4145356 Canada Limited v. The Queen

4145356 Canada Limited v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2011-04-21
Neutral citation
2011 TCC 220
File numbers
2008-2315(IT)G
Judges and Taxing Officers
Wyman W. Webb
Subjects
Income Tax Act
Decision Content
Docket: 2008-2315(IT)G
BETWEEN:
4145356 CANADA LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on October 25, 26, 27, 28, 29, November 1, 2010,
January 26, 27 and 28, 2011
at Toronto, Ontario
With written submissions received on February 4, 2011,
February 11, 2011 and February 18, 2011
Before: The Honourable Justice Wyman W. Webb
Appearances:
Counsel for the Appellant:
Al Meghji; Martha MacDonald
Kimberly Brown; Andrew McGuffin
Counsel for the Respondent:
Daniel Bourgeois; Andrew Miller
Pascal Tétrault
____________________________________________________________________
JUDGMENT
The appeal is allowed, with costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled, in determining its tax payable for 2003 under the Income Tax Act, to a foreign tax credit in the amount of $3,199,601 pursuant to subsection 126(2) of this Act.
Signed at Ottawa, Canada, this 21st day of April, 2011.
“Wyman W. Webb”
Webb J.
Citation: 2011TCC220
Date: 20110421
Docket: 2008-2315(IT)G
BETWEEN:
4145356 CANADA LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1] The issue in this Appeal is whether the Appellant is entitled, in determining its tax payable for 2003 under the Income Tax Act (the “Act”), to a foreign tax credit in the amount of $3,199,601 either pursuant to subsection 126(2) of the Act or paragraph 2 of Article XXIV of the Canada - United States Tax Convention.
[2] At the conclusion of the Respondent’s case, the Respondent sought to read into evidence, pursuant to subparagraph 100(1) of the Tax Court of Canada Rules (General Procedure) (the “Rules”), excerpts from the examination for discovery of Donovan Flynn, the nominee of the Appellant. The Appellant objected to the Respondent reading in several portions of the excerpts.
[3] Subparagraph 100(1) of the Rules provides as follows:
100. (1) At the hearing, a party may read into evidence as part of that party's own case, after that party has adduced all of that party’s other evidence in chief, any part of the evidence given on the examination for discovery of
(a) the adverse party, or
(b) a person examined for discovery on behalf of or in place of, or in addition to the adverse party, unless the judge directs otherwise,
if the evidence is otherwise admissible, whether the party or person has already given evidence or not.
As I had stated previously in relation to the Motion made by the Respondent to exclude portions of the excerpts from the examination for discovery of Simmin Hirji, the nominee of the Respondent, that the Appellant wanted to read-in, it seems to me that the qualification “if the evidence is otherwise admissible” is an important qualification to the introduction of the discovery evidence.
[4] The Ontario Court of Appeal in R. v. Dupuis, 23 O.R. (3d) 608, [1995] O.J. No. 1481 stated that:
[22] It has been repeatedly held that the hallmark of admissibility is relevance. In R. v. Fields (1986), 56 O.R. (2d) 213 at p. 228, 28 C.C.C. (3d) 353, this court put it this way:
It is trite law that any evidence to be adduced at trial must meet the legal criteria for its admissibility, of which the sine qua non is its relevance. As stated by the Supreme Court of Canada in Cloutier v. The Queen (1979), 48 C.C.C. (2d) 1 at p. 28, 99 D.L.R. (3d) 577, [1979] 2 S.C.R. 709, "[t]he general rule as to the admissibility of evidence is that it must be relevant."
[5] Both parties submitted written arguments in relation to the main issue in this Appeal (whether the Appellant is entitled to a foreign tax credit) and in relation to the proposed discovery read-ins. The Appellant’s objections to the discovery read-ins are based on relevance and the parole evidence rule. Since the hearing is now concluded I do not propose to deal separately with the admissibility of the discovery read-ins but rather to address the issue if and when a particular matter addressed in the excerpt would be relevant to an issue that is to be decided. Matters that are addressed in the discovery read-ins that are not relevant to any issue to be decided are not admissible.
[6] The Appellant is indirectly a subsidiary of the Royal Bank of Canada. The Appellant acquired, on September 5, 2003, 400 million limited partnership units in Crown Point Investments LP (“Crown Point”), a limited partnership formed under the laws of Delaware, for $400 million. The general partner (Gaskell Management LLC) and the other limited partner (Altier LLC) of Crown Point were indirectly subsidiaries of Bank of America. Under the laws of Delaware, Crown Point was a separate legal entity[1].
[7] Under the Purchase and Sale Agreement between the Appellant and Altier, the Appellant had the right to require Altier to repurchase the limited partnership units, inter alia, on any Period End Date after September 15, 2004 and under the limited partnership agreement Gaskell had the right to acquire the limited partnership units held by the Appellant, inter alia, on any Period End Date after September 15, 2004.
[8] Following the acquisition of the limited partnership units by the Appellant, the partners of Crown Point (with the number of limited partnership units held by each and the contributed capital of each partner) were as follows:
Partners
Number of Limited Partnership Units
Contributed Capital
Percentage of Contributed Capital
Appellant
400,000,000
$400,000,000
24.7678%
Altier
1,200,000,000
$1,200,000,000
74.3034%
Gaskell (General Partner)
0
$15,000,000
0.92829%
Total:
$1,615,000,000
100.00%
[9] Crown Point made a loan of approximately $1.6 billion to Mecklenburg Park, Inc., which was also a subsidiary of Bank of America. Mainly as a result of the income earned in relation to this loan the taxable income of Crown Point was US $28,730,507.
[10] Crown Point filed an “Entity Classification Election” (Form 8832) under U.S. Treasury Regulation §301.7701-3 to be “classified as an association taxable as a corporation”. As a result, for U.S. federal tax purposes, Crown Point was taxable as a corporation and paid taxes in the U.S. in the amount of US $10,055,677 (Cdn $13,233,379[2]). Crown Point was not included as part of the Bank of America group in its consolidated U.S. income tax return.
[11] In filing its tax return under the Act, the Appellant reported income of $9,377,496 (which was only from the one source – Crown Point) and claimed a foreign tax credit in the amount of $3,199,601 (which was the least of the three amounts that the Appellant determined pursuant to subsection 126(2) of the Act). Based on a 24.7678% interest in Crown Point, if the income of Crown Point were determined for the purposes of the Act, this would mean that the income of Crown Point (before taxes) would be $37,861,642[3]).
[12] The Appellant also entered into swap transactions to hedge against currency and interest rate risks.
[13] For U.S. tax purposes, the investment by the Appellant of $400,000,000 was treated as a loan to Altier and the payments made by Crown Point to the Appellant were treated as deductible interest payments by Altier. It appears that the amount distributed to the Appellant by Crown Point was $9,377,496 - $3,277,617 = $6,099,879[4]. Therefore it would appear that Altier, for the purposes of determining its U.S. federal taxes payable, was entitled to claim a deduction of $6,099,879 (or some amount close to this amount). As a result, assuming that the income of Altier was taxed in the U.S. at the same rate as the income of Crown Point and that Altier claimed the deduction, Altier received a reduction in its taxes payable equal to the taxes paid by Crown Point on $6,099,879 (or some amount close to this amount) of its income.
[14] The issue in this appeal is whether the Appellant is entitled to claim a foreign tax credit pursuant to subsection 126(2) of the Act in determining the amount of tax payable under the Act for its 2003 taxation year. Subsection 126(2) of the Act provides in part that:
(2) Where a taxpayer who was resident in Canada at any time in a taxation year carried on business in the year in a country other than Canada, the taxpayer may deduct from the tax for the year otherwise payable under this Part by the taxpayer an amount not exceeding the least of
(a) such part of the total of the business-income tax paid by the taxpayer for the year in respect of businesses carried on by the taxpayer in that country and the taxpayer's unused foreign tax credits in respect of that country for the 10 taxation years immediately preceding and the 3 taxation years immediately following the year as the taxpayer may claim,
(emphasis added)
[15] The only issue in this case in relation to section 126 of the Act is whether the Appellant paid $3,277,617 as business income tax to the U.S. government. The Respondent acknowledged that the amount paid by Crown Point ($13,233,379) to the U.S. government was a tax. However, it is the position of the Respondent that the Appellant did not pay what the Appellant claims was its share of this amount ($3,277,617).
[16] It is the position of the Respondent that in order for the Appellant to have paid the tax the Appellant must be the person who was liable to pay the tax. The Respondent referred to a number of cases. The issue in Re Eurig Estate, [1998] 2 S.C.R. 565, was whether a particular levy imposed by the province of Ontario for grants of letters probate was a fee or a tax. Justice Major, writing on behalf of the majority of the Justices of the Supreme Court of Canada stated that:
15 Whether a levy is a tax or a fee was considered in Lawson, supra. Duff J. for the majority concluded that the levy in question was a tax because it was: (1) enforceable by law; (2) imposed under the authority of the legislature; (3) levied by a public body; and (4) intended for a public purpose.
[17] While this case clearly confirms that the amount paid by Crown Point to the U.S. government was a tax, it does not assist in determining whether, for the purposes of subsection 126(2) of the Act, a person must be liable for the tax in order to find that the person paid the tax.
[18] The respondent also referred to the case of The Queen v. The Bank of Nova Scotia, [1982] 1 F.C. 311. Justice Heald, on behalf of the Federal Court of Appeal, described the issue as follows:
2 The issue in the appeal is whether, for purposes of paragraph 126(2)(a) of the Income Tax Act, R.S.C. 1952, c. 148, as amended, and Article 21(2) of the Canada-United Kingdom Income Tax Agreement *, the U.K. income tax which was imposed on the respondent in respect of the income from its branches in the U.K. for the 1972 taxation year should be translated into Canadian funds:
(a) at the weighted average rate of exchange prevailing in the 1972 taxation year as contended by the respondent and accepted by the learned Trial Judge, or
(b) at the rate of exchange prevailing on January 1, 1974 when the U.K. income tax was paid, as contended by the appellant.
* denotes a footnote reference that was in the original text but which has not been included.
[19] Justice Heald also made the following comments:
3 … It is my opinion that the respondent's liability for U.K. income taxes for the 1972 taxation year arose in 1972 since that is the year when the income creating the liability was earned, even though by U.K. law, the tax was not required to be paid until some 14 months later. I consider that the liability for the U.K. tax attached to the respondent at fiscal year end, namely, October 31, 1972.
… In my view, Parliament clearly intended, in enacting paragraph 126(2)(a) to relieve against double taxation by providing for a tax credit based on the amount of tax payable for a taxation year, by a Canadian resident, on income earned in a foreign country in that taxation year, regardless of when, by the law of that foreign country, the foreign tax was required to be paid.
[20] This case dealt with a timing issue with respect to the calculation of the amount of the foreign tax credit. The taxpayer’s foreign tax credit in that case was determined based on the weighted average rate of exchange for 1972 and the taxpayer was entitled to the credit payable for 1972 even though the taxpayer did not pay the U.K. tax until 1974. This case does not stand for the proposition that in order to claim the foreign tax credit the Appellant must be the person who was liable to pay the foreign tax.
[21] The Respondent also referred to the decision of the Court of Appeal for Ontario in Sentinel Hill No. 29 Limited Partnership et al. v. Attorney General of Canada, 2008 ONCA 132. While this case does deal with a limited partnership, it does not deal with section 126 of the Act and does not assist in determining whether for the purposes of section 126 of the Act the Appellant could be considered to only have paid the tax if the Appellant was also liable for the tax.
[22] In White v. The Queen, 2003 TCC 668, 2003 DTC 1170, [2004] 1 C.T.C. 2581, Mr. White was claiming that he should be permitted to claim a foreign tax credit in relation to certain imputation tax credits that attached to dividends that he had received from an Australian company. Australian residents could apply the imputation tax credits against taxes payable to the Australian government. Justice Bowie stated as follows:
7 There is a more fundamental obstacle to Mr. White's claim, however. Subsection 126(1) only entitles the Canadian taxpayer to a foreign tax credit in respect of tax paid by that Canadian resident taxpayer to a foreign government for the year in question. The tax for which Mr. White claims the credit was not paid by him, but by the Australian corporations that paid dividends to him. He admitted quite candidly when cross-examined that he had paid no tax to the government of Australia for the years in issue.
[23] In this case there is no such admission by the Appellant. The issue in this case is whether the Appellant paid the tax to the U.S. government. In White there were two separate persons who could, depending on where they were resident or the source of income, have a potential liability for taxes under the Act – the Australian company and Mr. White. In this case, since Crown Point was a limited partnership for the purposes of the Act, there is only one person who could have any potential liability for taxes under the Act in relation to the income earned by Crown Point and that person was the Appellant[5]. The decision in White does not assist in determining whether, in dealing with a limited partner of a partnership, the limited partner should be considered to have paid taxes to the U.S. government imposed on that limited partnership that has, for the purposes of the Internal Revenue Code, elected to be classified as a corporation and taxed as such.
[24] The Appellant referred to the decision of the Supreme Court of Canada in United Parcel Service Canada Ltd. v. The Queen, [2009] 1 S.C.R. 657, as support for its argument that the Appellant could be considered to have paid a tax for the purposes of section 126 of the Act, even though that person was not liable to pay such tax. The issue in that case was whether United Parcel Service Canada Ltd. was entitled to $2,900,858 in GST that had been paid in error. Subsection 261(1) of the Excise Tax Act provides as follows:
261. (1) Where a person has paid an amount
(a) as or on account of, or
(b) that was taken into account as,
tax, net tax, penalty, interest or other obligation under this Part in circumstances where the amount was not payable or remittable by the person, whether the amount was paid by mistake or otherwise, the Minister shall, subject to subsections (2) and (3), pay a rebate of that amount to the person.
[25] Justice Rothstein, writing on behalf of the Supreme Court of Canada, stated as follows:
16 However, the Minister says that s. 261(1) cannot be interpreted in a contextual vacuum. The Minister's first argument is that UPS was not the person who paid the amount on account of GST. He says UPS as customs broker acted as an agent for the consignees and that it was the consignees who were liable to pay the GST and not UPS. The Minister says that, for the purposes of s. 261(1), the person who "has paid an amount" is the person who has the legal liability to pay, not the person who simply transmitted the money to the Minister.
17 I cannot agree. This argument would impose an inquiry into liability for payment instead of actual payment where no such inquiry is mandated by the statute. It may well be that it was the consignees of UPS who had the liability to pay the GST on the imported goods. But that does not detract from the fact that in actuality it was UPS -- and UPS alone -- who paid and was out of pocket for the GST. At first blush, the words "or other obligation" in s. 261(1) might be thought to import the notion of liability to pay. However, the words "other obligation" must be read in the context of the provision as a whole. Section 261(1) applies where a person pays an amount as or on account of "tax, net tax, penalty, [or] interest". These terms refer to categories of amounts that are to be paid as or on account of obligations established by the Excise Tax Act. In this context, "other obligation" simply refers to an obligation under Part IX of the Excise Tax Act that is not specifically enumerated in s. 261(1). Actual liability is not relevant in this context since there is no liability to pay tax that was paid in error. If the Minister's argument were correct, a stranger who mistakenly paid GST on goods imported by someone else (perhaps because the names of two importers were similar) could not obtain a rebate. It cannot have been the intention of Parliament that persons who were not liable for GST but paid GST in error could not obtain a rebate.
(emphasis added)
[26] Since that case dealt with GST that was paid in error (and hence there would be no liability to pay the amount that was paid in error), this case is also not directly relevant in determining whether, for the purposes of section 126 of the Act, a person who has paid the tax must be the same person who was liable for the tax.
[27] The Respondent argued that section 126 should be read in isolation and in particular should be read independently of section 96 of the Act. The Supreme Court of Canada in The Queen v. Canada Trustco Mortgage Company, 2005 SCC 54, 2005 DTC 5523 (Eng.), [2005] 5 C.T.C. 215, 340 N.R. 1, 259 D.L.R. (4th) 193, [2005] 2 S.C.R. 601, stated that:
10 It has been long established as a matter of statutory interpretation that “the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament”: see 65302 British Columbia Ltd. v. R., [1999] 3 S.C.R. 804 (S.C.C.), at para. 50. The interpretation of a statutory provision must be made according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole. When the words of a provision are precise and unequivocal, the ordinary meaning of the words play a dominant role in the interpretive process. On the other hand, where the words can support more than one reasonable meaning, the ordinary meaning of the words plays a lesser role. The relative effects of ordinary meaning, context and purpose on the interpretive process may vary, but in all cases the court must seek to read the provisions of an Act as a harmonious whole.
[28] It seems to me that interpreting the words “paid by the taxpayer” in subsection 126(2) of the Act without regard to the other provisions of the Act and in particular without regard to the provisions of section 96 of the Act would be contrary to the approach to be taken in interpreting statutory language as set out by the Supreme Court of Canada. The word used in subsection 126(2) of the Act is “paid”. There is no reference in this subsection to the liability for the payment and no requirement in this subsection that the person who has paid the tax be the same person who has the liability for the tax. It seems to that to read a requirement for liability into this section (or to not do so) I would be required to determine whether the liability for the payment would be required based on a reading of the Act “as a harmonious whole”. A person could have paid an amount without necessarily having the liability to pay such amount. Therefore the word “paid” can support more than one meaning – paid even if there is no liability (as submitted by the Appellant) or paid only if the payor has the corresponding liability to make the payment (as submitted by the Respondent).
[29] Subsection 126(2) of the Act itself provides some assistance in determining how the word “paid” should be interpreted for the purposes of this subsection of the Act. It creates a direct link between the foreign tax credit that may be claimed and the amount of foreign sourced business income. This subsection provides as follows:
(2) Where a taxpayer who was resident in Canada at any time in a taxation year carried on business in the year in a country other than Canada, the taxpayer may deduct from the tax for the year otherwise payable under this Part by the taxpayer an amount not exceeding the least of
(a) such part of the total of the business-income tax paid by the taxpayer for the year in respect of businesses carried on by the taxpayer in that country and the taxpayer's unused foreign tax credits in respect of that country for the 10 taxation years immediately preceding and the 3 taxation years immediately following the year as the taxpayer may claim,
(b) the amount determined under subsection (2.1) for the year in respect of businesses carried on by the taxpayer in that country, and
(c) the amount by which
(i) the tax for the year otherwise payable under this Part by the taxpayer
exceeds
(ii) the amount or the total of amounts, as the case may be, deducted under subsection (1) by the taxpayer from the tax for the year otherwise payable under this Part.
[30] Subsection 126(2.1) of the Act provides that:
(2.1) For the purposes of paragraph (2)(b), the amount determined under this subsection for a year in respect of businesses carried on by a taxpayer in a country other than Canada is the total of
(a) that proportion of the tax for the year otherwise payable under this Part by the taxpayer that
(i) the amount, if any, by which the total of the taxpayer's qualifying incomes exceeds the total of the taxpayer's qualifying losses
(A) for the year, if the taxpayer is resident in Canada throughout the year, and
(B) for the part of the year throughout which the taxpayer is resident in Canada, if the taxpayer is non-resident at any time in the year,
from businesses carried on by the taxpayer in that country
is of
(ii) the total of
(A) the amount, if any, by which
(I) if the taxpayer is resident in Canada throughout the year, the taxpayer's income for the year computed without reference to paragraph 20(1)(ww), and
(II) if the taxpayer is non-resident at any time in the year, the amount determined under paragraph 114(a) in respect of the taxpayer for the year
exceeds
(III) the total of all amounts each of which is an amount deducted under section 110.6 or paragraph 111(1)(b), or deductible under any of paragraphs 110(1)(d) to (d.3), (f), (g) and (j) and sections 112 and 113, in computing the taxpayer's taxable income for the year, and
(B) the amount, if any, added under section 110.5 in computing the taxpayer's taxable income for the year, and
(b) that proportion of the amount, if any, added under subsection 120(1) to the tax for the year otherwise payable under this Part by the taxpayer that
(i) the amount determined under subparagraph (a)(i) in respect of the country
is of
(ii) the amount, if any, by which,
(A) where section 114 does not apply to the taxpayer in respect of the year, the taxpayer's income for the year, and
(B) where section 114 applies to the taxpayer in respect of the year, the total of the taxpayer's income for the period or periods referred to in paragraph 114(a) and the amount that would be determined under paragraph 114(b) in respect of the taxpayer for the year if subsection 115(1) were read without reference to paragraphs 115(1)(d) to (f)
exceeds
(C) the taxpayer's income earned in the year in a province (within the meaning assigned by subsection 120(4)).
[31] The amount that any taxpayer may claim as a foreign tax credit under subsection 126(2) of the Act is limited to the least of three amounts. One of these amounts is the amount of foreign tax paid in respect of the business carried on by the taxpayer in the foreign country. The second amount is determined in accordance with the provisions of subsection 126(2.1) of the Act which amount requires a determination of the taxpayer’s qualifying incomes. “Qualifying incomes” is defined in subsection 126(7) of the Act which provides that:
“qualifying incomes” of a taxpayer from sources in a country means incomes from sources in the country, determined in accordance with subsection (9);
[32] Subsection 126(9) of the Act provides that:
(9) The qualifying incomes and qualifying losses for a taxation year of a taxpayer from sources in a country shall be determined
(a) without reference to
(i) any portion of income that was deductible under subparagraph 110(1)(f)(i) in computing the taxpayer's taxable income,
(ii) for the purpose of subparagraph 126(1)(b)(i), any portion of income in respect of which an amount was deducted under section 110.6 in computing the taxpayer's income, or
(iii) any income or loss from a source in the country if any income of the taxpayer from the source would be tax-exempt income; and
(b) as if the total of all amounts each of which is that portion of an amount deducted under subsection 66(4), 66.21(4), 66.7(2) or 66.7(2.3) in computing those qualifying incomes and qualifying losses for the year that applies to those sources were the greater of
(i) the total of all amounts each of which is that portion of an amount deducted under subsection 66(4), 66.21(4), 66.7(2) or 66.7(2.3) in computing the taxpayer's income for the year that applies to those sources, and
(ii) the total of
(A) the portion of the maximum amount that would be deductible under subsection 66(4) in computing the taxpayer's income for the year that applies to those sources if the amount determined under subparagraph 66(4)(b)(ii) for the taxpayer in respect of the year were equal to the amount, if any, by which the total of
(I) the taxpayer's foreign resource income (within the meaning assigned by subsection 66.21(1)) for the year in respect of the country, determined as if the taxpayer had claimed the maximum amounts deductible for the year under subsections 66.7(2) and (2.3), and
(II) all amounts each of which would have been an amount included in computing the taxpayer's income for the year under subsection 59(1) in respect of a disposition of a foreign resource property in respect of the country, determined as if each amount determined under subparagraph 59(1)(b)(ii) were nil,
exceeds
(III) the total of all amounts each of which is a portion of an amount (other than a portion that results in a reduction of the amount otherwise determined under subclause (I)) that applies to those sources and that would be deducted under subsection 66.7(2) in computing the taxpayer's income for the year if the maximum amounts deductible for the year under that subsection were deducted,
(B) the maximum amount that would be deductible under subsection 66.21(4) in respect of those sources in computing the taxpayer's income for the year if
(I) the amount deducted under subsection 66(4) in respect of those sources in computing the taxpayer's income for the year were the amount determined under clause (A),
(II) the amounts deducted under subsections 66.7(2) and (2.3) in respect of those sources in computing the taxpayer's income for the year were the maximum amounts deductible under those subsections,
(III) for the purposes of the definition “cumulative foreign resource expense” in subsection 66.21(1), the total of the amounts designated under subparagraph 59(1)(b)(ii) for the year in respect of dispositions by the taxpayer of foreign resource properties in respect of the country in the year were the maximum total that could be so designated without any reduction in the maximum amount that would be determined under clause (A) in respect of the taxpayer for the year in respect of the country if no assumption had been made under subclause (A)(II) in respect of designations made under subparagraph 59(1)(b)(ii), and
(IV) the amount determined under paragraph 66.21(4)(b) were nil, and
(C) the total of all amounts each of which is the maximum amount, applicable to one of those sources, that is deductible under subsection 66.7(2) or (2.3) in computing the taxpayer's income for the year.
[33] In this case none of the adjustments as provided in subsection 126(9) of the Act are applicable and therefore the qualifying incomes of the Appellant will be its income from the sources in the United States which is its income as a limited partner in Crown Point. In this particular case since the Appellant’s only source of income was its share of the income of Crown Point and since none of the adjustments contemplated by paragraph 126(2.1)(a) of the Act are applicable, the amount determined under paragraph 126(2)(b) of the Act will be the same whether the Appellant’s income was $9,377,496 or approximately $6 million as the same amount would be used for both the numerator (subparagraph 126(2.1)(a)(i) of the Act) and the denominator (subparagraph 126(2.1)(a)(ii) of the Act). However, since one of the limiting amounts in subsection 126(2) of the Act is based on the income of the Appellant (or any other taxpayer) there is a direct link between the foreign tax credit that may be claimed and the amount of foreign sourced business income.
[34] Section 96 of the Act provides that a partnership (which would include a limited partnership) determines its income as if it were a separate person and allocates to each partner, that partner’s share of such income. Income tax is not imposed at the partnership level but rather at the partner level. Subsection 96(1) of the Act provides, in part, as follows:
96. (1) Where a taxpayer is a member of a partnership, the taxpayer's income, non-capital loss, net capital loss, restricted farm loss and farm loss, if any, for a taxation year, or the taxpayer's taxable income earned in Canada for a taxation year, as the case may be, shall be computed as if
(a) the partnership were a separate person resident in Canada;
(b) the taxation year of the partnership were its fiscal period;
(c) each partnership activity (including the ownership of property) were carried on by the partnership as a separate person, and a computation were made of the amount of
(i) each taxable capital gain and allowable capital loss of the partnership from the disposition of property, and
(ii) each income and loss of the partnership from each other source or from sources in a particular place,
for each taxation year of the partnership;
…
(f) the amount of the income of the partnership for a taxation year from any source or from sources in a particular place were the income of the taxpayer from that source or from sources in that particular place, as the case may be, for the taxation year of the taxpayer in which the partnership's taxation year ends, to the extent of the taxpayer's share thereof; and
…
[35] There was no suggestion in this case that Crown Point was not a partnership for the purposes of the Act. The Appellant, in determining its income for the year from the partnership, was required to compute the income of Crown Point as if Crown Point were a separate person resident in Canada. Therefore its income was to be determined in accordance with the Act, not in accordance with any rules that may be applicable in determining income for the purposes of the Internal Revenue Code. In this case, under the governing legislation of Delaware, Crown Point was a separate legal entity. Therefore Crown Point was already a separate person. However it seems to me that the Appellant’s share of the income of Crown Point is still to be determined in accordance with the provisions of section 96 of the Act even though Crown Point is a separate legal entity under Delaware law. There is no distinction in section 96 of the Act between general partnerships and limited partnerships nor is there any distinction between limited partnerships which, under the laws under which the limited partnership were formed, are separate legal entities and those that are not separate legal entities.
[36] In The Queen v. Robinson, [1998] 2 F.C. 569, Justice Stone, writing on behalf of the Federal Court of Appeal, stated that:
13 That the income of a partnership receives particular treatment under various provisions of the Income Tax Act is a point well made by L. R. Hepburn, Limited Partnerships (Scarborough, Carswell, 1992), at page 5-3:
The basic principles for the taxation of income, transactions between the partners and the partnership, and transactions involving partnership interests apply equally to both general and limited partnerships and their partners. The fact that the liability of certain partners may be limited does not alter the manner in which partnership income is taxed . . . .
Although a partnership itself is not a taxpaying entity, the income (or loss) from the partnership activities is determined at the partnership level as if it were a separate person. Such income (or loss), whether or not actually distributed, is taxed on an annual basis in the hands of the members of the partnership according to their share. Income from the partnership generally retains its characteristics as to source and nature in the hands of the partners.
[37] Therefore the Appellant’s share of the income of Crown Point does not depend on whether the partnership is a general partnership or a limited partnership. It also seems to me that it should not depend on whether or not the limited partnership is a person under the domestic laws under which the partnership is formed. The Appellant is required to include in its income for the purposes of the Act (which would include for the purposes of subsection 126(2) of the Act) its share of the income of Crown Point even though Crown Point is a separate legal entity under the laws of Delaware. The status of Crown Point as a separate legal entity under the laws of Delaware does not affect the treatment of Crown Point as a limited partnership for the purposes of the Act and therefore does not affect the determination of the amount or the source of income to be reported by the Appellant. Since the income of the Appellant is its share of the income of Crown Point (from the same sources of income), in determining whether the Appellant paid foreign taxes in relation to this income, the amount of foreign taxes paid by the Appellant should be its share of the foreign taxes paid by Crown Point in relation to that same income, even though Crown Point is a separate legal entity under the laws of Delaware. The Appellant would bear the economic burden of such taxes as such taxes would have to be deducted from the amount that could be distributed to the Appellant.
[38] It seems to me that, in this case, if the Appellant’s share of the income of Crown Point for the purposes of the Act was $9,377,496 (as alleged by the Appellant) then the Appellant would have paid $3,277,617 in taxes to the U.S. government for the purpose of the Act. If the Appellant’s share of the income of Crown Point was approximately $6 million (which was the amount that the Appellant received), as alleged by the Respondent, then it seems to me that the Appellant would not have paid $3,277,617 in taxes to the U.S. government for the purpose of the Act.
[39] The Respondent’s position, as stated in the written argument submitted by counsel for the Respondent is that:
… the Appellant was not entitled to a 25% share of the profits realized by Crown Point L.P. It was entitled to a fixed return of no more than 4.7303% per annum on the amount it advanced to Altier.
[40] The tax consequences to the Appellant are to be determined in accordance with the provisions of the Act, not in accordance with the provisions of the Internal Revenue Code and U.S. tax law. While for U.S. tax law purposes the transactions were recharacterized as a loan from the Appellant to Altier, for the purposes of the Act, the tax consequences to the Appellant are to be determined on the basis that the Appellant was a limited partner of Crown Point. During the opening statement at the commencement of the hearing Mr. Bourgeois (counsel for the Respondent) stated that:
… The Minister assessed on the basis that that was of the correct view, that the appellant's entitlement to profits was 25 percent of the pre‑tax profits of Crown Point LP. We've pled an alternative fact. We've stated that that is not a proper interpretation of the partnership agreement because the only way the Appellant can share in the profits of Crown Point LP is through the distributions that are spelled out very clearly in the partnership agreement that say regardless of how many profits, regardless of whether or not the U.S. tax rate falls down to 10 percent, the only money that you can make, the only return that you can make as a limited partner is 4.7303 percent of the amount that you invested, which is $400 million. We're not re‑characterizing the transaction as a loan. It is partnership agreement we're interpreting.
(emphasis added)
[41] The reference in the Respondent’s written argument to a fixed return “on the amount it advanced to Altier” suggests that the Respondent is attempting to recharacterize the transaction as a loan. The word “advanced” and referring to “Altier” certainly suggest this. Interpreting the partnership agreement would require language such as a fixed return on its investment in Crown Point not on the amount it advanced to Altier (a different person). It is not appropriate for counsel for the Respondent to clearly state at the commencement of a hearing that the Respondent is not recharacterizing the transaction as a loan but use language in its written arguments submitted at the conclusion of the hearing that suggest that it is attempting to recharacterize the transaction. The fact that this language may have been the language used in the Reply does not justify repeating it in the closing argument following a very clear statement at the commencement of the hearing that the Respondent was not recharacterizing the transaction.
[42] In any event, Justice McLachlin (as she then was) in Shell Canada Ltd. v. The Queen, [1999] 3 S.C.R. 622, writing on behalf of the Supreme Court of Canada, stated that:
39 This Court has repeatedly held that courts must be sensitive to the economic realities of a particular transaction, rather than being bound to what first appears to be its legal form: Bronfman Trust, supra, at pp. 52-53, per Dickson C.J.; Tennant, supra, at para. 26, per Iacobucci J. But there are at least two caveats to this rule. First, this Court has never held that the economic realities of a situation can be used to recharacterize a taxpayer's bona fide legal relationships. To the contrary, we have held that, absent a specific provision of the Act to the contrary or a finding that they are a sham, the taxpayer's legal