Minister off National Revenue (Appellant)
v.
Bessemer Trust Company and Ogden Phipps as
Trustee (1959 Trust) (Respondent)
Court of Appeal, Jackett C.J., Sheppard and
Bastin D.J.T.---Vancouver, December 20, 1972.
Income tax—Canada-U.S. Tax Convention Art. XIII A
2-Recaptured capital cost allowances made taxable after
Convention came into force—U.S. resident electing to pay
tax under Part I of the Income Tax Act—Recaptured capital
cost allowances taxable—Income Tax Act, R.S.C. 1952, c.
148, s. 110(1), 110(5), am. 1955.
United States trustee off rental property in Canada elected
to pay tax on the rentals therefrom for 1965 and 1969 under
Part I of the Income Tax Act, R.S.C. 1952, c. 148, as
permitted by section 110(1). The property was sold in 1969
after some rents had been received and the trust was
assessed to income tax for that year 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 Conven
tion (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 off America shall receive tax treatment by
Canada not less favorable than that accorded under Sec
tion 99 of The Income Tax Act [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, the Convention prevails if there is an
inconsistency with any other law.
Held, reversing Collier J., while section 110(5) of the
Income Tax Act was excluded from application by the Tax
Convention so that the U.S. trustee was not required to
elect thereunder, it had the right to do so under section
110(1) and having done so was liable to pay tax on recap
tured cost allowances under section 20.
APPEAL from judgment of Collier J. ([1972]
F.C. 1176).
M. R. V. Storrow for appellant.
P. N. Thorsteinsson for respondent.
JACKETT C.J. (orally)—This is an appeal from
a decision of the Trial Division allowing an
appeal by the respondent from its assessment
under Part I of the Income Tax Act for the 1969
taxation year.
The respondent became liable to pay tax
under Part I of the Income Tax Act for the 1969
taxation year because it elected to file a return
of income under that Part for that year under
section 110 of the Income Tax Act.
To understand the questions raised by the
appeal, it is helpful to examine the historical
development of the law touching the matters in
question.
Thé problem arises concerning a taxpayer
resident in the United States whose only liabili
ty under the Income Tax Act is as a non-resi
dent person to whom amounts have been paid
as rent on real property in Canada.
Looking only at the Income Tax Act, and
setting to one side the Canada-United States of
America Tax Convention, there were, prior to
1955, two alternatives with reference to the
liability of such a person under the Income Tax
Act. In the first place, if he did not otherwise
elect, he was liable to pay as income tax 15 per
cent. of the gross amount of the rental pay
ments under section 106(1)(d) of the Income
Tax Act. Alternatively, he might have elected to
pay ordinary income tax under Part I of the
Income Tax Act as though
(a) he were resident in Canada,
(b) his interest in real property in Canada
were his only source of income, and
(c) he were not entitled to any deduction from
income to determine taxable income,
as provided by section 110 of the Income Tax
Act as it appeared in the Revised Statutes of
1952, which section is, for present purposes, to
the same effect as section 99 of the 1948
Income Tax Act. If a non-resident person made
such an election, the effect was that, instead of
paying 15 per cent. on the gross amount of the
rents received in a year, tax would be computed
on the net profit from the real property at the
graduated rates for an individual, if the taxpay
er were an individual, and at corporate rates, if
the taxpayer were a corporation. As can readily
be seen, it would be a matter of calculation in
each year for each taxpayer to determine which
alternative was preferable.
Under the second option, in the computation
of "income" from the real property in the
manner provided by Part I of the Income Tax
Act, one of the deductions permitted was a
deduction in respect of the capital cost of the
property as allowed by regulation under section
11(1)(a) of the Act, which deduction is com
monly referred to as "capital cost allowance".
The scheme of capital cost allowance, as it
was originally enacted in 1948 for residents of
Canada and persons carrying on business in
Canada was twofold. In the first place, annual
allowances in respect of capital cost were per
mitted by regulation under section 11(1)(a) each
year during which the taxpayer continued to
own property acquired for use as, or in, a
source of income. In the second place, when the
taxpayer disposed of the property, if the pro
ceeds of disposition exceeded the portion of the
capital cost that had not been written off under
section 11(1)(a), the excess (or the amount of
the capital cost that had been written off, if it
were smaller) had to be included in computing
income for the year of disposition. See section
20(1) of the Income Tax Act.
This second feature of the capital cost allow
ance scheme is commonly referred to as "re-
capture" and that name conveys accurately
enough, for practical purposes, the scheme of
the matter. If one conceives of the allowance
under section 11(1)(a) as intended to permit the
capital cost of property that has been used as,
OAOne +'
or in, a source of income to be written off in
computing the income of which it was a source,
then, if the property is disposed of for an
amount in excess of the portion of the capital
cost that was not written off, it becomes appar
ent that more has been written off than was
consumed in the income earning function and,
to that extent, what has been so written off is
"recaptured".
Returning now to the position of a non-resi
dent recipient of rent from real property in
Canada prior to 1955, it is clear that the first
branch of the capital cost allowance scheme
applied to him in a year in respect of which he
elected to pay tax under Part I of the Income
Tax Act. He could deduct capital cost allow
ance under section 11(1)(a) for such a year
because that was one of the deductions allowed
in computing the "income" for the year on
which he had elected to pay tax. However,
there was nothing in the Act at that time to
require him to pay tax under Part I for a year in
which he disposed of the property in respect of
which he had previously taken capital cost
allowance and he was not therefore bound to
pay tax resulting from the recapture provision.
(As will be seen later, the question that arises in
this case is whether, that tax becomes payable,
if he chooses to elect to pay tax under Part I in
the year of disposition on rental payments
received in the year of disposition.)
I turn now to the relevant provision of the
Canada-United States of America Tax Conven
tion. While the Canadian income tax provisions
were in the state that I have described, a provi
sion was introduced into that Convention read
ing as follows:
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.
(As already indicated section 99 was substan
tially the same as section 110 of the 1952
Income Tax Act as it was before 1955.)
It is common ground that, if this provision in
the tax convention is inconsistent with the
provisions of the Income Tax Act that would
otherwise apply in a particular case, the tax
convention provision must prevail.
In 1955, certain subsections were added to
section 110 of the Income Tax Act of which it
will be sufficient to refer to subsection (5),
which reads in part as follows:
(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 ... he shall ... file a return of income under Part
I ... for any subsequent taxation year in which that real
property ... is disposed of, within the meaning of section
20, by him, and he shall ... thereupon be liable ... to pay
tax under Part I for that subsequent taxation year ..
In this case, the facts are simple, the respond
ent was a resident of the United States who
received rent from property in Canada until
some time in 1969. In 1965, it elected to pay
tax under Part I with reference thereto. In 1969,
after receiving some payments of rent from the
property, it disposed of the property and, subse
quently, it filed a return of income under Part I
for the 1969 taxation year. The sole question is
whether section 20 applies to bring the "recap-
ture" amount into the calculation of the
respondent's "income" for 1969.
In the first place, it is common ground that, if
section 110(5) as enacted in 1955 is applicable,
then section 20 does apply. I agree with the
learned trial judge that section 110(5) does not
apply in this case because the provision from
the Tax Convention quoted above excludes it.
Apart from the Convention, as it appears to
me, the situation is that, at the time of the Tax
Convention, a non-resident could elect, in
respect of a year when he was paid an amount
as rent on real property in Canada, to file a
return under Part I, in which event he became
liable to pay tax under Part I as though the real
property in Canada were his only source of
income and he was not bound to file such a
return in respect of a subsequent year when he
disposed of the property so as to become liable
to "recapture", but, after 1955, if a non-resi
dent so elected to pay tax under Part I in
respect of a year when he was paid such an
amount as rent, it carried with it a liability, by
virtue of the new section 110(5), to file a return
in respect of the year of disposition and to pay
any tax arising from the "recapture" provision
in section 20(1). In my view the application of
section 110, including subsection (5), involves
"tax treatment" of "rentals from real property
derived from sources within Canada" less
favourable than that accorded by the old sec
tion 99 and is excluded in the case of persons
resident in the United States by the Canada-
United States of America Tax Convention.
The question remains as to whether, on the
facts of this case, the recapture provision was
properly invoked by the appellant in assessing
the respondent. On this question, I have the
misfortune to disagree with the learned trial
judge.
In my view, while the respondent was not
required to elect to pay tax under Part I for
1969, as it received rental payments from real
property in Canada in 1969, it was authorized
by section 110(1) to elect to do so, and, having
done so, it becomes liable to pay tax computed
in accordance with the provisions of Part I "as
though ... his interest in real property in
Canada ... were his only source of income".
While, normally, the only amounts included in
computing the income of a taxpayer for a year
during which his only source of income was real
property are the amounts of rent received in
respect of the property for the year, section 20
requires that, where such property was "depre-
ciable property", as this property was, and was
disposed of in the year, the amount determined
thereby "shall be included in computing his
income for the year". I cannot escape the con
clusion that, having elected to pay tax for the
1969 taxation year as though its sole source of
income for that year was its real property in
Canada, section 20 operates to require that the
"recapture" amount be included in computing
the respondent's income for the year.
Counsel for the respondent endeavoured to
find something in section 110(3) inconsistent
with this conclusion but, not only was it not
clear to me how that provision led to any such
conclusion, but, when it is read with section
110(4), there is an obvious reason for including
it in the section even though, taken by itself it
was probably unnecessary.
I am of the view that the appeal should be
allowed with costs in this Court and in the Trial
Division, that the judgment of the Trial Division
should be set aside and that the assessment of
the respondent under Part I of the Income Tax
Act for the 1969 taxation year should be
restored.
* * *
SHEPPARD AND BASTIN D.JJ. concurred.
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.