Date: 20021211
Docket: 2001-3210-IT-G
BETWEEN:
CARL BEAME,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] This appeal pursuant to the General Procedure was heard at Toronto, Ontario on November 22, 2002. Sunny Ngan, who was the accountant for the Appellant at all material times, was the only witness.
[2] Paragraphs 1 to 13 inclusive of the Notice of Appeal outline the matters in dispute. They read:
1. The Appellant's address is:
Waterloo House
Killarney Road
Mallow, Co. Cork
Ireland
2. The Appellant appeals from a Notice of Assessment dated June 16, 1999 issued by the Minister of National Revenue (the "Minister") pursuant to the Income Tax Act (Canada) the "Act" for the 1997 taxation year.
I. FACTS
3. At all material times the Appellant has been a resident of Ireland.
4. The Appellant disposed of shares of 1169813 Ontario Inc. (the "shares"), a Canadian private corporation, realizing a capital gain in the amount of $8,250,824, and a taxable capital gain of $6,188,117, during the 1997 year.
5. The shares constituted "taxable capital property" as defined in paragraph 115(1)(b) of the Act.
6. The Appellant obtained a clearance certificate from the Minister pursuant to section 116 of the Act, prior to the disposition of the shares, issued upon the basis that the Canadian tax was 15% ($928,218) of the Appellant's taxable capital gain.
7. The Minister assessed by Notice of Assessment dated June 16, 1999 for the 1997 taxation year upon the changed basis that the Appellant's Canadian tax was 15% ($1,237,623) of his entire capital gain, rather than 15% of his taxable capital gain.
8. The Appellant objected to the Minister's assessment by Notice of Objection dated August 6, 1999 upon the basis that the 15% tax rate under Article VI(1) of the Canada-Ireland Tax Treaty is applicable to his taxable capital gain of $6,188,117.
9. The Minister confirmed his assessment for the 1997 taxation year by Notification of Confirmation dated June 7, 2001, upon the basis that:
"non-resident withholding tax of 15% was assessed on income of $8,250,824 under the provisions of paragraph I of Article VI of the Canada-Ireland Income Tax Treaty."
II. ISSUE
10. The issue is whether the 15% tax rate, on the Appellant's income derived from sources in Canada, under Article VI(1) of the Canada-Ireland Income Tax Treaty, is applicable to the Appellant's taxable capital gain, or to his entire capital gain.
III. STATUTORY PROVISIONS RELIED ON
11. The Appellant relies, inter alia, upon sections 2, 3, 38, 39, 40, 115 and 116 of the Income Tax Act, Articles II(3), VI(1) and XVI(l) of the Canada-Ireland Tax Treaty and section 3 of the Income Tax Conventions Interpretation Act, RSC 1985, c. I-4.
IV. REASONS THE APPELLANT INTENDS TO RELY ON
12. The Appellant submits that the word "income" in the Act and in Article VI(l) of the Canada-Ireland Tax Treaty refers only to the Appellant's taxable capital gain rather than to his entire capital gain.
V. RELIEF SOUGHT
13. The Appellant requests that the appeal be allowed with costs and that the assessment be referred back to the Minister for reassessment upon the basis that the 15% tax rate under Article VI(l) of the Canada-Ireland Tax Treaty is applicable to his taxable capital gain, rather than to his entire capital gain.
[3] Paragraphs 1, 2, 3, 5, 6, 7, 8 and 9 of the Notice of Appeal were admitted by the Respondent. Paragraph 4 describes what the Appellant did in fact in 1997. The remaining paragraphs describe the position of the Appellant.
[4] Paragraph 12 of the Notice of Appeal describes the problem. The Appellant states that "income" in Article VI(1) of the Canada-Ireland Income Tax Agreement (the "Agreement") means "taxable income" as it is described under the Income Tax Act ("Act"). The Respondent states that meaning of "income" in Article VI of the Agreement should be confined to the Agreement itself and that it has a broad meaning.
[5] The Appellant's accountant, Mr. Ngan, testified that he applied for a Clearance Certificate from Revenue Canada on July 5, 1996 (Exhibit A-1, Tab 2). It was issued to him on the basis described in paragraph 4 described in the Notice of Appeal, on February 7, 1997 in return for a cheque payable to the Receiver General for 15% of the taxable capital gain pursuant to the Act. He calculated the capital gain to be $8,250,823 and the taxable capital gain to be $6,188,177.25. The Appellant paid $928,218 as set out in the Certificate (Exhibit A-1, Tab 5).
[6] Because the Appellant had paid all of his tax as set out in the Clearance Certificate, he was not in a hurry to file his income tax return. It was dated October 5, 1998 and filed in November. It set out the particulars already described (Exhibit A-1, Tab 6).
[7] On June 16, 1999 the Appellant was issued a Notice of Assessment which claimed a balance of tax, interest and a late filing penalty with an unpaid balance of $287,049.29. It stated "According to the Canada-Ireland Income Tax Agreement, the reduced tax rate of 15% applies to the total capital gains." (Exhibit A-1, Tab 7).
[8] The Appellant filed a Notice of Objection on August 6, 1999 (Exhibit A-1, Tab 8).
[9] On June 7, 2001, the assessment was confirmed (Exhibit A-1, Tab 15) but the penalty was waived. This appeal followed.
[10] The Respondent's position and argument is confined to Article VI, paragraph 1, of the Agreement which reads:
1. The rate of Canadian tax on income (other than income from carrying on business in Canada or from performing duties in Canada) derived from sources within Canada by a resident of Ireland shall not exceed 15 per cent.
[11] Appellant's counsel argued that the word "income" in Article VI is not confined to the Agreement. He then went on through five arguments. However the first two arguments are the essence of the Appellant's case. The first is that Article VI lowers the rate payable, which is true. The second is that the meaning of the word "income" is to be determined by reference to subsection 117(2), sections 2 and 3 and paragraph 115(1)(b) of the Act.
[12] Respondent's counsel stated that the words of the Agreement are to be read broadly and that it is not necessary to go into the Act. The following passage from Gladden Estate v. The Queen, 85 DTC 5188 was cited in support of the essence of this argument:
The case of The Queen v. Melford Developments, 81 DTC 5020 (F.C.A.) and 82 DTC 6281 (S.C.C.) is very much in point. Both divisions of the Federal Court, as well as the Supreme Court of Canada, held in favour of the taxpayers who were originally assessed on the basis that they had failed to pay non-resident's withholding tax on guarantee fees paid to a German bank. They, in turn, argued that they were exempt since industrial or commercial profits were exempted under the provisions of the Canada -Germany Tax Convention of 1956 and on the grounds that the guarantee fees had to be classified as such. The Minister argued that, pursuant to a 1974 enactment which provided that guarantee fees would be deemed to be interest, a non -resident withholding tax was payable. Section 3 of the Act adopting the Canada-German Treaty is identical to Section 3, which I have quoted supra, of the legislation adopting the Canada-U.S. Treaty. Urie, J., of the Federal Court of Appeal, had this to say regarding the inviolability of a tax treaty (refer p. 5024 of the report):
The paragraph (i.e. paragraph 5 of Article III which allowed Canada to tax interest) does not enable Canada to declare that a kind of income that was accorded exemption in the Convention as such profits and is not specifically provided for in the Articles that follow shall be taxable. Such a unilateral action would not be possible, in my view, because it would be in violation of the terms of a binding agreement freely entered into by sovereign states. Such an agreement can only be varied or amended by agreement of the parties not by the action of one party in changing its tax laws by the enactment of a section such as section 214(15) in 1974 some 18 years after the agreement was entered into.
On the same subject Estey, J., in the Supreme Court of Canada remarked (see pp. 6285-6286 of the above mentioned report):
... Laws enacted by Canada to redefine taxation procedures and mechanisms with reference to income not subjected to taxation by the Agreement are not, in my view, incorporated in the expression "laws in force" in Canada as employed by the Agreement. To read this section otherwise would be to feed the argument of the appellant, which in my view is without foundation in law, that sub. (2) authorizes Canada or Germany to unilaterally amend the tax Treaty from time to time as their domestic needs may dictate.
It is well to remind ourselves in analysing these statutes and the subtended tax Agreement that the international Agreement does not itself levy taxes but simply authorizes the contracting parties, within the terms of the Agreement, to do so.
...
Obviously it follows that s. 3 or any other part of the 1956 statute can be repealed or amended. The question is not that, but whether the collateral legislative action in connection with the Income Tax Act has the effect of amending the 1956 statute. The suggestion that it does have such an effect is startling. There are twenty-six concluded and ten proposed tax conventions, treaties or agreements between Canada and other nations of the world. If the submission of the appellant is correct, these agreements are all put in peril by any legislative action taken by Parliament with reference to the revision of the Income Tax Act. For this practical reason one finds it difficult to conclude that Parliament has left its own handiwork of 1956 in such inadvertent jeopardy. That is not to say that before the 1956 Act can be amended in substance it must be done by Parliament in An Act entitled "An Act to Amend the Act of 1956". But neither is the converse true, that is that every tax enactment, adopted for whatever purpose, might have the affect [sic] of amending one or more bilateral or multilateral tax conventions without any avowed purpose or intention so to do.
There is no doubt, in my view, that the effect of s. 3 is to make the operation of any other law of Parliament, including the Income Tax Act, subject to the terms of the 1956 Act and the incorporated Agreement. The only exception to this result would be where Parliament has expressly set out to amend the 1956 statute. Then, of course, there is no conflict between the 1956 Act and "any other law". This interpretation has the necessary result of embodying in the Agreement, by reason of Art. II(2), as definitions of the words not therein defined, the meaning of those words at the time the Agreement was adopted. Thus any legislative action taken for whatever reason which results in a change of expansion of a definition of a term such as "interest" does not prevail over the terms of the 1956 statute because of the necessary meaning of s. 3 thereof ...
What the position of the appellant amounts to is an assertion that Canada can simply amend the Agreement by the device of redefining the term interests.
(emphasis added)
The same result was arrived at on the same basis in the case of The Queen v. Associates Corporation of North America, 80 DTC 6140 (F.C.A). (Refer also: Doris Lillian Gadsden v. M.N.R., 83 DTC 127.) The next issue involves the interpretation which must be given to the words "sale or exchange" in Article VIII of the Treaty.
[Treaty interpretation]
Contrary to an ordinary taxing statute a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated insofar as the particular item under consideration is concerned.
Article 31 of the Vienna Convention on the Law of Treaties (1969) to which Canada subscribed governs the general rule of interpretation to be applied. Paragraph 1 of that Article reads as follows:
1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.
[13] Article VI of the Agreement fixes a rate of 15% on "income". It does not go further and add the adjective "taxable" to that word. Even when the Agreement was drafted and adopted in 1966 and 1967, that could have been inserted into the Agreement by the parties. But it was not.
[14] The Court accepts the Respondent's argument that the meaning of the word "income" under the Agreement is to be interpreted in a broad fashion, without reference to the Act. In particular, the passage quoted from Gladden is adopted in support of that argument.
[15] For this reason, the appeal is dismissed.
[16] The Respondent is awarded party and party costs.
Signed at Vancouver, British Columbia, this 11th day of December, 2002.
|
"D. W. Beaubier" |
J.T.C.C.COURT FILE NO.: 2001-3210(IT)G
STYLE OF CAUSE: Carl Beame v. Her Majesty the Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: November 22, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge D. W. Beaubier
DATE OF JUDGMENT: December 11, 2002
APPEARANCES:
Counsel for the Appellant: Pierre Barsalou and Zoltan Ambrus
Counsel for the Respondent: Marie Thérèse Boris
COUNSEL OF RECORD:
For the Appellant:
Name: Pierre Barsalou and Zoltan Ambrus
Firm: Barsalou Lawson
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-3210(IT)G
BETWEEN:
CARL BEAME,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on November 22, 2002 at Toronto, Ontario, by
the Honourable Judge D. W. Beaubier
Appearances
Counsel for the Appellant: Pierre Barsalou and Zoltan Ambrus
Counsel for the Respondent: Marie Thérèse Boris
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1997 taxation year is dismissed, with costs, in accordance with the attached Reasons for Judgment.
Signed at Vancouver, British Columbia, this 11th day of December, 2002.
|
"D. W. Beaubier" |
J.T.C.C.