[1] This is an appeal from a judgment of the Tax Court of Canada delivered on December 11, 2002 (reported as [2003] 2 C.T.C. 2140) which determined the meaning of the word 'income' used in Article VI (1) of the Canada- Ireland Income Tax Agreement (the Treaty) without reference to the Income Tax Act, R.S.C. 1985 c. 1 (5^th Supp.) (the Act). That article provides as follows:

The rate of Canadian tax on income.... derived from sources within Canada by a resident of Ireland shall not exceed 15 per cent.

II. Issue

[2] The issue on appeal is whether the Tax Court Judge erred in concluding that the term 'income' in the Treaty applies to the entire capital gain made by the appellant on his shares disposition rather than on his taxable capital gain. The specific error alleged is in concluding that the meaning of the term 'income' in the Treaty could be determined without reference to the Act particularly taking into account section 3 of the Income Tax Conventions Interpretation Act, R.S. 1985, c. I-4.

[3] For the reasons which follow, I am persuaded that the term 'income' in Article VI (1) of the Treaty means taxable capital gain and not capital gain.

III. Factual Background

[4] A brief recital of the facts is necessary before dealing with the various arguments.

[5] From 1996 Mr. Beame was a resident of Ireland and a non-resident of Canada. Since neither capital gains nor taxable capital gains are specifically referred to in any of the articles of the Treaty, the appellant approached the International Audit Division of Revenue Canada in Toronto in 1996 to obtain a clearance certificate under section 116 of the Act (section 116 certificate). This certificate was requested in respect of his contemplated disposition of shares of 1169813 Ontario Inc., a Canadian private corporation. The appellant requested the section 116 certificate on the basis that his overall tax liability amounted to 15% of the taxable capital gain. The Toronto office requested and received the opinion of the Income Tax Rulings Directorate of Revenue Canada in Ottawa that Mr. Beame's overall tax liability would, upon disposition of his shares, amount to 15% of the taxable capital gain.

[6] During January 1997, Mr. Beame disposed of his shares, realizing a reported capital gain in the amount of $8,250,824.00 and a reported taxable capital gain of $6,188,117.00.

[7] In February of 1997, the appellant obtained a section 116 certificate from Revenue Canada, in return for his cheque in the amount of $928,218.00; being 15% of the taxable capital gain. In due course, Mr. Beame filed his 1997 tax return as a non-resident of Canada reporting the capital gain and the taxable capital gain pursuant to section 115 and subsection 2(3) of the Act.

[8] It is not disputed that these shares constitute "taxable Canadian property" as defined in paragraph 115(1)(b) of the Act.

[9] In June of 1999, the Minister issued a Notice of Assessment for the 1997 taxation year upon the changed basis that the appellant's Canadian tax was 15% of his entire capital gain, rather than 15% of his taxable capital gain. Mr. Beame objected to the Minister's assessment upon the basis that the 15% tax rate under Article VI (1) of the Treaty is applicable to his taxable capital gain.

[10] The Minister confirmed his assessment upon the basis that the non-resident withholding tax of 15% was to be assessed on the entire capital gain of $8,250,824.00 under the provision of paragraph 1 of Article VI of the Treaty. This confirmation ultimately led to the Tax Court trial and the present appeal.

IV. Decision Below

[11] In reaching his decision the Tax Court Judge considered Mr. Beame's argument that the meaning of the word 'income' in the Treaty should be determined by reference to sections 2 and 3, paragraph 115 (1)(b) and subsection 117 (2) of the Act. This, however, he rejected on the basis of the Federal Court, Trial Division decision in Gladden Estate v. The Queen, 85 D.T.C. 5188 where at p. 5191 Addy J. wrote:

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 insofar as the particular item under consideration is concerned.

Article 31 of the Vienna Convention on the Law of Treaties (1969) to which Canada subscribed governs the general rule of interpretation to be applied. Paragraph 1 of that Article reads as follows:

1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose.

Since article VI provides for a 15% tax rate on 'income' without any modification or suggestion that income is limited to taxable income, the Tax Court Judge concluded that a broad interpretation must be accepted without reference to the Act.

V. Standard of Review

[12] This is an appeal under subsection 27 (1.1) of the Federal Court Act, R.S.C. 1985, c. F-7 as amended, dealing with the interpretation of a provision in a treaty to which Canada is a party and the interrelationship, if any, with interpretations mandated by Canadian income tax legislation. Following Housen v. Nikolaisen, [2002] 2 S.C.R. 235 the standard of review is clearly one of correctness.

VI. Analysis

[13] As a starting point, the correct approach to be followed in interpreting a treaty to which Canada is a party is Article 31(1) of the Vienna Convention on the Law of Treaties, [1980] Can T.S. No. 37 which provides that:

A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.

[14] The Supreme Court of Canada has also given guidance to treaty interpretation where in the case of Crown Forest Industries Ltd. v. Canada, [1995] 2 S.C.R. 802 Iacobucci J. wrote at p. 814:

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.

I turn then to Article II (3) of the Treaty.

[15] Article II (3) of the Treaty provides that undefined terms in the Treaty have the meaning given to them under domestic legislation, unless the context otherwise requires:

In the application of the provisions of this Agreement by one of the Contracting Governments any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting Government relating to the taxes which are subject of this Agreement.

[16] As for relevant domestic legislation, section 3 of Canada's Income Tax Conventions Interpretation Act, mandates that the meaning to be given to a term found in a treaty will be the meaning given to the term from time to time under the Act, unless the context otherwise requires. That section reads:

Notwithstanding the provisions of a convention or the Act giving the convention the force of law in Canada, it is hereby declared that the law of Canada is that, to the extent that a term in the convention is

Par dérogation à toute convention ou à la loi lui donnant effet au Canada, le droit au Canada est tel que les expressions appartenant aux catégories ci-dessous s'entendent, sauf indication contraire du contexte, au sens qu'elles ont pour l'application de la Loi de l'impôt sur le revenu compte tenu de ses modifications, et non au sens qu'elles avaient pour cette application à la date de la conclusion de la convention ou de sa prise d'effet au Canada si, depuis lors, leur sens pour la même application a changé. Les catégories en question sont:

(a) not defined in the convention,

a) les expressions non définies dans la convention;

(b) not fully defined in the convention, or

b) les expressions non définies exhaustivement dans la convention;

c) les expressions à définir d'après les lois fédérales.

that term has, except to the extent that the context otherwise requires, the meaning it has for the purposes of the Income Tax Act, as amended from time to time, and not the meaning it had for the purposes of the Income Tax Act on the date the convention was entered into or given the force of law in Canada if, after that date, its meaning for the purposes of the Income Tax Act has changed. (Emphasis added)

[Je souligne]

[17] This section, enacted in 1985, effectively displaces the 1982 Supreme Court of Canada decision in the R. v. Melford Developments Inc., [1982] 2 S.C.R. 504 so as to now permit the evolution of treaty terms consistent with changes in Canadian income tax law. In my analysis, by ignoring section 3 above and Article II (3) of the Treaty, the Tax Court Judge committed an error of law. Taken together, these two provisions can but lead to the conclusion that the word 'income' in the Treaty must reflect the 'meaning' derived under the relevant provisions of the Act as at 1997. (See Canada v. Kubicek Estate, 97 D.T.C. 5454 at p. 5456 (F.C.A.)).

[18] Section 3 of the Act provides the following rules, inter alia, for the computation of a taxpayer's income for the year:

3. The income of a taxpayer for a taxation year for the purposes of this Part is the taxpayer's income for the year determined by the following rules:

3. Pour déterminer le revenu d'un contribuable pour une année d'imposition, pour l'application de la présente partie, les calculs suivants sont à effectuer:

(a) determine the total of all amounts each of which is the taxpayer's income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, the taxpayer's income for the year from each office, employment, business and property,

a) le calcul du total des sommes qui constituent chacune le revenu du contribuable pour l'année (autre qu'un gain en capital imposable résultant de la disposition d'un bien) dont la source se situe au Canada ou à l'etranger, y compris, sans que soit limitée la portée générale de ce qui précède, le revenu tiré de chaque charge, emploi, entreprise et bien

(b) determine the amount, if any, by which

b) le calcul de l'excédent éventuel du montant visé au sous-alinéa (i) sur le montant visé au sous-alineéa (ii)

(i) the total of

(i) le total des montants suivants:

(A) all of the taxpayer's taxable capital gains for the year from dispositions of property...

(A) ses gains en capital imposables pour l'année tirés de la disposition de biens...

...

exceeds

(ii) the amount, if any, by which the taxpayer's allowable capital losses for the year from dispositions of property...[Emphasis added]

(ii) l'excédent éventuel de ses pertes en capital déductibles pour l'année, résultant de la disposition de biens...[Je souligne]

[19] The "taxable capital gain" from the disposition of a particular property is determined by reference to subsection 38(a) of the Act which read in 1997 as follows:

... a taxpayer's taxable capital gain for a taxation year from the disposition of any property is 3/4 of the taxpayer's capital gain for the year from the disposition of the property

... le gain en capital imposable d'un contribuable pour une année d'imposition, tiré de la disposition d'un bien, est égal à trois quarts du gain en capital qu'il a réalisé pour l'année à la disposition du bien

On a straightforward reading of clause 3(b)(i)(A) (quoted above), only the taxable portion of a capital gain is to be taken into account in computing income for purposes of the Act.

[20] For a person who is not a resident of Canada, the computation of income is determined by the combined operation of subsection 2(3) and subparagraph 115(1)(b)(iii), which read in 1997 as follows:

2.(3) Where a person who is not taxable under subsection (1) for a taxation year

...

2.(3) Un impôt sur le revenu doit être payé, ainsi qu'il est prévu par la présente loi, sur son revenu imposable gagné au Canada pour l'année, déterminé conformément à la section D, par la personne non imposable en vertu du paragraphe (1) pour une année d'imposition et qui, à un moment donné de l'année ou d'une année antérieure, a:

...

(c) disposed of a taxable Canadian property,

c) soit disposé d'un bien canadien imposable.

at any time in the year or a previous year, an income tax shall be paid, as required by this Act, on the person's taxable income earned in Canada for the year determined in accordance with Division D.

115(1) For the purposes of this Act, the taxable income earned in Canada for a taxation year of a person who at no time in the year is resident in Canada is the amount, of the non-resident person's income for the year that would be determined under section 3 if

115(1) Pour l'application de la présente loi, le revenu imposable gagné au Canada pour une année d'imposition d'une personne qui ne réside au Canada à aucun moment de l'année est le revenu pour l'année qui serait déterminé en application de l'article 3 :

...

(b) the only taxable capital gains and allowable capital losses referred to in paragraph 3(b) were taxable capital gains and allowable capital losses from dispositions of property each of which was a disposition of property or an interest therein (in this Act referred to as " taxable Canadian property " that was

b) si les seuls gains en capital imposables et les seules pertes en capital déductibles visés à l'alinéa 3b) étaient des gains en capital imposables et des pertes en capital déductibles provenant de dispositions de biens dont chacune était une disposition d'un bien ou d'un droit y afférent (appelé « bien canadien imposable » à la présente loi) qui était :

(iii) a share of the capital stock of a corporation resident in Canada (other than a public corporation)

[Emphasis added]

(iii) une action du capital-actions d'une société résidant au Canada (autre qu'une société publique).

[Je souligne]

[21] If these provisions are interpreted in the same straightforward way as clause 3(b)(i)(A), the inescapable conclusion is that it is only the taxable portion of a capital gain from the disposition of property that comprises part of the non-resident's "taxable income earned in Canada". By that interpretation, the taxable income earned in Canada by Mr. Beame within the meaning of subparagraph 115(1)(b)(iii) of the Act upon his disposition of shares in 1169831 Ontario Inc. is the taxable portion of his net capital gains. Canadian tax is then calculated in accordance with the provisions of paragraph 3(b), sections 39 and 117 of the Act, with the caveat that under Article VI(1) of the Treaty the taxation rate may not exceed 15%.

[22] The Minister argues that this interpretation should not be adopted because it is not consistent with the meaning of "income" as derived from the scheme of the Act read as a whole (See Ludco Enterprises Ltd. v. Canada, [2001] 2 S.C.R. 1082). The Minister points to section 9 (which is the guiding provision for the determination of income from a business or property), and in particular subsection 9(3), which reads:

(3) In this Act, "income from a property" does not include any capital gain from the disposition of that property and "loss from a property" does not include any capital loss from the disposition of that property.

(3) Dans la présente loi, le revenu tiré d'un bien exclut le gain en capital réalisé à la disposition de ce bien, et la perte résultant d'un bien exclut la perte en capital résultant de la disposition de ce bien.

[23] According to the Minister, subsection 9(3) supports the argument that "income" includes the non-taxable portion of a capital gain, because if it were not so, it would not have been necessary to exclude "capital gains" from the determination of "income from property".

[24] There is no merit in this argument. While I would not wish to attempt to explain all of the implications of subsection 9(3) for the present appeal, it is clear enough that its fundamental purpose is to ensure that a capital gain is not treated for income tax purposes in the same way as income from a business or property, and that a capital loss is not treated for income tax purposes as a loss from a business or property. It would be a considerable stretch to say that it is also intended to ensure that, despite the relevant parts of sections 2, 3 and 115 quoted above, the exempt portion of a capital gain is to be treated as income for some purposes.

[25] The Minister also argued, following the Crown Forest decision, supra at paragraph 14, that the Tax Court Judge was correct in refusing to apply a legalistic or literal interpretation. This was said to be so since the result would be to defeat or frustrate the basic object of the Treaty, that is to tax income including capital gains. However, none of the international documentation provided supports this argument. On the contrary, the remarks surrounding the Model Convention articles dealing with income indicate that the decision as to whether and how capital gains should be taxed is to be left to the domestic law of each Contracting State. (See for example "Preliminary Remarks to the Commentary on Article 13 concerning the Taxation of Capital Gains, Organization for Economic Co-operation and Development Model Convention"). The intention of the parties to tax capital gains is certainly not disclosed by this material.

[26] The appeal should be allowed, the decision of the Tax Court set aside and the assessment referred back to the Minister for reconsideration and reassessment on a basis consistent with these reasons. The appellant should be awarded his costs in this Court and in the Tax Court of Canada.

"B. Malone"

J.A.

"I agree

A.J. Stone

J.A."

"I agree

J. Edgar Sexton

J.A."

FEDERAL COURT OF APPEAL

NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET: A-59-03

STYLE OF CAUSE: CARL BEAME

Appellant

- and -

HER MAJESTY THE QUEEN

Respondent

PLACE OF HEARING: TORONTO, ONTARIO

DATE OF HEARING: THURSDAY, JANUARY 15, 2004

REASONS FOR JUDGMENT BY: MALONE J.A.

CONCURRED IN BY: STONE J.A.

SEXTON J.A.

DATED: FEBRUARY 4, 2004

APPEARANCES: Mr. Pierre Barsalou

Ms. Josee Pelletier

FOR THE APPELLANT

Ms. Marie Therese Boris

FOR THE RESPONDENT

SOLICITORS OF RECORD: Barsalou, Lawson

Montreal, Quebec

FOR THE APPELLANT

Morris Rosenberg

Deputy Attorney General of Canada

FOR THE RESPONDENT

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