Tax Court of Canada Judgments

Date: 20020122

Dockets: 2000-674-IT-G

BETWEEN:

KINGUK TRAWL INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent,

and

2000-671(IT)G

BETWEEN:

FAROCAN INCORPORATED

(Successor to Aqviq Trawl Incorporated),

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Margeson, J.T.C.C.

[1]            It was agreed at the time of trial by the parties that the evidence given in one case would apply equally to the other. It was further agreed that the Appellant Farocan Incorporated ("Farocan") was the successor by amalgamation of the former Farocan Incorporated and of the former Aqviq Trawl Inc. ("Aqviq").

[2]            This appeal is from four Notices of Assessment by the Minister of National Revenue ("Minister"), notices of which were dated May 6, 1998 advising the Appellant that it had been assessed liability pursuant to Part XIII of the Income Tax Act ("Act") for amounts of tax which it failed to deduct and remit on payments made to F. Uhrenholt Holdings A/S ("Uhrenholt"), during the years 1994, 1995, 1996 and 1997 and for penalties and interest relating thereto.

[3]            It was undisputed that Aqviq and the Appellant Kinguk Trawl Inc. ("Kinguk") during the years in question, each owned and operated a trawler (the "Aqviq" and the "Kinguk"), respectively on which the crew fished and processed shrimp, mostly in the Canadian economic zone. The fish was processed on board. Both ships were based in Mulgrave, Nova Scotia, and the catch ordinarily landed there or other places. The administration for both ships took place in Mulgrave although no marketing took place there.

[4]            Agreements were in place between both vessels and Uhrenholt, which companies were managed by one Hans Andersen. These agreements provided long term financing for the two ships and lines of credit were established for both ships. The significance of these agreements is the main issue in this case.

[5]            A running account was kept for both ships with advances being made to them and interest was charged on the accounts as well against offsetting credits to the Appellants for the price obtained for the cash. The credits were netted against the advances and charges. None of the interest which is an issue in this case was paid in cash. It was charged to the line of credit accounts. Neither of the Appellants withheld or paid to Revenue Canada, tax under Part XIII of the Act on the interest credited to Uhrenholt in their line of credit accounts in respect of the 70 per cent advances, the running balance of the line of credit accounts or the quarterly so-called "commissions" based on the maximum line of credit.

[6]            Revenue Canada assessed the Appellants for 15 per cent withholding tax on these amounts being the reduced rate on interest applicable under the Canada-Denmark Income Tax Agreements and Conventions. The Minister also grossed up by 15/85, the interest that was actually credited by Aqviq and Kinguk in the line of credit accounts in the years in question, on the basis that the line of credit agreements required Aqviq or Kinguk to indemnify Uhrenholt for any Canadian taxes that Uhrenholt was required to pay on that interest.

Evidence

[7]            Hans Andersen testified that he was the chairman of the board of Uhrenholt as of June 2001. Before that he was managing director of the holding company and had been so since around 1987. Between 1994 and 1997 he was managing director. He was a leader of the company and part of his duties involved making recommendations to the board. He reported to the board.

[8]            His background was in banking for over a period of 20 years and he had been managing director of the fifth largest savings bank in Denmark.

[9]            Exhibit A-1 was introduced by consent and the witness was referred to Tab 3 of the exhibit which showed the organization plan of the Uhrenholt Group. The head office of this company was in Denmark and this witness had been involved with this organization since 1987.

[10]          The main business commenced around 1978 and it involved the dairy industry. Now the companies are involved in foodstuffs, fish and meat as well. It is run from Denmark with representative offices in China, Moscow and other places throughout the world. In the years 1993 and 1994 Uhrenholt wanted to get into the shrimp business. They looked to Canadian companies with which they might become involved. They invited the Appellants to get involved with them.

[11]          The Farocan Group of companies was "cash starved" and Uhrenholt had to help them out. The two trawlers were financed through Danish banks who had called the loans. Uhrenholt talked to the bankers and ultimately had to invest in the trawlers in order to get involved in the shrimp business. They made a deal in which Uhrenholt bought the debt from one bank and made a deal with the other bank then subsequently bought the second debt. This witness was personally involved in the arrangements.

[12]          He was referred to Exhibit-1, Tab 4 which was called an Operating Facility Agreement between Kinguk and Uhrenholt. The purpose of this agreement was to convince the bank that Farocan could run the business. A similar agreement was entered into with Aqviq.

[13]          Two separate lines of credit were established, one for each ship. Tab 2 of this exhibit was the English translation of the Aqviq Trade Agreement. The original agreements were in Danish.

[14]          They wanted to keep the arrangements simple as a commission deal. "We did it ourselves. It was a gentleman's agreement."

[15]          The agreements were intended to allow Farocan to use its experience in sales, that it should be a commission deal and that Farocan would have 4 per cent of the gross sale price received less all expenses. They would receive 4 per cent of the net for their work.

[16]          With respect to the settlement of the catch, when the vessel came into port their sales people looked at the product and offered their opinion as to the price that it would obtain and as to the cost of sales. They prepaid to the ships, 70 per cent of what they had pre-calculated they would receive for the catch and paid the balance after the catch was sold. The prepaid price was based on a calculated market price conservatively determined. The product was inspected by agents of Farocan as well as by Japanese officials when the product was scheduled to be sold to them. Approximately 90 days later, they would settle up.

[17]          The market price could change but mostly it went up. In the last two years it went down. In the worse case scenario the ships could end up owing them money if the price went down radically. The witness said that both agreements were the same.

[18]          Again referring to Tab 1 of this exhibit, the witness said that the ships were charged an interest rate on the advance until the product was sold. Once the catch was landed Uhrenholt "took care of it and once the goods leave the vessel they are our responsibility. We say where it goes and we sell it. We tell the ship how to pack it". Uhrenholt wanted security when they paid the money. Farocan bore the risk of drop in prices. Uhrenholt paid the insurance and then charged it back to the trawlers.

[19]          He was referred to Tab 8 which was a letter from F. Uhrenholt Holdings A/S with respect to insurance. He said that Uhrenholt charges insurance to the trawlers at exactly the same amount as they pay for it. Tab 9 was a copy of the final settlement in Danish currency. These statements show how they valued the catch.

[20]          They were entitled to sell the catch to one of their companies but this was usually for small amounts only. Normally they sell the catch to someone else. The "interest on account payment" as set out in this final settlement statement could be called an expense. This is a part of the disputed interest in this case. The practice during the years in dispute was basically the same as this.

[21]          The witness referred to Tab 11 which was a record of the line of credit of Kinguk for 1994, 1995, 1996 and 1997. Page 13 showed an interest charge calculated daily at the bank rate.

[22]          In cross-examination the witness said that Uhrenholt had dairy sales all over the world. He did not know how many representatives the company had worldwide. With respect to their fishing business this was done mostly from Denmark. He travelled around the market place to exhibitions. With respect to their income from the fishing business, it was obtained mostly on a commission basis. With other products they obtained their remuneration by buying and selling. Their main business with respect to the fish was buying and selling. "The representatives in China and other places more or less keep up with the paperwork." They arrange meetings with potential buyers to show them that Uhrenholt is serious.

[23]          During the years in question Uhrenholt was entitled to buy products from sellers other than the two Appellants. It did not have any investments in the other vessels from which they purchased products. He said, "We normally do it in the same way with others. Some times we have a commission arrangement." When questioned further about this item he said, "Nearly the same arrangement with others and on the same commission. Sometimes, due to commission charges, we buy directly and not on a commission basis."

[24]          The logo of Uhrenholt is placed on some products and the product must state where it comes from. Sometimes it contained the logo of the seller. He was asked why his company's logo appeared on the product if it still belonged to the seller. He said that that was because their logo is well known. The logo was up to the customer. Uhrenholt discussed it with them. Then he said he could not answer that as he was not in sales. Sometimes the wholesalers' logo was on the product and sometimes both were on it. Sometimes a buyer wanted to say how it was packed. Uhrenholt's logo is the sign of a ship and is well known as a top product. They have different logos for different markets. They try to get the best product price for the supplier.

[25]          He was referred to Tab 10 at page 5 which showed the sign of a ship as a logo and he also pointed out that at the bottom of the page was the term "Friendship" which was also their logo. In the years in question they had the ship as a logo and also the "Friendship" brand.

[26]          They never would have the name Kinguk or Aqviq on the letterhead. He said, "I think they could tell us not to put our name on the product." Uhrenholt tells the trawlers what packaging materials are to be used. They must show where the product came from. Uhrenholt has nothing to do with how to catch the fish. It does not tell them what kind of shrimp to catch. It does not advise them how to process the product. Uhrenholt were the salespeople.

[27]          He was asked whether or not there were specialists on board the ships and he said that he was not the person to ask about that. He confirmed that the trawlers had no input into the selling of the product although Uhrenholt does talk to them about it. Normally no one from the trawlers contacts their customers.

[28]          With respect to the question as to whether or not the trawlers had any input into the price, he said: "They have no input as to the price but it is not closed to them."

[29]          He indicated that sometimes Uhrenholt does take the product to China. The salespeople from Uhrenholt who were located in Denmark obtained the customers. The products are sold differently in different countries.

[30]          With respect to Japan, all of the sales were made directly from Denmark. This witness did not know how they made the deals or where they were signed and whether the contract was made by fax or otherwise.

[31]          With respect to Japan they sell containers only. He did not know how they do the paperwork or where the contracts are made. Cheques from the buyers are made out to Uhrenholt. Invoices are sent by Uhrenholt to the Japanese and Uhrenholt receives the payment.

[32]          He was referred to the change of names seen on Exhibit A-1 at Tabs 1, 4 and 5 and he said that the names were changed but the company remains the same. He was referred again to the trade agreement with Aqviq located at Tab 2 and he said that paragraph 1 showed the commission of 4 per cent and paragraph 2 indicated that his company took care of the expenses for freight, discharge, handling, cold storage, insurance, customs duties and all sales-related costs and these amounts were deducted in order to obtain the net selling price.

[33]          He indicated that the trawlers surrendered their total catch to Uhrenholt except for a small portion that they may keep for themselves. "In principle, we sell everything. That is the deal. We settle up after each trip. Uhrenholt fixes its own resale prices."

[34]          He was questioned with respect to the term 'resale' and he said that this has only to do with their duty to sell the product at the highest price. He did not believe that it was a true resale. It was his position that ownership was only transferred after the final sale. They have a floating charge on the goods.

[35]          He was referred again to the trade agreement with Aqviq at Tab 1 and he said that it was the same as the agreement with Kinguk. It was suggested to him that this is not an agency agreement and he said: "I don't know what it is. If we are not an agent I don't know why we are doing it. I don't know if the word agent is the same as in Danish. We are selling the product and taking 4 per cent commission." He said that the buyer would sue Uhrenholt if the product were late. Paragraph 9 of the trade agreement was correct and Uhrenholt could tell the trawler how to pack and produce the product.

[36]          He identified the logo and the "Friendship" brand insignia at the top of Exhibit R-2, Tab 7. The head office of the company was listed at the top of this document. He said that the person who wrote the document, Tommy Schneider was a salesman in the shrimp business. He was asked what the company was doing in writing this letter at Tab 7. He said that they were trying to give their best advice to Farocan Inc., Halifax, Canada in this letter which was written on February 2, 1995.

[37]          This letter appeared to be a suggestion that better prices could be obtained for industrial shrimp. The suggestion was that (we) increase this production. He was asked whether or not the producers had to follow through on this suggestion and at first he did not answer the question but later on said, "They do what they can to follow the suggestions." He confirmed that the agreements were terminable by Uhrenholt at three month's notice although the trawlers could not terminate them if they still owed money to Uhrenholt.

[38]          The trawler must take out product liability insurance with coverage in compliance with the general Danish law of damages although he was unable to say who was the insurer as Uhrenholt has its own insurance in place as well.

[39]          He was shown an invoice in Exhibit A-1 at Tab 10 and he said that the invoices during the years in question were the same. At Tab 5, he referred to an invoice from his company to itself. He said that between 1994 and 1997, Uhrenholt sold 5 per cent or less of the product to itself. The trawlers knew that they were selling small amounts of the product to themselves.

[40]          Between 1994 and 1997 Uhrenholt sold shrimp to Japan but he did not know what percentage. He did not know whether Japan was their best market or not. They were in the Japanese market before they entered into the relationship with the Appellants. His company also sold to Sweden and other European markets and Taiwan. He could not say if there were other markets. China is now one of their biggest markets.

[41]          He was referred to Exhibit A-1 at Tab 13 which was referable to Aqviq and he said that he did not know what it was but it looked like a budget. He agreed that the costs referred to in paragraph two of the agreement with Aqviq represented the usual costs related to selling the product. With respect to freight, all costs of the freight in shipping or transporting the product to Denmark and from Denmark to the purchasers were deducted from the ultimate price to obtain the net price. He was asked whether or not there were some costs incurred in freight that do not occur in Canada. He said they could be incurred in all countries.

[42]          He was referred to Tab 6 at pages 1 and 2 with respect to the ports of landing in the years in question for the two trawlers. He was further referred to Exhibit A-1 at Tab 1 with respect to the insurance referred to in paragraph 2 and he said that this could have been a transport insurance or a payment insurance but transport insurance was the most important. Uhrenholt pays all of its taxes in Denmark. Uhrenholt was in charge of selling all of the products for both trawlers. Uhrenholt does not have to clear the price with the trawlers. It does not have to tell the trawlers the names of the purchasers. The trawlers do not have to consent to the sale to Uhrenholt. However, the witness said that if Uhrenholt should decide to buy all of the catch he would think that Uhrenholt should tell the trawlers. However, in this case it was so small that they did not have to.

[43]          In the event that the product cannot be sold it is destroyed and the Appellants would pay the cost. He was referred to Exhibit A-1 at Tab 8, page 6 and he was asked what it was. He said it was a copy of the terms and conditions of the sale and delivery by Uhrenholt to their customers including the buyers of their products supplied to them by the Appellants. Uhrenholt also uses this for insurance purposes. These are the same terms and conditions that existed during the years in question. He was referred particularly to paragraph 2.5 which said:

To the extent permitted by law, title to the goods shall remain with F. Uhrenholt until payment has been completed.

[44]          Uhrenholt had one other company in Latvia which fishes shrimp where they have a similar sales agreement and a line of credit in operation as existed between Uhrenholt and the two Appellants here. Uhrenholt sells their shrimp to various customers but only one customer buys from one boat.

[45]          The Latvia company is in a negative balance on their line of credit. The Appellants know that Uhrenholt is selling products of many trawlers including those purchased from the Latvian company.

[46]          He was referred again to Exhibit A-1 at Tab 4, the Operating Facility Agreement with Kinguk, and more particularly at page 4 with respect to the purpose of the agreement and he said that he agreed with it.

[47]          Again he was referred to page 7 of the same agreement at paragraph 6.1(a) which provided inter alia, that:

... in the event that the Borrower is required to withhold or pay such tax, it shall nonetheless pay to the Lender such additional amounts so that the Lender actually receives in full all amounts on account of principal and interest owing to it hereunder, as if such tax had not been paid.

He said that he did not understand it, this was not made by him but by the company's attorneys. Then he said that it was the responsibility of the borrower. His company does not pay taxes in Canada.

[48]          In re-direct the witness referred to Exhibit A-1 at Tab 7 page 5 which was an invoice from Uhrenholt and identified the number 0007 as being an indication as to where the shrimp came from. The same type of number was used with respect to Aqviq. Sometimes the cost of storage in Denmark would be charged to the Appellants.

[49]          Mr. Sunvar Mortensen testified. He resided at Port Hawkesbury, Nova Scotia and had been the chief accountant for Farocan since August 1990. His duties included doing daily accounting, accounts payable, projections and some management in the absence of the President who was frequently absent. During the years in issue he communicated with the trawlers. The office of the company was in Mulgrave, Nova Scotia. The company was in the shrimp harvesting business and operated the two vessels in question with about 23 crew members. These vessels operated from Labrador to the Davis Strait and Baffin Bay. They were licensed for these areas and only fished for shrimp.

[50]          The shrimp were brought on board, sized, the larger ones were processed for Japan, were treated and packed. The medium sized shrimp were cooked for the European market and packed. The smaller shrimp were processed as quick frozen items and were packed for the peeling market. Quality and size of the shrimp varied. Only broken shrimp were discarded. The product was landed in Nova Scotia, Newfoundland or Greenland as well as Denmark when they went there for a refit and brought the catch with them.

[51]          When the product was landed, Uhrenholt took possession of it and told them where to ship the product. Sometimes it went directly to Japan or in cold storage in Denmark on commercial carriers. In Denmark, inspections were conducted for quality, the product was sorted and sold to customers.

[52]          On board the trawlers the logo of Farocan was put on them as well as the logo of Uhrenholt. Normally they were not repackaged in Denmark. Very few of the shrimp were sold to buyers in Canada. They needed some shrimp product for the peeling factories in Canada. Two thousand to thirty-five hundred pounds would have been the total amount, one shipload for four years in total. He admitted that the trawlers fished in the Canadian economic zone only.

[53]          He prepared Tab 6 in Exhibit A-1 with respect to each vessel which showed when the vessel started, when it stopped for each trip and where the product was unloaded. The sea time might be 10 to 48 days but it was normal to take two to three weeks. They stopped when the hold was full of shrimp. The vessels went to Denmark for refits whether they were minor or major. Repairs are done every year and the ship's safety examination takes place in Mulgrave, Nova Scotia. One repair job was conducted in Greenland as shown at Tab 7. The boat went there for these repairs. The witness also referred to a payment on behalf of Kinguk by Codan Insurance Limited ("Codan"), dated June 1, 1995.

[54]          He said that Uhrenholt did an accounting for each boat. The Appellants received a settlement statement showing the expenses. He identified such a statement found at Tab 10 as well as the pro forma invoices that followed. He received them. He also saw the final settlements. He did not see the underlying invoices. It was normally three months from the date of landing until they received the final settlement.

[55]          There was a line of credit for each trawler. Both Uhrenholt and the Appellants maintained it. They compared them every month. Amounts were in Danish currency. The rate of exchange varied but was .17 to .24 during the period in issue.

[56]          The line of credit was used to pay for fuel, gear, supplies, maintenance and all other operating expenses. He sent bills out to Uhrenholt and asked that payment be made to the customers. Uhrenholt paid them directly. They debited the line of credit of the Appellants in the Appellants' account and thus increased the amount that the Appellants owed to Uhrenholt. Trip settlements were credited net. The balances went up and down.

[57]          With respect to interest charges Uhrenholt charged interest on the line of credit day-to-day and entered them at month end. There was also a commission fee recorded as well as interest on the 70 per cent advance. The interest was just an entry in the books. In the books of Uhrenholt it would be a debit to the line of credit and on the books of the Appellants it would be a credit. He referred to spreadsheets at Tabs 11 and 12 with respect to the line of credit for each Appellant in the books of Uhrenholt and the debits and credits during the years in question were included. This information came from the Appellants' general ledger and referred to Danish currency. This included the trip settlements as well as all interest charges.

[58]          Tab 11 at page 3 included interest paid on the 70 per cent advance (but this was not shown on the settlement sheet). The Appellants had no role in marketing the fish product as Uhrenholt did it all and received a 4 per cent sales commission for doing so. The Appellants incurred the risk of declining prices between the time the product was landed and the time it was sold. It was possible for the Appellants to owe Uhrenholt money. The customers were decided upon by Uhrenholt. Uhrenholt always got the best price that they could for the product.

[59]          There were four people in the Appellants' office. Mr. Sunvar Mortensen was in charge when the President was away. The office managed the supplies, standards, quality control, paid the crew and the fuel but had nothing to do with the sales. This office engaged the crew and had to ensure that they were qualified. The crew consisted of Canadians and landed immigrants, mostly captains and officers.

[60]          He was not involved in the drafting of the two trade agreements. He later on found out what was in them. He was not involved in setting up the line of credit agreements.

[61]          All of the expenses referred to at Tab 10 at pages 2 and 3 were deducted. He prepared the statement for Aqviq which is shown at Tab 13. This showed a summary of all trips. These figures were from the pro forma and final settlement statements. He also identified Tab 14. He said that the Appellants bore all of the embedded expenses. The figures represented all of the sales-related expenses and it would be the same if they entered them separately in the line of credit account. Instead of netting the embedded expenses, had they put them in the ledger directly and entered the gross amounts separately, there would be no changes. The interest charges, balances would be the same. If the Appellants did not have to pay the embedded expenses it would have owed less money, fewer charges would be made and the line of credit balance would have been greater. The Appellants paid interest on the embedded expenses.

[62]          Tab 14 was with respect to the trawler Aqviq and it referred to supplies obtained in a foreign port (summary). Page 2 contained a reference to particular items. Tab 16 contained the same type of information for the other trawler. References were to Danish Krona. The supplies and packaging were all purchased outside of Canada. All expenses for vessel maintenance were made outside Canada. The insurance was purchased outside of Canada. The fishing gear was purchased in Denmark. Fuel was purchased at sea from a Danish company but they came into Canadian waters. Payments to crew were to foreign companies and the legal expenses were made to foreign lawyers. The embedded expenses were all taken from their books as shown at Tabs 11 and 12.

[63]          In cross-examination he said that the information in Exhibit R-1 at Tab 22 was provided by him. These were year-end financial statements as of December 31, 1996. These were prepared by KPMG, Chartered Accountants. The contents of these statements are true. They relate to the trawler Aqviq. Tab 12 contained financial statements with respect to the trawler Kinguk. Revenue recognition was a problem before 1999. This problem was corrected in 1999 and other than that, the statements are correct.

[64]          All employees at the Head Office live in Nova Scotia. Both companies have the same office which is owned 100 per cent by the Farocan Group. The major shareholder was Mr. Kjolbro, a landed immigrant and Canadian resident. Both himself and Mr. Kjolbro had signing authority between 1994 and 1997 but this witness made decisions regarding the operations of both trawlers.

[65]          Both companies owned the vessels referred to and were registered in Halifax. Both were operating under a license issued by the Government of Canada, Department of Fisheries and Oceans Canada. The fishing licenses were shown in Exhibit R-2 at Tab 6 for the period in question. These two trawlers fished only in Canadian waters and in the designated areas as per their licenses.

[66]          Tab 1 showed the three types of shrimp, Japanese, cooked and industrial. They are sorted according to size. The large shrimp were for the Japanese market and were packed frozen in 12-1 kilogram bags and then put into a master carton. The medium sized shrimp were cooked and packed in 5 kilogram cartons and were ready for market. The smaller shrimp were packed in 20 kilogram industrial bags and were used as raw material for shore based peeling plants. The letter 'J' represents Japan; 'C' cooked and 'I' industrial as referred to in the exhibit. The Japanese shrimp are cooked, finished and ready for the market. All of the work is done aboard the two trawlers. Processing is completed. Boats land in different places such as Mulgrave, Nova Scotia when fishing in southern areas. They landed in Newfoundland when fishing in northern areas and landed in Greenland when they went fishing farther north.

[67]          Exhibit A-1 at Tab 6 showed all of the trips and landings of the two trawlers in issue. In 1994 there were no landings in Denmark. It was suggested to him that Greenland belongs to Denmark and he said that he did not know if that was so considered under the Canadian-Denmark Treaty. Between the years 1994 and 1997 the trawler Aqviq was in Denmark only once and the majority of the catch was landed in Canada in all of the years in question. The product was off loaded, the ship was resupplied and the engine and gear repairs were done there. Most of the time the Japanese shrimp were shipped directly to Japan but sometimes it went to Denmark after the boats landed in Mulgrave. He had no say in where the catch was going.

[68]          Head office duties were performed in Mulgrave. All operations were conducted from there with respect to crew, repairs, supply, ship and safety regulations, fishing regulations and accounting, accounts payable, accounts receivable, expenses for vessel insurance, expenses relevant to the catch on board the vessel, oil slick indemnity insurance, workers compensation, crew members insurance (accidental, life and medical). Everything was conducted out of their head office with the exception of sales of the product.

[69]          With respect to the crew, they were all Canadians, landed immigrants and possibly some foreigners during the years in question. Today all are Canadians or landed immigrants. Their pay is calculated in Canadian dollars. The Bank of Nova Scotia accounts are in the name of each boat.

[70]          The company employed a secretary, Michelle, who was also responsible for the payroll, crew changes, reports to Fisheries and Oceans (daily), settlements for the crew, provisions and supplies (salt, etc.). This witness was the chief accountant and practically the manager when the President was away. One hundred per cent of the shrimp sales were reported on Canadian income tax returns for both trawlers. They filed only in Canada. They paid income tax in Canada only and all assets were in Canada. War insurance was in place. Mortgage interest insurance was in place as well as crew effects insurance for articles on board ship and cargo insurance (loss due to breakdown). All of these policies were negotiated by this witness from his office in Nova Scotia.

[71]          Japan, China and Europe were the main markets (as far as he knew) and a small part of the industrial shrimp sales were in Canada. He estimated that around 20 per cent of the shrimp were sold to Japan but more than 20 per cent of the revenue was obtained from that source. Cooked shrimp, mainly for the European market represented about 40 per cent of the catch. The balance was industrial shrimp. He did not know what sales took place in Denmark but some sales took place there. They were mostly for industrial shrimp for the peeling plants in Denmark. Some industrial shrimp went to Norway and some to Sweden as well. Industrial shrimp represented 30 to 40 per cent of the catch.

[72]          He identified a credit facility agreement with respect to Aqviq found at Exhibit A-1, Tab 5 and the Operating Facility Agreement with respect to Kinguk at Tab 4. Most of the funds involved in this case fell within these agreements.

[73]          Counsel referred the witness to Exhibit R-1, Tab 11 which was a letter to Mr. Sunvar Mortensen from KPMG, Chartered Accountants. This was on the subject matter of the requirement of the Appellants to deduct and remit withholding taxes with respect to the interest paid on the line of credit from Uhrenholt. The witness said that he agreed with the statement which said that the Appellants did not have to withhold and remit this tax because none of the interest was related to the business activities of the company in Canada.

[74]          He was shown Exhibit A-1 at Tab 11 and he said this document was his attempt to show what was spent in Canada and what was spent out of Canada. This related to Kinguk and Tab 12 related to Aqviq. Tab 14 was a detailed form of Tab 11 to reflect the amounts paid for activities outside of Canada. Tab 16 was the same type of document with respect to Kinguk. Here the payments were in Danish Krona. The figure of $169,739 was with respect to services received in Greenland and payment was made to the supplier in Norway. These expenses were necessary for the vessel to continue to fish. This witness negotiated the insurance in Canada for the operation of these boats. Insurance was required.

[75]          The packing supplies were in three locations. Payment to Skold Insurance was a payment to Norway for indemnity insurance negotiated in Canada. This was necessary insurance.

[76]          The fishing gear included trawls, netting, wire, floaters, trawl doors. This gear was used on the vessels. He referred to a payment with respect to fuel and a lube oil and he indicated that this was fuel that was received at sea in Canadian waters. The supplier was Danish and payment was made to Denmark. With respect to payments to Malik he said that these supplies were all made in Canadian waters unless the boat was in Denmark for a landing. Whenever the ships came to port for landing they refueled and oiled. These were necessary expenses.

[77]          With respect to crew travel, these were tickets for the crew that lived abroad. These were foreign residents. These were necessary expenses.

[78]          With respect to the legal and professional, these were monies that were paid to Danish lawyers with respect to the line of credit, the operating facility agreements etc. These were all necessary expenses.

[79]          The payment at Tab 7 was a payment to the ship's agent in Greenland for repairs made there. He referred to another item which was a payment for full damage made through their insurance company. The trawlers paid their share and Codan paid theirs.

[80]          Sometimes Uhrenholt would buy from themselves and the Appellant would not be consulted about it.

[81]          He was referred to Tab 4 of Exhibit A-1 which was a copy of the operating facility agreement for Kinguk. He was referred specifically to paragraph 6.1(a) with respect to the liability of the Appellant Kinguk to pay additional amounts to the lender in the event that the borrower was required to withhold or pay tax. They did not withhold tax and the full interest was debited to the line of credit without deduction of any income tax in Canada.

[82]          He was referred to the trade agreement in Exhibit A-1 at Tab 1 requiring Aqviq to take out product liability insurance in compliance with the general Danish law of damages. The witness said that this was not taken out until this year. The Appellant was the beneficiary of this insurance and this insurance was obtained in the Nova Scotia market.

[83]          In 1995, 1996 and 1997 a total of $183,000 was borrowed by the Appellants to finance the building of a home for the President in Nova Scotia on the line of credit of the Appellants.

[84]          In re-direct the witness said that packaging expenses represented purchases from suppliers outside of Canada. He was asked why the product was packaged and he said that they packaged it in accordance with instructions of Uhrenholt and in accordance with Canadian law.

[85]          With respect to the legal expenses referred to at Tabs 5 and 6 he said that he could not tie them into these agreements. There may have been others.

[86]          Again he said that the supply of fuel by Malik took place mostly at sea. Some took place during the refit in Denmark.

[87]          In response to the Court's question he said that some of the fuel would have been supplied by Malik in Greenland. In further response to a question from counsel for the Appellants he said that the vessels would take on fuel when they landed in Nuuk, Greenland. In response to a question by counsel for the Respondent he said that he was not able to say which amounts expended were for fuel received at sea.

[88]          The Respondent called Joseph Gillis who was an auditor with the Canadian Customs Revenue Agency since 1978. He started doing audits with respect to withholding taxes in 1983 up to a year ago. He is now doing general audits again.

[89]          He conducted an audit for the years in question with respect to the Appellants for payments made to foreign companies which might come under the purview of section 212 of the Act with respect to withholding tax. He started the audit in the summer of 1997. He talked to the controller Mr. Mortensen to review his records. He went to Mulgrave, looked at payments to non-residents, particularly with respect to interest. He discussed the matter with Mr. Mortensen. He also noticed interest in the books of the Appellants and also looked at the loan agreements. He found that no withholding tax was taken.

[90]          Mr. Mortensen gave him a letter from their accountant with respect to the withholding policy. This was shown in Exhibit R-1 at Tab 11. This letter indicated that the activities of the Appellants were outside of Canada and therefore the business was being conducted outside of Canada. He also noted that Uhrenholt charged interest on the balance of the line of credit.

[91]          At the time of the audit the Appellants took the position that if the catch was made outside the 12-mile limit then it was in another country. The witness also spoke to Mr. Bryan Duffy with respect to this matter. He reviewed copies of the loan agreement and had access to all of the Appellants' books and records relative to the transactions with Uhrenholt. He tied them into the general ledger.

[92]          Mr. Gillis said that he had a copy of the Operating Facility Agreement for Kinguk and Aqviq. He reviewed the financial statements of the Appellants, their income tax returns and he discussed them with his supervisor. They disagreed with the position taken by the company's accountants and they wrote a letter in February of 1998 to the company. He indicated to them that he would issue an assessment.

[93]          He referred again to the letter of February 27, 1998 directed to Kinguk from himself. This letter was found in Exhibit R-1, Tab 9. He advised Mr. Mortensen that the exemption did not apply because they were fishing in the Canadian economic zone.

[94]          Page 2 contains a summary of the interest paid or credited to Uhrenholt which he then grossed up because of the liability that he said was owing to the Appellants as a result of Article 6.1 of the Operating Facility Agreement. This article provided that any withholding would be at the expense of Kinguk. With respect to Aqviq, the amount paid to Uhrenholt was a net figure and therefore in order to calculate the proper tax they had to get a gross amount. The 15 per cent calculation was arrived at through the treaty application.

[95]          His letter to Aqviq was dated February 27, 1998 and was found at Exhibit R-1, Tab 24. The same type of letter was sent to Kinguk. He pointed out that the proper amounts found on page 2 were the handwritten amounts rather than the typewritten amounts. Further, reference to Article 6 of the loan agreement should have read Article 5. Tab 24 showed how he arrived at the amounts that he claimed due.

[96]          The document in Exhibit R-1, Tab 8 was not a payroll audit although it was indicated as such. He explained how he used this program to calculate the interest and the penalty to make the final assessment of the taxpayers. He sent it out to them. Exhibit R-1 at Tab 23 which referred to Aqviq was not a payroll audit. He gave the same explanation.

[97]          He referred to Exhibit R-1, Tab 12 which was a letter he wrote to the Appeals Division in St. John's, Newfoundland in which he outlined the reasons for the position that he took in making the assessment. This was used by the appeals officer in conducting the appeal.

[98]          Page 7 was just a sample of the period of time outside the audit period with respect to the line of credit operation. This was presented in order to show how it worked. Pages 8, 9 and 10 were examples taken outside the period in issue as well. Pages 13 and 14 contained the commercial agreement between Uhrenholt and Aqviq. Page 15 related to issues dealt with regarding the non-withholding issue relative to advances to Jogvan Kjolbro. Tab 13 contained the confirmation of assessment by the Appeals Division.

[99]          He understood that the line of credit was to be used for financing of the trips made by the boats, their catch and the selling of same. There were also some personal expenses that the President added to the line of credit but these amounts have no other effect on the issues here. These amounts are referred to in paragraph 9 of the Reply to Notice of Appeal.

[100]        In cross-examination the witness admitted that the interest was not actually paid in cash or by cheque. Entries were in the line of credit account and were debited and credited in different books. He calculated interest on all three amounts and he explained how he arrived at the amount of the calculations. It was suggested to him that he had applied an accrual system of accounting to the interest but he did not answer that question.

Argument on behalf of the Appellants

[101]        Counsel for the Appellants presented both written and oral argument. He said that central to the relationship between Uhrenholt and Aqviq and Kinguk were two "trade agreements" - one made with each of Aqviq and Kinguk, expressed in essentially similar terms. The agreements were drafted in Danish in 1993 or 1994 without legal assistance, by Hans Andersen in negotiation with Jogvan Kjolbro, the principle shareholder of the former Farocan Incorporated. These agreements were in effect during the years under appeal and tied into the lines of credit granted by Uhrenholt to Aqviq and Kinguk. It was counsel's position that these agreements should not be interpreted "too legalistically". Mr. Andersen had testified that they knew what they wanted to do.

[102]        The "trade agreements" made Uhrenholt the sole marketing agent for Aqviq and Kinguk, for which function Uhrenholt was entitled to a commission of 4 per cent. Uhrenholt was to take control of the catch wherever it was landed. In practice, the Farocan Group either delivered the catch to an agent appointed by Uhrenholt or shipped it as directed by Uhrenholt. In most cases the catch was shipped either directly to buyers in Japan procured by Uhrenholt or was shipped to a warehouse maintained by Uhrenholt in Denmark and subsequently forwarded to its ultimate destination. This destination might, for example, be China or Japan, but in some cases the ultimate buyer was a member of the Uhrenholt Group.

[103]        In oral argument counsel referred to Exhibit A-1, Tab 9, page 5 which was an invoice from F. Uhrenholt to itself. Counsel asked the question, "how could one sell to oneself? It can't. It would not make sense for them to act this way." Counsel opined that when you look at the term title, in the agreements and couple it with all of the other facts, it must have been an agency arrangement until the goods were actually sold. It was a single business inside and outside of Canada. Therefore, you must allocate interest inside and outside of Canada.

[104]        Each month there were three types of calculation of interest. One, interest on the amounts owing Uhrenholt by Aqviq and Kinguk based on the daily balances of the line of credit account in question during that month. Two, a quarterly commission based on the maximum allowable line of credit. Both of these charges were debited to the line of credit account in question on the books of Uhrenholt and correspondingly credited to the reciprocal account on the books of Aqviq and Kinguk. Three, Uhrenholt charged interest on the 70 per cent "advances" when the product was received by them.

[105]        It was counsel's position that charging of interest on these advances indicated Uhrenholt's view that the delivery of the catch on its landing from the vessel in question did not represent a sale. It is inconsistent with a sale. This would not happen in normal buyer and seller situation. Interest was only charged on this 70 per cent for up to three months.

[106]        Under this scenario, Aqviq and Kinguk bore the risk of a decline in market price between the landing of the catch and its ultimate sale by Uhrenholt, as well as the risk of physical damage to the catch. Presumably this was the rationale for Uhrenholt to "advance" only 70 per cent of the estimated net settlement amount. This conclusion is reinforced by the fact that Aqviq and Kinguk bore, as part of the "embedded expenses", the costs incurred by Uhrenholt to insure the catch while it was in Uhrenholt's possession or en route to the ultimate buyer.

[107]        Counsel said that Mr. Andersen testified that the passage of "title" referred to in the "trade agreements" was for security only. It was only prudent for Uhrenholt to so act in light of the fact that both Aqviq and Kinguk were substantially indebted to Uhrenholt. In this way Uhrenholt could protect itself against a possible claim by some other creditor of Aqviq or Kinguk. All other elements of the "trade agreements" point to an agent's relationship rather than a transfer of beneficial ownership of the catch to Uhrenholt. Uhrenholt held legal title as security, but beneficial ownership, including the important element of risk - both risk of damage and risk of market decline - remained with Aqviq and Kinguk.

[108]        The following additional factors are inconsistent with the transfer of beneficial ownership to Uhrenholt:

a) one does not pay a commission to a seller but only to an agent. If it owned the goods, the beneficiary, Uhrenholt would stand to make a profit or loss on resale, not a commission;

b) the provision that Uhrenholt might pledge the goods as security. If Uhrenholt already owned the goods, it did not need any such authorization;

c) the amount received by Aqviq and Kinguk for a trip was based on the final sale price to the ultimate buyer, which would be inconsistent with an earlier sale to Uhrenholt;

d) Aqviq and Kinguk bore all the relevant expenses in marketing the catch; and

e) the charging of interest on the 70 per cent "advance". If the goods had already been sold by Aqviq or Kinguk to Uhrenholt, no part of the purchase price could be regarded as being owed by Aqviq or Kinguk to Uhrenholt.

[109]        Virtually none of the catch was sold to buyers in Canada. In marketing the catch, as well as in other business activities, Uhrenholt carried on business in Denmark and perhaps other countries.

[110]        The "embedded expenses" were incurred by Aqviq and Kinguk through its agent Uhrenholt, in the course of carrying on a business - namely the marketing of the catch - in Denmark and perhaps other countries. Those expenses caused the balance owing to Uhrenholt in the line of credit accounts to be higher, and the interest in those accounts to be higher, then would have been the case if the "embedded expenses" had not been incurred. Consequently, the interest credited to Uhrenholt included interest on those expenses once the settlement accounts were rendered.

[111]        In addition to repairs to the vessels done outside of Canada, Aqviq and Kinguk incurred several expenses outside Canada in the course of carrying on their business.

[112]        These included supplies and services for the vessels when they were in a foreign port, vessel insurance, packaging supplies, protection indemnity insurance, fishing gear, fuel and lube oil, crew travel and legal. These expenses were part of the business carried on outside Canada by Aqviq and Kinguk.

[113]        Aqviq and Kinguk did not withhold or pay tax to Revenue Canada under Part XIII of the Act on the interest credited to Uhrenholt on their line of credit account in respect of the 70 per cent advances, the running balance of the line of credit accounts, or the quarterly "commission" based on the line of credit.

[114]        Revenue Canada assessed the Appellant for 15 per cent withholding tax on these amounts, being the reduced rate on interest applicable under the Canada-Denmark Income Tax Agreements and Conventions. As well, the assessments were grossed up by 15/85 of the interest that was actually credited by Aqviq and Kinguk in the line of credit accounts in the years in question, on the basis that the line of credit agreements required Aqviq and Kinguk to indemnify Uhrenholt for any Canadian taxes that Uhrenholt was required to pay on that interest.

[115]        According to counsel, the issues that remain in dispute in these appeals are: (a) whether, to the extent that withholding tax under Part XIII of the Act is payable in any of the interest in question for the years in question, it is payable, at a rate of 15 per cent, on 100 per cent or 100/85 of the interest credited to Uhrenholt on the books of Aqviq and Kinguk; (b) whether, and, if so, to what extent, the interest in question is exempt from withholding tax under clause 212(1)(b)(iii)(E) of the Act, on the basis that the line of credit debts were obligations entered into by Aqviq and Kinguk in the course of carrying on a business in a country other than Canada and that the interest was deductible in computing the income of Aqviq or Kinguk under Part I of the Act from a business carried on by it in that country.

[116]        Counsel took the position that: (a) there was no basis in the Act for grossing up the actual interest by 15/85, since, in effect, no such additional amount of interest was paid or credited to Uhrenholt during the years in question, as is required by the opening words of subsection 212(1) of the Act; (b) a portion of Aqviq and Kinguk's business was conducted in a country other than Canada, principally Denmark, and an appropriate portion of the total interest should be regarded as relating to that business and therefore as being deductible under Part I of the Act in computing their income from that business.

[117]        The Appellants, in argument, have provided to the Respondent and to this Court a method for calculating withholding tax properly payable.

[118]        The parties agree that Aqviq and Kinguk dealt at arm's length with Uhrenholt and that the total interest that is in issue is to be reduced by the interest reversals credited by Uhrenholt to Aqviq and Kinguk with respect to interest on the 70 per cent advances after three months had elapsed from the landing of the catch for this particular trip. This adjustment is reflected in the calculations included in the Appellants' document at Exhibit A-1, Tab 21. If a reassessment is ordered then the Court should refer to these calculations in determining the proper amount by which the interest should be reduced.

[119]        Part XIII of the Act imposes tax on payments of, among other things, interest paid by a resident of Canada to a non-resident for amounts credited by a resident of Canada to a non-resident that are regarded as the equivalent of payment. The opening words of subsection 212(1) of the Act do not refer to income, such as interest, that might be regarded as having accrued. Rather, those words, except where Part I of the Act deems an amount to have been paid or credited, only apply where an amount has actually been paid or credited by a Canadian resident to a non-resident.

[120]        Nothing in Part I of the Act appears to deem grossed-up interest to be paid or credited in the present circumstances. Since no interest was paid by Aqviq or Kinguk to Uhrenholt during the years in question, the only interest that is potentially relevant is interest credited; and it must be credited in such a manner that it is freely available to the creditor - La Compagnie Minière Québec Cartier v. M.N.R., 84 DTC 1348; Mutuelle des Fonctionnaires du Québec v. The Queen, 97 DTC 5030 (F.C.T.D.) and Mutuelle des Fonctionnaires du Québec v. The Queen, 2000 DTC 6625, (F.C.A.).

[121]        Regardless of any possible contractual obligations on the part of Aqviq or Kinguk to indemnify Uhrenholt for withholding tax payable by Uhrenholt under Part XIII of the Act, no such indemnification occurred - by either payment or credit - during the years in question. What the tax consequences might be if and when indemnity occurs in the future is not before this Court.

[122]        Consequently, it is submitted that, if and to the extent that any of the interest credited by Aqviq or Kinguk to Uhrenholt during the years in question was subject to withholding obligations under Part XIII of the Act, it was incorrect to gross up the actual interest by 15/85 and to apply the 15 per cent tax rate to the grossed up amounts - in effect a rate of 17.647 per cent on the actual amount of interest credited.

[123]        With respect to the question of title to goods, the fact that legal title to goods may be held by a party as security only, while a risk remains with another party, is acknowledged in the frequently cited decision of the Exchequer Court of Canada in M.N.R. v. Wardean Drilling Ltd., 69 DTC 5194. The concept of beneficial ownership, which might differ from strict legal ownership, is well recognized in the case law. Here, taking the "trade agreements" as a whole, particularly in the context of how the parties interpreted and applied them, it seems quite clear that any passage of title to Uhrenholt did not involve a transfer of beneficial ownership.

[124]        Once it is accepted that Uhrenholt, in marketing the catch from Aqviq and Kinguk, was acting as the agent of Aqviq and Kinguk respectively, and did so by carrying on its business of selling that catch as agent, either in Denmark alone or in any other country other than Canada, it follows that Aqviq and Kinguk, through their agent, were carrying on that business in those countries. It also strengthens the case that Aqviq and Kinguk's other commercial transactions outside Canada were related to and a part of, their business activities being carried on outside Canada.

[125]        The case law is not entirely consistent in the criteria that it uses to determine whether a taxpayer is carrying on business in a particular country. There should be no question on the facts of this case, however, that if Uhrenholt was the agent of Aqviq and Kinguk in marketing the catch, there was sufficient activity by Uhrenholt, in that capacity, in Denmark to amount to the carrying on of business there. Merely advertising an item for sale in Canada does not amount to carrying on business in this country - Sudden Valley Inc. v. The Queen; Miller Estate v. M.N.R., 76 DTC 6448. Similarly, the mere purchase of goods in a country other than Canada does not amount to the carrying on of a business in that country - Cutlers Guild Limited v. The Queen, 81 DTC 5093. On the other hand, even the use of an "address of convenience" in Canada for a business primarily carried on outside Canada can amount to carrying on business in this country. In The Queen v. Gurd's Products Company Limited, 85 DTC 5314 even though the business was basically a front, it was carrying on a business in Canada. The case law emphasizes the selling function as being the most important indication of where a business is carried on: here Uhrenholt's activities in Denmark as agent of Aqviq and Kinguk were essentially a selling function.

[126]        In Loeck v. The Queen, 78 DTC 6368 (F.C.T.D.) and Loeck v. The Queen, 82 DTC 6071 (F.C.A.), the taxpayer, a resident of Germany engaged in adventures in the nature of trade in Canada through a fellow German who had become resident in Canada. The latter individual was held to be the taxpayer's partner or his agent. The taxpayer was found to be carrying on business in Canada, even though he visited Canada only occasionally and briefly. The decisions of the Courts in this case are an illustration of the fact that business may be carried on in a country through an agent established there. In the present case, Aqviq and Kinguk carried on a business in Denmark through their agent, Uhrenholt.

[127]        Under paragraph 4(1)(b) of the Act, when a taxpayer carries on a business in more than one place - in Canada and Denmark, as would be the case in Aqviq and Kinguk here - a reasonable allocation of revenues and expenses of the business should be made between or among those places. This criterion appears to be relevant in allocating the appropriate portion of the total interest in question to the business carried on outside Canada, for the purposes of applying the exemption from withholding tax in clause 212(1)(b)(iii)(E) of the Act. However, the Act does not say how this allocation is to be done. Therefore, any calculation has to be somewhat arbitrary.

[128]        The document at Tab 21 supplies a reasonable basis for this allocation. Such an allocation was accepted in the Twentieth Century Fox Film Corporation v. The Queen, 85 DTC 5513. Here too, the carrying on of a part of a business by an independent agent on behalf of the taxpayer was equated to the carrying on of that part of the business by the taxpayer.

[129]        The decision in The Queen v. London Life Insurance Company, 90 DTC 6001 again accepted the concept of carrying on business in a country through an agent who carried on important aspects of that business in that country, including significant aspects of the sales functions. The test used was a determination of the place "from which profits in substance arise". There can be no question here that the profits of Aqviq and Kinguk's business "in substance arose from the marketing efforts of Uhrenholt".

The Calculations

[130]        The Appellants' document 21 at Tab 21, is an attempt to allocate the total interest expense in question on a reasonable basis between the portion applicable to Aqviq and Kinguk's business activities outside Canada and their business activities within Canada. It proceeds from the assumption that, since the interest in question was charged on the basis of the daily fluctuations in the balance of the line of credit accounts, the portion of that interest most reasonably applicable to the business conducted by Aqviq and Kinguk outside Canada can best be determined by allocating the amounts debited to those accounts by Uhrenholt - being the source of the interest charges - between those related to business conducted outside Canada and the balance of those debits. Once the portion applicable to business conducted outside Canada is determined, the balance of the interest would be subject to withholding tax.

[131]        In order to determine the amounts that were charged to the line of credit accounts on Uhrenholt's books and to generate the interest charges, it must be recognized that the "embedded expenses" were of that nature. It was a matter of convenience for Uhrenholt, in its final settlement sheets for each ship, to net these expenses against the gross proceeds and, after deducting the 70 per cent "advance", to credit the balance to the appropriate line of credit account on its books. The result, in terms of the effect on the balance of the line of credit account and the interest calculations based on that balance, was identical to what would have resulted if the "embedded expenses" had been debited to the line of credit accounts in Uhrenholt's books and the gross proceeds of the sale (being the total of the 70 per cent and the remaining balance) had been credited to that account.

[132]        The point here is that, to determine the total expenses that generated interest charges and that related to business carried outside Canada, it was necessary to add the "embedded expenses" to the other expenses incurred by Aqviq and Kinguk outside Canada, which were directly debited by Uhrenholt to the line of credit accounts on its books. To determine the proportion of all charges to those accounts that generated interest expense, it was necessary, as well, to add the "embedded expenses" to the total direct debits to those accounts. The proportion of the total direct and indirect debits relating to business carried on outside Canada to the total of all direct and indirect debits to the account on Uhrenholt's books (with the debits and credits reversed to the books of Aqviq and Kinguk) applied to the total interest charges would be the most reasonable basis for determining the portion of the total interest exempt from withholding tax by reason of clause 212(1)(b)(iii)(E) of the Act. The remaining interest will be subject to withholding tax.

[133]        In conclusion counsel submitted that these appeals should be allowed, in part, in accordance with the calculations in the Appellants' document 21 and that the matter be referred back to the Minister of National Revenue to reassess Part XIII tax accordingly.

[134]        It was further submitted that costs should be awarded to the Appellants.

Argument on behalf of the Respondent

[135]        In argument, counsel for the Respondent said that both Appellants were incorporated in Canada during the relevant years and had their home port at Mulgrave, Nova Scotia. Neither Appellant had offices outside of Nova Scotia, the employees of the Appellants were all residents of Nova Scotia. The President and Hans Andersen were the controlling minds of the corporations. The investments were registered in Nova Scotia, the vessels fished in Canadian waters during the relevant period of time, the vessels operated with licenses issued under Canadian law and all processing was completed aboard the boats. The Japanese part of the catch was packaged on board, the goods were shipped directly to Japan and all assets of the Appellants were located in Nova Scotia.

[136]        He proposed that the real issue under the relevant section of the Act was whether or not the Appellants were carrying on a business in a country other than Canada. Counsel asks, what is the taxpayer's business? He answers that the business was to harvest or catch shrimp. Mr. Mortensen said that this was the company's business and the financial statements established the same thing.

[137]        He referred to Exhibit R-1, Tab 22 which were the notes to the financial statements for Aqviq for the year ended December 31, 1996. These notes indicate that the business of the company was to operate a fishing vessel to harvest shrimp. The controller who testified said that this information was correct. The notes to the financial statements for Kinguk were found in Exhibit R-1, Tab 12 page 20, and set out the purposes of the corporation. The controller said that this information was true and he provided this information. The statements corroborate the oral testimony of Mr. Mortensen.

[138]        Harvesting and selling are different operations. There was no evidence presented that the Appellants were involved in selling their product. They engaged Uhrenholt to do that. Mr. Andersen said that Uhrenholt had been in the selling business for twenty years and that they were experts in the field.

[139]        Harvesting was only done in Canadian waters. All activities were carried on there. Canada is the place where the company's business is carried out. Therefore, the requirements of clause 212(1)(b)(iii)(E) of the Act have not been satisfied and the exemptions do not apply to the facts of this case. "The mere fact that I engage someone to sell my product does not make me in the business of selling shrimp. Their business is not my business."

[140]        Immaterial of what Uhrenholt did in Denmark, the Appellants were not engaged in business outside of Canada. Therefore, where Uhrenholt carried on its business is irrelevant to this case. All of the business of the Appellants, harvesting shrimp, was carried out in Canada. The business of Uhrenholt was not the business of the Appellant. There was no evidence from the Appellants that they were in the business of selling shrimp.

[141]        Counsel referred to the trade agreements entered into between Uhrenholt and the Appellants. In Exhibit A-1, Tab 1, paragraph 10 deals with the question of title. This paragraph states

FUF takes title to the product ex quay, immediately upon landing by the trawler. FUF is entitled to create a charge in the cargo or assign it as security of any kind.

Mr. Andersen did not give any credible explanation as to why they used the term 'title' and not 'possession' or some other term. He would have known what it meant. This witness knew very little about how a sale was completed. He should have known more and if he had, the Court may have had a better idea about the meaning of the terms in the agreement and how these might have been clarified during sales negotiations. Further, counsel referred to paragraph 8 which said:

FUF shall sell the goods purchased at the highest price obtainable and submit a separate sales account for each trip. FUF fixes its own resale prices.

The witnesses gave no reasonable explanation as to what the term 'resale' meant, other than what it appears to mean. If title passed, as this paragraph seems to suggest, then the case is over as far as the Appellants are concerned.

[142]        The Appellants had no offices outside of Canada. Therefore, they must show that they carried on business outside Canada through Uhrenholt. There was no true agency in existence between Uhrenholt and the Appellants. Whatever Uhrenholt did in Denmark cannot be attributed to the Appellants. Therefore, they could not assert that they were carrying on a business in Denmark through Uhrenholt.

[143]        If Uhrenholt was acting as agent for the Appellants it would owe a fiduciary duty to the Appellants and therefore it would not have been able to purchase the goods itself. In this case it did purchase the goods itself as the evidence shows. There was no prior consent received from the Appellants to do this and this is an indication that there was no agency basis. He referred to the case of General Motors Acceptance Corporation of Canada Ltd. v. The Queen, [2000] 2 C.T.C. 2061 (TCE), in support of this position.

[144]        Counsel stated that a second condition of an agency in the relationship is that the principal has the right to control the agent. The evidence in this case shows otherwise. The Appellants here had no input into the selling price, as to the customers, they had no contact with the customers, therefore, if there was an agency basis here the agent was directing the principal as to how to market the goods. One can see from the letter in Exhibit R-2 at Tab 7 that Uhrenholt was advising the Appellant through its controller, Mr. Sunvar Mortensen, by suggesting to him what kind of shrimp they should produce, what kind of shrimp they should stop cooking and insisting that they continue to produce the same amount of Japanese shrimp as possible. Further, the trade agreement provided that "production and packing must be carried out according to FUF's current instructions, based on the specific market demands." This was an indication that Uhrenholt had complete control over the production and packing and were not acting as agent for the Appellants. This was consistent with the letter of instructions.

[145]        Mr. Andersen said that Uhrenholt could do what it wanted with respect to selling. This is consistent with the evidence of Mr. Mortensen who said that the Appellants were not in the business of selling. Further, at page 2 of the agreement, it can be seen that termination of the agreement was dictated by Uhrenholt and that would be unreasonable if Uhrenholt was an agent of the Appellants. The agreement provided that it was non-terminable by the Appellants so long as they had outstanding accounts with Uhrenholt. Further, if there was an agency relationship, one would think that Mr. Mortensen, in his managing capacity would have known something about selling, something about invoices and yet he did not.

[146]        In this case the agent had no right or capacity to bind the principal because Uhrenholt assumed all of the risk of loss if the buyer did not pay. Mr. Andersen said that the customer could also make a claim against Uhrenholt in the event of problems with the product. This would not be consistent with an agency relationship.

[147]        Counsel referred to the terms and conditions of sale and delivery that were in effect here which provided that:

F. Uhrenholt is solely liable for damages to persons or property provided it is documented that F. Uhrenholt's delivery is defective and that the damage is caused by such defect.

This was attached to the invoices to customers. Some of the key elements of agency as referred to above do not exist. Therefore, there was no agency relationship.

[148]        If there was an agency then the activities that took place in Denmark could be attributed back to the Appellants. Therefore, the question is whether the Appellants have shown that the business of Uhrenholt was theirs. The activities in Denmark and the Faroe Islands should not be treated the same way. Counsel referred to Article 3 of the Canada-Denmark Income Tax Agreements and Conventions which provided that the term "Denmark" means the Kingdom of Denmark, excluding the Faroe Islands and Greenland.

[149]        He referred to the case of Gurd's Products Company Limited, supra, in support of his position that each case must turn upon its own facts. In that case, even though there was a sham and it was contended that the operation had no real business connection in Canada, the Court found that Gurd's Products was in fact carrying on business in Canada and one could not disregard the facts in support of the company's position to the contrary.

[150]        Counsel referred to London Life Insurance Company, supra, and argued that one must look to the entire facts of the business and not one aspect of it only. In that case the Court considered the "cumulative effect" of a number of factors (including the place where profits were generated and where the expenses were incurred by the taxpayer in connection with his alleged business). A reasonable consideration of the factors as established by the evidence in this case shows that the business of the Appellants was carried on in Canada.

[151]        When one regards the evidence with respect to the maintenance of the vessels in Nova Scotia; acquiring of the crews; requirements of adherence to the regulations of the Department of Fisheries and Oceans in Canada; the right of the companies to manage the trawlers; the matter of repairs; the matter of supplies; the matter of vessel insurance in Canada; the fact that the controlling minds of the corporations were in Canada; the head office employees were located in Canada; the directors resided in Canada; the crews were made up of Canadians and landed immigrants; all salaries were paid in Canadian dollars; the ships operated under Canadian Fishing Licenses; the ships operated in Canadian fishing waters; packaging and processing was done in Canadian waters and that the majority of the catch was landed in Canada; then one must conclude that the business of the Appellants took place in Canada.

[152]        Exhibit A-1, Tab 6 shows that the majority of the landings of the Appellants were in Canada. Any time a catch was landed in Denmark the boats were there for the purpose of refitting. Further, after the product was landed, most of the time in Canada, the ships were refitted, resupplied and repairs to the engine and the gear were completed in Canada. The bank accounts of the Appellants were in Canada. Funds under the line of credit were advanced to the Bank of Nova Scotia to pay bills for the business activities carried on in Canada by both Appellants.

[153]        The Appellants paid only Canadian taxes on sales of shrimp. One hundred per cent of the sales were reported. No tax was paid in any other country and no returns were filed in any other country. The witnesses called on behalf of the Appellants were only able to testify in general terms about where the product was sold. Again, counsel referred to the fact that all assets of the Appellants were located in Canada.

[154]        Counsel referred to an article by Vern Krishna, The Fundamentals of Canadian Income Tax, 6 RED, (Ottawa; Carswell, 2000) and argued that Canada must be the place where the business is carried on and this must be the primary purpose for the business. The secondary or auxiliary purpose is where the selling takes place.

[155]        Even if the Appellants were in the business of harvesting shrimp and engaging someone else to sell it they would not engage other parties to carry on its primary business. Therefore, it was only engaging Uhrenholt to carry on its secondary or auxiliary business.

[156]        In the event that the Court should find there was an agency created and that part of the primary business took place in countries other than Canada, then the Court would have to deal with the question of apportionment.

[157]        With respect to the formula proposed by counsel for the Appellants as set out in Tab 21 of Exhibit A-1, counsel for the Respondent disagreed with letter 'B' in the formula because he said that these were payments between non-Canadian suppliers. This was flawed because it is apportioned on the basis of where the payments were made and not where the activity was carried on. Malik replenished the ships with fuel in Canada, therefore it makes no difference that the payment was made outside of Canada. With respect to the costs of the gear, counsel argued that all of the gear was used to catch shrimp in Canadian waters. What does it matter that they purchased the gear outside of Canada? The primary use of the gear was to catch shrimp in Canada.

[158]        With respect to embedded expenses, Mr. Andersen testified that these occurred where the goods were landed. Most of these landings took place in Canada although some took place outside of Canada. Just because they were incurred outside of Canada does not make them related to an activity outside of Canada.

[159]        He referred to paragraph 4(1)(b) of the Act and argued that where a company is carrying on a business in more than one place then any expenses incurred must be tied into that place where the activity was occurring. In the case at bar harvesting was done in Canada, selling was done in Denmark and the expenses should be apportioned as to how they related to each place. You do not look at the place where the expense was made. It only applies if it relates to a purchase of a service. If you buy something in Denmark and fish in Canada that does not mean that the expense was related to the fishing in the other place. The test should be the purpose of the expense and not where the expenditure was made.

[160]        If the activity, as in this case, was harvesting and selling, you ask, what was the expense for? Counsel referred to a number of different items of expenditure and particularly referred to one item in Exhibit A-1 at Tab 14 in the amount of $103,755 which he said was related to catching of the shrimp in Canada and had nothing to do with selling of the product. Further, the insurance expenditure of $220,311 related to a Canadian activity. With respect to packaging and supplies, these went to the boat to package but were also related to selling, therefore it qualified. However, the expenditures with respect to one of the vessels, the repairs to the engine and maintenance had nothing to do with selling of the product but had all to do with catching of the product in Canadian waters. Therefore, it was with respect to a Canadian activity and is not exempt.

[161]        Protection and indemnity insurance was paid to Norway but pertained to catching of the shrimp and not to the selling of the shrimp. It did not qualify. Likewise, the expenditure for fishing gear was necessary for the catch but had nothing to do with the selling of the product.

[162]        Regarding fuel and lube oil, the ships were refuelled at sea. The supply mechanism was in Canadian waters. Further, the consumption of fuel related to the catching of the fish and not the selling of the fish. In any event, only two refuellings were done in Denmark. Malik had a bunker in Greenland as well. Food and travel expenditures also related to the catching activity and not to the selling.

[163]        The evidence showed that legal expenditures related to the operation of the vessels. If the Court finds that it is deductible it should be done on a 50-50 basis.

[164]        Embedded expenses were related to the efforts of Uhrenholt in selling their product. These would be exempt under section 212 of the Act.

[165]        If the Court applies the formula it should make use of the numbers referred to by the Respondent and use the formula proposed by the Appellants.

[166]        Regarding the matter of "gross-up", counsel did not object greatly to the appeals being allowed in that respect.

[167]        Again, in relation to the formula, counsel argued that if counsel for the Appellants was successful in part then the letter 'A' in the formula is agreed upon. The first element of the letter 'B' is agreed upon, the second element of 'B' is not. The letter 'C' is accepted.

[168]        The first part of the letter 'B' is the total embedded expenses and the second part is other expenses incurred outside of Canada. This should be decided in accordance with the Respondent's argument about apportionment and therefore 'B' would be changed.

[169]        At the end of the day counsel's primary argument was that there was no agency and the appeal should be dismissed with the exception of the gross-up amount. Further, as indicated in the argument of counsel for the Appellants, the parties to these appeals have now agreed that Aqviq and Kinguk dealt at arm's length with Uhrenholt and that the total interest that is in issue is to be reduced by the interest reversals credited by Uhrenholt to Aqviq and Kinguk with respect to interest on the 70 per cent advances after three months had elapsed in the landing of the catch for a particular trip. This adjustment is reflected in the calculations included in the Appellant's document at Tab 21.

[170]        In rebuttal, counsel for the Appellants said that with respect to the financial statements and notes shown in Exhibit R-1, Tab 12, page 20, the witness for the Appellants indicated that this was an error and it is not of great significance. However, one does not look at the accounting entries to determine the substance of the transaction. If there is an agency, you have the necessary element of carrying on a business through the agent. He referred again to Loeck, supra. He argued that when Mr. Andersen talked about title, he meant legal ownership and not beneficial ownership. Uhrenholt took title as a security only, but beneficial ownership did not change. The Court should not attach too much weight to the term resale because in drafting the agreement laymen were referring to legal title only.

[171]        On the matter of credibility, counsel raised the issue that the argument of the Respondent in that regard was not plausible. More light might have been shed on sales by the witnesses but that is not relevant.

[172]        The rights and duties of principal and agent can be the subject matter of an agency document. The principal may not have the right to control the agent, it depends upon the agreement.

[173]        With respect to the right to terminate, these provisions do not take the parties outside the agency situation. The fact that the customers could sue Uhrenholt did not mean that the risk was not to the Appellants. They paid the premiums.

[174]        With respect to the Denmark Treaty, it is irrelevant that Greenland is not a part of Denmark. Greenland is outside of Canada. They can be carrying on business outside of Canada. With regards to the question of whether or not the Appellants filed tax or paid any tax elsewhere, the Appellants referred to the Canada-Denmark Income Tax Agreements and Conventions. The Appellants did not have a permanent establishment in Denmark and therefore are not subject to Denmark's taxes. This argument is therefore irrelevant.

[175]        A minority of the products were sold on land in Denmark. This is not significant. The business was selling. The direction of the business was in Denmark.

[176]        Just because a small portion of the activity was carried on in Denmark does not mean that the Appellants were not carrying on business outside of Canada. See London Life Insurance Company, supra, where the Court held that such words as "carried on an insurance business . . . in a country other than Canada" is not to be limited by considerations that may or may not be determinative of whether such a business was carried on in Canada. These words are of broad import and must be construed as such.

[177]        In the case at bar there was sufficient activity carried on in Denmark so that it was not auxiliary to the Appellants' business, providing the agency argument is accepted. Marketing was a major effort and activity. The Appellants were in an international business operating in many different countries.

[178]        With respect to embedded expenses, even the freight from Canada to the selling point plus the storage costs in Canada were all arranged from Denmark. Therefore, they were part of carrying on the business in Denmark through the agency. One must not just look at the location and the expense but who is doing it and wherefrom. Who is arranging it? All embedded expenses are related to carrying on business outside of Canada. There is no need to apportion the embedded expenses.

[179]        In applying paragraph 4(1)(b) of the Act, the Respondent argued that any expenses incurred must be tied into the place where the expenses are incurred. This is not correct. It is broader than that. It is not a mechanical test where you look at where the expenses were made to make the final determination. The business decisions were made in Denmark.

[180]        He agreed with the submission by the Respondent that the packaging expenses incurred in Canada were intimately related to marketing in Denmark or outside of Canada. Not only marketing occurred outside of Canada. The situation calls for apportionment. The issue is not to whom the expenses were paid but whether the expenses relate to a business outside of Canada. This apportionment may, to some extent be arbitrary, but is necessary.

[181]        In regard to the formula, you just do not fish for shrimp and stop at that. You must sell the product. It is a whole business from the time that you start until the sale is completed that must be taken into account. Just because the expenses were paid in Canada does not mean that they do not relate to the business that took place outside of Canada. All embedded expenses were related to activity in Denmark.

[182]        In relation to the formula presented by the Appellants, 'A' is agreed upon, 'C' is acceptable (total expenses incurred), 'B' is not agreed upon completely but it was counsel's position that the embedded expenses should be taken into account in total including freight and storage.

[183]        All other expenses outside of Canada were based upon a reasonable calculation and all of these expenses related to activity outside of Canada. If this is not acceptable then all of the packaging expenses should be accepted and 50 per cent of the legal costs should be accepted.

[184]        For relief, counsel submitted that the matter should be referred back to the Minister for reassessment and reconsideration to eliminate the grossing up amount, that the total interest in issue be reduced by the interest reversals credited by Uhrenholt to Aqviq and Kinguk with respect to interest on the 70 per cent advances after three months had elapsed and the landing of the catch for a particular trip and to apply the formula as it has been presented by the Appellants, or as changed by the Court, for expenses outside of Canada. All embedded expenses should be allowed.

Analysis and Decision

[185]        There are three matters which need to be addressed by the Court in this matter although only two of them remain in issue.

[186]        As indicated above, the parties to these appeals now agree that Aqviq and Kinguk dealt at arm's length with Uhrenholt and that the total interest that is in issue is to be reduced by the interest reversals credited by Uhrenholt to Aqvik and Kinguk with respect to interest on the 70 per cent advances after three months had elapsed in the landing of the catch for a particular trip. This adjustment is reflected in the calculations included in the Appellants' documents at Tab 21. The appeal is allowed in that respect and the matter is referred back to the Minister for reassessment and reconsideration to reflect this adjustment.

[187]        The second issue is whether or not, to the extent that withholding tax under Part XIII of the Act is payable on any of the interest for the years in question, is it payable, at a rate of 15 per cent, on 100 per cent or on 185ths of the interest credited to Uhrenholt on the books of Aqviq or Kinguk. Put another way, was there any basis in the Act for grossing up the actual interest by 15/85, since, in effect, no such additional amount of interest was paid or credited to Uhrenholt during the years in question, as is required by the opening words of subsection 212(1) of the Act?

[188]        The Court is satisfied that the Appellant has met the burden in this regard and that the Minister had no right to gross-up the actual interest by 15/85 or, put another way, to assess the Appellants at a rate of 15 per cent, on 100/85 of the interest credited to Uhrenholt on books of Aqvik or Kinguk. There is no basis for such action by the Minister and the argument of the Appellants in this regard is well taken.

[189]        What the Minister did in this regard was the equivalent of applying an accrual method to the calculation of the tax.

[190]        Counsel's position is well taken where he said, "regardless of any possible contractual obligations on the part of Aqviq or Kinguk to indemnify Uhrenholt for withholding tax payable by Uhrenholt under Part XIII of the Act, no such indemnification occurred - by either payment or credit - during the years in question. What the tax consequences might be if and when the indemnity occurs in the future is not before this Court."

[191]        The appeals are allowed in this regard and the matter is referred back to the Minister for reconsideration and reassessment based upon the Court's finding that the Minister was not entitled to gross-up interest in the years in question.

[192]        The sole remaining issue, which is the most important issue, is whether, and to what extent, the interest in question is exempt from withholding taxes under clause 212(1)(b)(iii)(E) of the Act, on the basis that the line of credit debts were obligations entered into by Aqviq or Kinguk in the course of carrying on a business in a country other than Canada and that the interest was deductible in computing the income of Aqviq or Kinguk under Part I of the Act from a business carried on by it in that country, as set forth by counsel for the Appellants in his submission, and as agreed to by counsel for the Respondent.

[193]        As counsel for the Appellants pointed out, essential to the relationship between Uhrenholt and Aqviq and Kinguk were the two "trade agreements". These trade agreements were in essentially the same terms and have been referred to above. The documents were drafted in Danish in 1993 or 1994 without legal assistance. It was submitted that the witness, Hans Andersen handled the negotiations with Jogvan Kjolbro, the principal shareholder of the former Farocan Incorporated and that the Court should not interpret these documents "too legalistically".

[194]        No further evidence was led on the intention of the parties to the agreements either by testimony of Jogvan Kjolbro or any other witness called on behalf of the Appellants. Counsel for the Appellants relied upon the evidence given by Hans Andersen who testified that they "wanted to keep it simple on a commission deal. We did it ourselves. It was a gentleman's agreement."

[195]        He stressed the commission basis for the remuneration for the product on a net basis. He did say, "we wanted security when we paid the money".

[196]        This witness said very little more about the purpose and intent of the agreement and was asked no question whatsoever with respect to the terms "legal" or "equitable" title nor indeed did he say that he understood that there was a difference between them. Certainly he was not asked and did not testify that Uhrenholt was intending only to take legal title as opposed to beneficial ownership of the product.

[197]        As well, in cross-examination this witness agreed that Uhrenholt fixed its own "resale" prices. When asked to explain what he meant by the term "resale", he merely said that this had to do with the duty to sell it at the highest price. His answer really had nothing to do with his understanding of the term "resale" and he did not address that matter any further. This interpretation did not appear to be reasonable to the Court.

[198]        When pressed, he did say that he did not consider it to be a resale, but he gave no further explanation in that regard. This witness seemed to be more fixed on the term "commission" rather than distinguishing between "legal" ownership and the "beneficial" ownership. He did say that ownership was transferred after the final sale but this did not appear to be a reasonable interpretation in light of his evidence as to what happened when the product was unloaded.

[199]        He did indicate that they had other security documents such as a floating charge but in no way did this explanation assist in the determination of whether or not a transfer of "legal" and "beneficial" ownership had taken place.

[200]        With reference to Exhibit A-1, Tab 1, which was the trade agreement with Aqviq, he indicated that this was the same as the agreement with Kinguk. It was suggested to him that this was not an agency agreement and he responded by saying, "I don't know what it is. I don't know if the word agent is the same in Danish. We are selling the product and taking 4 per cent commission."

[201]        With respect to Exhibit A-1, Tab 4, page 7, Article 6.1(e) this witness said that he did not understand it. It was not made by him but by their attorneys. Then he said that the responsibility was that of the borrower and that Uhrenholt did not pay taxes in Canada.

[202]        This witness was obviously a very astute and experienced businessman. The only areas where he showed some lack of knowledge was with respect to the arrangements for selling which he said were left up to their salespeople and with respect to some of the more cogent sections of the agreements. He put himself forward as having been the person who negotiated the agreements which contained specific words such as, "the transfer of title" and "resale", without having the agreements containing any words which limited the meaning of those words. One would have thought that with the great experience that this witness had, and the obvious legal consequences of such agreements, that he would have had them prepared by someone with legal expertise, had he not believed that they meant exactly what they said. Similarly when the agreements referred to a transfer of title, that is what the agreement meant rather than referring to transfer of legal title only with the beneficial title remaining in the Appellants.

[203]        The interpretation that counsel for the Appellants seems to put upon these agreements, particularly these words, would not appear to be consistent with this witness's limited testimony regarding these vital aspects of the documents and there was no other evidence which would suggest that these words had any other meaning than the plain ordinary meaning which they appear to imply.

[204]        Sunvar Mortensen was a very knowledgeable person with respect to the Appellants. However, he offered very little testimony of any value with respect to the reasonable interpretation of the agreements in spite of the fact that he was the person in charge when the President was away, which occurred quite frequently. He had many important responsibilities with respect to the operation of these two ships. He merely said that he was not involved in the drafting of the trade agreements and that he found out what was in them. Further, he was not involved in setting out the line of credit agreements.

[205]        It was the position of counsel for the Respondent that this was not an agency relationship, the Appellants were in the business of harvesting shrimp, they were not in the business of selling shrimp. The business of selling shrimp rested entirely upon Uhrenholt who received title to the goods once the shrimp were unloaded and that any expenses incurred after that point in time were expenses of Uhrenholt and had nothing whatsoever to do with the Appellants and their job of harvesting shrimp.

[206]        There was no evidence that the Appellants were involved in selling shrimp. They engaged Uhrenholt to do that. Even the evidence of Mr. Andersen indicated that the expert in the business of selling was Uhrenholt and that it had been in that business for many years. The only job of the Appellants was to harvest the shrimp and that was done in Canadian waters. All of the activities of the Appellants related to activities in Canada, that is the place where the companies carried on business.

[207]        The Appellants have not met the burden of showing that the claimed expenses related to business activities of the Appellants carried on outside of Canada and therefore the exemptions do not apply.

[208]        The business of Uhrenholt in selling the shrimp was not the business of the Appellants. Immaterial of whatever actions Uhrenholt took in Denmark or anywhere outside of Canada, they were not the actions of the Appellants. Wherever Uhrenholt carried out its business is irrelevant to the present case.

[209]        The Appellants introduced no evidence whatsoever to show that they were involved in the business of selling shrimp. Indeed, the evidence was all to the contrary.

[210]        Counsel for the Respondent referred specifically to the cogent items contained in the trade agreements which referred to the fact that title passed and there were no ambiguities.

[211]        With respect to paragraph 10 of the Agreement, the explanation offered by Mr. Andersen as to why they used the term "title" and not "possession", if Uhrenholt was only acting as agent for the Appellants, was not reasonable or acceptable. He did not explain why they did not use some other word if they meant something else.

[212]        Surely such an experienced person would have known what it meant. Further, paragraph 8 says, "Uhrenholt shall sell the goods purchased". Surely this indicates a passing of title. Further, the reference as to "resale" indicates that there must have been an original sale. The explanation offered by Mr. Andersen in this regard was not reasonable.

[213]        Counsel for the Respondent argued there was no true agency and whatever Uhrenholt did outside Canada cannot be attributed to the Appellants. Therefore, the Appellants could not say that they were carrying on business outside of Canada through Uhrenholt so that the deductions are available. This argument is well taken.

[214]        Both counsel referred to various principles of agency. Some of these principles are found in some agency relationships and some are not. Not all agency relationship contain all of the elements referred to. One must consider the specific facts in any one case to determine whether or not there was an agency relationship in existence.

[215]        Counsel for the Appellants took the position that the manner in which Uhrenholt charged interest on the 70 per cent "advances" indicated its view that the delivery of the catch on its landing from the vessel in question did not represent a sale. However, no such position was put forward by anyone who testified on behalf of the Appellants. The Court is not satisfied that this was the only interpretation that could be put upon this method of payment. After all, it was merely a method of payment and surely it was open to the parties to design whatever method of payment they sought. There is nothing in the agreements which would indicate that the charging of such interest would be in any way indicative of the nature of the relationship.

[216]        The Court is not certain as to why Uhrenholt chose to advance only 70 per cent of the estimated net settlement amount but there was no evidence presented which convinced the Court that this indicated that the relationship that existed between the parties was one of agency.

[217]        As indicated before, the Court is not satisfied with the explanation given by Mr. Andersen that the passage of "title" referred to in the "trade agreements" was for security only. The Court fails to see how the method of payment can be translated into an indication of the parties that legal title only was to pass and not beneficial ownership.

[218]        There can be no doubt that it was prudent for Uhrenholt to advance only a portion of the purchase price in line with the risks that it might be taking in the event of a claim against the Appellants by some of the creditors. However, there is nothing in the "Trade Agreements", or other documents to point to an agency relationship rather than a transfer of "legal" and "beneficial" ownership once the shrimp were landed.

[219]        In spite of the able argument of counsel for the Appellants with respect to the various factors which he believed were inconsistent with the transfer of beneficial ownership to Uhrenholt, the Court is not convinced that the relationship that was contemplated between the parties was that of an agency. On the basis of the evidence given before the Court, a plain reading of the agreements, with any reasonable presumptions the Court is entitled to draw from the evidence, the Court cannot conclude that the evidence has established an agency relationship or indeed that the agreements ever contemplated such a relationship.

[220]        As already indicated by the Court the method of payment employed in this case does not necessarily indicate an agency relationship. The provision that Uhrenholt might pledge the goods as security, although at first blush appearing to be inconsistent with the beneficial ownership, is certainly no more inconsistent than the provision in the agreement that the title had passed and not just "legal title". Further, such provisions do not explain the use of the term "resale" used in the agreement without any further explanation of same.

[221]        The Court does not accept counsel's argument that the method of calculation of the remuneration of Aqviq and Kinguk, based on the final sale price to the customers, was inconsistent with an earlier sale to Uhrenholt. Again, this was merely a method of calculation of the final payment, obviously negotiated between the parties, which was accepted by the Appellants and obviously put in by Uhrenholt for their own benefit.

[222]        Further, the fact that Aqviq and Kinguk were responsible for all of the relevant expenses in marketing the catch reflect only a very good bargaining position put forward by the able representatives of Uhrenholt when these agreements were incorporated and were probably reflective of the dire financial state that the Appellants found themselves in at that time. The same thing applies to the charging of interest on the 70 per cent "advance". Again, the Court does not conclude that because this method was employed that this means that the parties were not contemplating a transfer of "legal" and "beneficial" ownership.

[223]        The greatest arguments against the Appellants' position are the agreements themselves and the Court's requirement to interpret them according to their plain and simple meaning, absent any ambiguity which would call upon the Court to view extraneous documentation or evidence to properly interpret such agreements. The agreements speak for themselves unless there is an ambiguity. The Court finds no such ambiguity in these agreements and there was no evidence given by any witness which would cause the Court to have serious concerns with respect to the true meaning, purpose and intent of these clear words in these agreements.

[224]        The words title, sale and transfer of ownership all have clear and simple meanings and if the parties wished to be more specific about whether or not the terms "ownership" and "title" were meant to refer only to the transfer of legal ownership or legal title as opposed to beneficial ownership or beneficial title, then the agreements should have been more specific thereto. If the Appellants chose to have a gentleman's agreement put in place to regulate what appear to be very specific, serious, substantial and legal relationships between the parties, and those agreements do not in the end lend themselves to the interpretation which the parties prefer, then they have only themselves to blame.

[225]        In the end result, the Court is not satisfied that the Appellants have met the burden upon them of establishing that the interest in question was exempt from withholding tax under clause 212(1)(b)(iii)(E) of the Act and the appeals in that regard are dismissed. Subject to the reassessment required by the Minister with respect to issues one and two, the Minister's assessments are confirmed.

[226]        Since the Appellants have not been substantially successful in these appeals, they are not entitled to any costs.

[227]        The Respondent will have its costs to be taxed.

Signed at Vancouver, British Columbia, this 22nd day of January 2002.

"T.E. Margeson"

J.T.C.C.

COURT FILE NO.:                                                 2000-674(IT)G

                                                                                2000-671(IT)G

STYLE OF CAUSE:                                               Kinguk Trawl Inc. and

Farocan Incorporated (Successor to Aqviq Trawl Inc.) and

Her Majesty The Queen

PLACE OF HEARING:                                         Halifax, Nova Scotia

DATE OF HEARING:                                           October 17, 2001

REASONS FOR JUDGMENT BY:                      The Honourable T.E. Margeson

DATE OF JUDGMENT:                                       January 22, 2002

APPEARANCES:

Counsel for the Appellants:                                E.C. Harris

Counsel for the Respondent:              John Bodurtha

COUNSEL OF RECORD:

For the Appellants:              

Name:                Edwin C. Harris

        Firm:                Daley Black & Moreira

                                                                400-1791 Barrington Street

                                                                Halifax, Nova Scotia B3J 2N7

For the Respondent:                             Morris Rosenberg

                                                                Deputy Attorney General of Canada

                                                                                Ottawa, Canada

2000-674(IT)G

BETWEEN:

KINGUK TRAWL INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on common evidence with the appeals of Farocan Incorporated (Successor to Aqviq Trawl Incorporated) (2000-671(IT)G) on October 17, 2001, at Halifax, Nova Scotia, by

the Honourable Judge T.E. Margeson

Appearances

Counsel for the Appellant:                             Edwin C. Harris

Counsel for the Respondent:                         John P. Bodurtha

JUDGMENT

The appeals from the assessments made under the Income Tax Act for the 1994, 1995, 1996 and 1997 taxation years are allowed and the matter referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the interest assessed to the Appellants be reduced by the interest reversals credited by Uhrenholt to Aqvik and Kinguk with respect to the 70 per cent advances after three months had elapsed since the landing of the catch for a particular trip, as reflected in the calculations included in the Appellants' documents at Tab 21, and as agreed to by the Respondent;

The Minister was not entitled to gross-up interest in the years in question and the assessments will be reduced to reflect this finding;

The Appellant is entitled to no further relief.

The Respondent will have its costs to be taxed.

Signed at Ottawa, Canada, this 22nd day of January 2002.

"T.E. Margeson"

J.T.C.C.

2000-671(IT)G

BETWEEN:

FAROCAN INCORPORATED

(Successor to Aqviq Trawl Incorporated),

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on common evidence with the appeals of Kinguk Trawl Inc. (2000-674(IT)G) on October 17, 2001, at Halifax, Nova Scotia, by

the Honourable Judge T.E. Margeson

Appearances

Counsel for the Appellant:                             Edwin C. Harris

Counsel for the Respondent:                         John P. Bodurtha

JUDGMENT

The appeals from the assessments made under the Income Tax Act for the 1994, 1995, 1996 and 1997 taxation years are allowed and the matter referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the interest assessed to the Appellants be reduced by the interest reversals credited by Uhrenholt to Aqvik and Kinguk with respect to the 70 per cent advances after three months had elapsed since the landing of the catch for a particular trip, as reflected in the calculations included in the Appellants' documents at Tab 21, and as agreed to by the Respondent;

The Minister was not entitled to gross-up interest in the years in question and the assessments will be reduced to reflect this finding;

The Appellant is entitled to no further relief.

The Respondent will have its costs to be taxed.

Signed at Ottawa, Canada, this 22nd day of January 2002.

"T.E. Margeson"

J.T.C.C.