Date: 20000217
Docket: 98-2335-IT-I
BETWEEN:
LAURA FEIGENBAUM,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
(Delivered orally from the Bench at Toronto, Ontario, on December 7, 1999)
Mogan J.T.C.C.
[1] This appeal is from an assessment issued under Part XIII of the Income Tax Act which levies a tax on certain income received by non-residents of Canada from Canadian sources. Generally speaking, that income is of an investment nature such as interest on a principal amount of money, dividends on shares of a corporation, royalties from the use of certain property, etc. When those kinds of payments are made by a resident of Canada to a non-resident, there is a tax levied under the Act. It is a special tax different from the tax levied on the world income of persons resident in Canada. This special tax is levied under section 212 of the Act. The rate is 25% and, in international tax circles, 25% is regarded as high. The policy of the Government of Canada in imposing that relatively high rate is to encourage tax treaties with foreign countries so that, under the terms of an international tax treaty between Canada and some other country, the tax on investment income flowing between the two countries is usually reduced to a lower rate of 10% or 15%.
[2] The Appellant was a resident of Canada until 1987 when she moved to California. According to the evidence of her son who represented her in this proceeding, she resided in the State of California from 1987 up to and including the end of 1995. There is no dispute on the facts that in the years 1991 to 1995, which are the taxation years under appeal, the Appellant resided in the State of California and not in Canada. She was in receipt of a relatively small amount of interest income in each of the years under appeal. In 1991, the interest income was approximately $8,700. In the four succeeding years, it was in the range of $300 to $600. The non-resident tax under Part XIII was assessed on that interest income in each of the five years under appeal. The Appellant has appealed from those assessments and has elected the Informal Procedure.
[3] Under the Canada/U.S. Income Tax Convention, the tax on such income is either 10% or 15%. Because of that Tax Convention, the statutory rate of 25% in section 212 no longer applies. For some reason, Revenue Canada thought that the Appellant was continuing to reside in Canada. The undisputed evidence is that starting around 1990 or 1991, Revenue Canada wrote to the Appellant asking her to file an income tax return in Canada under Part I of the Act as if she were resident of Canada. Her son testified that when she received these requests from Revenue Canada, she either wrote to them or phoned them, explaining that she did not have to file under Part I because she no longer resided in Canada. In other words, there was no attempted deception or misrepresentation because she informed Revenue Canada that she did not reside in Canada.
[4] I have no reason to disbelieve the evidence of the Appellant's son. I also believe the allegations in the notice of appeal which are consistent with the story presented here in Court of a person trying to persuade Revenue Canada that it is following the wrong course. Sometime around 1995, Revenue Canada issued one or more assessments to the Appellant under Part I of the Act assessing her as if she were a resident of Canada for certain years. I am not sure what years, but she objected to those assessments and filed a notice of objection in 1996. She then must have obtained some advice because she did what probably appeared to her as a practical thing. Because Revenue Canada had insisted on assessing her as a resident, she complied with their request and filed returns for the various years showing that her income was so low that she did not have any tax to pay in Canada if she were a resident.
[5] Revenue Canada then cancelled the assessment (or assessments) it had issued in 1995 based on Part I of the Act. It obviously was concerned that no tax had been paid on this modest amount of investment income because sometime in the latter part of 1996, it issued assessments under Part XIII of the Act levying tax under that Part as modified by the Canada/U.S. Tax Convention. The amounts of tax which were assessed and which the Appellant's representative acknowledged as mathematically accurate were: for 1991 - $1,362; for 1992 - $142; for 1993 - $204; for 1994 - $100; and for 1995 - $126. A total non-resident tax of $1,935 was levied for those five years. Revenue Canada did not issue those assessments until October 1996. It also assessed interest of $891 making a total liability of approximately $2,830 for non-resident tax plus interest.
[6] It is from those assessments that the Appellant has appealed to this Court. Both the tax and the interest are in dispute. The argument put forward is primarily an equitable argument. The Minister of National Revenue was so late in concluding that the Appellant truly was a non-resident in Canada and, therefore, taxable only under Part XIII and not under Part I that the Appellant did not know at the time she filed her income tax returns in the United States that she would have any tax liability in Canada. When the Appellant filed her income tax returns in the U.S.A. for each year under appeal, she did not claim a tax credit with respect to the non-resident tax which the Minister has now assessed. In other words, if the non-resident tax had been assessed by Revenue Canada in a timely manner each year, the Appellant would have known what her tax liability was in Canada when she filed her income tax returns in the United States, and she could have claimed a tax credit in the United States with respect to her tax liability in Canada.
[7] There is not much doubt that the Appellant has a tax liability in Canada because, on the admitted facts, she was a non-resident at all relevant times in the five years under appeal and she was in receipt of interest income from Canada which is one of the designated heads of income under paragraph 212(1)(b) of the Act.
[8] I am satisfied that the Appellant is liable for tax on the interest income. If she had known about that liability, she could have claimed a tax credit in the U.S.A. when filing her annual tax returns. Because of the long delay in issuing the assessments for non-resident tax, it appears that it is now too late for her to go back and claim a tax credit in the U.S.A. or in the State of California with respect to these modest amounts of tax which she is required to pay in Canada for the years 1991 to 1995.
[9] She also disputes the assessed interest on the same premise that if she had known about the non-resident tax, she would have either paid it in Canada or had it paid by the Canadian resident person who paid the interest to her. In those circumstances, there would have been no interest to pay. It appears from paragraph 12(b) of the Reply to the Notice of Appeal that the interest was payable by a non-arm's length person being one of the prominent Canadian chartered banks and I assume that non-resident tax was not withheld because the bank thought that the recipient was still resident in Canada. This arises from time to time when the last known address to the bank of its customer is a Canadian address, perhaps an address of convenience like a relative or business location in Canada to which the interest payments are sent. Therefore, the Canadian resident payor does not know that the payee is actually not a resident of Canada. That is a possible reason why a financial institution would not withhold tax on interest which was in fact payable to a non-resident. A financial institution like a bank would ordinarily have a procedure in place for withholding tax on payments known to be going to a non-resident.
[10] I am troubled in this case by the long delay in issuing the assessments for Part XIII tax when the Appellant had apparently informed Revenue Canada that she was not a resident of Canada and, therefore, was not required to pay tax under Part I and could have been assessed under Part XIII. On the other hand, I do not know the extent of her disclosure or the means of her disclosure. I believe her son's statement that she communicated with Revenue Canada and told them she was not resident in Canada but, if she was receiving interest income from Canada, I do not know whether she made that known to Revenue Canada or made her non-resident status known to the bank so that tax could have been withheld.
[11] I did not have the opportunity to hear the Appellant's own testimony concerning the precise details of whatever communications went on between the Appellant and Revenue Canada or between the Appellant and the bank which was paying the interest. Even if there were the most explicit disclosure of every relevant fact, there is nothing that I can do for the Appellant under Part XIII because of the admitted facts. She was not a resident in Canada but she received these amounts of interest income from a payor resident in Canada. Those bare facts are adequate to trigger the application of section 212 of the Income Tax Act and impose the liability for tax. The Tax Convention reduces the rate to 10% or 15% and, as the Appellant's son acknowledged when he testified in this appeal, she does not dispute the amounts of tax or interest. In other words, she does not dispute that the tax levied would be $1,935, and there is no evidence that the interest is calculated in any erroneous way, given the dates when the tax should have been paid under Part XIII and the date of the notices of assessment that are under appeal. There was some discussion as to what section of the Act permitted the Minister to assess the Appellant. I am satisfied that the assessments were issued under subsection 227(10.1) and that the Appellant is the appropriate person to be assessed.
[12] I, therefore, conclude that the assessments of tax are justified under the terms of the Income Tax Act. There is no flaw in the Minister's authority to assess the amounts of tax and interest. The Appellant's claim for relief is primarily equitable and I direct myself to that claim. As a matter of equity, I would recommend that the Minister exercise his discretion under subsection 220(3.1) of the Act and waive the interest on the non-resident tax. It ought to have been clear to the Minister long before the assessments were issued that this Appellant was not a resident of Canada but was a resident of the U.S.A. If the assessments had been issued earlier than they were in fact issued, they would have been paid to avoid the interest and, also, the Appellant might have had an opportunity to claim a tax credit in the U.S.A. with respect to at least some of the years. Because she could not claim the tax credit in the U.S.A. and has to pay interest because Revenue Canada did not recognize earlier that she was not a resident, I am recommending that the Minister exercise his discretion under subsection 220(3.1) to waive interest.
[13] On the question of the tax itself, there is no equitable relief. Under the provisions of the Canada/US Tax Convention, a taxpayer may make an application to a "competent authority" to obtain relief from double taxation where it exists. There is no doubt that from time to time double taxation does arise with respect to transactions between residents of Canada and residents of the U.S.A. A "competent authority" is there to grant relief but, as a practical matter, having regard to the multiplicity of transactions between residents with cross-border transactions, it is my understanding that the competent authority does not ordinarily respond to relief where the amounts in issue are relatively small even though they may be of some consequence to the individual involved. In this appeal, compared to many international transactions, the amounts are relatively small because they are measured in amounts of only $2,000 or $3,000.
[14] Therefore, it may not be practical or possible to obtain relief from the "competent authority," under the Canada/US Tax Convention from the double taxation that could very well arise from my decision to dismiss these appeals and permit the assessments to stand with regard to the non-resident tax. This Court is a court of law and not a court of equity. I do not have the jurisdiction to grant equitable relief in any kind of case. I have to apply the statute to the facts before me. On those facts, I find that the statute applies and authorizes the Minister to issue the assessments and levy tax and interest because subsection 227(10.1) specifically brings in sections 150-163 which includes section 161, authorizing the Minister to assess interest for the tax where the tax is not paid within the time required. For these reasons, I dismiss the appeals. I will include a note in my formal judgment to the effect that I am recommending that the taxpayer be granted some relief with respect to interest under subsection 220(3.1) of the Act.
Signed at Ottawa, Canada, this 17th day of March, 2000.
"M.A. Mogan"
J.T.C.C.