Bessemer Trust Company and Ogden Phipps as
trustee (1957 Trust) (Plaintiffs)
v.
Minister of National Revenue (Defendant)
Trial Division, Collier J.—Vancouver, B.C.,
June 22; Ottawa, September 13, 1972.
Income tax—Canada-U.S. Tax Convention Act, 1943,
Art. XIII A 2—Recaptured capital cost allowances made
taxable after Convention came into force—U.S. resident not
taxable thereon.
United States trustees of rental property in Canada paid
tax on the income therefrom for certain years under Part I
of the Income Tax Act, R.S.C. 1952, c. 148, pursuant to an
election under section 110(1). In 1969, following the sale of
the property, the trust was assessed to income tax on
recaptured capital cost allowances pursuant to section
110(5), which was enacted in 1955. The trust contended
that the assessment violated Article XIII A 2 of the Canada-
U.S. Tax Convention (which came into force in 1951), viz,
Rentals from real property derived from sources within
Canada by an individual or corporation resident in the
United States of America shall receive tax treatment by
Canada not less favorable than that accorded under sec
tion 99 of the Income Tax Act [now section 106 of the
Income Tax Act, R.S.C. 1952, c. 148], as in effect on the
date on which this Article goes into effect.
Under section 3 of the Canada-U.S. Tax Convention Act,
1943, 1943-44, c. 21 0 the Convention prevails if there is an
inconsistency with any other law.
Held, allowing the trust's appeal, the Tax Convention
prevented the assessment of the so-called recaptured capital
cost allowances. Such allowances were "rentals from real
property derived from sources within Canada" within the
meaning of Article XIII A 2 of the Tax Convention.
Pioneer Envelopes Ltd. v. M.N.R. (1962) 28 Tax A.B.C.
37; Powell Rouyn Gold Mines Ltd. v. M.N.R. (1959) 22
Tax A.B.C. 281, approved. M.N.R. v. Hollinger North
Shore Exploration Co. [1963] S.C.R. 131, applied.
INCOME tax appeal.
P. N. Thorsteinsson for plaintiff.
M. R. V. Storrow for defendant.
COLLIER J.—This is an appeal by a non-resi
dent trust against an assessment by the Minister
which seeks to add back into the taxable
income of the trust for the year 1969 capital
cost deductions previously allowed to the trust.
The trust had owned real property in Vancou-
ver, B.C., which earned rental income. The
property was sold in 1969. The full amount of
the previous capital cost deductions or allow
ances is in issue: $156,777.
The parties have filed an agreed statement of
facts, which I set out:
1. The Appellant is a Trust. The Trustees of the Trust are
the Bessemer Trust Company and Ogden Phipps, both of
whom are residents of the United States of America. The
beneficiaries of the Trust are residents of Great Britain.
2. Prior to 1969 part of the Trust property was rental
property situated in the City of Vancouver, in the Province
of British Columbia.
3. For the 1965 and 1969 taxation years the Trust elected
to file returns on the basis as set forth in Section 110(1) of
the Income Tax Act, in respect of the property described in
paragraph 2 above, and was assessed accordingly with
respect to the said returns.
4. In 1969, the property referred to in paragraph 2 above
was sold.
5. By Notice of Re-Assessment the Minister of National
Revenue re-assessed the Appellant by purporting to tax
recapture in the amount of $156,777.00 arising out of the
said sale of the rental property.
By way of further explanation, I understand the
appellant, in the years 1966, 1967 and 1968, did
not elect to file under section 110(1) of the
Income Tax Act, R.S.C. 1952, c. 148 and
amendments, but paid tax on the rental income
under section 106(1)(d).
To appreciate the submissions made, it is
necessary to set out section 110 in full:
110. (1) Where an amount has been paid during a taxa
tion year to a non-resident person as, on account or in lieu
of payment of, or in satisfaction of, rent on real property in
Canada or a timber royalty, he may, within 2 years from the
end of the taxation year, file a return of income under Part I
in the form prescribed for a person resident in Canada for
that taxation year and he shall, without affecting his liability
for tax otherwise payable under Part I, thereupon be liable,
in lieu of paying tax under this Part on that amount, to pay
tax under Part I [and tax under Part IB] for that taxation
year as though
(a) he were a person resident in Canada and were not
exempt from tax under section 62,
(b) his interest in real property in Canada or timber limits
in Canada were his only source of income, and
(e) he were not entitled to any deduction from income to
determine taxable income.
(2) Where a non-resident person has filed a return of
income under Part I as permitted by this section, the
amount deducted under this Part from rent payments to him
or from timber royalties paid to him and remitted to the
Receiver General of Canada shall be deemed to have been
paid on account of tax under this section and any portion of
the amount so remitted to the Receiver General of Canada
in a taxation year in excess of the tax under this section for
the year shall be refunded to him.
(3) Part I is applicable mutatis mutandis to payment of
tax under this section.
(4) Where a non-resident person has filed with the Minis
ter an undertaking in prescribed form to file a return of
income under Part I for a taxation year as permitted by this
section but within 6 months from the end of the taxation
year, a person who is otherwise required by subsection (3)
of section 109 to remit in the year an amount to the
Receiver General of Canada in payment of tax on rent on
real property or in payment of tax on a timber royalty may
elect, by virtue of this section, not to remit under that
subsection but if he does so elect
(a) he shall, when any amount is available out of the rent
or royalty received for remittance to the non-resident
person, deduct therefrom 15% thereof and remit the
amount deducted to the Receiver General of Canada on
behalf of the non-resident person on account of the tax
under this Part, and
(b) he shall, if the non-resident person
(i) does not file a return for the taxation year in accord
ance with the undertaking filed by him with the Minis
ter, or
(ii) does not pay the tax he is liable to pay for the
taxation year under this section within the time limited
for payment,
pay to the Receiver General of Canada, upon the expira
tion of the time for filing or payment, as the case may be,
the full amount that he would otherwise have been
required to remit in the year minus the amounts that he
has remitted in the year under paragraph (a).
(5) Where a non-resident person has filed a return of
income under Part I for a taxation year as permitted by this
section and has, in computing his income under Part I for
that year, deducted an amount under paragraph (a) of
subsection (1) of section 11 in respect of real property in
Canada or a timber limit in Canada, he shall, within the time
prescribed by section 44 for filing a return of income under
Part I, file a return of income under Part I, in the form
prescribed for a person resident in Canada, for any subse
quent taxation year in which that real property or timber
limit or any interest therein is disposed of, within the
meaning of section 20, by him, and he shall, without affect
ing his liability for tax otherwise payable under Part I,
thereupon be liable, in lieu of paying tax under this Part on
any amount paid to him or deemed by this Part to have been
paid to him in that subsequent taxation year in respect of
any interest of that person in real property in Canada or
timber limits in Canada, to pay tax under Part I [and tax
under Part IB] for that subsequent taxation year as though
(a) he were a person resident in Canada,
(b) his interest in real property in Canada or timber limits
in Canada were his only source of income, and
(c) he were not entitled to any deduction from income in
computing his taxable income.
(6) Subsection (5) does not apply to require a non-resi
dent person to file a return of income under Part I for a
taxation year unless, by filing that return, there would be
included in computing his income under Part I for that year
an amount by virtue of subsection (1) of section 20.
(7) Where, by virtue of subsection (5), a non-resident
person is liable to pay tax under Part I for a taxation year,
no election may be made by that person under subsection
(1) of section 43 unless that person has, within the time
prescribed by subsection (1) for filing a return of income
under Part I, filed a return of income under Part I, in the
form prescribed for a person resident in Canada, for each of
the 5 taxation years immediately preceding the taxation
year, in which latter case he shall be deemed, for the
purposes of section 43, to have been resident in Canada or
to have carried on business in Canada, as the case may be,
during each of those 5 years immediately preceding the
taxation year.
I point out that subsections (5)-(7) were added
to section 110 in 1955. Prior to 1955, and
particularly as of January 1, 1951 (the effective
date of Article XIII A 2 of the Canada-U.S. Tax
Convention) the predecessor section of the Act
was section 99, and I set it out:
99. (1) Where an amount has been paid during a taxation
year to a non-resident person as rent on real property in
Canada, he may, within 2 years from the end of the taxation
year, file a return of income under Part I in the form
prescribed for a person resident in Canada for the taxation
year and he shall, without affecting his liability for tax
otherwise payable under Part I, thereupon be liable in lieu
of paying tax under this Part on that amount, to pay tax
under Part I as though
(a) he were a person resident in Canada,
(b) the real property were his only source of income, and
(c) he were not entitled to any deduction from income to
determine taxable income.
(2) Where a non-resident person has filed a return under
subsection (1), the amount deducted under this Part from
rent payments to him and remitted to the Receiver General
of Canada shall be deemed to have been paid on account of
tax under this section and any portion of the amount so
remitted to the Receiver General of Canada in a taxation
year in excess of the tax under this section for the year shall
be refunded to him.
(3) Part I is applicable mutatis mutandis to payment of
tax under this section.
(4) If a non-resident person has filed with the Minister an
undertaking in prescribed form to file a return of income for
a taxation year as permitted by this section, a person who is
otherwise required by subsection (3) of section 98 to remit
in the year an amount to the Receiver General of Canada in
payment of tax on rent on real property may elect, by virtue
of this section, not to remit under that subsection but, if he
does so elect,
(a) he shall, when any amount is available out of the
rents received for remittance to the non-resident person,
deduct therefrom 15% thereof and remit the amount
deducted to the Receiver General of Canada on behalf of
the non-resident person on account of the tax under this
Part, and
(b) he shall, if the non-resident person
(i) does not file a return for the taxation year as and
when permitted, or
(ii) does not pay the tax he is liable to pay for the
taxation year under this section within the time limited
for payment,
pay to the Receiver General of Canada, upon the expira
tion of the time for filing or payment, as the case may be,
the full amount that he would otherwise have been
required to remit in the year minus the amounts that he
has remitted in the year under paragraph (a).
As can be seen sections 99(1) and 110(1) are,
but for minor differences in wording, the same.
Section 99, however, did not have a "recap-
ture" provision similar to subsection (5) of sec
tion 110.
In 1951, there were "recapture" provisions in
section 20 of the Act substantially the same as
those in section 20 of the Act as it stood in
1969.
It is necessary to set out Article XIII A 2 of
the Conventions :
ARTICLE XIII A
2. Rentals from real property derived from sources
within Canada by an individual or corporation resident in
the United States of America shall receive tax treatment by
Canada not less favorable than that accorded under Section
99, The Income Tax Act, as in effect on the date on which
this Article goes into effect.
The appellant concedes that if subsections (5)
and (6) of section 110 are applicable in this
case, then the assessment is correct. Counsel
submits, however, that one must look at the
true nature of the dollars in question here. The
appellant says they are, in essence, income
from rent not previously taxed. If that is so,
then, as there was no "recapture" provision in
section 99 in 1951 (the effective date of Article
XIII A 2), the appellant contends there is no
authority for the Minister to make the assess
ment he did.
I deal first with the contention that the
amount in question here is, in essence, rental
income. The word "recapture" nowhere
appears in section 110(5), nor for that matter, in
section 20. It has become a convenient label to
describe what those sections appear to do.
After consideration of those sections along with
section 11(1)(a) and section 1100 of the Income
Tax Regulations, I agree with counsel for the
appellant that the so-called "recapture" provi
sions are fundamentally adjustments to income
of previous years, and do not create, in the year
of disposal of the asset, some new form or
source of income, described by the respondent
as income from the sale of depreciated proper
ty. Section 11(1)(a) refers to a deduction in the
computation of the taxpayer's income of an
amount in respect of the capital cost of proper-
ty. Section 1100(1) of the regulations provides
that in computing his income, a taxpayer is
allowed certain deductions and what is loosely
called the capital cost allowances are set forth.
Applying that concept to the facts here, this
is in my view what occurred. The appellant had
real property in Canada and derived rents from
that source. Obviously, the rent was income.
When the appellant elected to file under Part I
of the Act, it was allowed to deduct from that
income, certain amounts, called capital cost
allowances.
These allowances are, I think, not deprecia
tion in the true accounting sense, but an artifi
cial depreciation system which may not accord
with the ultimate economic facts in a particular
case. Here, the allowances were made in
respect to real property from which the income
came, but to my mind they merely reduced the
amount of income taxable in the particular year.
They did not, in my view, create a potential new
source of income when the asset was disposed
of at a price greater than the "undepreciated
capital cost" 2 . As I see it, the recapture provi
sions amount tQ this in this case: the reduction
of your rental income in previous years, by
reason of these artificially calculated allow
ances, has turned out to be too great and the
excess reductions will be added back in to your
rental income, now that you have disposed of
that asset.
I find support for this view in two decisions
of the Tax Appeal Board, Pioneer Envelopes
Limited v. M.N.R. (1962) 28 Tax A.B.C. 225;
Powell Rouyn Gold Mines Limited v. M.N.R.
(1959) 22 Tax A.B.C. 281, although the cases
are not directly in point. In the Pioneer case the
taxpayer had carried on a farming business and
a printing business. It sold the printing business
and some $70,000 of recaptured capital cost
allowance was added to its income by virtue of
section 20(1). The taxpayer sought to deduct its
farming losses for previous years from this
amount, contending it was not income derived
from its three main sources of income, but was
"statutory income". The argument was not
accepted. The Chairman said at pp. 226-227:
Counsel for the Minister submitted that the appellant's
argument that its various activities constituted one business
was not in accord with the decision in the Eastern Textile
Products case where it was held that losses sustained in a
textile business carried on by that appellant could not be
written off against profits from another phase of the compa-
ny's operations. It was pointed out that Section 13 contem
plated the division of income from various sources and that
section allowed the deduction of only one-half of farm
losses from income derived from another source. Capital
cost allowance granted to the appellant in respect of assets
of the printing business related to the computation of the
appellant's income from that business and, when recovered,
this allowance also related to the printing business and farm
losses were not deductible from the amount recaptured.
As to the appellant's argument that its farming losses
should be deductible from what it termed "statutory
income" it would be well to examine the wording of Section
27(1)(e) under which this deduction is claimed. That section
provides for the deduction of business losses of previous
years from "the taxpayer's income for the taxation year
from the business in which the loss was sustained". It does
not state that a loss may be deducted. from "income for the
taxation year from any source". Despite the appellant's
novel argument that the amount of recaptured capital cost
allowance was not income from any particular phase of its
operations but was instead "statutory income" it must be
remembered that this amount would not be included in its
1956 income if the company had not sold its printing
business in its 1956 fiscal year. While the printing business
did not produce this amount of income in its usual opera
tions, nevertheless it would be fanciful to attribute this
amount to any other source than the said printing
business....
In my opinion, the source of the recaptured
capital cost allowances in this case was the
rental income derived from real property.
In the Powell case the Minister had taken the
position taken here: that the recaptured capital
cost allowance monies represented the proceeds
of the sale of certain capital assets and were not
profits reasonably attributable to the production
of prime metal from the taxpayer's mine. The
Minister's argument did not succeed. The Board
said at pp. 286-287:
From the last-mentioned case above, the present appel
lant argued that, since the income derived by it in past years
from the operation of its gold mine was taken into account
for taxation purposes, even although it may have been
reduced by deductions in respect of capital cost allowance,
it should follow that, when the amounts represented by that
capital cost allowance had been recaptured and were
brought into income for taxation purposes, the appellant
herein should be entitled to obtain a depletion deduction in
respect thereof, that is, the converse of the Sheep Creek
Gold Mines case should be applicable in the present
instance.
It has long been held by the Courts that a taxpayer cannot
be held liable for tax merely on a bookkeeping entry. I do
not need to cite cases to this effect. In my opinion, the
appellant should succeed in its appeal in the circumstances
of the present case. In years prior to 1956, a portion of the
income which it had derived from the operation of a gold
mine was permitted to be deducted in respect of a capital
cost allowance deduction for the purposes of arriving at the
taxable income of the appellant company, and each of the
amounts so deducted over the years was recorded in a
bookkeeping entry designated as "Capital Cost Allowance
Account". When, in the year 1956, the appellant company
happened to sell some of its assets at a figure in excess of
the undepreciated capital cost of those assets on its books
at the time of the sale, and was thus required to bring into
income the amount of this excess up to but not exceeding
the total amount of the capital cost allowance deductions
written off on those assets in its books for income tax
purposes, it is my opinion that the source of this income
should be recognized as having been, originally, the appel
lant's activities in respect of its gold mine, and the income
itself as having been, as the Income Tax Regulations state,
"reasonably attributable to the production of prime metal".
I find the reasoning persuasive.
I proceed to the next step; Were these monies
"rentals from real property derived from
sources within Canada"? (Article XIII A 2 of
the Convention). The only problem is the mean
ing to be given to "derived" and I think that is
resolved by adopting the construction given to
that word by the Supreme Court of Canada in
M.N.R. v. Hollinger North Shore Exploration
Co. [1963] S.C.R. 131 at p. 134 as "arising or
accruing" rather than "received". On that inter
pretation, there arises the connotation of source
or origin of the income rather than the connota
tion of mere receipt.
Counsel for the respondent submitted an
alternative argument to his contention that
these recaptured monies were not rent within
the meaning of either section 99(1) or 110(1).
The appellant, it is said, by electing to file under
section 99(1) brought into play section 20, and
is therefore taxable on these "recaptured"
monies under that section. In my opinion, to
give effect to that submission would render
meaningless the addition of subsections (5) and
(6) to section 110 in 1955. Until that year the
concept of recapture arose only under Part I of
the Act. Part III, dealing with non-residents
such as the appellant here, was silent. There
was, in my view, a gap, in the sense that non
residents, electing to file under section 99, were
not subject to section 20, and Parliament
intended to close that gap by enacting the two
subsections referred to earlier.
This brings me to the final point which is
whether the Article of the Convention prevents
the application of section 110(5) to this case.
While the words "... shall receive tax treat
ment by Canada not less favorable than that
accorded under Section 99 ..." are quite gener
al, I am unable to construe them in any other
way, and I hold the Article does so prevent.
The appellant here is entitled to have its
rental income taxed according to section 99. To
apply subsection (5) of section 110 would, in
my view, be less favourable treatment.
The appeal is therefore allowed with costs
and the assessment referred back to the Minis
ter accordingly.
1 The Canada-United States of America Tax Convention
Act, S.C. 1943, provides that in the event of inconsistency
between the Convention "and the operation of any other
law" the Convention shall prevail (sec. 3).
2 The words used in section 20(1) and defined in section
20(5)(e).
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.