T-1299-79
Associates Corporation of North America (Plain-
tiff)
v.
The Queen (Defendant)
Trial Division, Mahoney J.—Ottawa, January 8
and 10, 1980.
Income tax — Non-residents — Guarantee fees paid to
non-resident corporation by its Canadian subsidiary with
respect to its borrowings — Guarantee fees deemed to be
"interest" and subject to taxation under ss. 212(1)(b) and
214(15)(a) of the Income Tax Act — Inconsistency with provi
sions of Canada-U.S. Tax Convention exempting "industrial
and commercial profits" from taxation in Canada — Assess
ment vacated — Income Tax Act, S.C. 1970-71-72, c. 63, ss.
212(1)(b), 214(15)(a) as amended by S.C. 1974-75-76, c. 26, s.
119(2) — The Canada-United States of America Tax Conven
tion Act, 1943, S.C. 1943-44, c. 21, ss. 2, 3, Articles I, II,
XXII.
Bennett v. Minister of National Revenue [1949] S.C.R.
287, followed.
ACTION.
COUNSEL:
B. Verchere and S. Kerr for plaintiff.
J. Power, Q.C. and G. Jorre for defendant.
SOLICITORS:
Verchere & Eddy, Toronto, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
MAHONEY J.: The issue is whether payments,
received by the plaintiff, which are deemed by
paragraph 214(15)(a) of the Income Tax Act' to
be a payment of interest, are, in the circumstances,
exempted from taxation under the Income Tax
Act by The Canada-United States of America
Tax Convention Act, 1943. 2 The facts are not in
dispute. The evidence consists entirely of the ma
terial transmitted to the Court's Registry by the
' S.C. 1970-71-72, c. 63 as amended by S.C. 1974-75-76, c.
26, s. 119(2).
2 S.C. 1943-44, c. 21.
Minister of National Revenue pursuant to subsec
tion 176(2) of the Income Tax Act and an agreed
statement of facts.
The amount in issue, $440,019.39, represents
15% of the guarantee fees earned by the plaintiff
in Canada between November 18, 1974, when
subsection 214(15) came into effect, and Decem-
ber 31, 1976. The assessments were made under
Part XIII of the Income Tax Act whereof subsec
tion 214(15) is a provision.
The text of the agreed statement of facts
follows:
THE PARTIES HERETO in addition to the documents agreed
upon and submitted herewith, admit the facts hereinafter speci
fied, provided that these admissions are made for the purpose of
this cause only and may not be used against either party on any
other occasion or by anyone other than the parties hereto.
1. The Plaintiff is a U.S. resident corporation incorporated
under the laws of the state of Delaware, one of the United
States of America.
2. During the calendar years 1974, 1975 and 1976, the
Plaintiff did not have any permanent establishment in
Canada.
3. During the 1974, 1975 and 1976 calendar years, the
Plaintiff carried on an enterprise in the United States of
America.
4. Associates Acceptance Company Limited is a Canadian
resident corporation established under the laws of Canada
(presently known as Associates Capital Corporation, having
changed its name on 29 April 1977.)
5. During the 1974, 1975 and 1976 calendar years, the
Plaintiff owned all the shares of Associates Acceptance
Company Limited.
6. During the 1974, 1975 and 1976 calendar years, the
Plaintiff, as part of its enterprise and pursuant to written
agreements between the Plaintiff and Associates Acceptance
Company Limited dated 1 January 1970 and 1 January
1976, copies of which are attached hereto as Appendices A
and B respectively, provided repayment guarantees with
respect to all notes and debentures issued by Associates
Acceptance Company Limited. An example of such a note is
attached hereto as Appendix C.
7. As consideration for providing repayment guarantees, the
Plaintiff received guarantee fees of 1V2% of the amounts
guaranteed from time to time, which percentage was reduced
to 1% by the agreement of 1 January 1976 referred to in
paragraph 6 above.
8. During the 1974, 1975 and 1976 calendar years the
Plaintiff received the amounts of $1,284,684, $1,404,489 and
$1,311,114 respectively, as guarantee fees paid by Associates
Acceptance Company Limited, which amounts were receipts
from the carrying on by the Plaintiff of its business activities.
9. During the 1974, 1975 and 1976 calendar years the
Plaintiff did not make any amounts of money available to
Associates Acceptance Company Limited.
10. During the 1974, 1975 and 1976 calendar years Associ
ates Acceptance Company Limited did not default on any of
its borrowings which were guaranteed by the Plaintiff. The
Plaintiff was not required or called upon to make any
payments pursuant to the guarantees nor did the Plaintiff
make any such payments.
It is unnecessary to recite any part of the appen
dices but it should be explained that the guarantee
fee was calculated quarterly, at the prescribed rate
per annum on the average daily guaranteed bor
rowing outstanding during the quarter, and paid
on the last business day each year.
The guarantee fees fall squarely within the con
templation of paragraph 214(15)(a).
214... .
(15) For the purposes of this Part,
(a) where a non-resident person has entered into an agree
ment under the terms of which he agrees to guarantee the
repayment, in whole or in part, of the principal amount of a
bond, debenture, bill, note, mortgage, hypothec or similar
obligation of a person resident in Canada, any amount paid
or credited as consideration for the guarantee shall be
deemed to be a payment of interest on that obligation; and
They are thereby rendered subject to tax by para
graph 212(1)(b).
212. (1) Every non-resident person shall pay an income tax
of 25% on every amount that a person resident in Canada pays
or credits, or is deemed by Part Ito pay or credit, to him as, on
account or in lieu of payment of, or in satisfaction of,
(b) interest except
None of the exceptions apply. If it were not for the
Canada-U.S. Tax Convention, the guarantee fees
would be clearly taxable to the plaintiff as interest.
The effective rate of tax is 15% rather than 25%
by virtue of subsection 10(3) of the Income Tax
Application Rules, 1971 [S.C. 1970-71-72, c. 63,
Part III] and Article XI of the Convention.
The material provisions of the Act implementing
the Convention are sections 2 and 3.
2. The Convention and Protocol entered into between
Canada and the United States of America, which are set out in
the Schedule to this Act, are hereby approved and declared to
have the force of law in Canada.
3. In the event of any inconsistency between the provisions of
this Act or of the said Convention and Protocol and the
operation of any other law, the provisions of this Act and of the
Convention and Protocol shall, to the extent of such inconsist
ency, prevail.
Material provisions of the Convention follow:
ARTICLE I
An enterprise of one of the contracting States is not subject
to taxation by the other contracting State in respect of its
industrial and commercial profits except in respect of such
profits allocable in accordance with the Articles of this Conven
tion to its permanent establishment in the latter State.
ARTICLE II
For purposes of this Convention, the term "industrial and
commercial profits" shall not include income in the form of ...
interest ....
Article XXII provides that the accompanying
Protocol is to be considered "an integral part of
the Convention". The Protocol provides, in para
graph 7(b), as follows:
7....
(b) the term "interest", as used in this Convention, shall
include income arising from interest-bearing securities,
public obligations, mortgages, hypothecs, corporate bonds,
loans, deposits and current accounts;
The definition of "interest" in the Protocol is
not, by its terms, exhaustive. This is not, however,
to say that it can be unilaterally expanded by
Canada to embrace income that is not interest at
all.
In Bennett v. M.N.R., 3 the Supreme Court of
Canada dealt with the precise question of the
nature of payments by a borrower to the guaran
tors of its bank loans in the context of the Income
Tax Act. In separate, but concurring judgments, it
was held:
While the amounts paid to the guarantors were described as
interest in the various resolutions which authorized their pay
ment, this was clearly inaccurate. Interest is paid by a borrower
to a lender: a sum paid to a third person as the consideration
for guaranteeing a loan cannot be so described. 4
3 [1949] S.C.R. 287.
4 Per Locke J., at 289-290, Rinfret C.J., and Kellock J.,
concurring.
The disbursements of [sic] the guarantors here in question
were made not as interest on the money borrowed but as the
purchase price for the guarantee that made borrowing under
the line of credit possible. 5
Counsel for the defendant was entirely correct in
conceding that the word "interest" is not suf
ficiently elastic in its meaning to embrace the
guarantee fees in issue here.
The guarantee fees paid to the plaintiff are not
interest within the terms of the Canada-U.S. Tax
Convention. Paragraph 214(15)(a) of the Income
Tax Act deeming them to be interest is inconsist
ent with the Convention and, by virtue of section 3
of the Act that makes the Convention part of
Canada's domestic law, paragraph 214(15)(a)
cannot apply to guarantee fees subject to the
Convention. The fees in issue were a component of
the plaintiff's industrial and commercial profits
which were not taxable by Canada since the plain
tiff was a United States enterprise having no per
manent establishment in Canada.
Lest it be thought that such a result renders
paragraph 214(15)(a) a nullity, I should note that
the tax conventions concluded by Canada since its
enactment in 1974 all contain expanded definitions
of "interest" which may well not be inconsistent
with the paragraph. For example, the Canada-
France Income Tax Convention, which became the
domestic law of Canada July 29, 1976, 6 contains,
in Article XI, a definition of "interest" that
includes "income assimilated to income from
money lent by the taxation law of the State in
which the income arises".
The assessments will be vacated. The plaintiff is
entitled to its costs.
5 Per Estey J., at 298-299. It is apparent from a perusal of his
entire judgment that Mr. Justice Estey either misspoke or was
the victim of a typographical error. The case is entirely con
cerned with payments to, not payments by, the guarantors.
6 S.C. 1974-75-76, c. 104.
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.