Crown Forest Industries Ltd. v. Canada
A-1103-92 / A-1104-92 / A-1105-92
Heald J.A., Décary J.A., dissenting
8/11/93
20 pp.
Appeal from trial judgment ((1992), 92 DTC 6305 (F.C.T.D.) allowing respondent's appeal from reassessments -- Respondent, forestry company incorporated in B.C., making rental payments in 1987, 1988, 1989 to Norsk, incorporated in Bahamas, but office and place of business in U.S.A., for barges to transport wood chips to pulp mills -- Norsk only filing tax returns in U.S. -- Claiming exemption from U.S. federal income tax pursuant to U.S. Internal Revenue Code, s. 883(a)(1) because income derived from operation of ships, and organized in Bahamas which grants equivalent exemption to U.S. corporations -- Appellant alleging rental payments subject to 25% withholding tax as "rent, royalty or similar payment" pursuant to Income Tax Act, s. 212(1)(d) -- S. 212(1)(d) providing every non-resident shall pay tax of 25% on every amount person resident in Canada pays to him as rents -- Canada-United States Income Tax Convention, Art. XII(2) providing royalties may also be taxed in Contracting State in which arise and according to laws of that state, but if resident of other Contracting State beneficial owner of such royalties, tax so charged shall not exceed 10% of gross amount -- Art. IV(1) defining "resident of a Contracting State" as any person liable to tax under laws of that State by reason of domicile, residence, place of management, place of incorporation or any other criterion of similar nature -- Trial Judge holding Norsk resident of U.S.A. within meaning of Art. IV(1) -- Holding Norsk's income effectively connected with trade or business actively conducted in U.S.A. because place of management located in U.S.A. -- Appellant alleging Trial Judge erred as to (1) findings of fact; (2) applicability of Convention -- Appeal dismissed -- (1) No error in Trial Judge's findings of fact -- (2) Appellant submitting (a) since foreign corporations not generally liable to tax in U.S.A. on basis of place of management, Norsk not liable based on place of management; (b) inclusion of phrase "or a criterion of a similar nature" indicating common basis for liability under that Article, i.e. liability to tax on world-wide basis; (c) finding that Norsks liable to tax because income effectively connected to conduct of trade or business is criterion of similar nature and tantamount to amendment to Convention; (d) Trial Judge's interpretation of Article IV(1) leading to anomalous results -- (a) Inquiry into resident status must have regard for basis of liability of particular taxpayer, rather than application of domestic tax law generally -- Question not whether, as general rule, U.S. imposing tax by reason of foreign corporation's place of management, but whether Norsk liable to pay tax by reason of place of management -- (b) Only domestic corporations liable to tax on 100% of world-wide income -- Necessary consequence of appellant's interpretation, that only those corporations liable to tax on 100% of world-wide income meeting definition of "resident", restricting definition of "resident" to domestic corporations -- Foreign corporations with substantial operations in U.S.A., and U.S.A. source income unable to benefit from Convention -- Such result could have been expressly provided for -- Furthermore, as Model Treaty from which Convention adopted providing "resident" not including any person liable to tax in that State or capital situated therein, absent evidence of contrary intent, reasonable to conclude omission of clause from Convention intentional -- Omission indicating drafters not intending to make liability to tax on world-wide basis necessary condition for resident status under Convention -- (c) Not logically necessary to resort to "criterion of similar nature" to find Norsk liable herein -- Norsk's liability to tax in U.S.A. based on income effectively connected with trade or business in U.S.A., which is primarily based on its place of management -- Trial Judge's interpretation of Art. IV(1) effectively giving meaning to expression "place of management" in manner consistent with facts -- (d) Rejecting "world-wide income" test as only basis for tax liability not meaning any corporation with U.S. source income liable to tax in U.S. and thereby becoming U.S. resident under Convention -- Foreign corporation can still only acquire liability for payment of U.S. tax by reason of any Art. IV(1) enumerated criteria -- Under proposed interpretation Norsk could be considered resident corporation in U.S.A. and not pay tax because of exemption and still benefit from double taxation provisions -- While Norsk exempt from tax on U.S. income under U.S. Internal Revenue Code, still liable to tax -- U.S.A. entitled to tax corporations at whatever rate deems appropriate -- Rate of tax not affecting characterization as resident -- Décary J.A. (dissenting) holding Trial Judge erred in holding Norsk liable to tax in U.S.A. because place of management there -- Norsk liable to tax because trade or business effectively connected with U.S.A., that connection established because place of management there -- Art. IV(1) imposing liability to tax by reason of one of four specific criteria or by reason of generic criterion of similar nature -- Common element of specific criteria that each alone basis for taxation, each easily, readily and objectively identifiable, each could be related to tangible location -- Criterion "of a similar nature" must satisfy these elements -- Norsk qualifying as "resident" only if liable to tax by reason of criterion of similar nature -- Norsk liable to tax in U.S.A. because conducted trade or business which is effectively connected with U.S.A. -- Neither enumerated ground, nor ground of similar nature -- To say tax liability caused by conduct of business effectively connected with U.S.A. similar in nature to tax liability caused by place of management, constituting amendment to Convention -- Canada-United States Income Tax Convention Act, S.C. 1984, c. 20, Sch. I, Arts. IV, XII -- Income Tax Act, S.C. 1970-71-72, c. 63, s. 212(1)(d) (as am. by S.C. 1986, c. 2., s. 26) -- U.S. Internal Revenue Code, 26 U.S.C. 883(a)(l) (1988).