http://decision.tcc-cci.gc.ca/site/tcc-cci/decisions/en/item/66377/index.do 
Conrad Black v. The Queen[1] (January 14, 2014) is one of the most complex tax treaty cases the Tax Court has dealt with in recent years. The appellant, Conrad Black, is of course a famous Canadian businessman and author. He became resident of the United Kingdom in 1992 and remained resident (but not domiciled) there throughout 2002. Under the Canada/UK Treaty he was deemed a resident of the UK in 2002 notwithstanding that he was also legally resident in Canada. The dispute concerned seven alleged items of income. The largest item (income from offices and employment) arose in the United States but was never remitted to or taxed in the UK. Two items, dividends and interest, arose in Canada. The remaining four items represented alleged taxable benefits in one form or another (by far the largest stemming from Mr. Black’s alleged personal use an airplane to which Hollinger International Inc. had access). None of the alleged benefits were subject to tax in the UK.[2] Mr. Black asserted that all seven items were exempt from Canadian taxation under the provisions of the Canada/UK Treaty. The Crown asserted that the Treaty did not apply to any of the items.
The Treaty issue did not proceed to trial but was resolved on an application under section 58 of the
Tax Court of Canada Rules (General Procedure) for determination of a point of law:
[1] This a determination of the following question of law made pursuant to section 58 of the
Tax Court of Canada Rules (General Procedure):
Whether, in view of the
Canada-United Kingdom Income Tax Convention (1978) and the
Canada-United Kingdom Income Tax Convention Act (1980) the Minister of National Revenue (“Minister”) may assess tax against the applicant on the basis that he was a resident of Canada for purposes of the Income Tax Act on any of the items described in subparagraphs 5(i) to (vi) and subparagraph 5(viii) of the Amended Amended Notice of Appeal.
[2] There is no issue that, absent the Canada –
U.K. Tax Convention, for purposes of the
Income Tax Act (“Act”), the applicant was a resident of Canada in 2002. As a resident of Canada, he is required by Part I of the Act to pay tax on his worldwide income. In 2002, he was also a resident of the U.K. for purposes of U.K. tax. Article 4 of the Convention defines the term “resident of a Contracting State” for the purposes of the Convention and provides tie-breaker rules for dual residents. By virtue of paragraph (a) of Article 4(2) of the Convention, the applicant was deemed to be resident of the U.K. and not Canada. The Minister assessed the applicant income tax for 2002 on the Assessed Items described in subparagraphs 1(a) to 1(g) of the Amended Agreed Statement of Facts on the basis he was a resident of Canada “for purposes of the Act” in 2002. These amounts included income derived from duties of offices and employments performed outside of Canada.
[3] The primary issues in considering the question to be determined are:
a) whether Article 4(2) of the
Canada‑U.K. Tax Convention deeming the applicant (by the tie breaker rule) to be resident of the United Kingdom (“U.K.”) for the purposes of the Convention overrides the provisions of the
Income Tax Act so as to prevent the Minister of National Revenue (“Minister”) from assessing the applicant under Part I of the
Income Tax Act certain amounts of income described in paragraph 1 of the Amended Agreed Statement of Facts (“Assessed Items”) in 2002 as resident of Canada for purposes of the Act; and
b) whether or not Article 27(2) of the Convention applies to enable the Minister to assess the applicant under Part I of the Act as a resident of Canada on any Assessed Items.
Evidence on the application was adduced by means of an extensive Amended Agreed Statement of Facts:[3]
[4] The matter proceeded by way of the following Amended Agreed Statement of Facts:
1. By a series of reassessments, the last of which (the “Reassessments”) is the subject of this appeal, the Minister of National Revenue assessed tax against the applicant under Part I of the
Income Tax Act (the “Act“) on the following amounts [referred to in these reasons as “Assessed Items”]:
(a) $2,862,385 on account of incomes from the duties of offices and employments performed by the applicant outside of Canada;
(b) $90,291 on account of the value of the benefit assumed by the Minister to have been received by the applicant from 10 Toronto Street Inc (“10 Toronto”) for the security paid in connection with the applicant’s home at 26 Park Lane Circle, Toronto;
(c) $87,834 on account of the value of the benefit assumed by the Minister to have been received by the applicant from The Ravelston Corporation (“Ravelston”) for an amount paid to John Hillier;
(d) $326,177 on account of taxable dividends received by the applicant;
(e) $28,035 on account of interest and other investment income received by the applicant;
(f) $365,564 on account of benefits which the Minister assumed that the applicant was deemed to have received under subsection 15(1), subsection 15(9) and subsection 80.4(2) of the Act in respect of indebtedness owed by him to Conrad Black Capital Corporation (“CBCC”); and
(g) $1,367,055 on account of benefits that the Minister assumed had been conferred upon him as a result of his use of an airplane to which Hollinger International Inc. had access and which the applicant used.
2. The Reassessment was made on the basis that the applicant was a resident of Canada for purposes of the Act in the 2002 taxation year.
3. The respondent takes the position that the benefits described in subparagraphs 1(b) and (c), respectively, were conferred to the applicant in respect of, in the course of, or by virtue of an office or employment the applicant held with 10 Toronto and Ravelston, respectively, under paragraph 6(1)(a) of the Act.
4. The respondent takes the following alternative position with respect to the interest benefit described in subparagraph 1(f): that the benefit was conferred on the applicant by virtue of a previous or current office or employment the applicant held with CBCC under subsections 80.4(1) and (9) of the Act.
5. The respondent takes the position that the airplane benefit described in subparagraph 1(g) was conferred on the applicant in respect of, in the course of, or by virtue of an office or offices or employment or employments held by the applicant with one or more of Hollinger Inc., Hollinger International Inc., and Ravelston under paragraph 6(1)(a) of the Act. In the alternative, the respondent takes the position that the benefit was received by the applicant by virtue of his direct or indirect shareholding in one or more of those corporations under subsections 15(1), 56(2) or 246(1) of the Act.
6. The applicant became resident of the United Kingdom under the law of the U.K. in 1992 and remained so resident throughout 2002.
7. The applicant was, in the 2002 taxation year, apart from the provisions of the
Canada‑United Kingdom Income Tax Convention (1978) (the “Convention“) as enacted by the
Canada‑United Kingdom Tax Convention Act (1980) (the “Convention Act“), a resident of Canada for purposes of the Act.
8. The applicant was not resident in another country, other than Canada or the U.K. in 2002. Nor did he become resident of any other country between 1992 and 2002.
9. By virtue of paragraph 2 of Article 4 of the Convention Act, the applicant was deemed to be a resident of the U.K.
10. The applicant was resident of, but not domiciled in the U.K. As he was not domiciled in the U.K., the applicant was subject to tax in the U.K. only on such portion of his non U.K. source income as was remitted to or received in the U.K.
11. None of the amounts referred to in subparagraphs 1(b) through (g) was remitted to or received in the U.K. and therefore none was subject to tax in the U.K.
12. The Minister of National Revenue assumed that the amount referred to in subparagraph 1(a) was in respect of the duties of offices or employments performed in the U.S.
13. The applicant says that the amount referred to in subparagraph 1(a) was in respect of the duties of offices or employments performed in the U.S. and the U.K.
14. To the extent that the amount referred to in subparagraph 1(a) relates to the duties or offices or employments performed in the U.K., it was not remitted to or received in the U.K. but was subject to tax in the U.K.
15. To the extent that the amount referred to in subparagraph 1(a) relates to the duties of offices or employments in the U.S., it was not remitted to, received in or subject to tax in the U.K.
16. The applicant reported in his return of income for 2002, and the Minister included in his income by the Reassessment, the amount of $808,226 derived from the duties of offices and employments performed by him in Canada.
17. If the applicant was a resident of Canada for purposes of the
Act, then the amount of $808,226 was properly included in computing his income as a resident.
18. If the applicant was not a resident of Canada for purposes of the
Act, then the amount of $808,226 was properly included in computing his income by virtue of subsection 2(3) and subparagraph 115(1)(a)(i) of the
Act.
19. If the applicant was not a resident of Canada for purposes of the Act, the the Minister was not entitled to assess tax against the Applicant under Part I of the Act on any of the items referred to in paragraph 1.
20. If the applicant was a resident of Canada for the purposes of
Act, the then Minister
(a) was entitled to assess tax against the applicant under Part I of the Act on the amounts referred to in subparagraph 1(a) that relate to the duties of offices or employments performed outside the U.K.; and
(b) was entitled to assess tax against the applicant under Part I of the
Act on each of the items referred to in subparagraphs 1(b) through 1(g), subject to the determination at trial of whether, and if so, the extent to which, the applicant received taxable benefits in the amounts described in subparagraphs 1(b), (c) and (g).
[Footnotes omitted}
The first point the court had to decide was whether the “tiebreaker” rule under the Canada/UK Treaty prohibited Canada from taxing the seven disputed items of income. After an extensive review of authorities the court concluded that the Treaty should not be interpreted as ousting Canada’s jurisdiction to tax the seven items in question as they did not come within the ambit of the Treaty:
[51] Article 4(2) provides preference criteria for instances where a taxpayer is a resident of both contracting states. These tiebreaker rules deem a dual resident to be a resident of either Canada or the U.K. for the purposes of the
Convention. Once a taxpayer is a resident of either the U.K. or Canada for the purposes of the Convention, the other Articles of the
Convention operate to relieve taxation and allocate taxing authority. That is what the
Convention does: it allocates to each country the authority to tax. That a person is resident of the U.K. for
Convention purposes does not affect his or her status under Canadian law for non‑treaty purposes.
[52] As respondent’s counsel stated, Canada is required by international law to implement the substance of the provisions of the Convention. To respect its obligation, Canada need not treat the applicant as a non‑resident of Canada for the purposes of the
Act. Canada’s responsibility is to insure that the applicant can obtain relief from Canadian taxation to which he is entitled under the Convention.
[53] In summary, a liberal and purposive approach must be adopted when interpreting tax treaties, not a mechanical approach. I must look to the plain language of the treaty and to the intent of the parties. When looking for an inconsistency between the
Act and a tax convention, it is the results that should be examined. An inconsistency only occurs if the result of the application of the
Act is in contradiction with, or in violation of, the purposes of the Convention and I have not found this to be.
[Footnotes omitted]
The court next turned its attention to Article 27(2) of the Treaty:
2. Where under any provision of this Convention any person is relieved from tax in a Contracting State on certain income and, under the law in force in the other Contracting State, that person is subject to tax in that other State in respect of that income by reference to the amount thereof which is remitted to or received in that other State, the relief from tax to be allowed under this Convention in the first-mentioned State shall apply only to the amounts so remitted or received.
The Crown’s position was that Article 27(2) justified the imposition of the tax in question:
[16] Contrary to the applicant’s reading of Article 27(2), the respondent’s view of that provision is that where Canada provides the applicant with relief from taxation on certain income under any provision of the Convention and the income is subject to tax in the U.K. by reference to the amount that is remitted or received in the U.K., Canada may tax the amount of income that has not been remitted to, or received in, the U.K. Canada may tax the applicant as a resident of Canada, again without restrictions imposed by the Convention, on his employment income, including benefits, and dividends and interest. And the Minister so assessed the applicant for 2002.
The taxpayer’s counsel anticipated this position and countered as follows:
[11] Counsel for the applicant anticipated the respondent’s submissions on Article 27(2) of the
Convention. Counsel argued that Article 27(2) of the Convention has no application to the matter at bar. It does not entitle the Minister to assess tax against the applicant under Part I of the Act on his non‑Canadian office and employment (“O&E”) income or any of the other Assessed Items. Article 27(2), he asserts, applies only to limit the application of Articles 10, 11 and 12 of the
Convention, provisions that relate to dividends, interest and royalties.
[12] Counsel explained that a non‑resident of Canada who receives dividends from a Canadian source is ordinarily subject to a 25% withholding tax under Part XIII of the
Act. The Convention provides the non‑resident with relief since, under the Convention, the withholding tax for individuals is 15% on dividends, for example. However, if the dividend is not remitted or received in the U.K., any relief would be denied: the 25% withholding tax under the
Act would be chargeable.
The court rejected the taxpayer’s submission and held that Article 27(2) acted to permit Canada to tax the amounts at issue:
[64] The applicant’s submission with respect to Article 27(2) is based wholly on the assumption that the applicant was not subject to tax in Canada on the Assessed Items since he was a non‑resident of Canada in 2002. And that is the applicant’s problem. I have determined that he was a resident of Canada in 2002 for the purposes of the Act and, as such, liable for tax on his world income subject to any allocation by the
Convention of taxing power between Canada and the U.K. Article 27(2) does apply to the applicant and the Canadian tax authority may assess the applicant since he was resident of Canada in 2002.
[65] The applicant’s O&E income in 2002 has its source in the United States, which is not party to the
Convention. A number of commentators, such as Professor Vogel, are of the view that the purpose of Article 27(2) is to allow the state of source to tax income that has not been remitted to the person’s country of residence. If I were to accept this interpretation, respondent’s counsel submits, Canada would not retain the right to tax the applicant’s O&E income derived from his employment in the United States in accordance with Part I of the
Act. For this to be correct, that is Canada’s right to tax is limited, counsel submits, words have to be read into the provision since there is no reference in Article 27(2) to the source of income or to the state in which it arises. (Article 27(2) speaks to relief of tax in a Contracting State and the person being subject to tax by reference to amounts remitted or received in the other Contracting State.)
[66] Counsel for respondent referred to several tax conventions to which Canada is a party that contain a provision permitting it to tax income that has not been remitted to the person’s country of residence. In some cases under such a provision, Canada, for example, may tax the income only where it is the source of the income while others provisions are similar to Article 27(2) that do not refer to a source. The U.K. also has entered different tax treaties where there are and are not references to source.
[67] I agree with respondent that reading the words such as “arising in Canada” into Article 27(2) would distort the intended meaning of that provision of the Convention. I cannot fathom that Canadian and British negotiators would agree to hand over any taxing authority to a third country, in the case of the applicant, income from employment in the United States, to the Americans. The applicant was resident in Canada for purposes of the Act in 2002. As resident of Canada, he is subject to tax on his worldwide income, including income from employment in a third state unless the Convention determines otherwise, which it does not.
[68] Therefore, I determine that the Minister of National Revenue may assess tax against the applicant on the basis that he was a resident of Canada for purposes of the
Income Tax Act on any of the items described in subparagraphs 5(i) to (vi) and subparagraph 5(viii) of the Amended Amended Notice of Appeal.
[Footnotes omitted]
Thus, subject to an almost certain intervening appeal to the Federal Court of Appeal, the stage is set for the second step of these proceedings: a trial in the Tax Court to determine the quantum of the “benefit” component of the 2002 assessment.
Comment: This case is somewhat odd in that there appear to be no clear international precedents on the taxation of unremitted amounts under “tiebreaker” provisions of OECD based tax treaties.[4] In the case of the income from offices and employment arising in the United States there seems to be no suggestion that Canada could have taxed these amounts had they been remitted to the UK and subject to tax there in 2002. What would be the case if they were remitted to the UK subsequent to 2002, the taxation year in question? Also troubling are notes 37-39 to the Reasons for Judgment which outline provisions in both Canadian and British tax treaties where provisions similar to Article 27(2) of the Canada/UK Treaty in some cases confine the provisions to sources arising in the contracting state (e.g., Canada could not tax sources not arising in Canada)[5] and in some cases are silent as to where the source of the income might arise. What then is the appropriate default reading of such rules?
This is an important decision that could benefit from further judicial and academic reflection.
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[1] 2014 TCC 12.
[2] None of the benefits were “remitted to the UK”. It does not appear clear from the decision whether the UK would have asserted a jurisdiction to tax any of these benefits, remitted to the UK or not – or how, if at all, the “remitted” test would apply to such benefits.
[3] Neither party appears to have adduced any expert evidence which is somewhat unusual in a treaty case of this complexity.
[4] At least none appear to be cited in the Reasons for Judgment.
[5] There appears to be a typographical error in note 37. The reference to the Canada/Malta Treaty should probably be to Article 28(3), not Article 28(2).