Tax Court of Canada Judgments

Date: 20000911

Docket: 97-2037-IT-G

BETWEEN:

NEIL BARRY McFADYEN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Garon, C.J.T.C.C.

[1]            These are appeals from the income tax reassessments from the Minister of National Revenue for the 1993, 1994 and 1995 taxation years.

[2]            By Notices of Reassessment dated December 16, 1996, the Minister of National Revenue reassessed the Appellant on the basis that he was a resident of Canada and determined his taxable income to be $39,528.00, $115,701.00 and $78,684.00 for the 1993, 1994 and 1995 taxation years respectively.

Evidence

[3]            The Appellant and Ms. Karen Caspersen, a senior officer of Revenue Canada, were the only witnesses at the hearing of these appeals.

[4]            I shall now examine in some detail the Appellant's testimony.

[5]            The Appellant was born on October 27, 1960 in West Germany. He became a Canadian citizen in 1977.

[6]            The Appellant graduated from Carleton University in Ottawa in 1983 with a Bachelor of Mechanical Engineering. He obtained his Master's in Mechanical Engineering from Carleton University in 1988. He has been a registered professional engineer in Ontario since 1987.

[7]            In 1987, the Appellant was married to Mrs. Sheridan Gardner and they have three children.

[8]            Between 1985 and July 1992, the Appellant was employed by Gastops Inc. in the Ottawa region. That firm is an engineering company in the business of software development, system analysis for propulsion systems and date acquisitions systems. Between 1988 and 1990, the Appellant worked in Germany on a two-year posting for Gastops Inc. The Appellant's spouse was with him in Germany for only one of the two years because she could only obtain a one-year leave of absence from her employment with Revenue Canada without losing her job.

[9]            In late 1991, the Appellant's spouse was asked to make an application for a position in the Anti-Dumping Program with the Canadian Government at the Canadian Embassy in Tokyo, Japan.

[10]          The Appellant believed at that time that joining his spouse in Japan would be a good experience for him, and that he could probably find viable employment in Japan that could lead to other career opportunities.

[11]          Early in 1992, while still in Canada, the Appellant began looking for employment in Japan. He sent his resume to Northern Telecom Japan Inc., in Tokyo, Japan.

[12]          In an effort to make himself more marketable for employment in Japan, the Appellant enrolled in a Japanese language-training course at Carleton University, which ran from April 22 to June 24, 1992.

[13]          Shortly after June 24, 1992, the Appellant's spouse received confirmation from the Director of Policy and Administration Program, Assessment Program of Revenue Canada Customs and Excise, that she would be posted in Japan for three years, and possibly four, as a Customs representative.

[14]          In the Spring of 1992, the Appellant and his spouse each owned a 50% interest in their matrimonial home at 12 Southport Drive in Ottawa and a rental property at 40 Greenboro Crescent in Ottawa which was being rented to the same persons since 1988.

[15]          The Appellant and his spouse put the Southport Drive home up for sale in the Spring of 1992, because they could not afford the mortgage if they were both in Japan and the Appellant was not able to find employment. The home was sold on July 24, 1992.

[16]          On August 4, 1992, just before the Appellant and his spouse left for Japan, they also put the Greenboro rental property up for sale. The latter property was for sale for about six months but it did not sell. In order not to further annoy the tenants by attempting to sell the property, a three-year lease was entered into by Megacorp Property Management Inc. on behalf of the Appellant and his spouse, with the same tenants who had been renting since 1988. The term of the lease was from July 31, 1993 to July 31, 1996. A three-year lease was signed to provide the tenants with the security they wanted.

[17]          Between May 1 and May 4, 1992, the Appellant and his spouse signed an agreement of purchase and sale regarding a property located at 63 Picasso Drive, in Ottawa. They viewed this as an investment. They believed they were buying at a low price. The closing date in respect of this transaction took place on November 30, 1992. When the Appellant and his spouse signed the agreement of purchase and sale in May, 1992, they had not yet received the confirmation letter (which, as indicated earlier, was dated June 24, 1992) that the Appellant's spouse had been posted to Japan.

[18]          In December 1992, after having been in Japan since August 12, 1992, the Appellant and his spouse returned to Canada for a vacation, at which point they decided that it would be more profitable to rent the Picasso Drive house, rather then sell it, since the housing market had slowed down. At that point they had no fixed plan to ever live in the Picasso Drive house, but the "possibility of moving back into it existed."

[19]          The Appellant decided that he could not move to Japan until the matrimonial home on Southport Drive was sold, which happened on July 24, 1992.

[20]          After the Appellant decided to go to Japan, he terminated his employment with Gastops Inc., by giving that firm only a short notice period. There was no discussion with his manager about him returning to work for the latter firm and he had no intention to do so.

[21]          When the Appellant and his spouse decided they were going to Japan, they sold the following personal property:

-                on July 29, 1992, the Appellant sold his 1988 Volkswagen Jetta;

-                on July 24, 1992, the Appellant's spouse sold her 1975 Suzuki motorcycle;

-                on July 29, 1992, the Appellant's spouse sold her 1981 Honda Accord.

[22]          Some of the Appellant's personal property (including clothes, furniture, books, a computer, recreational equipment, tools, photographs, stereo, VCR, cameras and lens) were sent to Japan. The personal property that was too expensive to send to Japan was put in storage. Other personal property was sold or given away permanently to friends. In 1992, the Appellant had no personal property in storage at the Picasso Drive property.

[23]          Prior to leaving for Japan, the Appellant terminated his OHIP coverage because he was told by the employees at the Department of Foreign Affairs that he would no longer be considered an Ontario resident for OHIP purposes. He also cancelled the private disability insurance that he had as an employee of Gastops Inc., because he would no longer be considered to be a resident of Canada and he no longer had employment income to insure. The Appellant, while in Japan, tried to obtain disability insurance with Metropolitan Life in Canada, but that insurance company refused it on the ground that he had to be in Canada.

[24]          Before departing from Canada, the Appellant stated that he "had RRSP's" in Canada and that he "left them the way they were". The Appellant and his spouse had one joint bank account in Canada prior to them leaving for Japan. While the Appellant and his spouse were in Japan, the joint account was used to deposit the Appellant's spouse's pay cheques and receive the rents and pay the mortgage with respect to the Greenboro Crescent rental property. While in Japan, the Appellant and his spouse maintained a second bank account in Canada which received the rents and paid the mortgage with respect to the Picasso Drive property.

[25]          Upon his arrival in Japan on August 12, 1992, the Appellant began looking for employment. He continued to study the Japanese language from the course material he had obtained at Carleton University. At the same time, the Appellant was contacted by the personnel officer of the Canadian Embassy in Japan. In January 1993, the Appellant began providing some computer training at the Canadian Embassy in Japan as a "self-employed person". Income tax was not deducted at source from the Appellant by the Canadian Embassy for this work.

[26]          In August 1993, the Appellant was employed as a "temporary" locally-engaged staff person at the Canadian Embassy. On January 1, 1994, the Appellant became a "permanent" locally-engaged staff person of the Canadian Embassy as a "System Administrator".

[27]          As a "locally-engaged employee" the Appellant testified that he "was not actually an employee of Foreign Affairs there, because if I was I would have been entitled to all the various benefits under the foreign service directives". He was paid by the Embassy in local currency, on a monthly basis. These payments were deposited directly into a Japanese bank account via a direct deposit system. The salary of "locally-engaged employees" was based on local conditions, one of which was the "local tax rate". This regime is to be contrasted with that applicable to employees of the Department of Foreign Affairs whose pay cheques were in Canadian dollars and sent directly to a bank account in Canada.

[28]          For the 1993 taxation year, the Appellant stated that he filed a Canadian income tax return as a deemed resident. His understanding was that he was a non-resident of Canada, but deemed to be a resident of Canada because he "was married to a government employee".

[29]          In the spring of 1994, the Appellant began looking for employment other than as a "locally-engaged employee" of the Canadian Embassy because he did not have much income left from this employment after taxes were withheld and day care expenses were paid for the care of his children. At that time, the yen was still rising against the Canadian dollar and this caused the taxes being withheld to increase.

[30]          During the spring of 1994, the Appellant and his spouse were contemplating staying beyond the period of employment of the spouse because they both had employment and liked living in Japan.

[31]          The Appellant eventually found other employment and began working on September 12, 1994 for a securities company, Schroder Securities (Japan) Limited, ("Schroder's") that has its Head Office in London, England, and an office in Japan. The Appellant learned of the position through an advertisement in a local newspaper. The position was for a one-year contract to do some computer system administration work that the Appellant believed would probably turn into a permanent position.

[32]          The Appellant was told by Schroder's that he needed a work visa to be able to work at Schroder's. Prior to that, he was unaware of this requirement.

[33]          The Appellant applied for a work visa at Immigration, which required that a "Note Verbale" be obtained from the Japanese Ministry of Foreign Affairs. The "Note Verbale" is permission from the Japanese Ministry to the Appellant that he may "engage in activity other than that permitted by the status of residence previously granted". The Appellant gave the Japanese Ministry of Foreign Affairs his red Canadian passport, received the "Note Verbale", through the Canadian Embassy and a few days later he received his red passport. It took a few days to obtain the "Note Verbale" from the Japanese Ministry of Foreign Affairs. The process was completed by paper only. The Appellant was required to answer a few questions that related to his employment at Schroder's (like the length of employment and what kind of work he would be doing). The Appellant also understood the "Note Verbale" to mean that he would no longer enjoy diplomatic immunity under the Vienna Convention with respect to Japanese law, including income tax law.

[34]          The Appellant provided testimony and written evidence that he was actually employed by Schroder's in Japan. A certificate of employment dated March 2, 1995 and issued by Schroder's was filed. A monthly payroll statement shows that Japanese income tax was withheld from his remuneration in 1994 and 1995. The Appellant also filed Japanese income tax returns in 1994 and 1995.

[35]          In September 1994, the Appellant began making some enquiries from a Mr. Palmer, a personnel officer of the Canadian Embassy, about the application of the Canada-Japan Income Tax Convention and whether he could get some relief to help him reduce his taxes. The Appellant was surprised when Mr. Palmer told him that Canada should not be taxing him under the Canada-Japan Income Tax Convention, at which point the Appellant requested a copy of the Convention.

[36]          The Appellant took cognizance of the Canada-Japan Income Tax Convention and began making enquiries in the late Fall of 1994 at the Japanese National Tax Administration, which is part of the Japanese Finance Department, about his status under the Treaty, at which point he met Mr. Taguchi, the Assistant Director of International Operations for the Japanese National Tax Administration. The Appellant told Mr. Taguchi that he had been employed at the Canadian Embassy and that he now worked at Schroder's. Mr. Taguchi took a few weeks to look into the matter and subsequently told the Appellant that he had confirmed with his superior, the Director of the above-mentioned office of the Japanese National Tax Administration, that the Appellant's income at the Embassy and at Schroder's was only taxable in Japan. This confirmed the Appellant's view from having read the Canada-Japan Income Tax Convention.

[37]          The Appellant then got in touch with Revenue Canada and he was told that he required proof that he was a resident of Japan. The Appellant contacted again the above International Operations Office of the Japanese National Tax Administration and Mr. Soto of the latter office confirmed the information provided to the Appellant by Mr. Taguchi.

[38]          The Appellant requested evidence in writing from the Japanese authorities that he was only taxable by Japan in respect of his income. The Appellant eventually went to the Japanese local taxation office with his passport, his foreigner I.D. card, his work visa and a Japanese tax form entitled in English "Certificate of Residency of Japan". The Appellant completed this form himself and gave it to the local taxation office. A few days later, the Appellant picked up the certificate, which was now officially stamped by the local taxation office and which, according to the Appellant, makes it a legal document in Japan. The Appellant then attached the certificate to his income tax return as the proof required by Revenue Canada that he was a resident of Japan. The "Certificate of Residency of Japan", filed with the Court, states that the Appellant "is a resident of Japan under Article 4 of the Japan/Canada Tax Treaty".

[39]          The Appellant believed that the officials of Revenue Canada did not accept the legitimacy of the certificate because in their opinion the Appellant may have manufactured the certificate, or the Appellant may have had the District Director of the Japanese local taxation office sign the certificate without knowing what he was signing. This prompted the Appellant to contact a professor of Law of the Faculty of Law at ASIA University in Tokyo to enquire about the legitimacy of the certificate. The Appellant faxed his certificate to the professor, who contacted the Japanese local tax office. The professor provided a letter dated June 21, 1999 to the Appellant, stating that he had confirmed that "Japanese district tax offices issue routinely a certificate of residency for the purpose to prevent international dual taxation".

[40]          With respect to the introduction of this letter from the professor of Law of the Faculty of Law of the above-mentioned University, the Respondent objected to the testimony of the Appellant regarding it on the ground that it was all hearsay. Counsel for the Appellant relying mainly on two decisions of the Supreme Court of Canada argued for the admissibility of the letter on the grounds of necessity and reliability. I allowed the letter into evidence only to establish an administrative practise followed by the Japanese tax authorities, not to establish foreign law.

[41]          The Appellant testified that in the Spring of 1995, it was his intention to stay in Japan as long as he had employment and it was economically viable for him and his spouse. They liked living there and they had no fixed plan to return to Canada.

[42]          Sometime in 1994, the Appellant's spouse requested that her three-year term with the Embassy be extended to four years, so that her term would end in August 1996. In January of 1995, the request was granted and then cancelled by letter dated April 21, 1995. In her letter dated June 2, 1995 to the Director of Policy and Administration, Anti-Dumping and Countervailing Division, the Appellant's spouse referred to the April 21, 1995 letter from her Department and expressed her disappointment and concerns. The June 2, 1995 letter also requested a delay in the repatriation back to Canada of the personal property of the Appellant's spouse and the Appellant. It is also mentioned in this letter that the Appellant's spouse would be leaving the Embassy on August 16, 1995, and that the Appellant and his spouse would remove his property from the housing compound without assistance from the Government of Canada.

[43]          The Appellant then outlined the steps that he and his spouse took in anticipation of the possibility of staying in Japan before and after learning that his spouse's employment in that country would not be extended:

-                they contacted a Japanese real estate agent and began looking for other housing outside the Canadian Embassy in Tokyo where they had been living up to this point;

-                the Appellant obtained a Canadian blue passport so that he would be ready to return the red diplomatic passport if necessary;

-                the daughter of the Appellant and his spouse remained in day care;

-                they purchased a few items of furniture (a bed for the daughter) in preparation for moving out, but they already had most of the normal household goods they had brought from Canada;

-                the Appellant's spouse began applying for jobs in Japan, including a locally-engaged staff position at the Canadian Embassy that she did not get;

-                the extension in respect of the repatriation of their goods in the Embassy housing back to Canada was approved;

-                the Appellant attempted to get an extension of his employment at Schroder's but he was unsuccessful because the company was concerned about the high turnover rate of employees who were not nationals of Japan;

-                the Appellant enquired about employment at several companies in Japan including the Union Bank of Switzerland, Merrill Lynch Japan, Morgan Stanley Japan, and Bloomber. He was also interviewed for employment at Kellogg's, Japan. None of these efforts were successful.

[44]          The Appellant referred in some detail to the correspondence he exchanged with the Deputy Minister of National Revenue in 1995 and subsequently with the Assistant Director, Enquiries and Adjustments, International Tax Office of Revenue Canada and another officer from that office. It is worth mentioning that the Appellant in a letter dated August 7, 1995 asked the Assistant Director, Enquiries and Adjustments, International Tax Office of Revenue Canada to apply the tie breaker rules in the Canada-Japan Income Tax Convention and reiterated his reasons why he believed he was resident of Japan according to the "tie-breaker rules". The Appellant indicated that he received a letter from Mr. Steve Eng of Revenue Canada dated August 9, 1995 informing him that his request for the mutual agreement process had been forwarded to the Director of the International Audits Division at Revenue Canada. The Appellant requested the mutual agreement process because he had been told by Mr. Eng that he did not have authority to issue a refund and that a refund could only be issued through the competent authority process.

[45]          The testimony turned at this point to the Appellant's efforts to find employment in the United States. This was after the Appellant and his spouse had been unsuccessful in finding employment in Japan, but before they decided to come back to Canada.

[46]          The Appellant made the decision to return to Canada around the end of July 1995 because neither he nor his spouse could find employment. His spouse was pregnant at the time and he did not really want to be away from her, and he did not have the money to stay in Japan. The Appellant believed that he would have at least been able to stay in Japan longer if he had received the C$28,000.00 refund which he thought he was entitled to. With that money, he could have paid six months rent in respect of a prolonged stay in Japan and could eventually find a job.

[47]          The Appellant returned to Canada around September 10 or 11, 1995. The Appellant and his spouse lived with his spouse's parents and his mother until October 8, 1995, at which point they moved into 63 Picasso Drive, the house that they owned, as mentioned earlier. The Appellant had given notice to the tenants at the end of July 1995 that the Appellant and his spouse wanted to move in.

[48]          The Appellant eventually received his Notice of Assessment dated September 18, 1995 for the 1994 taxation year indicating a refund of C$30,678.61. The Appellant understood this to mean that he had been successful on the issue that he was a resident of Japan for the purposes of the Canada-Japan Income Tax Convention.

[49]          After receiving the refund, the Appellant also sent a letter to Mr. Rick Pearson of Revenue Canada. The Appellant had spoken to Mr. Pearson by telephone and cancelled his request for the competent authority agreement process because he believed at the time that Revenue Canada had accepted his contention regarding his residency in Japan and that the matter was over since he had received the refund. The letter was sent to Mr. Pearson at the latter's request so that he could have the cancellation in writing.

[50]          When the Appellant returned to Canada in September 1995 he was unemployed and did not become employed until December 1996 with Carleton University. The Appellant was unemployed for 15 months because his employment in Japan with Schroder's was highly specialized and there was no demand in the Ottawa area for the Appellant's skills and experience. Potential employers also viewed his continued unemployment as a possibility that he had become unfamiliar with current computer systems.

[51]          The Appellant testified that he filed his income tax return for 1995 as a resident of Ontario because he was living at 63 Picasso Drive and was a resident of Canada at December 31, 1995. He also had indicated as "date of entry" the figures "10/9". In this return, he claimed a deduction from his income earned as a resident of Japan as an exemption under the Canada-Japan Income Tax Convention. When the Appellant mentioned a change of residency in his return, he was attempting to indicate that he "had returned from being a non-resident or a deemed resident effective September 10th". It also came out in the Appellant's testimony that he claimed a "principal residence designation" for his home at 40 Greensboro for 1987, 1988, 1989 and 1990 and not for any period while he was in Japan.

[52]          The Appellant's testimony then turned to a letter dated November 2, 1998 from the Appellant to the Minister of National Revenue, Herb Dhaliwal, in which the Appellant asks a number of questions, including the following ones:

[...]

2) Can I still request a Mutual Agreement Process? if so, until what date?

3) Until what date can the deadline for the Mutual Agreement Process to extended? [sic]

4) Can I still request the process after going to Tax court if I have to?

The Appellant explained in his testimony why he was prompted to write this letter:

                I was advised by my lawyer that there had been a recent case that the Tax Court of Canada ruled that they would not rule on the tie-breaker rules other than the Tax Treaty. It was a Canada - France Tax Treaty, I believe.

                Based on that and one other case, a similar case, my lawyer recommended that we should try to get them to do this process before Tax Court of Canada. So, he talked to the Justice lawyer who agreed to requesting a six month adjournment to look into this process.

[53]          In response to the November 2, 1998 letter from the Appellant to the Minister of National Revenue, Mr. K.N. Malholtra, Assistant Director Appeals, Ottawa Tax Services Office of Revenue Canada, replied on December 16, 1998, in substance that:

(1)            since the Appellant had filed a Notice of Appeal to the Tax Court of Canada, the Canadian Competent Authority will not, as a matter of policy, hear his request while an appeal is in progress;

(2)            although the Appellant could request the Canadian Competent Authority to deal with the Canada-Japan Income Tax Convention issue after the decision of the Tax Court, the Competent Authority could not alter a decision of the Tax Court if it were to rule against you;

(3)            in any event, the reassessments for two of the three years in issue cannot be modified because they were statute-barred. These reassessments could not be subjected to a review by the Competent Authority.

Some of this information was new to the Appellant. From the Revenue Canada Information Circular that the Appellant had been given, he was aware that the Competent Authority would not accept his request for the mutual agreement process while the appeal to the Tax Court was ongoing. But the Appellant's understanding of the mutual agreement process from his reading of the Canada-Japan Income Tax Convention was that the two competent authorities were obliged to meet and resolve the issue, regardless of whether the taxpayer had requested it or not.

[54]          Prior to receiving the December 16, 1998 letter from Mr. Malhotra, the Appellant had written on December 14, 1998 a letter to Mr. Mike Quebec, Director General, International Tax Programs Directorate, Revenue Canada. The purpose of this letter was to request the mutual agreement process, which was the reason why the Appellant had requested in June 1998 the adjournment of the hearing before this Court.

[55]          By letter dated December 31, 1998, Mr. Quebec replied to the Appellant's December 16, 1998 request for the mutual agreement process by indicating that it was inappropriate for his office to intervene in the matter, "given that your Notice of Objection against the assessments for the taxation years in question is pending before the Tax Court of Canada". The Appellant had no further contact with Mr. Quebec.

[56]          The Appellant then testified that while in Japan he took the following steps:

-                he obtained a Japanese driver's license;

-                he secured a Japanese health system card and became covered by the Japanese health system and used it several times;

-                he had a bicycle in Japan that he registered, as legally required in Japan;

-                he returned to Canada three times between August 1992 and September 1995 while he lived in Japan for:

                (1)            a Christmas vacation for three or four weeks in December 1992;

                (2)            his father's funeral for two or three weeks in June 1993;

(3)            a training course for two weeks in January 1994 as part of his employment with the Canadian Embassy.

Also, the Appellant had a permanent home in Tokyo, Japan and did not have a permanent home available to him in Canada within his "definition of a permanent home" because the two houses he owned in Canada at 40 Greenboro Crescent and 63 Picasso Drive were rented out at arm's length to third parties and they were not available to him on a continuing basis.

[57]          The Appellant further stressed that he had his economic relations in Japan because that is where:

-                he and his spouse were employed;

-                he was living;

-                his family lived;

-                his daughter went to school;

-                he had a bank account into which his Japanese earnings went by direct deposit.

He also mentioned that his social activities over this period of time were all in Japan because Canada was 3,000 miles away.

[58]          While the Appellant was in Japan, the Appellant stored items of furniture in Canada that were large, bulky items, including:

-                a large wall unit made in Germany that the Appellant brought with him when he returned from his period in that country;

-                a washer and a dryer from his home at 12 Southport Drive;

-                possibly some winter clothing.

The storage charges for these items were paid by the Government of Canada as part of the Appellant's spouse's compensation package.

[59]          While in Japan, the Appellant maintained in Canada:

-                two joint bank accounts, one was used for the payments in respect of one mortgage, and the other was used for everything else, including the payments for the other mortgage;

-                a Registered Retirement Savings Plan;

-                a Canadian credit card;

-                a safety deposit box at a local Toronto Dominion branch;

-                a current Ontario driver's license;

-                a current membership with the Association of Professional Engineers of Ontario, which he paid for.

[60]          When the Appellant's spouse returned to Canada, she returned to her employment with Revenue Canada.

[61]          With respect to the income earned first as an independent contractor and then as a locally-employed staff person of the Canadian Embassy, the Appellant was not informed that he owed any Japanese income tax on that income and he did not pay any Japanese income tax on that income. With respect to some work the Appellant did for a small Japanese company called Metephore, the Appellant believed his earnings from this company were self-employment earnings and no tax was withheld at source. He did not pay Japanese income tax on the earnings from the latter company.

[62]          While in Tokyo, the Appellant lived in an apartment that his spouse rented from the Canadian Government on a subsidized basis as part of his spouse overall compensation package as an employee of the Foreign Service. The Appellant's spouse paid a higher rent to the Canadian Government than she would have been charged had she rented the apartment for herself, instead of for her family. The higher rent the Appellant's spouse was charged was still much below market rates in Tokyo.

[63]          The Appellant carried a Canadian red passport throughout his period in Japan, and he also had during part of the period a Canadian blue passport, which he obtained in 1994 before he started working at Schroder's. The red passport held by the Appellant was not revoked when he received the blue one.

[64]          The "Note Verbale" issued by the Japanese Ministry of Foreign Affairs is addressed to the Embassy of Canada. A copy of it was obtained from the appropriate person at the Canadian Embassy. The "Note Verbale" says that on September 21, 1994 the Appellant was issued a permit to engage in activity other than that permitted by the status of residence. This means that the Appellant had to go to the Japanese Ministry of Foreign Affairs for permission to hold any job in Tokyo, which the Appellant did to get his employment at Schroder's. The permit that was issued to the Appellant was "repossessed" by the Japanese Government before the Appellant left Japan.

[65]          As appears from excerpts from the Examination on Discovery of the Respondent that were put in evidence at the hearing of these appeals, Revenue Canada chose not to enquire about the Appellant's application to the Competent Authority provisions of the Canada-Japan Income Tax Convention, because Revenue Canada did not view the Appellant as a resident of Japan for the purposes of Article 4 of the Canada-Japan Income Tax Convention. This is required before the Competent Authority provisions can be engaged. Revenue Canada did not consider the Appellant as a resident of Japan for the purposes of Article 4 of the Canada-Japan Income Tax Convention because his spouse was a diplomatic agent for Canada and the Appellant was therefore not subject to tax on his world-wide income in Japan.

[66]          I shall now advert to the testimony of Ms. Karen Caspersen, a Special Advisor with the Legislative Policy Division of Revenue Canada.

[67]          Ms. Caspersen's duties involve tax treaty negotiations on behalf of Canada. She worked in the Competent Authority area under Canada's tax treaties. The Legislative Policy Division deals with foreign tax jurisdictions or foreign competent authorities to determine interpretations of treaties. Generally speaking, this Division does not deal with Competent Authority requests of specific taxpayers; it is involved in general interpretation under the treaties at a policy level.

[68]          A letter dated May 1, 1996 from the Canadian Competent Authority to the Japanese Competent Authority was entered into evidence. Ms. Caspersen wrote this letter on behalf of the Canadian Competent Authority who at that time was Bob D'Aurelio, the Director of Legislative Policy Division of Revenue Canada. The letter was written in response to a request by the Rulings Director at Revenue Canada to obtain an answer from the Japanese Competent Authority as to how that authority would treat certain general fact situations.

[69]          Counsel for the Respondent entered into evidence (Exhibit R-2) a letter dated October 4, 1996 from the Japanese Competent Authority in response to Ms. Caspersen's letter. Counsel for the Appellant objected to the admissibility of the letter on the ground that Counsel for the Respondent was attempting to obtain opinion evidence by filing the letter, which states in part that:

According to Article 9-11 of the Directive of the Japanese Income Tax Law, spouses of diplomats authorized by the Japanese Ministry of Foreign Affairs are exempted from Japanese income tax. This means that any income earned by a diplomat's spouse is not taxable in Japan.

[70]          The Appellant also objected to the admissibility of the letter based upon the Supreme Court of Canada cases of R. v. Kahn, [1990] 2 S.C.R. 531 and R. v. Smith, [1992] 2 S.C.R. 915, which establish necessity and reliability as the criteria for the admissibility of evidence. It was the Appellant's position, as formulated by his counsel, that the letter may be necessary if one accepts that it is difficult to obtain evidence from a country as far away as Japan, but that the letter is not reliable because it is contrary to:

-                the Respondent's own pleadings;

-                the "Note Verbale" from the Ministry of Foreign Affairs in Tokyo dated September 22, 1994;

-                the tax treaty itself.

According to Counsel for the Appellant, the material, to which reference has just been made indicates that the income earned by a diplomat's spouse is taxable in Japan. Counsel for the Respondent responded that the letter is not being introduced as evidence of foreign law, but only as evidence that Revenue Canada made a serious enquiry and that it received a reply. Counsel for the Respondent argued that he does not rely on the content of the letter because he acknowledged that the content may very well be a misstatement of the law. Counsel for the Respondent further added to the extent that the Appellant wanted "to build something out of Revenue Canada's handling of the whole affair" that the letters are "relevant to show that they have attempted to enquire, they have received a response and they have acted accordingly" (the word "they" in this citation refers to officials of Revenue Canada).

Position of the Appellant

[71]          The Appellant's position is extensively formulated in a document entitled "Written Submissions of the Appellant" that was filed with the Court on the hearing of these appeals. Three general propositions were propounded before the Court.

[72]          In his first general proposition, the Appellant relied on the Canada-Japan Income Tax Convention Act, notably sections 9 and 10 and referred more particularly to articles 4, 14, 15 and 18 of the Canada-Japan Income Tax Convention and article 42 of the Protocol to this Convention.

[73]          Counsel for the Appellant in applying the provisions of the Canada-Japan Income Tax Convention Act and the Convention itself began by urging the Court that if the Appellant was a resident of Japan for the purposes of the Convention, neither his income from the Embassy nor his income from Schroder's were subject to taxation by Canada.

[74]          In support of this proposition, the Appellant submitted that the income from the Embassy is covered by Article 18 of the Canada-Japan Income Tax Convention. "Pursuant to paragraph 1(b)(ii) thereof, assuming that the Appellant was a resident of Japan, he did not become a resident of Japan solely for the purpose of rendering the services he provided to the Canadian Embassy and, as a result, the income derived therefrom is taxable only in Japan". (Written Submissions of the Appellant, para. 47)

[75]          According to the Appellant, "The income earned by the Appellant from Schroder's is covered either by Article 14 or 15 of the Convention. Assuming that income was in respect of professional services, it is taxable only in Japan if the Appellant was a resident of Japan, since he did not have a "fixed base regularly available to him" in Canada for the purpose of performing his activities. Assuming that income was "salaries, wages and other similar remuneration ... in respect of an employment", it is covered by Article 15 and is taxable only in Japan, since the employment was not exercised in Canada". (Idem para. 48)

[76]          It was further propounded on behalf of the Appellant that he was a resident of Japan for the purposes of the Convention and reliance was placed on the decision of the Supreme Court of Canada in the case of Crown Forest Industries Ltd. v. Canada, [1995] 2 S.C.R. 802. In this connection, he made reference to the point that the Respondent had pleaded that the Japanese Government has asserted the right to tax the income earned by the Appellant from Schroder's.

[77]          The Appellant also advanced the submission that, "Assuming for the purposes of the argument that the Appellant was a resident of Canada either "factually" or as a "deemed resident" pursuant to the provisions of s. 250(1)(e) of the Income Tax Act he comes within the group described in Article 4, paragraph 2 of the Convention as "resident of both Contracting States"." (Idem para. 58)

[78]          On the above assumption, it was urged that "The Convention indicates, in those circumstances, that the "competent authorities" of the Contracting States shall determine by "mutual agreement" the Contracting State of which that person shall be "deemed to be a resident" for the purposes of the Convention". (Idem para. 59) He added that pursuant to the Protocol "the question shall be settled by applying rules which are referred to as the "tie breaker" rules". (Idem para. 60)

[79]          Counsel for the Appellant was careful to point out that "There is conflicting jurisprudence on the issue of whether this Court can apply the "tie breaker" rules". (Idem para. 64) He went on to mention that "This Court has held explicitly in one case and impliedly in another, that it does not have this jurisdiction". (Idem para. 64) "In three other cases, however, it has applied the tie breaker rules of a tax convention to determine whether a taxpayer was a resident of Canada at the relevant time". (Idem para. 65)

[80]          The application of the tie breaker rules, according to counsel for the Appellant, clearly leads "to the determination that the Appellant is, for the purposes of the tax convention, a resident of Japan. He had a permanent home available to him in Japan; he did not have a permanent home available to him in Canada. His personal and economic relations, at the relevant time, were closest to Japan. He lived there. His family lived there. He worked there. He was paid there. He put his pay in a bank account in Japan. His daughter attended day care there. He had little to do with Canada. In any event, his habitual abode was in Japan". (Idem para. 68)

[81]          The Appellant further advanced a second general proposition that paragraph 250(1)(e) of the Act is contrary to the provisions of subsection 15(1) of the Canadian Charter of Rights and Freedoms.

[82]          In support of the above proposition, after having referred to many excerpts from the judgment of Justice Iacobucci of the Supreme Court of Canada in the case of Law v. Canada (Minister of Employment and Immigration), (1990), 170 D.L.R. (4th) 1, counsel for the Appellant argued that the first step in the analysis under subsection 15(1) of the Charter is clearly met. According to him, "Subsection 250(1)(e) of the Income Tax Act imposes differential treatment between the claimant and others who are not married to public servants posted abroad. He is required to pay Canadian income taxes on income earned abroad whether or not he is factually resident within Canada, while other persons living abroad are not so required". (Idem para. 73)He further pointed out that "The Differential Treatment is based upon an Analogous Ground". (Idem para. 74) He concluded on this point that this "Differential Treatment is Discriminatory" (Idem para. 74) and in this connection, he expressed himself in part as follows:

77.            Paragraph 250(1)(e) treated the Appellant, and others in his situation, unfairly. It prevented him from having the same opportunity as others, who were not married to Canadian public servants, to travel abroad and work in foreign countries, and having terminated his residency in Canada, and be able to work, subject only to the taxes imposed by the country in which he was residing and working. By rendering him liable to pay tax solely on the basis of his wife's economic situation, his own self-worth was minimized. His ability to make his own decisions as to his economic future was constrained, by this law, solely as a result of his marital status - a "personal trait or circumstance" which does not relate to his "individual needs, capacities or merits".

...

82.            Not all laws which make distinctions on the basis of marital status are contrary to the provisions of s. 15(1). This law, however, which imposes an entire taxing regime upon a person as a result of the employment status of his or her spouse, treats one spouse as the economic appendage of the other. It is a continuation of the historic treatment of married persons as one, a principle which is still under the process of reform.

...

89.            The consequences of paragraph 250(1)(e) on the Appellant were both severe and localized. The imposition of Canada's high income tax rate upon him while he was attempting to live in Japan, a country with a very high cost of living and low domestic tax rates, made it impossible for him to continue to live there. He was effectively prevented from exercising what should be a fundamental economic option - the right to move to and work in the country of one's choice.

[83]          On behalf of the Appellant, it was further submitted that the law is not "saved by Section 1 of the Charter of Rights and Freedoms".

[84]          Counsel for the Appellant commented on the objective of paragraph 250(1)(e) of the Act simply by quoting from the Respondent's position formulated in response to undertakings given on the examination for discovery of the Respondent:

92.            This paragraph was added to the Income Tax Act as paragraph 139(3)(d) by S.C. 1960-61, c. 49, s. 38(4). The Respondent's position is that the objective is to ensure that persons who were formerly resident and taxable in Canada, but who may be exempt from taxation in foreign jurisdictions because of their relationship to a person who was taxable in Canada, remain taxable in Canada. This is achieved by deeming such persons to be resident in Canada.

[85]          In arriving at this conclusion, counsel for the Appellant made in his written submissions notably the following comments:

93.            The Supreme Court has held that, in determining whether the objective meets the test of being "of sufficient importance to warrant overriding a constitutionally protected right or freedom":

The standard must be high in order to ensure that objectives which are trivial or discordant with the principles integral to a free and democratic society do not gain s. 1 protection. It is necessary, at a minimum, that an objective relate to concerns which are pressing and substantial in a free and democratic society before it can be characterized as sufficiently important.

94.            The objective of the impugned legislation, propounded by the Respondent, is essentially one of maximizing the revenue of the Crown. Maximizing tax revenue, in and of itself, cannot be an objective which is of sufficient importance to justify overriding a constitutionally protected right or freedom.

95.            Further, the measures adopted in paragraph 250(1)(e) are arbitrary and unfair. There is not a rational connection between the goal of maximizing tax revenues and the method chosen of requiring spouses of Canadian taxpayers to pay tax to Canada.

96.            Furthermore, the impugned law does not impair "as little as possible" the right to not be discriminated against on the basis of marital status. That this is so is shown by the fact that the Federal Government has now proposed, in the Notice of Ways and Means Motion contained in the 1998 Federal Budget, amendments to the Income Tax Act pursuant to which paragraph 250(1)(e) would be repealed and a new paragraph 250(1)(g), would be added, after paragraph (f), to read as follows:

(g)            was at any time in the year, under an agreement or a convention with one or more other countries that has the force of law in Canada, entitled to an exemption from an income tax otherwise payable in any of those countries in respect of income from any source (unless all or substantially all of the person's income from all sources was not so exempt) because at that time the person was related to or a member of the family of an individual (other than a trust) who was resident in Canada.

                                                                                                [References omitted.]

[86]          The third general proposition advanced on behalf of the Appellant is that the Appellant was not a "factual resident" of Canada at the time in question. He formulated the general conclusion that "The application of this principle has resulted in determinations, by this Court and others, that individuals with more substantial and significant ties to Canada then those of the Appellant were not residents of Canada for the purposes of the Income Tax Act". To support this proposition, he referred to the case law and more particularly to the cases of Beament v. M.N.R., 52 DTC 1183, Boston v. The Queen, 98 DTC 1124 (T.C.C.) and Endres et al. v. The Queen, 98 DTC 1101 (T.C.C.).

Position of the Respondent

[87]          The Respondent's position was articulated in a document entitled "Outline of Respondent's Argument", which was tendered to the Court at the time of the hearing of these appeals.

[88]          It is the Respondent's position that "when the Appellant's intentions and desires are given their proper weight, what remains is an individual who accompanied his wife on a temporary overseas posting, returning to Canada periodically during the assignment and returning permanently as soon as the posting was over, and retaining throughout significant ties to Canada: family ties, real property later occupied as his home, and his professional membership". The Respondent added that "The transitory nature of the posting abroad was reflected in the storage of clothing, furniture and appliances, and retaining a safety deposit box, an RRSP, a credit card, and an Ontario driver's license". (Ibid) The Respondent submitted that the Appellant's residence in Japan was "special" and "occasional" and that the latter "remained ordinarily resident in Canada". (Ibid) The Respondent relied on the following cases where an individual in a fact pattern similar to that of the Appellant was considered ordinarily resident of Canada. Eastwood v. M.N.R., 75 DTC 126 (T.R.B.); Saunders v. M.N.R., 80 DTC 1392 (T.R.B.); Glow v. The Queen, 92 DTC 6467 (F.C.T.D.); Rajotte v. M.N.R., 79 DTC 436 (T.R.B.); Roy v. M.N.R., 83 DTC 576 (T.R.B.); and Fisher v. The Queen, 95 DTC 840 (T.C.C.).

[89]          The Respondent then moved to the application of section 15 of the Canadian Charter of Rights and Freedoms. He first stated that under section 15 of the Charter, the Appellant bears the burden of proving that the impugned legislation is discriminatory while under section 1 of the Charter, it is the Government which bears the onus of justifying the discrimination.

[90]          The Respondent generally submitted "that the Appellant should not succeed on the merits of his challenge even if the Court were to take judicial notice of circumstances which the Appellant apparently assumes to establish that he is a member of a discrete and insular minority, defined by a personal characteristic, which has suffered from stereotyping, historical disadvantage or political and social prejudice and which has suffered further discrimination as a consequence of the operation of paragraph 250(1)(e) of the Act".

[91]          Regarding the distinction based on a personal characteristic, the following propositions were advanced:

22. The impugned provision of the Act draws a distinction, based on a number of criteria, between those spouses deemed to be residents of Canada for income tax and those not so deemed. The distinction is not between spouses and non-spouses, but rather between certain spouses (in the extended meaning of the Act) and all others. "Intrinsic to taxation policy is the creation of distinctions which operate ... to generate fiscal revenue while equitably reconciling what are often divergent, if not competing, interests".

23. Is the fact that he was during the years in issue, the 'spouse of a public servant posted abroad' (spouse of a diplomat) a 'personal characteristic' of the Appellant? It is submitted that 'personal characteristic' in the sense relevant to s. 15(1) of the Charter is a characteristic that is "immutable or changeable only at unacceptable cost to personal identity".

24. It is to be observed that 'spouse of a public servant posted abroad' does not describe the Appellant today, nor did it describe him prior to 1992.

25. It is submitted that the status of 'public servant posted abroad' would not have been, even during the years in issue, a personal characteristic of the Appellant's spouse, because occupational status has been held not to be a personal characteristic, or an analogous ground, for purposes of s. 15(1).

26. Therefore, it is submitted that if the Appellant's spouse's occupational status is not one of her personal characteristics, it ought not to be viewed as a personal characteristic of the Appellant. While the status of "spouse" will be a personal characteristic, that status alone is not sufficient to ground liability under s. 250(1)(e).

                                                                                                [References omitted.]

[92]          After having referred to the case of Corbiere v. Canada, [1999] 2 S.C.R. 203, the Respondent submitted that "'spouse of a public servant posted abroad' is not an analogous ground in relation to s. 250(1)(e) of the Act because the policy reflected in that paragraph is "merit-based" as opposed to "stereotypical". (Idem para. 28) Counsel for the Respondent added that "In general, the 'spouse of a public servant posted abroad' will be exempted from taxation on most world income in the host country, as was the case on the evidence of the present case. A foreign tax credit is available under the Act to allow for those cases where, as here, some income sourced in the host country is taxed by that country. There is a clear connection to Canada and, due to the tax immunity enjoyed in the host country, there is an ability to pay. Paragraph 250(1)(e) of the Act reflects a policy based on the actual circumstances of the persons to whom it applies, rather than on any stereotypical view of spouses in general".

[93]          On the question of discrimination, the Respondent began by mentioning that "The distinctions which are forbidden are limited to those which involve prejudice or disadvantage". (References omitted) (Idem para. 30)

[94]          In connection with this subject matter, the following submissions were advanced:

31. The purpose of s. 15(1) of the Charter is to "prevent the violation of essential human dignity and freedom ..." Legislation will violate this purpose where it "has the effect of perpetuating or promoting the view that the individual is less capable, or less worthy of recognition or value as a human being.

32. All of the group's "traits, history and circumstances" must be considered in evaluating whether the legislation which imposes differential treatment on the Appellant has the effect of demeaning his dignity.

33. Contextual factors which should be taken into account include "pre-existing disadvantage". While not essential to a claim under s. 15(1), it is a "compelling factor". There is no evidence in the present case that diplomats or diplomat's spouses are subject to pre-existing disadvantage, vulnerability or prejudice.

34. Another contextual factor is the nature of the interest affected. The Appellant must advert to factors capable of supporting an inference that the imposition of differential treatment has the effect to demeaning his dignity.

[95]          The Respondent concluded on this aspect of the case relating to discrimination that "the Appellant has failed to establish discrimination in the sense required for application of paragraph 15(1) of the Charter". (Idem para. 35)

[96]          Counsel then discussed in his written "Outline of Respondent's Argument" the application of the Canada-Japan Income Tax Convention and advanced a number of propositions:

38. If the Appellant is not a resident of Canada for purposes of the Act, he will be taxable in Canada only on Canadian-sourced income, and would not be necessary to consult the Convention for purposes of determining whether Canada can tax his Japanese sourced income.

39. If the Appellant is a resident of Canada for purposes of the Act, it is necessary to consider whether he is also a resident of Japan for purposes of the Convention. The test in this case is not "residence" in the sense of the Canadian common law, but rather a consideration of the single factor of whether the Appellant is taxable in Japan under their domestic legislation by reason of "domicile, residence ... or any similar criterion".

40. It has been held by the Supreme Court of Canada that taxability in this sense means taxability on "world income"; i.e. income from all sources wherever situate. It is submitted that this is the proper interpretation of the Convention, notwithstanding that the omission of one sentence from the O.E.C.D. model convention could raise an inference that "taxation" in the Convention could include taxation of a single source of income.

41. There is no evidence before the Court as to the Japanese domestic law. Consequently, that law is presumed to be the same as Canadian domestic law. This presumption is consistent with inferences that can be drawn from the little information that is before the Court; in particular the facts that the Appellant paid no income tax to Japan with respect to his Embassy income and claims to have paid Japanese income tax by way of withholding on his Japanese sourced employment income. The text of the "note verbale" would also tend to support the legal presumption in this case. The result apparently experienced by the Appellant in Tokyo is the same result that would flow to the spouse of a Japanese diplomat in Canada from the application of paragraph 149(1)(b) of the Act.

[...]

43. If the appellant is a resident of Japan in the sense of Article IV of the Convention, then the only remedy for the Appellant is the Competent Authority procedure. This Convention in the Protocol thereto, and unlike most other tax conventions, provides that the "tie-breaker" rules are to be applied in the course of a settlement of the issue "by mutual agreement". This can only be a reference to the competent authority process.

Analysis

[97]          I find it appropriate to determine first whether the Appellant was a resident of Canada either factually or as a "deemed resident".

The Appellant was a factual resident

[98]          As a first step, I will consider the question whether the Appellant was a factual resident of Canada.

[99]          The leading case on the matter of the residence of an individual for income tax purposes is the decision of the Supreme Court of Canada in Thomson v. Minister of National Revenue, 2 DTC 812. This was a case where the taxpayer contended that he was not ordinarily resident of Canada but merely sojourning in Canada for a period less than 183 days in each year. The observations of Justice Rand at pages 815 and 816 are of particular interest:

The graduation of degrees of time, object, intention, continuity and other relevant circumstances, shows, I think, that in common parlance "residing" is not a term of invariable elements, all of which must be satisfied in each instance. It is quite impossible to give it a precise and inclusive definition. It is highly flexible, and its many shades of meaning vary not only in the contexts of different matters, but also in different aspects of the same matter. In one case it is satisfied by certain elements, in another by others, some common, some new.

The expression "ordinarily resident" carries a restricted signification, and although the first impression seems to be that of preponderance in time, the decisions on the English Act reject that view. It is held to mean residence in the course of the customary mode of life of the person concerned, and it is contrasted with special or occasional or casual residence. The general mode of life is, therefore, relevant to a question of its application.

For the purpose of income tax legislation, it must be assumed that every person has at all times a residence. It is not necessary to this that he should have a home or a particular place of abode or even a shelter. He may sleep in the open. It is important only to ascertain the spatial bounds within he spends his life or to which his ordered or customary living is related. Ordinary residence can best be appreciated by considering its antithesis, occasional or casual or deviatory residence. The latter would seem clearly to be not only temporary in time and exceptional in circumstances, but also accompanied by a sense of transitoriness and of return.

But in the different situations of so-called "permanent residence", "temporary residence", "ordinary residence", "principal residence" and the like, the adjectives do not affect the fact that there is in all cases residence; and that quality is chiefly a matter of the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living with its accessories in social relations, interests and conveniences at or in the place in question. It may be limited in time from the outset, or it may be indefinite, or so far as it is thought of, unlimited. On the lower level, the expressions involving residence should be distinguished, as I think they are in ordinary speech, from the field of "stay" or "visit".

[100]        The decision of the Supreme Court of Canada in Beament v. M.N.R., 52 DTC 1183 is also instructive.

[101]        In the Beament case, the Appellant went overseas in August 1940 as a volunteer for actual service with the Canadian Army. Prior to going overseas, the Appellant was a partner in an Ottawa law firm. While overseas, the Appellant married in 1941 a British subject, with whom he had three children and established a matrimonial home in England. The Appellant remained in England until 1946, except for a few weeks in 1941 when he returned to Canada in connection with his military duties. In May 1946, the Appellant, his wife, and their three children took up residence in Ottawa where the Appellant resumed his law practise. During the period while he was overseas, the Appellant was a non-active partner in an Ottawa law firm. During his absence, Canadian income tax returns covering income from his partnership carried on by salaried employees of the partnership were filed on his behalf. He maintained a bank account and safety deposit box in Ottawa, and his civilian clothes were stored at his parents' residence in Ottawa. The Appellant in this case was found not to be a resident of Canada because throughout the period in question he was resident either in army quarters or in the matrimonial home, neither of which were in Canada.

[102]        In light of the case law, I am therefore required to determine if the Appellant was residing in Canada during the 1993, 1994 and 1995 taxation years.

[103]        I have concluded that the Appellant's ties with Canada during the three-year period were significant.

[104]        In my view of the evidence, the Appellant can be considered to have accompanied his spouse on a temporary, overseas posting. He returned to Canada on three occasions during his spouse's assignment to Japan. He maintained with his spouse two joint bank accounts in Canada, one was used for the mortgage in connection with one of their properties and the other was used for everything else including another mortgage. He owned two houses in Canada, one of which was later occupied as his home on his return to Canada after giving two months notice. He maintained at his own expense during the years in issue his professional membership in the Association of Professional Engineers in Ontario. The transitory nature of his posting in Japan is reflected by the storage of items of furniture, which were large and bulky, and appliances in Canada, the retaining of a safety deposit box and the maintaining of a registered retirement savings plan, a credit card, and a current Ontario driver's license. These ties were largely economical but in part personal.

[105]        The evidence supports the contention that the Appellant left Canada for Japan with the intention that he may not return and I accept his evidence that he made significant efforts not to return. However, the Appellant maintained the Canadian connections with Canada in case he did return. He did in fact return and resumed his ties to Canada.

[106]        In my view, the Appellant's connections with Canada were in some measure closer than those of the taxpayer in the Beament case. Among other factors, the Appellant's three-year stay in Japan must be contrasted with the Beament case where the taxpayer lived abroad for almost six years. Also, the Appellant's economic ties to Canada were on the whole more important than those of Mr. Beament. The Appellant's ownership of two houses and one which he could return to by giving two month's notice is a significant factor. I am not overlooking at this point the fact that Mr. Beament was throughout the period of his living in England a non-active partner in a law firm in Canada.

[107]        I will now compare the Appellant's situation with that considered in the Boston case on which the Appellant put much reliance. In that case, the taxpayer moved to Malaysia in 1988 and lived there for over six years and did not return to Canada at all in two of the six years. The taxpayer was found not to be resident in Canada throughout the four years under appeal, 1989 to 1992. I find it significant that the taxpayer in that case stayed abroad for more then six years while in the present case the Appellant lived in Japan for just about three years.

[108]        I have considered the factual situation in the Endres decision involving two taxpayers who were husband and wife in relation to the facts of the present case. The husband went to North Carolina in 1985 to revive certain companies and the entire family moved from Nova Scotia to North Carolina in 1986. The two taxpayers retained their home in Nova Scotia where they spent periods of time during the summer and maintained some other ties to Canada. They were held by this Court to be residents of the United States of America in 1988 and 1989 and were not residents of Canada. It is of interest to note that their appeals came about as a consequence of the Appellant's failure to obtain a satisfactory resolution to their application to competent authorities pursuant to the Canada-U.S. Income Tax Convention (1980). I found it significant that in this case the taxpayers did not return to Canada to live there in subsequent years. The decision seems to concentrate on the point that the connections to the U.S.A. seemed more important than those regarding Canada. It is well recognized by case law that a person can reside in more than one country in a particular year.

[109]        It is therefore my conclusion that the Appellant was ordinarily resident of Canada during the relevant period pursuant to subsection 250(3) of the Income Tax Act.

Paragraph 250(1)(e) of the Income Tax Act is not contrary to subsection 15(1) of the Charter

[110]        If I should be wrong in my conclusion that the Appellant was in the years in issue a factual resident of Canada, the question would then arise if paragraph 250(1)(e) of the Act, which deems spouses of diplomats or other public servants of Canada to have been resident in Canada throughout a taxation year, is contrary to subsection 15(1) of the Charter, as argued by the Appellant. It is in effect beyond dispute here that if paragraph 250(1)(e) of the Act is applied to the Appellant, he would be deemed to be a resident of Canada.

[111]        Subsection 250(1) of the Act read in part as follows in the years in issue:

For the purposes of this Act, a person shall, subject to subsection (2), be deemed to have been resident in Canada throughout a taxation year if the person

[...]

(c) was, at any time in the year,

(i) an ambassador, minister, high commissioner, officer or servant of Canada, or

(ii) an agent-general, officer or servant of a province,

and was resident in Canada immediately prior to appointment or employment by Canada or the province or received representation allowances in respect of the year;

[...]

(e) was resident in Canada in any previous years and was, at any time in the year, the spouse of a person described in paragraph (b), (c), (d) or (d.1) living with that person; or

(f) was at any time in the year a child of, and dependent for support on, an individual to whom paragraph (b), (c), (d) or (d.1) applies and the person's income for the year did not exceed the amount used for the year under paragraph (c) of the description of B in subsection 118(1).

[112]        Paragraph 250(1)(g) was added and made applicable after February 23, 1998; it reads thus:

(g) was at any time in the year, under an agreement or a convention with one or more other countries that has for force of law in Canada, entitled to an exemption from an income tax otherwise payable in any of those countries in respect of income from any source (unless all or substantially all of the person's income from all sources was not so exempt), because at that time the person was related to or a member of the family of an individual (other than a trust) who was resident in Canada.

[113]        It is of some interest to note that paragraph 250(1)(e), which was enacted in 1961[1], was repealed effective February 23, 1998. This provision was replaced by paragraph 250(1)(g). The new provision changed the relationship test to that of a person related to or a member of the family of an individual resident in Canada. The new provision also added the requirement that all or substantially all of the person's income from all sources must be exempt from the other country's income tax by virtue of his or her relationship to the Canadian resident.

[114]        The general approach to an analysis of an issue under subsection 15(1) of the Charter is set out in the Supreme Court of Canada decision in Law v. Canada (Minister of Employment and Immigration), supra. In this case, Justice Iacobucci, speaking for an unanimous Court, summarized the basic elements in this way at page 38:

A. Does the impugned law (a) draw a formal distinction between the claimant and others on the basis of one or more personal characteristics, or (b) fail to take into account the claimant's already disadvantaged position within Canadian society resulting in substantively differential treatment between the claimant and others on the basis of one or more personal characteristics?

B. Is the claimant subject to differential treatment based on one or more enumerated and analogous grounds?

C. Does the differential treatment discriminate, by imposing a burden upon or withholding a benefit from the claimant in a manner which reflects the stereotypical application of presumed group or personal characteristics, or which otherwise has the effect of perpetuating or promoting the view that the individual is less capable or worthy of recognition or value as a human being or as a member of Canadian society, equally deserving of concern, respect, and consideration?

[115]        As appears from the above excerpt of the aforementioned judgment, the first requirement has to do with the existence of a differential treatment for the purpose of subsection 15(1) of the Charter.

[116]        Paragraph 250(1)(e) of the Income Tax Act applies to the spouse of a public servant posted abroad. A spouse includes both a legally married spouse and a common law spouse as defined in subsection 252(4), which definition is applicable after 1992. Paragraph 250(1)(e) clearly establishes a distinction between a spouse of a public servant posted abroad and another individual moving abroad who is not the spouse of a public servant. In other words, the distinction is not between spouses and non-spouses but rather between certain spouses in the extended meaning of the Act and all others. The spouse of a public servant is deemed to be a resident of Canada, irrespective of what his residency status might otherwise be according to the usual criteria.

[117]        As part of the first requirement, it must be determined if the differential treatment is based on a personal characteristic of the Appellant.

[118]        Paragraph 250(1)(e) of the Act applies to the Appellant because he is the spouse of a public servant posted abroad.

[119]        Is this a personal characteristic of the Appellant?

[120]        That part of the Appellant's status that refers to the occupation of the Appellant's spouse is obviously a personal characteristic of the Appellant's spouse. On the other hand, that part of the Appellant's status that relates to his marital status is a personal characteristic of the Appellant.

[121]        With respect to the first stage of the inquiry under subsection 15(1) of the Charter, I conclude that spouses, legal or common law, of public servants are treated substantially differently under paragraph 250(1)(e) of the Act as compared to all other individuals.

[122]        The second requirement is whether the Appellant is subject to differential treatment under one or more of the enumerated or analogous grounds.

[123]        The Appellant's status under paragraph 250(1)(e) of the Act relates in part to his marital status. It has been recognized by the Supreme Court of Canada in its decision in the case Miron v. Trudel, [1995] 2 S.C.R. 418, that marital status is an analogous ground covered by subsection 15(1) of the Charter. It follows that the second requirement is met.

[124]        The third requirement for the application of subsection 15(1) of the Charter involves the determination of the question whether the differential treatment discriminates in a substantive sense.

[125]        The application of this third requirement regarding married persons was analyzed by the Federal Court of Appeal in its decision in the case of Schachtschneider v. The Queen, 93 DTC 5298. Justice Linden in his concurring reasons, expressed himself thus at pages 5310 and 5311:

As I have indicated, the ground of discrimination - marital status - should not be confused with the group claiming discrimination - married people. Thus, while marital status may be accepted as an analogous ground, in order to determine whether there has been discrimination based on that ground, we must examine the particular circumstances of the group of which the claimant is a member. In the case before us, the applicant claims to be discriminated against as a married person; however, it cannot be said that married persons have been socially, politically, or historically disadvantaged in Canada (R. v. Swain, supra at p. 992). Rather, members of our society who are married may well have experienced some privilege and advantage as a result of their status. Married persons are not a discrete and insular minority, nor are they an independently disadvantaged group.

Counsel for the applicant argued that married individuals are commonly disadvantaged by the provisions of the Income Tax Act. ... However, the issue at this stage of the analysis is not whether the impugned legislation disadvantages the individual or group in question, but whether the individual or group is independently disadvantaged, so as to fit within the primary purpose of section 15 - namely to remedy or prevent discrimination against groups subject to stereotyping, historical disadvantage and political and social prejudice in Canadian society. Married persons do not meet this description, and hence, cannot be considered discriminated against merely because they are treated differently by paragraph 118(1)(b).

[126]        Justice Linden went on to state that an advantaged group must not only prove that the impugned distinction disadvantages them but "must also directly and clearly show some unfair prejudice against them". "The prejudice or stereotyping against an advantaged group cannot be assumed".

[127]        In my view, the Appellant has not established that a spouse of a person posted abroad is discriminated against by the operation of paragraph 250(1)(e) of the Act. There is no evidence in the present case that spouses of diplomats or other public servants posted abroad have suffered prejudice, stereotyping and historical disadvantage or are subject to pre-existing disadvantage, vulnerability or prejudice. Also, in my view, to adopt the language of Justice Iacobucci in the aforementioned case of Law, the Appellant was unable to advance factors capable of supporting an inference that "the imposition of a differential treatment has the effect of demeaning his ... dignity".

[128]        The Appellant's contention that he was prejudiced against is based on the fact that when moving to a foreign jurisdiction as a spouse of a public servant posted abroad he did not have the same financial opportunity as a person who was not a spouse of a public servant posted abroad.

[129]        In the present case, no evidence was adduced as to the amount of income tax the Appellant would have been liable to pay in each of the years in issue if the Appellant had been a resident of Japan during the relevant period. Precise data should have been put in evidence as to the Appellant's income tax liability in Canada and in Japan under two scenarios, assuming in one case that the Appellant resided in Canada and in the other case that he resided in Japan. The financial burden that the Appellant claimed he sustained in the years in question would have been established. By the same token the extent and significance of such burden could be fully assessed.

[130]        The only evidence before the Court shows that the Appellant paid no tax to Japan in respect of his work at the Canadian Embassy either a self-employed person or as a locally-engaged staff person. He paid no income tax to the Government of Japan with regard to his work in Japan for a firm by the name of Metephore. As far as his work for Schroder's is concerned, income tax was withheld at source. The withholding of tax does not, of course, determine a taxpayer's liability to tax. In the present case, the Appellant's liability to income tax in Japan in respect of his work for Schroder's was not clearly established.

[131]        As far as the financial implications of paragraph 250(1)(e) of the Act are concerned, it has not been shown that generally speaking in a substantial number of countries deeming a taxpayer to be resident in Canada has caused the latter to sustain a financial prejudice. This deeming provision cannot be invalidated on the simple ground that in some situations the taxpayer may be financially disadvantaged because he happens to be at a particular point in time in a low tax jurisdiction or because at a given time the Canadian dollar is particularly weak and the currency of the host country is specially strong.

[132]        I therefore conclude that the Appellant has failed to establish discrimination in the sense required for the application of subsection 15(1) of the Charter.

[133]        Since, in my view, no discrimination has been established under subsection 15(1) of the Charter, I will not address the issue involving the application of section 1 of the Charter.

The Appellant was not a resident of Japan for the purposes of the Canada-Japan Income Tax Convention

[134]        The next question is whether the Appellant was a resident of Japan in the present circumstances pursuant to Article 4 of the Canada-Japan Income Tax Convention Act, 1986, R.C.S. 1985, c. 48, Part II, Schedule III, which states :

1.             For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that Contracting state, is liable to tax therein, by reason of his domicile, residence, place of head of main office, place of management, or any other criterion of a similar nature.

[135]        With respect to treaty interpretation, the Supreme Court of Canada stated some general principles in Crown Forest (supra) in considering Article IV, paragraph 1 of the Canada-U.S. Income Tax Convention (1980). The latter portion of Article IV is identical to Article 4, paragraph 1 of the Canada-Japan Income Tax Convention. On behalf of the Supreme Court of Canada, Justice Iacobucci commented as follows at paragraphs 22 and 40:

22. 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.

[...]

40. ... the criteria for determining residence in Article IV, paragraph 1 involve more than simply being liable to taxation on some portion of income (source liability); they entail being subject to as comprehensive a tax liability as is imposed by a state. In the United States and Canada, such comprehensive taxation is taxation on world-wide income.

                                                                                [Emphasis added.]

[136]        The facts in the Crown Forest case are not similar to those of the present case. It is sufficient to say that in the Crown Forest case the Court was dealing with Article IV paragraph 1 of the Canada-U.S. Income Tax Convention (1980) in the context of the residency status of a third party Bahamian corporation that Canada and the Government of the United States of America, as an internevor, successfully claimed was not a resident of the United States because it was not subject to comprehensive taxation in the United States.

[137]        It is therefore apparent from the decision of the Supreme Court of Canada in the Crown Forest case, that the test for purposes of the Canada-Japan Income Tax Convention, is not residence in the sense of the Canadian common law but rather a consideration in accordance with Article 4, paragraph 1 of the Canada-Japan Income Tax Convention, of the single criterion of whether the Appellant is taxable in Japan under its domestic legislation "by reason of his domicile, residence ... or any other criterion of a similar nature". (I have omitted the words in that cited portion of Article 4 that apply to a body corporate or other entity). If the Appellant is liable to tax under Article 4 of the Canada-Japan Income Tax Convention, he is a resident of Japan.

[138]        The liability to tax referred to in Article 4 paragraph 1 of the Canada-Japan Income Tax Convention has been interpreted by the Supreme Court of Canada in Crown Forest to mean "as comprehensive a tax liability as is imposed" in Japan.

[139]        Based upon the words in the Canada-Japan Income Tax Convention, and the law as stated by the Supreme Court of Canada in Crown Forest, the Appellant, in my view, must establish that he was subject to as comprehensive a tax liability as is imposed by Japan.

[140]        It is the Appellant's position that if one is in a country which taxes only on source income, and one is being taxed on source income in that country, one is a resident of that country for the purposes of Article 4 of the Convention, because taxation on source income is as comprehensive a tax liability as is imposed by that state. Consequently, because Japan taxes on a source basis, and the Appellant's source income in Japan was taxed in Japan, it is submitted that this is sufficient to make the Appellant a resident of Japan for the purposes of Article 4 of the Convention.

[141]        The Appellant made reference in his written argument to an article "A case comment on Crown Forest Industries" which suggests that "the Crown Forest case does not require that a person who is a "resident" of a Contracting State for the purposes of the convention actually be subject to full tax liability". According to the Appellant's understanding of the commentary, "it is sufficient if the person be subject to full taxation" but for a special exemption".

[142]        The Appellant also relied on an excerpt of a commentary on the provisions of Article IV, paragraph 1 of the draft OECD Model Convention, a portion of which has been quoted with approval by the Supreme Court of Canada in the Crown Forest case.

[143]        These observations relating to the academic commentary and to the passage referred to in the commentary on Article IV of paragraph I of the OECD Model Convention are, of course, of great interest but they are essentially of a general nature. They do not establish the Japanese law in the income tax area and the full range of the tax liability under such law for residents of that country. In this regard, the Appellant also referred to an extract from a statement made by a Revenue Canada representative while taking part in a panel on the impact of the Crown Forest decision at the 1998 Conference proceedings held under the auspices of the Canadian Tax Foundation. The statement is hereafter reproduced:

Remittance Basis Taxpayers

Some countries, such as Japan and the United Kingdom, employ a tax system which classifies individual taxpayers into permanent or full fledged residents and temporary or non-permanent residents. While an individual, who is considered for tax purposes to be a full fledged resident of the country concerned is subject to tax on world income on a current basis, the so-called non-permanent resident is only subject to tax on a "remittance" basis. Under this latter system, the individual is liable to tax only on income derived from sources in the country concerned as well as on any foreign income to the extent that it is remitted to or received in that country. Two notable examples of countries using the remittance basis system are the United Kingdom and Japan.

The Department takes the view that individuals who are subject to tax on a remittance basis are liable to tax on a world income basis. Accordingly, persons who are liable to tax in a Contracting State on a remittance basis, would not in our view, be precluded from being resident there for the purposes of paragraph 1 of the residence article of a convention.

[144]        This extract reflects at best the position of Revenue Canada at that time. This document included in the Appellant's Brief of Authorities does not constitute evidence of the Japanese tax law at the time and this was clearly recognized by counsel for the Appellant.

[145]        The only concrete evidence submitted by the Appellant that suggests that he is subject to as comprehensive a tax liability as is imposed by Japan is the "Certificate of Residency" that was issued to the Appellant by the Japanese authorities. The "Certificate of Residency" reads thus:

This is to certify that the individual mentioned below is a resident of Japan under Article 4 of the Japan/Canada Tax Treaty.

Name:                      Neil McFadyen

Address:                 Apt. 4301, 7-2-24 Akasaka, Minato-ku, Tokyo 107, Japan

Effective Date of Residency: August 12, 1992

                                                Signature:               District Director

                                                                                Azabu Tax Office

                                                                                K. OHNISHI

                                                Designation:          Azabu Taxation Office

                                                                                (Azabu ZEIMUSHO)

Official Stamp:_________                  Date: MAR 10 1995

[146]                  In support of this certificate, a letter dated June 21, 1999 from Professor Machimura was filed with the Court which in part reads as follows:

Japanese district tax offices issue routinely a certificate of residency ... for the purpose to prevent international dual taxation.

[147]        The Appellant says that this evidence is uncontradicted by the Respondent and that as a result a prima facie case is established because the documentary evidence says that he is a resident of Japan for the purposes of Article 4 of the Canada-Japan Income Tax Convention.

[148]        I agree with the Respondent that the "Certificate of Residency" is weak and in my view should be given very little weight. The Appellant testified that he obtained the original of the certificate from an acquaintance of his at Nortel in Tokyo. He also testified that he prepared the certificate himself, meaning he actually typed the effective date of the certificate onto the certificate himself. It is purported to be an "official" Japanese document because of an "official" stamp that appears on the certificate. The Appellant, after having prepared the certificate himself, brought the certificate to the Japanese taxation office, left it with the taxation office, and then returned a few days later to pick it up.

[149]        There was no evidence provided that supported that the certificate was being issued to the Appellant by the Japanese authorities with the full knowledge of the Appellant's particular circumstances during the three years in issue. This certificate does not establish the parameters of the Japanese law in the area of income tax law. It simply states a conclusion. It is not known how the official arrived at that conclusion nor is there any evidence about the expertise of the Japanese official who was responsible for the issuance of the certificate. Briefly, the Japanese income tax law and its application to the Appellant were not established in the recognized fashion.

[150]        With regard to the letter from Professor Machimura, it constitutes some evidence of an administrative practise prevalent in Japan at the time. The statement in that letter to the effect that such "certificates of residency" are issued "routinely" suggests that perhaps less than a careful study is made before such certificates are issued. This letter does not constitute opinion evidence as to the Japanese law in the income tax area.

[151]        For the above reasons, it is my view that the Appellant did not establish that he was subject to as comprehensive a tax liability as is imposed by Japan for the purposes of Article 4 of the Canada-Japan Income Tax convention. For these reasons, I conclude that it has not been established that the Appellant was at the relevant times a resident of Japan for the purposes of Article 4 of the Canada-Japan Income Tax Convention.

Tie breaker rules of the Canada-Japan Income Tax Convention

[152]        Having decided that the Appellant is a resident of Canada and not a resident of Japan for the purposes of Article 4 of the Canada-Japan Income Tax Convention, it is not necessary to address other issues. However, I would like to make a few comments with respect to the mutual agreement process and the "tie breaker" rules in the Canada-Japan Income Tax Convention.

[153]        Article 4 of paragraph 2 of the Canada-Japan Income Tax Convention, and The Protocol to the Convention state:

1.                     Where by reason of the provisions of paragraph 1 a person is resident of both Contracting States, then the competent authorities of the Contracting States shall determine by mutual agreement the Contracting State of which that shall person be deemed to be a resident for the purposes of this Convention. [emphasis added]

Protocol

With reference to paragraph 2 of Article 4 of the Convention, when an individual or a company is a resident of both Contracting States, the question shall be settled by mutual agreement by applying the following rules:

(a)                  in the case of an individual:

(i)                    he shall be deemed to be a resident of a Contracting State in which he has a permanent home available to him. If he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closest (centre of vital interest);

(ii)                  if the Contracting State in which his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;

(iii)                 if he has an habitual habode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national;

[154]        Although I do not decide the matter, I doubt that this Court has the authority to apply the tie breaker rules referred to in the Canada-Japan Income Tax Convention. The words of the Convention state specifically that "the competent authorities of the Contracting States shall determine by mutual agreement the Contracting State of which that person shall be deemed to be a resident for the purposes of this Convention" and this should be done by resorting to the tie breaker rules. It therefore appears that the Contracting States intended that the application of the "tie breaker rules" is a matter for the competent authorities of the Contracting States and not for this Court.

[155]        For the above reasons, I have come to the following conclusions:

a)              the Appellant was ordinarily resident of Canada during the three years in issue;

b)             paragraph 250(1)(e) of the Income Tax Act is not contrary to subsection 15(1) of the Canadian Charter of Rights and Freedoms;

c)              he was deemed to be a resident of Canada during the period in question pursuant to paragraph 250(1)(e) of the Income Tax Act;

d)             the Appellant was not a resident of Japan pursuant to Article 4 of the Canada-Japan Income Tax Convention.

Accordingly, the assessments of the Minister of National Revenue for the 1993, 1994 and 1995 taxation years are confirmed and the appeals are dismissed, with costs.

Signed at Ottawa, Canada, this 11th day of September 2000.

"Alban Garon"

C.J.T.C.C.

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