T-329-74
Hunter Douglas Ltd. (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Grant D.J.—Toronto, June 19, 20,
21 and September 7, 1979.
Income tax — Non-residents — Withholding tax — Cana-
da-Netherlands Income Tax Convention — Plaintiff a com
pany incorporated in Quebec but relocated to the Netherlands,
paid dividends to shareholders not resident in Canada or the
Netherlands — Defendant claiming plaintiff resident under
definition of "resident" included in 1965 amendment to
Income Tax Act, and therefore subject to withholding tax -
Act's definition of "resident" inconsistent with definition con
tained in Convention — Whether or not plaintiff entitled to
refund of tax — Canada-Netherlands Income Tax Agreement
Act, 1957, S.C. 1957, c. 16, s. II(1)(f) — Income Tax Act,
R.S.C. 1952, c. 148, ss. 109, 139(4a).
The Minister of National Revenue reassessed withholding
tax against plaintiff, a Quebec company relocated to and
resident in the Netherlands, in respect of dividends paid in
1971 by it to shareholders not resident in Canada or the
Netherlands. Plaintiff paid the assessments under protest and
without prejudice to its right to reclaim the amounts paid by it
and appeal directly to this Court. Defendant attempts, under
the 1965 amendment to the Income Tax Act's definition of
"resident"—which is inconsistent with the definition of resident
contained in the Convention—to justify classifying the plaintiff
as resident in Canada at the time of such share dividend
distribution in 1971 as plaintiff was incorporated before April
27, 1965 in Canada and in preceding taxation years of the
Corporation ending after April 25, 1965, it carried on business
in Canada. Defendant contends that plaintiff relied entirely on
the Canada-Netherlands Treaty but that if any such treaty
gives relief from taxation to a non-resident recipient of divi
dends from the Canadian withholding tax, it must be the treaty
between Canada and the country in which that foreign share
holder resides and not the Convention between the Netherlands
and Canada.
Held, the appeal is allowed. The words "that other State
shall not impose any form of taxation on dividends paid by the
company to persons not resident in that other State", contained
in paragraph 5 of article IV of the Canada-Netherlands Income
Tax Convention, make it clear that shareholders of the Com
pany not resident in either Canada or the Netherlands are
entitled to the benefit of such provision and that the purpose
thereof is to insure that the dividends of a corporation resident
in one State shall not be taxed by the other State except as
provided by article VII where they are received by a resident of
the State seeking to impose such tax. if it had been meant
otherwise, appropriate language would have been used. The
words "by reason of the fact that those dividends or undis-
tributed profits represent, in whole or in part, profits or income
so derived", in paragraph 5, create some uncertainty as to the
meaning of the , whole phrase. The prohibition against imposi
tion of the tax is not confined to those cases where the reason
for attempting to levy the same is that dividends or undistribut-
ed profits of the payor company were derived by it in the
country so prohibited. A majority of the Canadian treaties with
other countries dealing with the same subject matter have the
same wording except that the words "by reason of the fact" are
replaced by the words "even if". The amendments made in
1962 and 1965 to the Canada Income Tax Act contravene the
provisions of the Canada-Netherlands Income Tax Convention
and are therefore ineffective to abrogate the provisions of
article IV(5) of that Convention. The Minister of National
Revenue for Canada had no authority to impose liability
against plaintiff for not withholding the 15% tax on dividends
paid by it to shareholders not resident in Canada.
INCOME tax appeal.
COUNSEL:
D. G. H. Bowman, Q.C. and W. I. Innes for
plaintiff.
N. A. Chalmers, Q.C. and I. MacGregor for
defendant.
SOLICITORS:
Stikeman, Elliott, Robarts & Bowman,
Toronto, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
GRANT D.J.: The plaintiff Hunter Douglas Ltd.,
(hereinafter referred to as "H.D.L."), is a com
pany incorporated in the Province of Quebec after
amalgamation of two existing corporations in the
year 1963. It was engaged in the manufacture and
sale of home improvement articles such as alumi
num storm windows, venetian blinds and small
tools. It was also the parent company of some 70
subsidiaries scattered throughout the world which
were engaged in similar businesses and managed
by the plaintiff, who earned considerable manage
ment fees thereby. The plaintiff's income was also
augmented by dividends received from such
subsidiaries.
In 1970, the officials of the plaintiff Company
decided to move its central management control
from Canada to the Netherlands. The chief reason
for such decision was the acceleration of its busi
ness in Europe and it would there be closer to the
centre of its business operations. There was no tax
advantage to it in making such move. Accordingly,
the Company's management and its officers and
personnel were transferred to Rotterdam on Octo-
ber 3rd of that year. It sold its Canadian business
at the same time to Hunter Douglas Canada Lim
ited, one of its subsidiaries in Canada. Thereafter
it conducted no more business here and owned no
more assets in this country, excepting shares of
and receivables from its subsidiary companies in
Canada. The plaintiff's earned surplus existing at
the time of this change was not distributed but was
transferred to the new company, Hunter Douglas
N.V. as it needed those funds in its business.
In 1957 the Kingdom of the Netherlands and
the Dominion of Canada entered into a Conven
tion for the avoidance of double taxation and the
prevention of fiscal evasion with respect to taxes
on income. It was implemented by Statutes of
Canada 1957, c. 16 and by a similar statute of the
Netherlands. It is hereinafter referred to as the
"Canada-Netherlands Income Tax Agreement".
Its scheme provided an allocation of taxing juris
diction between the countries. Thereby, the right
to tax dividends paid by a corporation is given
solely to the country in which the company is
resident within the meaning of the Treaty. Such
Treaty provides a definition of the term "resident"
in article II(1)(f) thereof, which reads as follows:
1. In this Convention, unless the context otherwise requires:
(f) The terms "resident of the Netherlands" and "resident of
Canada" mean respectively any person who is resident in
the Netherlands for the purposes of Netherlands tax and
not resident in Canada for the purposes of Canadian tax
and any person who is resident in Canada for the purposes
of Canadian tax, and not resident in the Netherlands for
the purposes of Netherlands tax; a company shall be
regarded as resident in the Netherlands if its business is
managed and controlled in the Netherlands and as resi
dent of Canada if its business is managed and controlled
in Canada.
Canada has similar agreements with 32 other
countries. The purpose of these Conventions is to
regulate the taxing powers of this country and the
contracting state so as to avoid double taxation of
the dividends being paid.
The defendant admits that, on October 2, 1970,
the management and control of the plaintiff's busi
ness was transferred to the Netherlands and, as a
result, the plaintiff thereafter came within the
definition of resident of the Netherlands for the
purposes of that Convention. The defendant, how
ever, submits that the terms of such Convention
apply only to the taxation of the shareholders of
the plaintiff who are resident either in Canada or
the Netherlands with respect to distribution of the
stock dividends in issue herein, and have no
application to taxation of dividends paid to share
holders who are resident neither in Canada nor the
Netherlands.
As part of a reorganization involving the plain
tiff in October 1971, it transferred all its business
and assets to Hunter Douglas N.V., a company
formed in the Netherlands Antilles but resident in
the Netherlands. As consideration therefor, the
latter Corporation issued to the plaintiff deferred
and common shares of its capital stock. Such
reorganization was made because carrying on busi
ness under a Quebec charter in the Netherlands
created some fiscal problems.
In November 1971, pursuant to a resolution for
its liquidation, the plaintiff distributed a dividend
of Hunter Douglas N.V. common shares to the
common shareholders of the plaintiff, many of
whom resided outside Canada. In December of
1971, the plaintiff distributed a further dividend of
Hunter Douglas N.V. deferred shares to the
deferred shareholders of the plaintiff, none of
whom was resident in Canada. It is conceded by
all parties that the distribution of such shares
amounted to payment of a dividend to the plain
tiffs shareholders.
As the plaintiff Company was a resident of the
Netherlands at the time of such liquidating distri
bution of the common and deferred shares of
Hunter Douglas N.V. to its shareholders in
November and December of 1971, according to
both the Dutch internal tax law and the Canada-
Netherlands Income Tax Agreement, the same
would have been subject to Dutch income and
withholding tax. The plaintiff therefore
approached the Dutch tax administration and on
November 5, 1971 secured a ruling to the effect
that such distribution thereof to its shareholders
was not subject to an immediate tax but that the
same should be deferred until actual distribution
was made by Hunter Douglas N.V.
The basis of such ruling was that the reorgani
zation which led to the distribution constituted a
change in form only and not in substance and
should therefore be treated as what was termed a
rollover. By this was meant that shareholders sub
ject to Dutch capital gains tax, on disposing of
their new shares, should not be charged a capital
gains tax in connection with their receipt of the
new shares on the basis of their previous share-
holding of the plaintiff Company, but that their
previous cost basis applied to the new basis.
It was a condition of the ruling that, for Dutch
corporation income tax purposes, the new Compa-
ny's capital and surplus accounts were to conform
to those of the plaintiff at that time in that the
plaintiff's existing earned surplus should continue
to be such in the hands of the new Company,
thereby preserving the right of Dutch revenue
authorities to levy withholding taxes at the time of
actual distribution thereof.
By assessments dated November 1, 1973 and
numbered 280169 and 280170, the Minister of
National Revenue cancelled previous assessments
made by him, and in place thereof reassessed
withholding tax in the amounts of $208,603.28
against the plaintiff in respect of such dividends
paid by it to holders of common shares, and
$1,624,930.80 in respect of such dividend distribu
tion made by it to persons who were holders of
deferred shares in the Company and not resident
in Canada or the Netherlands. The plaintiff has
paid such assessments under protest and without
prejudice to its right to reclaim the amounts so
paid by it and appeal directly to this Court. The
obligation to withhold tax and remit the same to
the Receiver General in such circumstances is
found in sections 106(1) and 109(1) of the Income
Tax Act, R.S.C. 1952, c. 148, which reads:
106. (1) Every non-resident person shall pay an income tax
of 15% on every amount that a person resident in Canada pays
or credits, or is deemed by Part I to pay or credit, to him as, on
account or in lieu of payment of, or in satisfaction of, ...
109. (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.
All references to numbers of sections of the
Income Tax Act herein are to those of such prior
Act.
In 1957, there was no statutory definition of
"resident" in the Canada Income Tax Act. At that
time, the test of corporate residency, in both
Canada and the Netherlands, was found in the
common law to be central management and con
trol. See De Beers Consolidated Mines, Limited v.
Howe [1906] A.C. 455.
In 1962, a definition of residence was inserted
[S.C. 1960-61, c. 49, s. 38(6),(8)] in the Canada
Income Tax Act as follows:
139. .. .
(4a) For the purposes of this Act, a corporation incorporated
in Canada shall be deemed to have been resident in Canada
throughout a taxation year if it carried on business in Canada
at any time in the year.
In 1965, this definition was amended [S.C.
1965, c. 18, s. 28(4),(5)] to read:
139. .. .
(4a) For the purposes of this Act, a corporation shall be
deemed to have been resident in Canada throughout a taxation
year if
(a) in the case of a corporation incorporated after April 26,
1965, it was incorporated in Canada; and
(b) in the case of a corporation incorporated before April 27,
1965, it was incorporated in Canada and, at any time in the
taxation year or at any time in any preceding taxation year
of the corporation ending after April 26, 1965, it was resi
dent in Canada or carried on business in Canada.
It is under this last amendment, which is incon
sistent with the definition of "resident" contained
in such Convention, that the defendant attempts to
justify classifying the plaintiff as resident in
Canada at the time of such share dividend distri
bution in 1971 as it was incorporated before April
27, 1965 in Canada and in preceding taxation
years of the Corporation ending after April 25,
1965, it carried on business in Canada.
The defendant contends that the plaintiff herein
has relied entirely on the Canada-Netherlands
Treaty but that if any such treaty gives relief from
taxation to a non-resident recipient of dividends
from the Canadian withholding tax, it must be the
treaty between Canada and the country in which
that foreign shareholder resides and not the Con
vention between the Netherlands and Canada. The
assessments, however, were made against the
plaintiff Company and not against the non-resi
dent recipient of the distribution.
Apparently they were so made at the request of
the plaintiff. See its letter of October 3, 1973 (Ex.
1). This made the proceedings more convenient for
all parties. There has been no objection to the
assessments being made in this form.
It is the liability of the plaintiff with which we
are hereby concerned and it should have every
right to invoke the Convention made between
Canada and the country of its residence.
It was the plaintiff that paid the assessments
under protest. The assessments were so made
because a Canadian resident payor is obliged to
withhold 15% of the non-resident's dividend pay
ments and remit it to the Receiver General of
Canada on behalf of such recipient pursuant to the
provisions of section 109 of the Income Tax Act.
In defence to such contention, the plaintiff must
be entitled to advance the fact that by the terms of
the Canada-Netherlands Convention, Canada has
agreed that it would not impose such a tax and has
thereby become deprived from enforcing such sec
tion against the plaintiff. The evidence indicates
that all such treaties made by Canada with other
countries are designed to avoid double taxation
and contain provisions similar to paragraphs 1 and
5 of such article IV. To plead the terms of the
agreements with every country in which the recipi
ent of such distribution resided would be repeti
tious and unnecessary, even though their terms
were also relevant to such fact.
It may be that if the non-resident shareholder
recipient was assessed for such tax and was the
plaintiff appealing against the same, he would rely
on the agreement existing between the State in
which he resided and Canada, but that is not the
situation in this appeal.
In M.N.R. v. Paris Canada Films Limited 62
DTC 1338, cited by the defendant, the Company
charged with the obligation to withhold the tax
had its head office in Canada and conducted all its
business in this country so that the situation was
not present, as here, where the payor company was
domiciled outside Canada in a country which had
such an agreement with Canada. It is therefore not
an authority for the proposition that the plaintiff
herein must rely on the taxing agreement between
Canada and the country in which the recipient of
the distribution resided.
Paragraphs 1 and 5 of article IV of the said
Convention read:
1. The profits of an enterprise of one of the States shall not
be subject to tax in the other State unless the enterprise is
engaged in trade or business in that other State through a
permanent establishment situated therein. If it is so engaged,
tax may be imposed on those profits by the last-mentioned
State, but only on so much of them as is attributable to that
permanent establishment.
5. Where a company which is a resident of one of the States
derives profits or income from sources within the other State,
that other State shall not impose any form of taxation on
dividends paid by the company to persons not resident in that
other State, or any tax in the nature of an undistributed profits
tax on undistributed profits of the company, by reason of the
fact that those dividends or undistributed profits represent, in
whole or in part, profits or income so derived.
In applying the wording of such paragraph 5 to
the facts of this case, the plaintiff is the company,
as it was resident at the time of the distribution in
the Netherlands according to the definition of
"resident" contained in such Convention. The
other State referred to must be Canada because
(a) it is the other party to the agreement, and (b)
it derived the undistributed profits or income
which it possessed at the time of its move to the
Netherlands while resident in Canada and carry
ing on its business here. It is also the "other State"
which is enjoined from imposing the tax on the
dividends or undistributed profits paid by such
company to persons not resident therein.
To determine the true meaning of the para
graphs, they must be read together. Paragraph 1
protects the profits of the enterprise from taxation
by the other State, except to the limited extent
thereby permitted. It refers to a corporation tax as
opposed to a tax on non-resident shareholders.
Paragraph 5 restrains taxation by such State on
the dividends or undistributed profits of the com
pany. It is significant that it does not differentiate
between payments to residents of third countries
not parties to the Convention and those made to
residents of Canada or the Netherlands. Canada's
right to have such dividends included in the tax
able income of its own residents is not interfered
with.
The defendant further claims that the terms of
the Canada-Netherlands Tax Convention do not
apply to the taxation of the shareholders of the
plaintiff Company who are resident neither in
Canada nor in the Netherlands with respect to the
distribution of the stock dividends in issue, and
that the terms of such Convention do not apply to
relieve the plaintiff from its obligation to withhold
such tax and remit it to the Receiver General of
Canada pursuant to section 109(1) of the Act nor
does the imposition of such tax by the Minister
contravene the provisions of such Convention.
The defendant's contention would lead to double
taxation of those dividends received by sharehold
ers not resident in either of such countries in
respect of the dividend to which they are entitled
on such distribution as the arrangements made
with the Dutch tax authorities in 1971 amounted
only to a postponement of taxation thereon by that
State. Such a result would be contrary to the
purpose of all of Canada's 32 international treaties
in respect of such form of taxation. The Conven
tion should be construed in such a manner that it
is consistent with the understanding that the
Crown does not intend to act in contravention of
its international obligations. See Black- Clawson
International Ltd. v. Papierwerke Waldhof-
Aschaffenburg A.G. [1975] A.C. 591 at pages
640-641.
Mr. A. Cooiman of Rotterdam, Holland, who
is a Dutch tax adviser and practitioner in the
Netherlands, where he has handled that country's
domestic and international tax matters since 1964,
was called as a witness by the plaintiff, and stated:
It is a principle of Dutch law that in the event of any
inconsistency between the domestic law and a treaty which has
been entered into and ratified by the Kingdom of the Nether-
lands and another country that the provisions of the Treaty
must prevail. Such provisions have the force of law in the
Netherlands.
Thus, although Article I paragraph 3 of the Dutch dividend
withholding tax law of December 23, 1965, provides that a
company incorporated under Dutch law is deemed resident in
the Netherlands for dividend withholding tax purposes, this is
overridden where the company in question is resident in another
country within the meaning of a double taxation agreement
between the Netherlands and such other country having provi
sions similar to article IV(5) of the Canadian Netherlands Tax
Treaty.
Specifically, it would be contrary to the law of the Nether-
lands as superseded by the Canada/Netherlands Income Tax
Treaty and as viewed by the Netherlands tax authorities to
impose withholding tax on dividends paid by a company formed
under the laws of the Netherlands whose management and
control is situated in Canada.
Such opinion had been confirmed by the Dutch
Secretary of State for finances.
Canadian Pacific Limited v. The Queen [ 1976]
2 F.C. 563 concerned interpretation of the Cana-
da-United States Convention and Protocol. Con
sideration was given to the effect that should be
given to the rulings of the United States taxing
authorities. At pages 596-597, Mr. Justice Walsh
stated:
While it is true that this Court has the right to interpret the
Canada-U.S. Tax Convention and Protocol itself and is in no
way bound by the interpretation given to it by the United
States Treasury, the result would be unfortunate if it were
interpreted differently in the two countries when this would
lead to double taxation. Unless therefore it can be concluded
that the interpretation given in the United States was manifest
ly erroneous it is not desirable to reach a different conclusion,
and I find no compelling reason for doing so.
In Stag Line, Limited v. Foscolo, Mango and
Company, Limited [1932] A.C. 328, Lord Mac-
millan in speaking of the rules to be followed in
interpreting such Conventions, stated at page 350:
It is important to remember that the Act of 1924 was the
outcome of an International Conference and that the rules in
the Schedule have an international currency. As these rules
must come under the consideration of foreign Courts it is
desirable in the interests of uniformity that their interpretation
should not be rigidly controlled by domestic precedents of
antecedent date, but rather that the language of the rules
should be construed on broad principles of general acceptation.
The words "that other State shall not impose
any form of taxation on dividends paid by the
company to persons not resident in that other
State", contained in such paragraph 5, in my
opinion, make it clear that shareholders of the
Company not resident in either Canada or the
Netherlands are entitled to the benefit of such
provision and that the purpose thereof is to insure
that the dividends of a corporation resident in one
State shall not be taxed by the other State except
as provided by article VII where they are received
by a resident of the State seeking to impose such
tax. If it had been meant otherwise, appropriate
language would have been used.
The words "by reason of the fact that those
dividends . or undistributed profits represent, in
whole or in part, profits or income so derived" in
the last four lines of such paragraph 5 create some
uncertainty as to the meaning of the whole phrase.
It can be argued that the prohibition against impo
sition of the tax is confined to those cases where
the reason for attempting to levy the same is that
dividends or undistributed profits of the payor
company were derived by it in the country so
prohibited. That, however, does not appear to con
stitute a reasonable interpretation. A majority of
the Canadian treaties with other countries dealing
with the same subject matter have the same word
ing except that the words "by reason of the fact"
are replaced by the words "even if". This makes
the meaning of this paragraph clearer and closer to
what is the purpose of all such conventions. James
L. Martin, who is an officer of the Department of
National Revenue and tax policy officer with Pro
vincial and International Relations Division there
of, was examined for discovery. He has taken part
in the negotiations leading to a number of such
later treaties and advised in relation to their
application. He stated that the change to the
words "even if" from "by reason thereof" did not
represent a change in policy by the Government of
Canada and that both expressions had the same
meaning in all such treaties.
The Vienna Convention on the Law of Treaties,
to which both Canada and the Netherlands are
parties, contains the general rules of interpretation
of international conventions. Paragraph 1 of article
31 thereof reads:
I. 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.
The Canada-Netherlands Income Tax Agree
ment Act, 1957, S.C. 1957, c. 16, whereby the
agreement entered into between the two countries
for the avoidance of double taxation was approved
and declared to have the force of law in Canada,
contains the following section:
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 this inconsistency.
The amendments made in 1962 and 1965 to the
Canada Income Tax Act (supra) contravene the
provisions of the Canada-Netherlands Income Tax
Convention and are therefore ineffective to abro
gate the provisions of article IV(5) of such Con
vention. The Minister of National Revenue for
Canada therefore had no authority to impose lia
bility against the plaintiff Company for not with
holding the 15% tax on dividends paid by it to
shareholders not resident in Canada.
The appeal should therefore be allowed and
judgment should go vacating the assessments of
withholding tax made by the Minister of National
Revenue against the plaintiff and directing that all
amounts paid by the plaintiff in respect of such
assessments be repaid by the defendant to the
plaintiff with interest thereon at the rate estab
lished by the Income Tax Act and the Income Tax
Regulations. The plaintiff should have its costs of
these proceedings against the defendant.
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.