T-225-79
Melford Developments Inc. (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Grant D.J.—Toronto, January 16,
February 12 and May 8, 1980.
Income tax — Non-residents — Withholding tax — Guar
antee fees paid by plaintiff to non-resident corporation with
respect to loan obtained from a Canadian bank — Guarantee
fees deemed to be "interest" and subject to taxation under ss.
212(1)(b) and 214(15)(a) of the Income Tax Act — Guarantee
fees in the nature of "industrial or commercial profits" within
the meaning of Art. 111(1) of the Canada-Germany Income
Tax Agreement Act, 1956, exempt from tax — Inconsistency
between provisions of Income Tax Act and provisions of
Agreement — Agreement terms to prevail — Assessments set
aside — Income Tax Act, S.C. 1970-71-72, c. 63, ss. 172(2),
212(1)(b), 214(15)(a) as amended by S.C. 1974-75-76, c. 26,
ss. 119(2), 215 — Canada-Germany Income Tax Agreement
Act, 1956, S.C. 1956, c. 33, ss. 2, 3, Convention, Art. 11(2),
111(1), XI.
Canadian Pacific Ltd. v. The Queen [1976] 2 F.C. 563,
applied. R. v. Saint John Shipbuilding & Dry Dock Co.
Ltd. [1979] 2 F.C. 743, applied. Associates Corp. of North
America v. The Queen [1980] 2 F.C. 377, considered.
INCOME tax appeal.
COUNSEL:
J. R. Dingle for plaintiff.
C. G. Pearson for defendant.
SOLICITORS:
Blaney, Pasternak, Smela & Watson,
Toronto, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
GRANT D.J.: This is an appeal by the plaintiff
pursuant to section 172(2) of the Income Tax Act,
S.C. 1970-71-72, c. 63, in respect of assessments of
its returns for the years 1975 and 1976 made by
the Minister of National Revenue dated the 22nd
day of August, 1977. Upon objection being made
by the appellant thereto the same were confirmed
by the Minister on November 30, 1978. The
appeal is made direct to this Court from the
decision of the Minister. The question to be decid
ed is as to whether the plaintiff was obliged to
deduct withholding tax from amounts paid by it to
Bayerische Vereinsbank Incorporating Bayerische
Staatsbank AG ("Vereinsbank"), a foreign corpo
ration resident in the Federal Republic of Ger-
many, as a fee for guaranteeing loans made by the
Bank of Nova Scotia to the plaintiff in such years
and remit the same to the Receiver General of
Canada pursuant to the provisions of section 215
of the Act. For the purpose of this appeal the
parties have filed an agreed statement of facts
which reads in part as follows:
1. The Plaintiff is a corporation created under the laws of the
Province of Ontario, with its statutory head office in the City of
Toronto, in the Province of Ontario. The Plaintiff carries on
and has for all relevant periods of this appeal, carried on in
Canada the business of developing real property for resale.
2. In the course of the Plaintiffs business it is necessary for it
from time to time to negotiate the borrowing of substantial
amounts of money in order to finance its business. In 1973 the
Plaintiff arranged a loan with the Bank of Nova Scotia at its
head office in Toronto, Ontario in the amount of $6,000,000.00
(Canadian). The terms of this loan included that it was to
mature on April 30, 1981. It was necessary however in the
course of the Plaintiffs negotiation of this loan to obtain a
guarantee of its obligation in favour of the Bank of Nova
Scotia. Accordingly, the Plaintiff obtained this guarantee from
Bayerische Vereinsbank Incorporating Bayerische Staatsbank
AG ("Vereinsbank") of the full amount of $6,000,000.00
(Canadian). Vereinsbank charged a fee for providing this guar
antee of 1% per annum of the principal which fee was payable
to the Vereinsbank in quarter-yearly instalments of $15,000.00
(Canadian) each.
3. As a commercial bank, Vereinsbank transacts any kind of
banking which includes commercial banking, investment,
acting as a fiduciary, and security and stock exchange business
which is carried out both in the domestic (German) and
international markets. As part of its banking business the
Vereinsbank is very active in underwriting Canadian borrow-
ings and in the ordinary course when it underwrites or guaran
tees such financings, it charges a fee for doing so.
4. At all material times Vereinsbank was a resident of the
Federal Republic of Germany and was not a resident of
Canada, nor did it have in Canada a permanent establishment
within the meaning of the Schedule to the Canada-Germany
Income Tax Agreement Act, 1956.
5. In satisfaction of its obligation to pay the guarantee fee
mentioned in paragraph 2 hereof, the Plaintiff paid to Vereins-
bank quarterly payments of $15,000.00 (Canadian) in each of
its taxation years that are the subject of this appeal.
6. The Plaintiff did not deduct or withhold any tax pursuant to
Part XIII of the Income Tax Act R.S.C. 1952 c. 148 as
amended by s. 1 of c. 63, S.C. 1970-71-72 from the quarterly
payments made to Vereinsbank in its 1975 and 1976 taxation
years, and did withhold and deduct tax in respect of $30,000.00
(Canadian) it paid to Vereinsbank in its 1977 taxation year.
It is acknowledged by the plaintiff that the
provisions of Part XIII of the Act make Vereins-
bank liable to Canadian income tax at the rate of
15% upon the amount paid to it for such guarantee
and places a duty upon the plaintiff to withhold
the same and remit it to the Receiver General
unless the provisions of the Canada-Germany Tax
Convention entered into in 1956, otherwise
provided.
Section 212(1)(b) of the Act, which establishes
the obligation of the non-resident to pay Canadian
income tax reads:
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...
There are no exceptions applicable to this
appeal. The rate has been reduced to 15% by
subsection 10(6) of the Income Tax Application
Rules, 1971 [S.C. 1970-71-72, c. 63, Part III, as
amended by S.C. 1974-75-76, c. 26, s. 127(1)] and
Article XI of the Convention.
Section 214(15)(a) which was an amendment to
the Act passed on November 18, 1974, for the
purpose of including such a payment under the
provisions of section 212(1)(b) (supra) and classi
fying it as interest, reads:
214. (15) ...
(a) where a non-résident 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;
Section 215(1) which imposes the obligation to
withhold and remit such percentage on behalf of
the non-resident to the Receiver General, reads:
215. (1) When a person pays or credits or is deemed to have
paid or credited an amount on which an income tax is payable
under this Part, he shall, notwithstanding any agreement or any
law to the contrary, deduct or withhold therefrom the amount
of the tax and forthwith remit that amount to the Receiver
General of Canada on behalf of the non-resident person on
account of the tax and shall submit therewith a statement in
prescribed form.
The Canada-Germany Income Tax Convention,
1956, was made part of the law of Canada by
Dominion statute, the Canada-Germany Income
Tax Agreement Act, 1956, S.C. 1956, c. 33 and
contains the following provisions:
2. The Agreement entered into between Canada and the
Federal Republic of Germany, set out in the Schedule, is
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 the Agreement, and the operation of any other law,
the provisions of this Act and the Agreement prevail to the
extent of the inconsistency.
Article III(1) of the Convention provides as
follows:
ARTICLE III.
(1) The industrial or commercial profits of an enterprise of
one of the territories shall not be subject to tax in the other
territory unless the enterprise carries on a trade or business in
the other territory through a permanent establishment situated
therein. If it carries on a trade or business in that other
territory through a permanent establishment situated therein,
tax may be imposed on those profits in the other territory but
only on so much of them as is attributable to that permanent
establishment.
Paragraph 4 of the agreed statement of facts
establishes that Vereinsbank was at all material
times a resident of the Federal Republic of Ger-
many and was not a resident of Canada and did
not have a permanent establishment within the
meaning of the Schedule to the Canada- Germany
Income Tax Agreement Act, 1956 within Canada.
There is no definition of the term "industrial or
commercial profits" in such Convention. In such
event Article II(2) of the Convention refers the
interpretation to the laws of Canada. The Crown
submits that the payments in question were not
industrial and commercial profits of the German
bank within the meaning of Article III(1) of the
Convention.
In Canadian Pacific Limited v. The Queen
[1976] 2 F.C. 563 at pages 595-596, Walsh J.
stated:
What we have to interpret in deciding whether this tax credit
should be allowed are the terms of the Convention and Protocol
itself, and not of the Income Tax Act. The parties are in
agreement that the terms of a treaty will override an Act and
that it should be construed more liberally. A good expression of
this principle is found in the case of Saunders v. M.N.R. [11
Tax A.B.C. 399] in which R.S.W. Fordham, Q.C. of the Tax
Appeal Board stated at page 402:
The accepted principle appears to be that a taxing Act
must be construed against either the Crown or the person
sought to be charged, with perfect strictness—so far as the
intention of Parliament is discoverable. Where a tax conven
tion is involved, however, the situation is different and a
liberal interpretation is usual, in the interests of the comity of
nations. Tax conventions are negotiated primarily to remedy
a subject's tax position by the avoidance of double taxation
rather than to make it more burdensome. This fact is indicat
ed in the preamble to the Convention. Accordingly, it is
undesirable to look beyond the four corners of the Conven
tion and Protocol when seeking to ascertain the exact mean
ing of a particular phrase or word therein.
The Shorter Oxford English Dictionary, 2nd
ed., 1970, provides the following definitions:
"Industrial" adj. pertaining to, or of the nature of, industry or
productive labour; resulting from industry.
"Commercial" adj. 1. Engaged in commerce; trading. 2. of or
relating to commerce or trade. 3. such as passes current in the
transactions of commerce. 4.—viewed as a matter of profit and
loss.
Also see the judgment of Walsh J. in The Queen
v. Saint John Shipbuilding & Dry Dock Co. Ltd.
[ 1979] 2 F.C. 743 at pages 753-756.
The guarantee given by Vereinsbank above
referred to was part of its ordinary business and
the fees paid to it for such service were receipts
earned by it in its normal banking operations. If
there exists any inconsistency between the Income
Tax Act and the provisions of the Canada-Ger-
many Income Tax Agreement Act, 1956, the
provisions of such Act and the Agreement which it
validates must prevail (section 3 of the Act
(supra)). I am convinced therefore that the various
amounts paid by the plaintiff Melford to it for the
guarantee of the appellant's loan from the Bank of
Nova Scotia were in the nature of "industrial or
commercial profits" within the meaning of Article
III(1) of the Convention (supra) and not taxable.
The Crown further submits that such guarantee
payments amounted to interest and were therefore
exempted from the provisions of Article III(1)
(supra) and that such fees in the hands of the
non-resident bank are deemed to be interest by the
1974 amendment contained in section 214(15)(a)
(supra). In Associates Corporation of North
America v. The Queen [[1980] 2 F.C. 377]g
Mahoney J. stated at page 380, in relation to facts
similar to the present case but dealing with the
Canada-U.S. Convention:
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.
The learned Judge further dealt with the nature
of such guarantee fees and found that they were a
component of the plaintiff's industrial and com
mercial profits which were not taxable by Canada
since the plaintiff was a United States enterprise
having no permanent establishment in Canada. At
page 381 he states:
Counsel for the defendant was entirely correct in conceding
that the word "interest" is not sufficiently elastic in its meaning
to embrace the guarantee fees in issue here.
The Vienna Convention on the Law of Treaties,
of which Canada is a party provides in article 31
as follows:
Article 31
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.
Interest is, in general terms, the return or consideration or
compensation for the use or retention by one person of a sum of
money, belonging to, in a colloquial sense, or owed to, another.
[See In re Farm Security Act, 1944 [1947] S.C.R. 394 at page
411.]
Such definition of interest was approved in: Attor-
ney-General for Ontario v. Barfried Enterprises
Ltd. [1963] S.C.R. 570 at page 575; Yonge-Eglin-
ton Building Limited v. M.N.R. [1972] C.T.C.
542 at page 545; Bennett and White Construction
Co. Ltd. v. M.N.R. [1949] C.T.C. 1—per Locke J.
at page 4 and Holder v. Inland Revenue Commis
sioners [1932] All E.R. Rep. 265 at page 271.
For the above reasons I have decided that
Vereinsbank was not liable to pay income tax on
the amounts received by it from the plaintiff in the
years 1975 and 1976 and that therefore the plain
tiff was not obliged to withhold and remit income
tax from the guarantee fees it paid such foreign
bank in such years. The Minister's assessment
should therefore be set aside and vacated. Judg
ment may go accordingly. The plaintiff should
have its costs from the defendant after taxation
thereof.
* * *
The following are the amended reasons for
judgment rendered in English by
GRANT D.J.: These are amended reasons to
those delivered by me on February 12, 1980, at the
suggestion of counsel for the plaintiff dated April
14, 1980 and counsel for the defendant dated May
2, 1980. I now direct that such reasons should be
amended to cover the question of liability of
"Vereinsbank" for income tax in the year 1977 as
well as for the previous years of 1975 and 1976
and that judgment may go accordingly.
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.