BETWEEN:
(successor by amalgamation to CanVideo Television Sales (1983) Limited),
and
____________________________________________________________________
Appeal heard on October 11, 2006, at
The Honourable Justice Campbell J. Miller
Appearances:
____________________________________________________________________
JUDGMENT
The appeal from the reassessment of tax made under the Income Tax Act for the 1997 taxation year is allowed, and the reassessment of August 16, 2004, is vacated as it was made beyond the maximum reassessment period of the Canada‑Barbados Income Tax Convention, 1980. The Appellant is entitled to its costs.
Signed at
BETWEEN:
CANWEST MEDIAWORKS INC.
(successor by amalgamation to CanVideo Television Sales (1983) Limited),
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] The Appellant, Canwest Mediaworks Inc., is the successor by amalgamation to CanVideo Television Sales (1983) Limited (CanVideo). Canwest International Communications Inc. (CICI) was a resident Barbadian company and a controlled foreign affiliate (CFA) of CanVideo at the relevant time. The Minister of National Revenue (the Minister), relying on the foreign accrual property income (FAPI) provisions of section 91 of the Income Tax Act (the Act), reassessed CanVideo for its 1997 taxation year within the time limits provided by Canadian domestic laws (due to a waiver), though beyond the five‑year limitation period set forth in Article XXVII(3) of the Canada-Barbados Income Tax Convention, 1980 (the "Treaty"). The Minister justifies the reassessment on the basis that Article XXX(2) of the Treaty overrides Article XXVII(3).
[2] Article XXVII(3) and XXX(2) of the Treaty read as follows:
XXVII(3) A Contracting State shall not, after the expiry of the time limits provided in its national laws and, in any case, after five years from the end of the taxable period in which the income concerned has accrued, increase the tax base of a resident of either Contracting State by including therein items of income which have also been charged to tax in the other Contracting State. This paragraph shall not apply in the case of fraud, wilful default or neglect.
…
XXX(2) Nothing in this Agreement shall be construed so as to prevent
[3] The sole issue is whether the limitation period in Article XXVII(3) applies or whether Article XXX(2) overrides the limitation period, allowing the Minister's reassessment after the five-year limitation period. I find the limitation period applies and the Minister's reassessment was issued too late.
[4] The parties provided an Agreed Statement of Facts which put some meat on the factual barebones set forth in the previous paragraphs. The following are segments of those agreed facts:
6. During its taxation year ending August 31, 1996 (the "1996 CICI Taxation Year"), CICI earned, among its other income, interest on treasury bills and deposits with the Royal Bank of
7. The RBC Interest was included as interest income in determining the
8. The RBC Interest was not included as foreign accrual property income ("FAPI"), as that term is defined in subsection 95(1) of the Act, in the tax return filed by CanVideo for the Taxation Year. There is no suggestion of fraud, wilful default or neglect on the part of CanVideo in not including the RBC Interest as FAPI in its tax return for the Taxation Year.
9. On December 18, 1997, the Minister of National Revenue (the "Minister") issued to CanVideo an original notice of assessment for the Taxation Year on the basis that the RBC Interest was not included as FAPI, pursuant to subsection 91(1) of the Act, in determining CanVideo's tax liability for the Taxation Year.
10. The normal reassessment period for the Taxation Year, as defined in subsection 152(3.1) of the Act, was four years from the date of the original notice of assessment and therefore ended on December 18, 2001.
11. Prior to the expiry of the normal reassessment period of the Taxation Year, the Minister requested a waiver of the limitation periods under the Act relating to a number of issues concerning the Taxation Year, including in respect of FAPI earned by CFA of CanVideo. On November 9, 2001, GCL delivered such a waiver to the Minister in respect of CanVideo that allowed the Minister a continuation of its review of the Taxation Year.
12. On August 16, 2004, the Minister issued to GCL a notice of reassessment in respect of CanVideo for the Taxation Year (the "Reassessment"). In the Reassessment, the Minister increased the tax base of CanVideo for the Taxation Year to include the amount of C$659,974 attributable to the RBC Interest earned by CICI in its 1996 CICI Taxation Year, which the Minister characterized as FAPI under subsection 91(1) of the Act. As a result of the delivery of the waiver, the Reassessment was issued prior to the expiry of the limitation periods under the Act but beyond the limitation period set out in Article XXVII of the Treaty.
…
14. The Treaty was signed on January 22, 1980 by representatives of the Governments of Canada and
…
17. There have been no public or published statements by the Government of Canada or the Government of Barbados, or in each case by any agency, department or similar subdivision thereof, with respect to the interaction between paragraph 3 of Article XXVII and paragraph 2 of Article XXX. There has been no exchange of diplomatic notes between the Government of Canada and the Government of Barbados with respect to the interaction between paragraph 3 of Article XXVII and paragraph 2 of Article XXX.
…
21.
…
25. Pursuant to subsection 91(1) of the Act, items of income qualifying as FAPI that are earned by a CFA in a particular taxation year of the CFA are added to the tax base of the Canadian resident in the taxation year of the Canadian resident in which the particular taxation year of the CFA ends.
[5] The Respondent also called Mr. Ross John Kauffman, a senior advisor on tax treaties with the Canada Revenue Agency. Over the last ten years he was involved in negotiating 20 treaties, all of which had a provision similar to, or broader than, Article XXX(2) of the Treaty (the FAPI provision). He explained that the reason for including such a provision in the treaties he negotiated was to preserve or ensure
Appellant's position
[6] The Appellant argues that the two Articles can live in harmony, as one deals with
Respondent's position
[7] The Respondent argues that the words of Article XXX are clear and that Article XXVII(3) is a provision in the Treaty that can be construed so as to prevent
Analysis
[8] Both sides agree that, in line with the Supreme Court of Canada decision in The Queen v. Crown Forest Industries Limited et al.,
[1]
it is essential in interpreting a treaty to look to the language used and the intention of the parties.
Language used
[9] The Respondent's position is simple – the words "Nothing in this Agreement shall be construed so as to prevent
[10] The Appellant scrutinizes the expression "construed so as to prevent" in some detail, arguing that limiting the application of a rule to five years is fundamentally different from preventing the application of a rule. The Appellant contends that even beyond the five-year period, Article XXVII(3) does not prevent taxation by Canada of FAPI, but simply narrows the items that may be included in income to those that have not been subjected to tax in Barbados, those in respect of which there has been fraud, neglect or wilful default, and those that have been included in income within the five years and assessed. In effect,
[11] "Prevent" implies a total prohibition of something before it occurs. The Oxford English Dictionary defines "prevent":
To stop, keep, or hinder (a person or other agent) from doing something (7); To provide beforehand against the occurrence of (something); to render (an act or event) impracticable or impossible by anticipatory action; to preclude, stop, hinder (8).
Justice Kerr in Abbott Laboratories, Limited v. The Queen
[2]
gave the following definitions:
[3]
… Various dictionary definitions were referred to, including the following:
Prevent
… To prevent is to stop something effectually by forestalling action and rendering it impossible. (Random House Dictionary of the English Language, 1966).
… 7. To use preventive measures. (The Shorter Oxford English Dictionary, Third Edition, 1956).
Prevention
… the action of keeping from happening or of rendering impossible an anticipated event or an intended act; a means of prevention; (The Shorter Oxford English Dictionary, Vol. 1, 3rd ed., 1944, reprinted in 1947).
The act of preventing; effectual hindrance. (Random House Dictionary of the English Language, 1966).
[12] This degree of a permanent cessation or forestalling is not what Article XXVII(3) does. I regard Article XXVII(3) as providing that
[13] I find further support for this view of the interplay between the two Articles by considering the use of the term "shall be construed so as to". These words must mean something: Article XXVII(3) does not read simply, "nothing in this agreement shall prevent". These additional words are inserted for a reason. Why? The logical explanation is because there may be provisions which are open to construction – they need interpretation one way or another. Nothing in Article XXVII(3) requires interpretation: it is a straightforward limitation provision – no construction necessary (unlike Articles VII and XX which I will consider later in reviewing the intent of Articles XXVII and XXX).
[14] Simply based on the language of the Articles:
(i) Does Article XXVII(3), on any construction, prevent
(ii) Specifically, does Article XXVII(3) prevent
(iii) Even more specifically, does Article XXVII(3) prevent
(iv) Finally, does Article XXVII(3) prevent
This is illogical, as there is no other way to construe Article XXVII(3). What the Respondent is really saying is that Article XXVII(3) be ignored, not that Article XXVII(3) be construed in a different way consistent with Article XXX(2). It is to be "construed" as though it does not exist; that is, that there simply is no limitation on FAPI. That is not a construction: that is a destruction. All to say, by its use of "construe", I find Article XXX is not directed at Article XXVII(3).
[15] It is clear to me that Article XXX, in addressing "nothing in this Agreement shall be construed so as to prevent" is directing the reader to consider the wording of other Articles in the Treaty, not the specific facts of a specific taxpayer. Just look at the other Articles and on their face do they prevent
Intention
[16] I am reinforced in my interpretation of the language of the two Articles by my findings as to the intent of the Articles. While there is no direct evidence from anyone engaged in the negotiating of the Canada-Barbados Treaty, some guidance was offered by Mr. Kauffman as to the rationale behind both Articles. With respect to Article XXVII(3), he suggested that this type of limitation provision avoids the problem of having to rely on competent authority provisions to make relieving adjustments long after records may have been lost or destroyed. I also accept the Appellant's position that limitation provisions of this sort do provide taxpayers some certainty. There was no evidence to suggest the provision was inserted for any reason related to specifically curtailing
[17] It is the intention behind Article XXX(2) that is of greater import. The Respondent argues that the intention is clearly gleaned from the words, and where the words are clear, it is inappropriate to rely on extrinsic sources to determine intention. The Appellant argues that the correct interpretation of Article XXX(2) revolves around a determination that the intention of the negotiators in inserting this provision was to remove any uncertainty regarding
[18] Before considering those sources, I shall consider just the Treaty itself in determining intention. The language of Article XXX(2) implies that there may be other Articles in the Treaty whose meaning is open to an interpretation of preventing
[19] Article VII states:
The profits of an enterprise of a Contracting State [defined in Article III(1) as an enterprise carried on by a resident of a Contracting State] shall be taxable only in that State unless the enterprise carries on or has carried on business in the other Contracting State through a permanent establishment situated therein.
It is not difficult to see how this provision could be construed to prevent
[20] Article X(5) states:
Where a company is a resident of only one Contracting State, the other Contracting State may not impose any tax on the dividends paid by the company to persons who are not residents of that other State, or subject the company to a tax on undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State.
This provision too could be interpreted as preventing
[21] I conclude, that within the Treaty itself, there are uncertainties as to
[22] This issue appears to have been addressed by the 2002 Update to the OECD Model Tax Convention:
Thus, whilst some countries have felt it useful to expressly clarify, in their conventions, that controlled foreign companies legislation did not conflict with the Convention, such clarification is not necessary. It is recognised that controlled foreign companies legislation structured in this way is not contrary to the provisions of the Convention.
Clearly,
Before the 2003 changes, the Commentary to the OECD Model was unclear and unsatisfactory in its treatment of the relationship between CFC rules and tax treaties.
[23] The Courts have also had to deal with the issue of a country's authority to tax controlled foreign companies' (CFC) income. The Appellant referred to the French case of Re Société Schneider Electric
[4]
and the Finnish case of Re A Oyj Abp.
[5]
Both cases dealt with treaties with Articles similar to Article VII of the Canada-Barbados Treaty. The French Conseil d'État held that
[24] The Appellant also referred to statements of Professor Dr. Michael Lang. In "CFC Regulations and Double Taxation Treaties", Professor Lang wrote:
In many countries, the issue of the compatibility of the CFC regulations with treaty law is far from settled. In many cases, there are no supreme court decisions on the issue. Most of the opinions mentioned in the 1987 OECD report and the 1992 Commentaries to the OECD Model represent the views of tax administrations of OECD countries. These views by no means reflect the current conclusions of other experts or the latest case law.
…
Tax treaties have a limiting effect on national taxation regimes. Therefore, in the absence of any arguments to the contrary, one may not assume that tax treaties will have no impact on inconsistent CFC regulations.
Also, Renata Fontana in a paper called "The Uncertain Future of CFC Regimes in the Member States of the European Union – Part I", stated:
The application of tax treaties to CFC regimes and their compatibility is neither a recent nor a settled debate. Rather, this is still a disputed issue in the national courts of the various states involved, with divergent decisions on the issues.
…
Although scholars, domestic (administrative and judicial) courts and the OECD itself have continuously addressed the issue of the compatibility between CFC regimes and tax treaties, no uniform and definitive solution has been found to date.
I appreciate that academics' comments, statements concerning the OECD and pronouncements by French and Finnish Courts do not constitute any direct evidence of the Canadian and Barbadian negotiators' true intent, but these sources do present a useful background. Combined with Mr. Kauffman's testimony of
[25] Based on both the language used in the Treaty itself, and the intent of Articles XXVII(3) and XXX(2), I am satisfied that Article XXX(2) is not to be interpreted as overriding Article XXVII(3) rendering the limitation meaningless. The five-year limitation is in play and the Respondent has, in this case, missed that limitation. I therefore allow the appeal and vacate the reassessment of August 16, 2004 as it was made beyond the Treaty maximum reassessment period. Costs to the Appellant.
Signed at
"
Miller J.
STYLE OF CAUSE: Canwest Mediaworks Inc. (successor by amalgamation to CanVideo Television Sales (1983) Limited and
Her Majesty The Queen
PLACE OF HEARING:
DATE OF HEARING: October 11 and 12, 2006
REASONS FOR JUDGMENT BY: The Honourable Justice Campbell J. Miller
DATE OF JUDGMENT: October 24, 2006
APPEARANCES:
Counsel for the Appellant:
|
Ian S. MacGregor and
|
Counsel for the Respondent:
|
Donald G. Gibson
|
COUNSEL OF RECORD:
Firm: Osler, Hoskin & Harcourt LLP
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada