goal of the entire undertaking. ... Therefore, this is not the case of a US firm being engaged in business dealings in Canada, promoted, controlled and carried out entirely from the United States without a branch or organization in Canada.

And further stated:

The fact that a company chooses to have certain of its business activities carried out by agents does not of itself prevent those activities from being the business operations of the company.

See summary under Reg. 805.

In accepting a finding of the Commissioners that the income earned by a U.K. petroleum consulting firm from work done pursuant to a contract with a Venezuelan company for the "rehabilitation investigation" of three Venezuelan oil fields arose partly in the U.K. and partly in Venezuela, Scott J. stated (p. 123):

"What conceptually or from a linguistic point of view is the matter with regarding remuneration from a contract with an international complexion as producing income which ... can be regarded as arising partly in one country and partly in another?"

The gains realized by a Hong Kong bank from the purchase and resale outside Hong Kong of certificates of deposit, bonds and gilt-edged securities were correctly found by the Commissioners not to be "profits arising in or derived from Hong Kong" from carrying on a trade or business in Hong Kong. The activities of the bank from which the income arose was the buying and selling of the securities in overseas markets and not the decision-making process in Hong Kong. Lord Bridge stated (p. 488):

"If [the taxpayer] has rendered a service or engaged in an activity such as the manufacture of goods, the profit would have arisen or derived from the place where the service was rendered or the profit making activity carried on. But if the profit was earned by the exploitation of property assets [such] as by letting property, lending money or dealing in commodities or securities by buying and reselling at a profit, the profit will have arisen in or derived from the place where the property was let, the money was lent or the contracts of purchase and sale were effected."

The Canadian branch office of the taxpayer, which was a U.K.-resident company earning profits from international shipping conducted by itself and its subsidiaries, earned income from servicing the shipping activities of the subsidiaries and third parties, e.g., providing stevedoring services and booking cargo. Thurlow J. found that in computing the Canadian branch profits, the taxpayer was entitled to deduct head office administrative expenses that were applicable to those profits, stating (at p. 5307):

[W]here the business of the non-resident company is carried on both in Canada and elsewhere some proportionate part of the general expenses incurred in carrying on the business in more than one country including Canada would ordinarily be attributable to the portion of the business carried on in Canada and be deductible on ordinary principles... .

The U.S. parent of the taxpayer rented equipment to the taxpayer for use by the taxpayer in its Canadian operations. Although the U.S. parent was considered to be carrying on a business in Canada, i.e., providing various administrative, supervisory and other services to the taxpayer at cost, the rents received by it could not reasonably be attributed to any part of the business which it carried on in Canada. The rental agreements were made in the United States, rentals started when the equipment left California, delivery of the equipment to the taxpayer took place in the United States, and payment was received in the United States. Accordingly, as the rental payments were revenues of a business carried on instead in the U.S., the withholding tax exemption in Reg. 805 was not available.

The taxpayer, who was a consulting electrical and mechanical engineer practising in Johannesburg, visited project sites in Rhodesia for the purpose of ascertaining the precise requirements of the clients, advising them and preparing rough sketches, and then returned to Johannesburg where the plans for the electrical and mechanical installation work were prepared. Hoexter J.A. affirmed a factual finding that s. 9(1)(b) of the Income Tax Act, 31 of 1941 did not apply to the portion of his fees allocated to the work performed in Rhodesia. This provision provided that "an amount shall be deemed to have accrued to any person from a source within the Union, whenever it has been received by or accrued to or in favour of such person by virtue of ... any service rendered ... by such person in the carrying on in the Union of any trade ...".

The taxpayer, which was an Ontario corporation engaged in the business of manufacturing and selling agricultural implements, carried on its manufacturing operations exclusively outside Saskatchewan while selling operations occurred partly in that province and partly in other provinces and countries. Any part of the taxpayer's net profit which might fairly be attributed to its manufacturing operations outside Saskatchewan, was found not to be profit arising from the business of the appellant inside Saskatchewan within the meaning of the Income Tax Act, 1932 (Saskatchewan).

An American manufacturer of airplanes purported to license its rights to use Australian patents and registered designs to an Australian company in consideration for a lump sum of $25,000 and further sums based on the number of aircraft engines manufactured by the Australian licensee. In fact, the American company did not own any Australian patents or any designs registered in Australia. The drawings of specifications were delivered in New York. Six technicians from the Australian company were to visit the American factory for the purpose of obtaining information and the American company further agreed to give the Australian company pertinent information and advice.

In finding that the American company was not subject to tax on income "derived directly or indirectly from all sources in Australia" in respect of this agreement, Latham C.J. found (at p. 321) that "the agreement was in reality an agreement for the communication of information which would facilitate the manufacture of the engines in Australia", that the knowledge so communicated did not represent property and (at p. 322) that "a person who neither owns anything in a country nor does nor has done anything in that country cannot ... derive income from that country".

The taxpayer, while practising as a public accountant in Western Australia, agreed with the client that if the taxpayer were able to secure a remission of taxes assessed on the client, the taxpayer would be entitled to a portion of the remission as his commission for those services. The taxpayer then closed his office in Perth, went to Melbourne in order to lobby for a legislative amendment and, following the passage of a favourable amendment, returned to Western Australia to apply for and obtain the remission. In finding that the fees were taxable pursuant to s. 30(3) of the Land and Income Tax Assessment Act, 1907-24 (Western Australia), the High Court noted that neither of the Courts below had been satisfied that the taxpayer's lobbying effort in Melbourne was the effective cause of his obtaining the remission, and that, instead, he earned his commission by applying for and obtaining the remission while in Western Australia. The Court also noted that "the place where those earnings [sic] occur which directly gave rise to income must be regarded rather than the place or places where remoter causes exist" (p. 67).