The reasons are also now available online in St. Michael Trust Corp. v. The Queen, 2010 FCA 309, aff’g Garron Family Trust v. The Queen, 2009 TCC 450, in which the Federal Court of Appeal also dismissed the taxpayer’s appeal.

The CRA and the Department of Justice are having a good fall when it comes to attacking arrangements involving offshore trusts.

Mr. Niemeijer was a commercial airline pilot with KLM Royal Dutch Airlines.  He was a resident of Canada, but KLM is based in Amsterdam and Mr. Niemeijer had his paycheques issued in The Netherlands.  KLM made several deductions from Mr. Niemeijer’s pay including an amount for Dutch Health Insurance premiums. The deductions were compulsory and variable depending on income. 

The court held that this kind of fee is not a tax as defined by Article 2 of the Canada-Netherlands Income Tax Convention:

1.      This Convention shall apply to taxes on income imposed on behalf of each of the States, irrespective of the manner in which they are levied.

2.      There shall be regarded as taxes on income all taxes imposed on total income, or on elements of income, including taxes on gains from the alienation of movable or immovable property, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation.

…

4.      The Convention shall apply also to any identical or substantially similar taxes which are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. The States or the competent authorities of the States shall notify each other of any substantial changes which have been made in their respective taxation laws.

The court then distinguished between taxes and social security charges, adopting Asscher v. Staatssecretaris van Finacikn, [1996] All ER (EC) 757.  That court held that there is a fundamental difference between a tax, which does not give rise to an entitlement to a specific benefit, and a social security contribution which does.

The applicability of this decision to US-Canadian taxes is questionable because Article 2(iii) of the Canada-US Tax Convention provides that social security taxes are taxes under the treaty.  However, the proposed US health care reform would require purchase of private insurance plans on penalty of a fine.  Under the Income Tax Act (Canada) fines do not typically qualify for tax relief. Would the private insurance premiums qualify as a social security tax under article 2(iii) of the treaty?  If they do, would the fines also qualify for treaty relief?  Can payments made to private companies even be thought of as taxes let alone social security taxes?

The court in Niemeijer took a narrow view of what is a “tax” despite the broad wording of Article 2 of the Dutch treaty.  Given the similarity of Article 2 in the Dutch and US treaties, the case is informative in the Canada/US context.  The court’s narrow reading seems to indicate a disinclination to grant tax relief in this type of situation, which in the Canada/US context, depending on the structure of the health reform legislation, could lead to double taxation or potentially unequal tax treatment for premiums vs. fines.

The CRA took the position that the penalty does apply. According to the CRA, if a non-resident corporation fails to file a return, it is subject to a penalty under subsection 162(1), even if its income is nil, because in that case the penalty is nil as well (see CRA technical interpretation 2006-0195531).

One of David Bazar’s clients fell afoul of this position: the client was assessed a penalty under 162(2.1) even though it did not have any taxable income. David took the case to Tax Court and won. See Goar, Allison & Associates Inc. v. The Queen, 2007-3173(IT)I.

David is attempting to obtain a copy of the Judge’s reasons, which were delivered from the bench yesterday. I will see whether I can publish them here.

[47] The scheme of section 231.6 suggests that Parliament was concerned that it could be unduly onerous for a person to be required to produce material located outside Canada and in the possession of another person, and that the section may operate in an unduly extraterritorial manner. While these concerns may be taken into account on a review by a judge for unreasonableness, they are largely irrelevant to the information (bulky as it may be) that is the subject of the requirement in the present case.

[48] This is because, with the click of a mouse, the appellants make the information appear on the screens on their desks in Toronto and Vancouver, or anywhere else in Canada. It is as easily accessible as documents in their filing cabinets in their Canadian offices. Hence, it makes no sense in my view to insist that information stored on servers outside Canada is as a matter of law located outside Canada for the purpose of section 231.6 because it has not been downloaded. Who, after all, goes to the site of servers in order to read the information stored on them?

[49] Nor is the extraterritorial application of the Act a significant issue on the present facts. For example, the agreements with eBay Canada expressly provide that they may disclose confidential “eBay System Information” (which the appellants say includes information about PowerSellers) which “is required to be disclosed by order of any court”: Appeal Book, vol. II, pp. 295-96. Nor does the requirement oblige a person outside Canada to do anything.

Many Canadian businesses that ship products into the state of Michigan may now be surprised to learn that they are subject to the gross receipts tax component of the Michigan Business Tax (MBT). Also, many Canadian businesses that historically did not have any Michigan sales under the old sourcing rules may now have Michigan sales for purposes of determining apportionment for the MBT and therefore may have a significant MBT liability if total Michigan sales are more than $350,000 during the year.

The Crown argued as follows:

[11] The position of the Respondent in this case is that there was no liability to pay any amount to the US government as taxes in relation to this disposition of shares by the Appellant. The Appellant was neither a resident of the United States nor a citizen of the United States. The Appellant worked in Toronto and was a resident of Canada. He is also a Canadian citizen. The position of the Respondent was that any gain realized by the Appellant as a result of the disposition of the shares will be exempted from US tax as a result of the application of Article XIII of the Canada ‑ US Tax Convention.

The Court refused to allow the taxpayer to claim a foreign tax credit, and it quoted from the Tax Court’s decision in Meyer v. The Queen, 2004 TCC 199, at ¶22:

With that said, I wish to emphasize that it is always open to the taxpayer to bring evidence that the foreign tax paid was not gratuitously paid without basis under the laws of the foreign jurisdiction. That is a question this Court can determine but the onus is on the taxpayer. The Appellant chose to ignore that onus and simply wanted the CCRA to work it out with the U.S. Treasury or Internal Revenue Service and leave him out of it. This is not an acceptable position in my view. That is, while the language of section 126 does not ultimately permit the CCRA to deny a credit because it has reason to believe that the foreign tax has been erroneously calculated under the laws of that foreign jurisdiction or is limited by provisions of the tax Treaty between that jurisdiction and Canada, nothing prevents it from taking that position and putting the onus on the taxpayer to show that such belief is not well-founded. In any event Article XVIII, paragraph 2(a), expressly provides that the U.S. cannot charge a tax in excess of 15% in respect of pensions received from the U.S. by a Canadian resident. Article XXIX, paragraph 3, provides that this limitation applies to citizens of the U.S. An excess amount paid then is not a “tax”.

The Court in Marchan concluded:

[26] The Appellant has failed to establish that the amounts withheld by the brokerage firm were a tax paid to the United States as the Code Collection provision referred to above was incomplete (as the regulations referred to in this provision were not submitted) and as the Appellant has failed to take any action in relation to his right to claim an exemption under the Canada – US Tax Convention. Therefore the appeal is dismissed without costs. The Appellant had also raised the issue of a deduction under subsection 20(12) of the Act. However, since a deduction under this section would also be based on the non-business income tax paid by the Appellant, the failure of the Appellant to establish that the amounts withheld by the brokerage firm were a tax paid to the United States, also means that no deduction would be available to the Appellant in this case pursuant to subsection 20(12) of the Act.

The appellant paid certain amounts to a non-resident that the appellant deducted in computing income on the basis of a ruling received from the CRA. Because the amount was deductible (or so the appellant thought), the appellant was required to withhold and remit amounts of withholding tax under Part XIII of the Act. Under its agreement with the non-resident, the appellant grossed up the amount payable to the non-resident and deducted and remitted Part XIII tax on the grossed-up amount.

The CRA later reversed its ruling and denied the appellant a deduction for the amounts paid to the non-resident. The appellant, understandably enough, claimed that it should receive a refund of the Part XIII tax that it had paid (in effect), but the CRA denied the claim on the basis that only the non-resident was entitled to claim back the withholding tax because Part XIII, legally, imposes tax on the non-resident payee. The appellant then launched a suit in the Superior Court on the grounds that the CRA had been unjustly enriched.

The Superior Court dismissed the action on a motion by the Crown, and the Court of Appeal upheld that decision. The Court of Appeal, unsurprisingly, held that the Act provides a complete code for resolving tax disputes. It was too bad for the appellant that it had borne the economic cost of the tax by entering into a gross-up agreement with the non-resident that removed any incentive it had to claim back the Part XIII. The Court wrote (at ¶13):

It would appear that if the person resident in Canada who is obliged to withhold and remit to CRA wants the ability to claim a refund from CRA in case of an incorrect or over payment, it must have an assignment or other legal arrangement with the non-resident that allows the resident to assert the non-resident’s rights. Without such an arrangement, no one other than the non-resident is owed a remedy; therefore there is no gap in Part XIII.

The moral of the story? If your agreement with a non-resident requires you to remit and withhold tax on amounts paid to the non-resident, and anything in your agreement reduces or eliminates the incentive the non-resident would otherwise have to claim that tax back in the appropriate circumstances, be sure that your agreement allows you to assert the claim on the non-resident’s behalf.

The Department of Finance announced today that it has appointed a panel on Canada’s international taxation system.