The Chairman (orally: July 3, 1975):
1 These are appeals by Ezra Shahmoon against reassessments of the Minister of National Revenue for the taxation years 1958 to 1963 inclusive. The point at issue is whether or not the appellant is taxable on certain profits earned by the disposal in Canada of interests in real estate, or whether he is sheltered from taxation by Article I of the Canada-US Reciprocal Tax Convention. The Minister has sought to tax him on the basis that the appellant had a permanent establishment in Canada and was taxable on profits earned in an adventure in the nature of trade. The appellant denies the existence of a permanent establishment in Canada, and claims that he owes no income tax to the Canadian Government or, in the alternative, not more than the 15% non-resident withholding tax. In any case, he claims to be entitled to a reserve under section 85B of the Income Tax Act as applicable to the years under appeal.
2 In the assumptions of fact listed in paragraph 3 of the respondent's reply to the notice of appeal, in paragraph (a) thereof, the Minister has assumed that the appellant, during the years under appeal, was a resident of Canada. At the opening of the hearing, counsel for the respondent broadened that assumption to include the assumption that, if the appellant was not resident in Canada, he had a permanent establishment in this country, a fact which excludes him from the benefits of the Canada-US Reciprocal Tax Convention.
3 First of all I would like to say a word about the said Convention, so that my approach to such Conventions, should the matter go further, will be on the record. I have recently issued for publication a decision in a case, heard by me some months ago and the name of which at the moment escapes me, in which I had to determine whether or not certain sums received by a retired US Army officer now residing in this country were paid as a pension or as something different, known in American military circles as “retired pay”, the issue being, of course, that, in the case of a pension, payments are taxable in the country in which they are received. In that case I had occasion to refer to the decision of Mr R S W Fordham, QC, then a member and later Chairman of the Tax Appeal Board, in the comparatively old case of William Vincent Saunders v. MNR, 11 Tax A.B.C. 399, 54 D.T.C. 524, where, at page 402 [526] he states:
The accepted principle appears to be that a taxing Act must be construed against either the Crown or the person sought to be charged, with perfect strictness—so far as the intention of Parliament is discoverable. Where a tax convention is involved, however, the situation is different and a liberal interpretation is usual, in the interests of the comity of nations. Tax conventions are negotiated primarily to remedy a subject's tax position by the avoidance of double taxation rather than to make it more burdensome. This fact is indicated in the preamble to the Convention.
4 I am in complete accord with that comment, and it is unusual in tax jurisprudence to come across a case that deals with the interpretation of reciprocal agreements between nations. I feel personally that the government of this country, which was a party to the various agreements, is not desirous of prosecuting cases in the tax courts, but rather prefers to adopt the principle enunciated by Mr Fordham in the Saunders case.
5 The facts before me are that Ezra Shahmoon was born in Baghdad approximately 80 years ago, and that he came to the United States of America in 1941, I believe. He settled in New Rochelle, New York, which is a suburb of Metropolitan Manhattan, and has lived in the same house from that day to the present time. He became a citizen of the United States in 1945, and together with his wife has lived and reared his children in New Rochelle. Both he and his wife have been citizens of that country for some 30 years. In 1952, a man by the name of Jacob Mukamal became interested in obtaining land in the Montreal area. He had other brothers, or at least a brother, and could not with his own resources purchase the land that he had in mind. He apparently interested the appellant in this case in his project as well as other people whose names appear in the various exhibits, most of whom, if not all, came originally from Baghdad.
6 The appellant has, from 1941 to the present time, filed United States income tax returns. He has even been a party to a tax case in the United States pertaining to some land held in Shanghai, and has without question, and I find this as a fact, maintained a permanent residence in New Rochelle, NY since his arrival in the United States in 1941. He entered into several transactions involving land in the Montreal area, and substantial profits were made over the years. In each year when a profit was made the US income tax returns which have been filed show that it was reported to the Internal Revenue Service of the United States as a capital gain and taxed accordingly. The evidence further indicates that this appellant is an orthodox Jew, as is his wife. The evidence indicates that he will not stay in hotels, will not eat off other people's dishes, and generally abides by the orthodox customs of his religion. Much has been made of the fact that for some years he maintained an apartment in Montreal. The apartment was rented, I think, for the sum of $165, or thereabouts, per month. Both he and his wife, in giving evidence, stated that the main purpose for this was convenience, because when they came to Montreal they were able to live in orthodox fashion in accordance with their beliefs. There is also no doubt that they were able to afford this, what might be termed by others, luxury, rather than stay at hotels; and the evidence is clear, and I accept it as a fact, that they used the apartment no more than one or two months a year and usually for two-week periods over the course of the period of time that is relevant in this case.
7 Mr Shahmoon was also president of a corporation by the name of Derby Development Corporation which carried on business in Montreal, and there is no doubt that when he came to Canada to look after, or to do what needed to be done in connection with, his real estate holdings, he used the facilities of Derby Development Corporation for that purpose. He signed a declaration to that effect, as did his late brother, which, amongst other things, shows that he paid no rent for the use of those premises.
8 I have no trouble whatsoever in following the decision in John William Meldrum v. MNR, 2 Tax A.B.C. 63, 50 D.T.C. 232, wherein three members of the Tax Appeal Board set out their views of the meaning of residence, referring particularly to the case of Cooper v. Cadwalader (1904), 5 TC 101, as well as other cases dealing with residency, and finding that the appellant Meldrum was not a resident of Canada at the material time. The fact that he had an apartment here is no different, in my view, from the situation of residents of this country who have apartments in the Southern United States for winter use, some of which are used less than one month a year. Surely it could not be seriously contested that those people are residents of the United States any more than American citizens who normally reside in the United States and have cottages in Ontario or Quebec could be considered Canadian residents for income tax purposes. The question then is whether or not the appellant is caught by the exceptions to Articles I and VIII of the Canada-US Reciprocal Tax Convention in that he had a permanent establishment in Canada. The only evidence that has really been brought forth is a declaration, signed by the appellant and his late brother, which proves conclusively that Derby Development Corporation had a permanent establishment in Montreal. There are literally hundreds of people who are employed by American corporations who come into Canada and do business, but these people are certainly not considered to be Canadian residents or to have a permanent establishment if they attend at an office in this country to transact their business.
9 I cannot find, on the evidence before me, that this appellant ever had a permanent establishment in Canada for the purpose of carrying on his business. His attendances were sporadic, his explanation as to the apartment is acceptable, and I find him in no different position than that of any foreigners, if I may use the term, who transact business in this country without anyone suggesting that they are taxable. I find, in applying a liberal interpretation to the Canada-US Reciprocal Tax Convention, that this man is exempt from taxation in Canada by reason of Article I. I also find that he did not have a permanent establishment in Canada and was at all material times a resident of the United States of America and therefore is not precluded from enjoying the benefits of the provisions of the said Article I. Another aspect of the application of the terms of the Convention, and particularly Article VIII thereof, was raised by the appellant on the basis that this Convention dates back to 1942 at which time the now well- worn phrase “adventure in the nature of trade” became part of our income tax law, and therefore any gain that was made was treated as a “capital gain” in the United States, and this country should not, and cannot, unilaterally change the connotation of whatever was known by that term in 1942 when the Convention was signed.
10 Having come to the conclusion that I have with respect to the matter of a permanent establishment in Canada and the application of Article I I do not find it necessary to make any further finding with regard to any of the other questions raised by the appellant with regard to the interpretation and application of the Convention to the circumstances of this case.
11 The appeals are therefore allowed and the assessments for each of the years under appeal vacated.
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