Crown Forest Industries Ltd. v. Canada

Crown Forest Industries Ltd. v. Canada
Collection
Supreme Court Judgments
Date
1995-06-22
Report
[1995] 2 SCR 802
Case number
23940
Judges
L'Heureux-Dubé, Claire; Sopinka, John; Gonthier, Charles Doherty; Cory, Peter deCarteret; McLachlin, Beverley; Iacobucci, Frank; Major, John C.
On appeal from
Federal Court of Appeal
Subjects
Taxation
Notes
SCC Case Information: 23940
Decision Content
Crown Forest Industries Ltd. v. Canada, [1995] 2 S.C.R. 802
Her Majesty The Queen Appellant
v.
Crown Forest Industries Limited Respondent
and
The Government of the United States of America Intervener
Indexed as: Crown Forest Industries Ltd. v. Canada
File No.: 23940.
1995: March 2; 1995: June 22.
Present: L'Heureux‑Dubé, Sopinka, Gonthier, Cory, McLachlin, Iacobucci
and Major JJ.
on appeal from the federal court of appeal
Income tax ‑‑ International taxation ‑‑ Withholding tax ‑‑ Residency ‑‑ Canada‑U.S. tax treaty ‑‑ Bahamian company operating in U.S. renting equipment to associated company in Canada ‑‑ Whether or not company resident in U.S. so as to benefit from lower withholding tax -- Canada‑United States Tax Convention Act, 1984, S.C. 1984, c. 20 , Schedule I (Convention between Canada and the United States of America with respect to Taxes on Income and on Capital (Canada‑United States Income Tax Convention (1980)), Preamble, Articles I, IV, XII).
In the 1987‑89 taxation years, Crown Forest rented barges from Norsk, a company incorporated in the Bahamas whose sole office and place of business was located in the United States. Norsk filed income tax returns in the U.S. only, where it was considered a foreign corporation exempt from U.S. income tax, and accordingly paid no U.S. tax on the barge rental payments. Crown Forest withheld 10 percent tax on the rental payments as permitted by Article XII of the Canada‑United States Income Tax Convention (1980), rather than the 25 percent deducted from non‑residents, on the footing that Norsk was a "resident of a Contracting State" for the purposes of the Convention. Article IV provides that a "resident of a Contracting State" is any person or entity who, under the laws of that state, is liable to tax therein by reason of domicile, residence, place of management, place of incorporation or any other criterion of a similar nature. The Minister disallowed the respondent's claim for 10 percent withholding tax and substituted 25 percent withholding tax.
The Federal Court Trial Division found Norsk to be a resident of a contracting party (the United States) and quashed the Minister's reassessment of Norsk at 25 percent. The Federal Court of Appeal upheld this decision. At issue is whether Norsk is a "resident of a Contracting State" (the U.S.) within the meaning of Article IV of the Canada-United States Income Tax Convention (1980), so that the withholding tax on its barge rentals would be 10 percent.
Held: The appeal should be allowed.
The basis of Norsk's liability for taxation in the United States emanates from the fact that it conducts a trade or business which is effectively connected with the United States and has income arising from that business which is also effectively connected with the United States. Although the fact that its "place of management" is located in the United States is one factor contributing to the finding that its trade or business is connected with the United States, it does not constitute the basis for Norsk's tax liability in the first place. A factual proposition which merely informs domestic tax liability cannot constitute a residency criterion under the Canada‑United States Income Tax Convention (1980). The only way for Norsk to benefit from residency status under the Convention is if source taxation on a business effectively connected with the contracting party constitutes a criterion similar to the other enumerated criteria in Article IV (residence, place of management, place of incorporation, domicile). It is not similar, since all of the other criteria constitute grounds for taxation on world‑wide income, not just source income. The parties to the Convention intended only that persons who were resident in one of the contracting states and liable to tax in one of the contracting states on their "world‑wide income" be considered "residents" for purposes of the Convention. Norsk is therefore not a "resident" of the United States for the purposes of Article IV of the Convention.
Cases Cited
Referred to: J. N. Gladden Estate v. The Queen, [1985] 1 C.T.C. 163; Canada (Attorney General) v. Ward, [1993] 2 S.C.R. 689; Bacardi Corp. of America v. Domenech, 311 U.S. 150 (1940); United States v. Stuart, 489 U.S. 353 (1989); Utah Mines Ltd. v. The Queen, 92 D.T.C. 6194; Hunter Douglas Ltd. v. The Queen, 79 D.T.C. 5340; Thiel v. Federal Commissioner of Taxation, 90 A.T.C. 4717; Thomson v. Thomson, [1994] 3 S.C.R. 551; Sumitomo Shoji America, Inc. v. Avagliano, 457 U.S. 176 (1982).
Statutes and Regulations Cited
Agreement between the Government of the United States of America and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with respect to Taxes on Income (done at Beijing, April 30, 1984). Reproduced in International Legal Materials, vol. 23, No. 4, July 1984.
Canada‑United States Tax Convention Act, 1984, S.C. 1984, c. 20 , Schedule I (Convention between Canada and the United States of America with respect to Taxes on Income and on Capital (Canada‑United States Income Tax Convention (1980)), Preamble, Articles I, IV, paragraph 1, XII, paragraphs 1, 2).
Income Tax Act, S.C. 1970‑71‑72, c. 63, s. 212(1)(d) [rep. & sub. S.C. 1986, c. 2, s. 26].
Internal Revenue Code, 1986, §§ 864(c)(1), (4)(B)(i), (ii), (iii), 882(a)(1), (2), 883(a)(1).
Technical Explanation of the Convention between the United States of America and Canada with respect to Taxes on Income and on Capital Signed at Washington, D.C. on September 26, 1980, as Amended by the Protocol Signed at Ottawa on June 14, 1983 and the Protocol Signed at Washington on March 28, 1984. Reproduced in Canadian Income Tax Act with Regulations, 57th ed. Don Mills: CCH Canadian Ltd., 1987.
Vienna Convention on the Law of Treaties, Can. T.S. 1980 No. 37, Articles 31, 32.
Authors Cited
American Law Institute. Federal Income Tax Project ‑‑ International Aspects of United States Income Taxation II ‑‑ Proposals on United States Income Tax Treaties. Philadelphia: The Institute, 1992.
Arnold, Brian J., and Timothy W. Edgar, eds. Materials on Canadian Income Tax, 9th ed. Don Mills: Richard De Boo, 1990.
Boidman, Nathan, L. Frank Chopin and Alan W. Granwell. "Tax Effects for Canadians of the New U.S. Code and Treaty Residency Rules (Part Two)" (1985), Tax Mgmt. Int'l J. 183.
Dwyer, Blair P., and James Cantillon Ross. "Canada ‑‑ Recent Cases Concerning Withholding Tax" (1992), 19 Tax Plan. Int'l Rev. 29.
Edwardes‑Ker, Michael. Case Comment. International Tax Treaties Service. Dublin: In‑Depth Publishing Ltd., 1993.
Isenbergh, Joseph. International Taxation: U.S. Taxation of Foreign Taxpayers and Foreign Income, vol. I. Boston: Little, Brown & Co., 1990.
Organisation for Economic Co‑operation and Development. OECD Committee on Fiscal Affairs. Model Double Taxation Convention on Income and on Capital. Paris: Organisation for Economic Co‑operation and Development, 1977.
Peters, Victor. "Resident (Article 4)", in International Fiscal Association, Canadian Branch, Special Seminar on Analysis of Canada's Tax Conventions and Comparison to the O.E.C.D. Model Double Taxation Convention. Toronto: Richard De Boo, 1979.
Tremblay, Richard G. "Crown Forest ‑‑ Tax Treaty Interpretation Bonanza" (1994), 4 Can. Curr. Tax C41.
United States of America. Senate. Committee on Foreign Relations. Report of the Committee on Foreign Relations United States Senate on Executive T, 96th Congress, 2d Session, Tax Convention with Canada. Tax Convention and Proposed Protocols with Canada. Washington: U.S. Government Printing Office, 1984.
Vogel, Klaus. Klaus Vogel on Double Taxation Conventions. Deventer, The Netherlands: Kluwer Law and Taxation Publishers, 1991.
Ward, David A. "Principles To Be Applied in Interpreting Tax Treaties" (1977), 25 Can. Tax J. 263.
APPEAL from a judgment of the Federal Court of Appeal (1993), 94 D.T.C. 6107, [1994] 1 C.T.C. 174, 164 N.R. 222, dismissing an appeal from a judgment of Muldoon J. (1992), 92 D.T.C. 6305, [1992] 2 C.T.C. 1, 53 F.T.R. 291, allowing an appeal from the Minister of National Revenue's tax assessment. Appeal allowed.
Ian S. MacGregor, Q.C., and Al Meghji, for the appellant.
Warren J. A. Mitchell, Q.C., and Karen R. Sharlow, for the respondent.
Brian A. Crane, Q.C., for the intervener.
The judgment of the Court was delivered by
1 Iacobucci J. -- This appeal raises issues regarding the interpretation of international tax treaties.
2 The more specific question is whether Norsk Pacific Steamship Company Limited ("Norsk") is a "resident of a Contracting State" -- in this case the United States -- within the meaning of Article IV of the Convention between Canada and the United States of America with respect to Taxes on Income and on Capital (hereinafter the Canada-United States Income Tax Convention (1980)) (enacted in law in Canada by the Canada-United States Tax Convention Act, 1984, S.C. 1984, c. 20 ). If it is, the amount of non-resident tax imposed by Canada on Norsk and required to be withheld by Crown Forest Industries Limited ("Crown Forest") from the rent paid by it to Norsk for the lease of several maritime barges would be reduced by virtue of Article XII, paragraph 2 of the Convention from 25 percent to 10 percent. Article IV provides that a "resident of a Contracting State" is "any person [or entity] who, under the laws of that State, is liable to tax therein by reason of ... domicile, residence, place of management, place of incorporation or any other criterion of a similar nature".
3 For the reasons that follow, I would allow the appeal with the result that Crown Forest is to pay 25 percent withholding tax to Canada.
I. Background
4 In the 1987, 1988 and 1989 taxation years, Crown Forest paid rent to Norsk for the use of certain barges. These barges were used to transport wood chips to pulp mills, and goods from those mills to markets in Canada and the U.S. Norsk was incorporated in the Bahamas in 1962 but its only office and place of business has been in the United States, in the San Francisco area. At this office it, at all relevant times, employed approximately 19 people with a monthly payroll of about US $75,000. Both Norsk and Crown Forest are owned by the same New Zealand corporation, Fletcher Challenge Limited.
5 For each of the years under review, the only income tax returns filed by Norsk with the United States Internal Revenue Service were entitled "Income Tax Return of a Foreign Corporation" (Form 1120F); however, Norsk has never filed income tax returns in Canada, the Bahamas, or any country other than the United States. To this end, Norsk is a foreign corporation for U.S. income tax purposes. Its primary source of income arises from the transportation of newsprint internationally.
6 In the relevant taxation years, Norsk paid no U.S. tax on the barge rental payments, claiming an exemption to which it was entitled as an international shipping company under § 883 of the U.S. Internal Revenue Code, 1986. This exemption accrued to Norsk owing to the fact that it had been incorporated in the Bahamas; given that the Bahamas has, in its income tax legislation, accorded a similar tax exemption to companies incorporated in the United States, these dual exemptions are reciprocal.
7 Crown Forest withheld 10 percent tax on the rental payments, on the footing that Norsk was a "resident of a Contracting State" for the purposes the Canada-United States Income Tax Convention (1980). For residents, the usual 25 percent rate of withholding tax paid by non-residents (pursuant to s. 212(1) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended) is reduced to 10 percent by virtue of Article XII of the Convention. Although the Minister of National Revenue ("Minister") re-assessed Crown Forest at 25 percent, this finding was quashed by Muldoon J. of the Federal Court Trial Division who found Norsk to be a resident of a contracting party (the United States). Muldoon J.'s decision was upheld by the Federal Court of Appeal, Décary J. dissenting. The Minister appeals to this Court and is supported by the intervener, the Government of the United States of America, neither of which wishes Norsk to be considered a "resident" under the Convention.
II.Relevant Statutory and International Convention Provisions
Canada-United States Income Tax Convention (1980)
Article IV
. . .
1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation or any other criterion of a similar nature, but in the case of an estate or trust, only to the extent that income is derived by such estate or trust is liable to tax in that State, either in its hands or in the hands of its beneficiaries.
. . .
Article XII
. . .
1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that State; but if a resident of the other Contracting State is the beneficial owner of such royalties, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties.
Income Tax Act, S.C. 1970-71-72, c. 63, as amended
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 I to pay or credit, to him as, on account or in lieu of payment of, or in satisfaction of,
. . .
(d) rent, royalty or similar payment....
United States Internal Revenue Code, 1986
864. ...
(c) ...
(1) For the purposes of this title --
(4) ...
(B) Income, gain, or loss from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States by a nonresident alien individual or a foreign corporation if such person has an office or other fixed place of business within the United States to which such income, gain, or loss is attributable and such income, gain, or loss --
(i) consists of rents or royalties for the use of or for the privilege of using intangible property described in section 862(a)(4) derived in the active conduct of such trade or business,
(ii) consists of dividends or interest, and either is derived in the active conduct of a banking, financing, or similar business within the United States or is received by a corporation the principal business of which is trading in stocks or securities for its own account; or
(iii) is derived from the sale or exchange (outside the United States) through such office or other fixed place of business of personal property described in section 1221(1), except that this clause shall not apply if the property is sold or exchanged for use, consumption, or disposition outside the United States and an office or other fixed place of business of the taxpayer in a foreign country participated materially in such sale.
882. ...
(a) ...
(1) A foreign corporation engaged in trade or business within the United States during the taxable year shall be taxable ... on its taxable income which is effectively connected with the conduct of a trade or business within the United States.
(2) In determining taxable income for purposes of paragraph (1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States.
883. ...
(a) The following items shall not be included in gross income of a foreign corporation, and shall be exempt from taxation under this subtitle:
(1) Gross income derived by a corporation organized in a foreign country from the international operation of a ship or ships if such foreign country grants an equivalent exemption to corporations organized in the United States.
III. Judgments Below
A. Federal Court Trial Division, 92 D.T.C. 6305, per Muldoon J.
8 Muldoon J. allowed Crown Forest's appeal from the Minister's tax assessment, holding that Norsk fit the definition of "resident of a Contracting State" in Article IV, paragraph 1 of the Convention.
9 To determine whether Norsk was a "resident" of the United States for the purposes of the Convention, Muldoon J. queried whether Norsk was liable to tax in that state by reason of the criteria listed in Article IV, or by reason of any criterion of a similar nature. He stated that the answer was a matter of United States law.
10 Muldoon J. referred at p. 6308 to expert opinion asserting that Norsk is liable to tax in the U.S. because it conducts a "trade or business which is effectively connected with the United States" and that the fact that its head office and place of management are in the U.S. constitutes a principal factor determining whether it carries on a trade or business in the U.S. He found, at p. 6310, that "[t]he reason for which Norsk's income is effectively connected with a trade or business which it actively conducts in the U.S.A., is because Norsk's place of management is located in the U.S.A. where it conducts its trade or business". Having characterized "place of trade or business" as an "other criterion of a similar nature" for the purposes of Article IV, paragraph 1 of the Convention, Muldoon J. then stated, at p. 6311, that:
If it were logically necessary to resort to the general analogous alternative expressed in article IV.1 of the Convention one would say, as the Court now holds: Norsk is a "resident" of the U.S.A. within the meaning of article IV.1 of the Convention because it is liable to tax under U.S. law by reason of its place of management and/or by reason of its place of conducting its trade or business...
11 Muldoon J. questioned why, if the negotiators of the Convention meant to exclude foreign corporations in the U.S. (such as Norsk) from the status of "resident of a Contracting State", they simply did not write into the Convention exactly what they supposedly meant to say.
B. Federal Court of Appeal, 94 D.T.C. 6107
(i) per Heald J.A. (majority)
12 The Federal Court of Appeal dismissed the Crown's appeal. Heald J.A., writing for himself and McDonald J.A., rejected the argument that Muldoon J. had erred in his findings of fact. In fact, he affirmed that Norsk's liability for U.S. tax arises because the trade or business which it conducts is effectively connected with the U.S. and not because its place of management is located in the U.S. Having stated at p. 6112 that "[t]he issue is not the general application of U.S. tax law but its application to Norsk in particular" (emphasis in original) Heald J.A. said that Muldoon J.'s factual finding "was reasonably open to him on this record" and that "[i]n any event, by no stretch of the imagination, can it be said that the Trial Judge made a palpable or overriding error in the findings of fact which he made".
13 In considering whether the factual finding that Norsk's place of management is a prime factor in its liability to tax in the U.S. is sufficient to bring Norsk within Article IV, paragraph 1, Heald J.A. rejected four submissions forwarded by the Crown.
14 First, the Crown had argued that, since foreign corporations are not generally liable to tax in the U.S. on the basis of their place of management, Norsk cannot be found liable on this basis. In response, Heald J.A. ruled at p. 6112 that this contention "fails to take into account the particular circumstances which make Norsk liable.... [and] begs the very question that must be determined by this Court".
15 Second, it was argued that the inclusion of the phrase "or any other criterion of a similar nature" in Article IV, paragraph 1 indicates a common ground for liability under that article, specifically, liability to tax on a world-wide basis, and that Norsk is not liable on this basis. Heald J.A. noted, however, that only domestic corporations are liable to tax on their world-wide income. Referring to the Crown's interpretation of Article IV, paragraph 1 he reasoned, at p. 6113, inter alia:
Were this the intention of the Contracting States, such a result could have been achieved simply by stipulating that only domestic corporations subject to tax on 100% of their world-wide income are residents for the purposes of the Convention.
16 The third submission advanced by the Crown was that Muldoon J.'s finding that tax liability caused by the conduct of a business effectively connected with the U.S. is similar in nature to the tax liability caused by the place of management was tantamount to an amendment to the Convention. Heald J.A. dismissed this claim; he relied at p. 6113 upon a passage from Muldoon J.'s judgment that "indicates that Norsk's liability to tax in the U.S. is by reason of its place of management, and that the Trial Judge would find Norsk to be liable by reason of a criterion of a similar nature only if it were `logically necessary'".
17 Lastly, it was argued that the interpretation given to Article IV, paragraph 1 by the trial judge would lead to anomalous results. One example given was that, upon the taxpayer's interpretation, a foreign corporation engaged in trade or business in the U.S. could earn $100 of effectively connected income (taxable in the U.S.) and $1,000,000 of foreign source income (not taxable in the U.S.) and, yet, the foreign corporation would entirely escape tax liability in respect of that foreign source income. Heald J.A.'s response was as follows: rejecting the "world-wide income" test as the only basis for tax liability does not mean that any corporation with U.S. source income is liable to tax in the U.S., and, thereby, automatically becomes a U.S. resident under the Convention.
(ii) Décary J.A. (dissenting)
18 Décary J.A. dissented on two grounds. First, he differed from Heald J.A. by concluding that at p. 6115 "[t]he reason for which Norsk is liable to tax in the United States is not because its place of management is located in the United States, but because the trade or business it conducts is effectively connected with the United States, that connection being established, amongst various factors, by Norsk's place of management".
19 Second, referring to the grounds enumerated in Article IV, paragraph 1, Décary J.A. concluded at p. 6115 that:
The parties obviously intended to set out very specific criteria, the common element of all of them being that each was in itself and standing alone a basis for taxation, that each was easily, readily and objectively identifiable and that each could be related to a tangible location. Any criterion "of a similar nature" must ... satisfy these common elements.
20 Remarking that the basis for Norsk's U.S. tax liability possesses none of these common elements, Décary J.A. went on at p. 6115 to hold that:
To say that the fact that the place of management is a factor in determining the very reason of Norsk's liability to tax (i.e. conducting a business ...), renders Norsk liable to tax by reason of its place of management, is to transform a factor used in assessing a tax liability that does not fall under article IV, into one of the four criteria recognized by the article.
IV. Issue on Appeal
21 Is Norsk a resident of one of the contracting parties to the Canada-United States Income Tax Convention (1980) pursuant to the following definition in Article IV thereof:
1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation or any other criterion of a similar nature...?
V. Analysis
22 In interpreting a treaty, the paramount goal is to find the meaning of the words in question. This process involves looking to the language used and the intentions of the parties. Both upon the plain language reading of Article IV and through an interpretation of the goals and purposes of the Canada-United States Income Tax Convention (1980), I reach the same destination: to allow the appeal.
A. The Plain Language
23 At this stage of the analysis, the primary question to ask is why Norsk is liable to pay tax in the United States. If its liability is rooted in the fact that "it is engaged in a trade or business effectively connected with the U.S.", then it would seem that Norsk is not a "resident" of the United States under Article IV since "engaged in a trade or business" is not listed as a factor to trigger residency under that article. The only way residency could be found in such a situation would be to determine "engaged in a trade or business" to be a "similar criterion" under Article IV. On the other hand, if Norsk's tax liability in the U.S. emanates from the fact that its "place of management" is in the U.S., then it would appear, prima facie, that Norsk could satisfy the residency requirements under Article IV, since "place of management" is a sufficient condition of residence.
24 Article IV states that the term "resident" means "any person who, under the laws of [the contracting party in question], is liable to tax therein by reason of... domicile, residence, place of management, place of incorporation or any other criterion of a similar nature". The courts below found Norsk's place of residence to be in the United States. At first blush, this seemingly disposes of the matter since such a finding appears to be sufficient to warrant a determination that Norsk is in fact a resident under the Convention.
25 Nevertheless, there is one important caveat. Under Article IV it must be shown that the liability to taxation operates by reason of one of the listed grounds. This connotes the existence of some sort of causal connection or, in the least, some relationship of proximity. In my opinion, the fact that Norsk's place of management is in the U.S. is not causally or even proximately connected to the basis of Norsk's tax liability in the U.S. Quite the contrary: in my mind, the reason why Norsk was liable to taxation in the U.S. was because of the income flowing from the business or trade it conducted that was connected to the United States.
26 I am supported in this conclusion by Muldoon J.'s summary at p. 6308 of the findings of Ginsburg, the expert witnesses called by Crown Forest to testify:
Norsk is liable to tax in the U.S.A. because it conducts a "trade or business which is effectively connected with the United States".... This latter expression is not identified in the Internal Revenue Code... but is determined by subjective factors according to common law.... The United States taxes foreign corporations on the basis of the continuous and continuing conduct of an active trade or business within the territorial jurisdiction of the U.S. and taxes the trade's or business' worldwide income "sourced" either within or outside of the U.S. . . . The fact that the foreign corporation's head office and place of management are in the U.S. are one factor -- a principal factor -- in determining whether it carries on a trade or business in the U.S. . . .
27 In fact, Ginsburg specifically testified (at p. 6308):
In our opinion, the fact that Norsk was entitled to the benefit of this Section 883 exemption does not alter the fact that its income was effectively connected with a U.S. trade or business, and therefor it is "liable to tax" in the United States by virtue of its effectively connected U.S. trade or business. [Emphasis added.]
28 Norsk's tax liability thus derived from s. 882 of the Internal Revenue Code which provides that a foreign corporation (such as Norsk) engaged in a trade or business within the United States shall be taxed in the same manner as a U.S. corporation only on that portion of its taxable income which is effectively connected with the conduct of its U.S. trade or business. In this respect, for a foreign corporation to be liable, under American law, to taxation in the U.S. it must meet two conditions: (1) it must be "engaged in trade or business in the United States", and (2) it must have income which is "effectively connected" to that trade or business. Clearly, a foreign corporation may have source income which is not effectively connected to its American operations; in that case, the U.S. would not have the jurisdiction to tax such income.
29 The place of management is only one factor in the determination of whether the first condition mentioned above is met. To this end, ascertaining that Norsk is a resident under the Convention because its place of management is in the United States erroneously amounts to elevating a factor used in determining its tax liability into the actual grounds for that tax liability. Place of management is one step removed from the true and immediate basis for tax liability.
30 I further note that, in the determination of whether a company is "engaged in a trade or a business within the United States", other factors may also be considered along with "place of management". These are all analogous to "place of management" and include, but are not limited to: the extent of the activity within the country whose residence is claimed, the location of books and records, the location of the head office, the nationalities of the persons employed, the use of resources, the continuing conduct of the business over a period of time, and the location of the principal place of business. I find it somewhat perverse to have all of these criteria individually elevated to actual grounds for tax liability; nevertheless, such a result logically flows from ascribing such a status to "place of management".
31 With respect, both Muldoon J. and Heald J.A. unfortunately conflated "place of management" and "engaged in business" and consequently introduced a degree of circularity into their reasons. For example, Muldoon J. explicitly found, at p. 6309, that Norsk is liable to tax in the United States on income connected with a trade or business which it carries on in the United States and that both of the experts agreed, in principle, with this conclusion. The fact that Norsk's place of management was in the U.S. was determined to be a "prime criterion" for determining whether Norsk was carrying on a trade or business in the United States. Nevertheless, after arriving at these conclusions, Muldoon J. then went on to find that "place of management", even standing alone, could ground Norsk's U.S. tax liability and hence deem it a U.S. resident under the Convention.
32 In my view, the majority of the Federal Court of Appeal took an even more troublesome approach. It noted, at p. 6111, that Norsk is liable to tax on that portion of its income which is effectively connected with the conduct of its U.S. trade or business but that, in making this finding, various factors are to be considered including: the head office location, the place of management, the extent of the activity within the U.S., the employment of individuals, the use of resources, and the continuity of the conduct of the business over a period of time.
33 In fact, the place of management criterion was found not to be a factor which in itself would determine the corporation's income to be effectively connected with the conduct of its U.S. trade or business. Yet, despite arriving at these conclusions, the Court of Appeal at p. 6112 still found it not unreasonable to conclude, as did the trial judge, that "[t]he reason for which Norsk's income is effectively connected with a trade or business which it actively conducts in the U.S.A., is because Norsk's place of management is located in the U.S.A. where it conducts its trade or business". The majority of the Court of Appeal then further found that Norsk benefitted from residency status under Article IV because its place of management was in the United States. However, the point of the matter is that the finding that Norsk's place of management is a prime factor in its liability to tax in the U.S. does not mean that its U.S. tax liability operates by reason of its place of management in the U.S.
34 This inconsistency was observed by Décary J.A. in dissent. Décary J.A. correctly noted that a foreign corporation is not liable for tax in the United States by reason solely of its domicile, of its residence or of its place of management. Décary J.A. also found, at p. 6115, that the trial judge had erred in determining that Norsk was liable to tax in the U.S. by reason of its place of management:
The reason for which Norsk is liable to tax in the United States is not because its place of management is located in the United States, but because the trade or business it conducts is effectively connected with the United States, that connection being established, amongst various factors, by Norsk's place of management. The nuance is of major significance: liability to tax derives from Norsk's trade or business, not from Norsk's place of management which, in itself, does not make Norsk liable to tax in the United States.
. . .
To say that the fact that the place of management is a factor in determining the very reason of Norsk's liability of tax (i.e. conducting a business...), renders Norsk liable to tax by reason of its place of management, is to transform a factor used in assessing a tax liability that does not fall under article IV, into one of the four criteria recognized by the article. Had the contracting states intended to qualify as residents foreign corporations liable to tax by reason of the conduct of their business, it would have been very easy to add another criterion such as conduct of business or place of business.
35 This analysis has been echoed in the academic literature. For example, Michael Edwardes-Ker writes, in a case-comment on the Federal Court Trial Division judgment (The International Tax Treaties Service, at p. 10.5007):
Muldoon J. seems to have assumed that because Norsk had a place of management in the US, it was liable to tax as a resident (i.e. full tax liability). This is not the case; "place of management" is not a criterion for full tax liability in the US. Norsk was liable to US tax because it had a US trade or business. The fact that this business included a place of management was simply a factor in establishing that a US trade or business existed. . . . [Emphasis by underlining added; italics in original.]
36 Out of this web of nuance flow, in my opinion, two conclusions: Norsk conducted a trade or business connected to the United States and Norsk's place of management was in the United States. Both of these findings of fact appear fully reasonable; however, the veritable lynch-pin of Norsk's U.S. tax liability is the "engaged in a trade or business" criterion, not the "place of management". While the courts below were correct that Norsk's place of management was a factor relevant to its American tax liability, they erred when they concluded that the legal basis of Norsk's tax liability was the fact that its place of management was in the U.S. In other words, the courts below erred in interpreting the expression "by reason of" as found in the Convention.
37 The respondent argues that this Court should not interfere with the findings, allegedly of fact, of the trial judge. It is further submitted that an appellate court should normally only overturn a trial judge's finding of fact if there is evidence of palpable or overriding error.
38 I agree with this latter submission. However, at issue in this appeal are not factual findings, but the trial judge's interpretation of the Convention, this being a conclusion as to law or, in the least, mixed law and fact, and, hence, properly reviewable by an appellate court. I further note that the expert testimony was clear that the legal basis for Norsk's tax liability was the "engaged in a business in the United States" criterion. Therefore, it is proper to revisit the legal conclusions of the trial and Federal Court of Appeal judges and clearly find, as did Décary J.A. in dissent, that Norsk's U.S. tax liability as a foreign corporation arose by reason of the fact it derived some income which was effectively connected to the United States from a business in which it was engaged in the United States. Although the barge income itself may not have been "effectively connected" to the United States, Norsk did have other sources of income that appear to be so connected.
39 Nevertheless, the analysis does not end here. Should the respondent successfully demonstrate that "engaged in a business in the U.S." is a criterion of a nature similar to the enumerated grounds, then Norsk will be deemed to be a resident under the Convention.
40 I agree with the appellant that the most similar element among the enumerated criteria is that, standing alone, they would each constitute a basis on which states generally impose full tax liability on world-wide income: Klaus Vogel on Double Taxation Conventions (1991), at pp. 154-59; Joseph Isenbergh, International Taxation: U.S. Taxation of Foreign Taxpayers and Foreign Income, vol. I (1990), at pp. 326-27. In this respect, the criteria for determining residence in Article IV, paragraph 1 involve more than simply being liable to taxation on some portion of income (source liability); they entail being subject to as comprehensive a tax liability as is imposed by a state. In the United States and Canada, such comprehensive taxation is taxation on world-wide income. However, tax liability for the income effectively connected to a business engaged in the U.S., pursuant to s. 882 of the Internal Revenue Code, amounts simply to source liability. Consequently, the "engaged in a business in the U.S." criterion is not of a similar nature to the enumerated grounds since it is but a basis for source taxation.
41 In sum, I endorse the following excerpt of the judgement of Décary J.A. (at p. 6115):
To say that Norsk, which is not liable to tax by reason of its place of management, is liable to tax by reason of a criterion of a similar nature because its place of management is one of the factors to be considered in determining the very reason of its liability to tax, i.e. the conduct of a business..., is to beg the question and try to enter through a door that has already been closed.
B. What was the Intention of the Drafters of the Convention?
42 On a direct application of Article IV, I hold that Norsk is not a "resident". This conclusion is confirmed when undertaken with an eye to the intentions of the drafters of the Convention and to the goals of international taxation treaties. In other words, I do not believe that Norsk should be considered a resident under Article IV of the Convention nor that the designers of the Convention would have envisioned that it ought to benefit from the preferential tax treatment accorded to residents.
43 Reviewing the intentions of the drafters of a taxation convention is a very important element in delineating the scope of the application of that treaty. As noted by Addy J. in J. N. Gladden Estate v. The Queen, [1985] 1 C.T.C. 163 (F.C.T.D.), at pp. 166-67:
Contrary to an ordinary taxing statute a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated in so far as the particular item under consideration is concerned. [Emphasis added.]
See David A. Ward, "Principles To Be Applied in Interpreting Tax Treaties" (1977), 25 Can. Tax J. 263; see als