Taran Furs (Montreal) Inc. v. Minister of National Revenue, [1996] 1 CTC 2819

St-Onge J.T.C.C.: — The appeal of Taran Furs (Montreal) Inc. was heard on October 17, 1995 in the City of Montreal, province of Quebec, and the issue is whether the Respondent was right in assessing the Appellant for non-resident tax and penalty with respect to the taxation years 1975, 1976 and 1977 and for non-resident tax with respect to the years 1980 and 1981 respectively.

The Reply to the Notice of Appeal reads as follows:

5. In assessing the Appellant for the 1975, 1976, 1977, 1980 and 1981 years, the Minister of National Revenue relied inter alia on the following assumptions of facts:

(a) The Appellant carried on the business of manufacturing and selling furs in Canada;

(b) In the course of this business carried on in Canada, the Appellant bought skins from non-resident suppliers, Finnish Fur Sales Ltd and Danish Fur Sales Ltd, who carried on their own business in Finland and Denmark respectively, and Hudson Bay Company in New York (USA), Nordic Fur Auctions in Stockholm (Sweden), Oslo Fur Auctions Ltd in Oslo (Norway) and Hudson Bay & Anning Ltd in London (England) who carried on their own business in the country mentioned in parenthesis;

(c) Finnish Fur Sales Ltd and Danish Fur Sales Ltd had no permanent

establishment in Canada during 1975, 1976, 1977, 1980 and 1981;

(d) The Appellant did not carry on any business in a country other than Canada and the mere purchase of goods outside Canada does not amount to carrying on a business in a foreign country;

(e) Payments of interest on late payments to the suppliers were provided in

the contracts passed on by the Appellant with its non-resident suppliers;

(f) During the 1975, 1976, 1977, 1980 and 1981 years, the Appellant paid or credited on late payments to its non- resident suppliers the amounts mentioned in the annex attached to this Reply, on account or in lieu of payment of, or in satisfaction of interest to its non-resident suppliers;

(g) In computing these amounts so paid to its non-resident suppliers, the Appellant applied a rate of interest to its overdue payments which were outstanding after a certain length of time;

(h) The interest paid by the Appellant represents interest derived from a source within Canada by the non-resident suppliers;

(i) The Appellant failed to deduct or withhold tax from the amounts of interest paid to its non-resident suppliers;

(j) The Appellant is liable to pay the following amounts of tax that should have been deducted or withheld:

YEAR: TAX

1975: $29,913.27

1976: $20,100.72

1977: $7,120.96

1980: $ 5,844.00

1981: $2,172.00;

(k) In consequence thereof, the Minister of National Revenue also assessed penalty provided by section 227(8) as follows:

YEAR: TAX

1975: $2,991.32

1976: $2,010.17

1977: $712.10

At the hearing, the Appellant admits sub-paragraphs Sa) to 5c), 5e) to 5g), except for the meaning of interest and denies all the other subparagraphs. The Respondent withdraws his paragraph 7 of the reply to the effect that the appeal for the years 1975 to 1977 inclusive was void.

Two witnesses were heard on behalf of the Appellant, Mr. Charles Taran, Vice-President of the Appellant company and Mr. Christophe, Chartered Accountant, having been in function at the time of the taxation years under appeal.

Mr. Taran testified that the Appellant company purchase raw materials and sell manufactured goods all over the world; that the buying was done at auctions which last 10 to 15 days at which he went 10 times a year.. The buyers had 7 days to examine the materials and 7 days to buy and some 200 buyers were present at those auctions. This way to proceed was the same in all the countries.

The payments were made with the money of the country where the buying was done and he had to discuss these transactions with his office in Canada. An employee was working for the Appellant company at the time of the auction and they had customers in all these countries. 60% of the sales by the Appellant company was done in Canada.

Invoices of the non-resident suppliers were filed as Exhibits R-l and R-2 to show that the amounts were called interest and Toronto Dominion Bank statement (R-3) shows that payments were made from the bank account of the Appellant in Canada.

The chartered accountant filed a schedule of expenses under A-l which show the mention (interest bank charges).

Counsel for the appellant summed up the principal witness’s testimony and emphasized the activities after the auction as follows:

So then he explained to us that, in those cases, he left the merchandise on the spot, that it was organized for that, that they had immense refrigerated warehouses and that all the merchandise remained on the spot. He also told us that it was impossible to take the goods to Montreal because there was no place in Montreal where they could have stored the skins and he was therefore forced to leave them there for a long time.

We know that when he decided he needed skins, well, he had his forwarder agent who took delivery, packaged them, put them on the plane and took them to Montreal and then they went to do the manufacturing work here. He also told us that he always paid in the currency of the country where he was, whether it was Denmark, Finland or whatever.

He then testified at length on the fact that at the auctions, first, of course, he had a number of activities, examining, purchasing and meeting customers, that was an important element. On site over there, he not only purchased, but also had customers who went to sell and he met them there. He also told us that he had employees in the United States and England; he had a warehouse, but for the finished product, a warehouse not for skins, but for fur garments. He told us that, over there, they did their own receiving, packaging, package slip and shipping to local customers.

As to the witness, the accountant, the only thing he ultimately came to say was that he had seen the company’s books and, for 1975, 1976 and 1977, he saw that the company had sold goods to various persons, “customer sold to”, and then he described by country, by company and by customer how many items had been sold.

That is the testimonial evidence and the documentary evidence. I do not think it is really in dispute, except for a few documents, the invoices that they tried to enter into evidence; the rest ultimately coincides with what was written in the reply to the notice of appeal and the facts are not really in dispute.

The problem that arises here is to determine under the Act and the tax conventions whether foreign companies have tax payable in Canada. If so, there is the whole mechanism of collection, penalties and interest that kicks in, but the issue is really at the starting point: do Danish Fur Sale, Finnish Fur Sale or U.K. Fur Sale have to pay tax in Canada.

[Translation.]

With respect to the tax conventions, he argued that the Finland convention provides at article 3 that if there is an inconsistency between the Act and the convention, it is the convention that must prevail, that Finland does not have to pay tax unless it has a permanent establishment in Canada, adding that the same provision existed in all the other conventions.

But if the issue of interest arises and the source of income is in Canada, non-residents must pay a minimum of 15 per cent. This exception raises two questions: Did the non-resident have a source in Canada? If so, did he receive interest?

He referred to the OECD conventions (Organization of Economic Cooperation and Development 1963 Draft Convention) in saying that a new article on interest was adopted in 1990 to the effect that interest must be taxed in the country where it is paid. However, paragraph 2 states that it may also be taxed in Canada at 10 per cent.

He saw a problem and explained that that was the reason why interest was defined by stipulating “penalty charge for late payment”. Consequently, it was not interest paid on the balance of a selling price, but rather borrower-lender interest.

As to the Canada-U.S. convention, it states that a non-resident does not have to pay taxes in Canada if he has no permanent establishment in Canada.

Depending on the activities that take place in the United States, it seemed to him that the source was there and he maintained the same reasoning for Sweden.

As to interest, he maintained the same reasoning as that used with respect to Finland. Borrower-lender interest is contemplated, not sellerbuyer interest. The following appears at page 5581 of the convention respecting Norway:

Such interest may also be taxed in the contracting state in which it arises.

He said that the word “source” does not appear and contended that a source in Canada is required in order to tax a Norwegian corporation.

As to interest, he contended that reference is made to the “amount lent’, which means a borrower-lender, not a seller-buyer relationship.

With respect to the United Kingdom, he said that the reasoning is the same: reference is made to interest “which arises”; a source in a country is required for there to be taxes payable.

He ended his remarks on the conventions by saying (1) that there must be a source in Canada and (2) that the interest must be interest on a loan.

He then commented on section 212 and the case law as follows:

So the legislator looks at that and says: If a Canadian company pays interest to a company in another country as part of the operation of its business, as part of a foreign business, we don’t want to tax that type of thing. What are the facts today? Well, the facts today are that Taran Furs goes to foreign countries and buys. Taran Furs goes to foreign countries, meets customers and Taran Furs sells in foreign countries to customers (3). Fourth, they have an office in London or in England and they have an office in the United- States.

When you meet customers, you purchase products and you sell products; that somehow resembles a business. Granted, perhaps it was not there 12 months of the year, but it was there and it did that. So section 212 does not even apply in this case because the evidence shows that Taran Furs had a business in foreign countries. The concept of business is a question of fact. So, are the facts in this case, purchase, sale and meeting customers, sufficient? What is a business? That’s what it is.

Now we turn to the case law. This is at tab 10. You are not the first person to hear the problems before you today. In 1985, your colleague Judge Tremblay heard the same evidence for other years in Taran Furs v. Revenue Canada. The evidence was identical, except that we were obviously talking about other years. In the case of... at tab 10, it was only Finland and Denmark. Today we have Finland, Denmark, Sweden, Norway and the United States. In 1985, unfortunately, and I do not understand why this is, no one proved that Taran sold goods outside Canada. I proved that today through the accountant and through Mr. Taran. And as you can see from reading the judgment, what I am arguing today was argued at the time; what my colleague argued was no doubt argued at the time. At page 2265, the judge recalled a fundamental concept:

[Translation.]

Where a tax convention is involved, a liberal interpretation is usual, tax conventions are negotiated primarily to remedy a subject’s tax possession by the avoidance of the low taxation rather than to make it more burdensome.

So the fundamental objective of all conventions that have been written is not to tax more and more, for a longer time and more often. The objective is to simplify business and to tax a little less and it is from that perspective that the problem must be addressed. The judge then comes to the following conclusion at page 2275, a very clear conclusion: was this thing paid by Taran Furs interest? Answer: No. It is clear: “I am thereby bound by the said decision” (Lebern). It was not interest, period.

Second: Is the source in Canada? Answer: No, the source is in Finland, Denmark, the United States, England, Sweden, etc. And here he explains the concept of source a little more. He tells us: a source of income is something, “a hard practical matter of fact”. Then he says “a practical man would regard as a real source of income”. A reasonable man looks at that and he is asked: Where is the source of all this income? Well, the source is not Montreal, that is not true; the source is outside Canada. The judge came to this conclusion; it is exactly the same conclusion that I am seeking today.

As to the rest of the case law, I have reproduced Studebaker at tab 11. In that case, this was a case of the High Court of Australia. In that case, there was a U.S. company and an Australian company. And the U.S. company and the Australian company signed a contract. The contract was signed in the United States. The U.S. company manufactured cars and signed a contract to the effect that it was going to sell cars to the Australian company. The U.S. company delivered the cars to the United States and all the risks shifted to the Australian company at the time of delivery. Thus, the Australian company took on all the risks in the United States, from the United States. The Australian company paid for transportation, customs, packing, forwarding, etc. This is very, enormously similar to our case.

The question arises: where was the source of income? In Australia? The payer was in Australia. Eventually the cars were in Australia. Was the source in the United States? The seller was in the United States, the con- tract was signed in the United States, the cars were built in the United States, delivery was made in the United States and it was paid for in the United States. Well, the Court considered the matter and it said, at page 203: “Where is the source?” Well, the source is a matter of fact and the facts are clear: the source was in the United States. That is what the Court ultimately said and it is very simple. And I think that this case applies fully in the instant case. As a matter of fact, the source is not in Montreal.

In Hilton, at tab 13, what happened in that case? This was a U.S. citizen living in Canada. And the U.S. citizen owned “bonds, German and Japanese bonds”. As a result, the documents were somewhere in New York and the said individual received interest income. The question arose: does the Canada-U.S. treaty apply in respect of that interest? The question that arose was: is the source of the interest in the United States?

The interest was paid in U.S. dollars, the bonds were in the United States and the Court said: Wait a minute, the source is not the United States; the source is Germany and Japan. In this case, it applied the same principle as in Studebaker: the location of the source was a matter of fact, not a matter of law. And at page 406, he repeated exactly what Studebaker said: “The actual source of interest is Germany and Japan”. And “sources” are “a practical hard matter of fact.” So, on the basis of this case law, it is clear in my view that the source in this case was not Montreal. There were too few ties with Montreal for that. That is the first concept: source.}

As to the interest, he contended that the countries’ intention was to tax borrower-lender interest, not buyer-seller interest.

He referred inter alia to the following decisions: (1) Lebern Jewellery Company Ltd. v. Minister of National Revenue, [1976] 2422, 1976 D.T.C. 1313 (T.R.B.); (2) Havlik Enterprises Ltd. v. Minister of National Revenue, [1989] 1 C.T.C. 2262 89 D.T.C. 159 (T.C.C.). On the question of the liberal interpretation of treaties, he referred the Court to the decision by the Supreme Court of Canada in Crown Forest Industries Ltd. v. R., (sub. nom Crown Forest Industries Ltd. v. Canada), [1995] 2 C.T.C. 64, 95 D.T.C. 5389, and, on the subject of section 212, to the decision by the Supreme Court of Canada in Québec (Communauté urbaine) c. Corp. Notre-Dame de Bonsecours, (sub nom. Notre-Dame de Bon-Secours (Corp.) v. Quebec (Communauté urbaine)), [1995] 1 C.T.C. 241, 95 D.T.C. 5017.

In conclusion, he contended that (1) the source was outside Canada, (2) the interest on the balance of a selling price is not contemplated, (3) what is paid is part of the cost and is not interest and (4) Taran Furs had a business outside Canada.

Counsel for the respondent gave her written argument, which she commented on orally, and the Court believes that it should form an integral part of its judgement:

1. The Respondent submits that:

-the amounts at issue are taxable as interest under Part XIII of the Income Tax Act for the Appellant’s 1975, 1976, 1977, 1980 and 1981 taxation years; and

- the seven Tax Conventions applicable for the taxation years at issue have only the effect of restricting to 15% the rate of taxation under Part XIII of the Income Tax Act for those years.

2. Since this Court rendered judgment in 1985 with respect to the Appellant’s 1972, 1973 and 1974 taxation years (Taran Furs Inc. v. Minister of National Revenue, 85 D.T.C. 1988), the case law has evolved. Further, this judgment is presently on appeal before the Federal Court of Canada.

I - THE FACTS

3. The Appellant, a corporation resident in Canada, carried on in Canada a business of manufacturing and selling fur garments.

In the course of its business carried on in Canada, the Appellant purchased skins from non-resident suppliers. These suppliers carried on their own businesses in Finland, Denmark, USA, Sweden, Norway and England, and have no permanent establishments in Canada. See the Reply to Notice of Appeal and admissions in the Notices of Objection.

The skins purchased from non-resident suppliers were bought at auction sales held in Copenhagen (Denmark), Oslo (Norway), Stockholm (Sweden), New York (USA) and London (England). The skins purchased from the Finnish supplier were bought at the auctions held in Copenhagen (Denmark). The sales were effective at the fall of the hammer and the purchase price had to be paid at the “prompt day” specified in the conditions of sale. If the purchase price was not paid on that day, interest accrued at a specified rate until full payment. See para. 2, 4, 6, 7 and 9 of the conditions of auction sales held in Denmark, as an example.

The skins are manufactured into fur garments by the Appellant in Canada.

In the course of its business carried on in Canada, the Appellant sold its fur garments in Canada (62 to 63%) and outside Canada (37 to 38%): see financial statements for the 1975 and 1976 fiscal years.

The Appellant did not carry on business in a country other than Canada: see its tax returns for the 1975, 1976, 1977, 1980 and 1981 taxation years.

4. During the 1975, 1976, 1977, 1980 and 1981 taxation years (ending on May 31), the Appellant paid or credited to its non-resident suppliers the following amounts as interest accrued on late payment of the purchase price of the skins bought at auction sales.

1975

$53,821.20 paid to a supplier resident in Denmark;

$88,034.48 paid to a supplier resident in Finland;

$21,813.88 paid to a supplier resident in the USA;

$7,682.20 paid to a supplier resident in Sweden;

$20,775.60 paid to a supplier resident in Norway;

$7,294.48 paid to a supplier resident in England.

1976

$66,349 paid to a supplier resident in Denmark;

$44,974.58 paid to a supplier resident in Finland;

$4,566 paid to a supplier resident in Sweden;

$15,442.30 paid to a supplier resident in Norway;

$2,673 paid to a supplier resident in England.

1977

$19,706.78 paid to a supplier resident in Denmark;

$17,278.62 paid to a supplier resident in Finland;

$1,480 paid to a supplier resident in Sweden;

$7,028.70 paid to a supplier resident in Norway;

$1,979 paid to a supplier resident in England.

1980

$15,948 paid to a supplier resident in Denmark;

$23,016.39 paid to a supplier resident in Finland.

1981

$14,481.41 paid to a supplier resident in Denmark.

5. Quantum is not an issue in the present case. Those amounts are called interest in the invoices of the non-resident suppliers. The payments were made from the bank account of the Appellant in Canada, see R-1, R-2 and R-3.

6. The Appellant failed to withhold Part XIII tax to be paid by its non-resident suppliers, and was assessed pursuant to paragraph 212(l)(b) and subsection 215(6) of the Income Tax Act, and pursuant to the Tax Conventions at issue which restrict to 15 per cent the rate of Part XIII tax.

II- INTEREST TAXABLE UNDER PART XIII OF THE INCOME TAX ACT

A. INTEREST ON LATE PA YMENTS

7. In the Taran Furs judgment of 1985, this Court felt bound by the Lebern Jewellery Co. Ltd. decision rendered in 1976 by the Tax Review Board. It was decided that the amounts at issue were not interest, even though, referring to Ontario (Attorney General) v. Barfried Enterprises Ltd. [1963] S.R.C. 570, 42 D.L.R. (2d) 13 this Court was “inclined to say that the word “interest” it its ordinary meaning included not only borrower-lender interest but also interest originating from late payment for property acquired for the purpose of gaining and producing income.

8. The Respondent submits that Her Majesty the Queen appealed from the Lebern Jewellery Co. Ltd. decision to the Federal Court of Canada. Her motion for judgment in accordance with the terms of Her Statement of Claim was granted by the Federal Court of Canada.

9. Moreover, the Thyssen Canada Ltd. v. R., (sub non. Thyssen Canada Ltd. v. R.), [1987] 1 C.T.C. 112 at 115, judgment rendered by the Federal Court of Appeal on December 1986, 87 D.T.C. 5038, at 5040, confirmed that late payment charges which have all the characteristics of interest are indeed interest. Application for leave to appeal was refused by the Supreme Court of Canada in June 1987. In that judgment, reference was made to the following definition, taken from Halsbury’s Laws of England, Fourth Edition, Vol. 32, par. 106:

Interest in general. Interest is the return or compensation for the use or retention by one person of a sum of money belonging or owed to another. Interest accrues from day to day even if payable only at intervals....

10. The same definition was adopted previously by the Supreme Court of Canada, in Ontario (Attorney General) v. Barfried Enterprises Ltd. [1963] S.C.R. 570, at 575, referring to the Reference re validity of s. 6 of the Farm Security Act, 1944 (Saskatchewan) case, [1947], S.C.R. 394, at 411 (affirmed by [1949] A.C. 110), and to Halsbury’s Laws of England.

11. See also the Riches v. Westminster Bank Ltd., a decision of the House of Lords, regarding the meaning of “interest” [1947] A.C. 390, at page 400:

...the essence of interest is that it is a payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have made if he had had the use of the money, or conversely the loss he suffered because he has not that use. The general idea is that he is entitled to compensation for the deprivation. From that point of view it would seem immaterial whether the money was due to him under a contract express or implied or a statute or whether the money was due for any other reason in law. In either case the money was due to him and was not paid, or in other words was withheld from him by the debtor after the time when payment should have been made, in breach of his legal rights, and interest was a compensation, whether the compensation was liquidated under an agreement or statute...or was unliquidated and claimable under the Act as in the present case. The essential quality of the claim for compensation is the same and the compensation is properly described as interest.

12. More recently, in Wenger’s Ltd. v. Minister of National Revenue, [1992] 2 C.T.C 2479 at 2496, (sub non. Wenger’s Ltd. and Dorso Optics Ltd. v. M.N.R. 92 D.T.C. 2132 (on appeal), at 2142, the Tax Court of Canada also decided that charges on late payments were interest. They were not part of the purchase price and at all times retained their quality of interest.

13. The Respondent submits that the amounts at issue have all the characteristics of interest: they represent compensation for the retention by the Appellant for the purchase price owed to its non-resident suppliers, and they accrued from day to day. The fact that the property which was sold at the fall of the hammer was not transferred until complete payment does not change the nature of the interest to be paid. The Appellant became indebted to its nonresident suppliers at the fall of the hammer and the purchase price was due on the “prompt day” specified in the conditions of sale.

B. INTEREST TAXABLE UNDER PARAGRAPH 212(l)(b)

14. Part XIII does not contemplate a meaning of interest different from the ordinary meaning of the word, as defined by the case law. [1]

In Sudden Valley Inc. v. R., [1976] C.T.C. 297, 76 D.T.C. 6178 (F.C.T.D.), and [1976] C.T.C. 775, 76 D.T.C. 6448 (F.C.A.), there was no doubt that the interest paid by Canadian residents to Sudden Valley Inc., a United States company, on the balance of the purchase price of lands, was taxable under Part XIII of the Income Tax Act, to the extent that Sudden Valley Inc. was not carrying on business in Canada.

In Maritime Coastal Containers Ltd. v. Minister of National Revenue, [1981] C.T.C. 2227, 81 D.T.C. 213 (T.R.B.), interest under agreements to purchase vessels, where the purchase price was paid over a period of time, was considered to be interest taxable under Part XIII of the Income Tax Act.

See also Wenger’s Ltd and Dorso Optics Limited v. Minister of National Revenue, cited above: interest on the purchase price of watches was also judged to be interest taxable under Part XIII of the Income Tax Act.

C. INTEREST NOT EXEMPT UNDER SECTION 212(1)(b)(iii)(E)

15. Section 212(1 )(b)(iii)(E) exempts from Part XIII tax “interest payable in a currency other than Canadian currency to a non resident person with whom the resident payer is dealing at arm’s length, on... any obligation entered into in the course of carrying on a business in a country other than Canada, to the extent that the interest payable on the obligation is deductible in computing the income of the payer under Part I from a business carried on by the payer in such a country”.

16. The Respondent submits that section 212(l)(b)(iii)(E) is not applicable in the present case because the Appellant did not carry on a business in a country other than Canada during the 1975, 1976, 1977, 1980 and 1981 taxation years at issue.

17. The fact that the Appellant bought skins in foreign countries does not imply that it carried on a business in each of those foreign countries.

Cutlers Guild Limited v. R., (sub non. Cutlers Guild Ltd. v. R.), [1981] C.T.C. 115 at 118, 81 D.T.C. 5093, at 5095 (F.C.)

Lebern Jewellery Co. Ltd. v. Minister of National Revenue, [1976] C.T.C. 2422 at 2428 76 D.T.C. 1313, at 1315-16 (T.R.B.)

18. Moreover, the fact that the Appellant exported some of its fur garments to foreign countries does not mean that it was carrying on business in those countries. To carry on business in Canada with foreign countries is quite different from carrying on business in a foreign country.

F.L. Smidth & Co. v. Greenwood, (1922) 8 T.C. 193 (House of Lords), cited in Cutlers Guild Ltd. above.

R. v. London Life Insurance Co. (sub nom. London Life Insurance Co. v. Canada; sub nom. London Life Insurance Co. v. R.), [1990] 1 C.T.C. 43, 90 D.T.C. 6001 (F.C.A.) about the test to be applied.

As to the facts, see the T-2 tax returns of the Appellant for the years in issue: the Appellant itself reports its whole profits as income from an active business carried on in Canada for the purpose of the small business deduction, and as Canadian manufacturing and processing profits for the purpose of the manufacturing and processing profits deduction. Further, in the same returns, the Appellant states that it had no income other than from an active business carried on in Canada, had no income from foreign sources, and had no permanent establishment in another jurisdiction.

19. The fact that a concession may have been made in previous years during which fur garments were sold by the Appellant in foreign countries, does not preclude the Minister from taking a different view of the facts in subsequent years.

See Wenger’s Ltd. v. Minister of National Revenue, 92 D.T.C. 2132 at page 2145; see also Ludco Enterprises Ltd. v. R. (sub nom. Ludmer v. R.), [1995] 2 F.C. 3, 182 N.R. 125, 95 D.T.C. 5311 (F.C.A.).

III - INTEREST NOT EXEMPT UNDER TAX TREATIES

20. In the Taran Furs judgment rendered in 1985 with respect to the Appellant’s 1972 to 1974 taxation years, this Court decided that the Appellant’s non-resident suppliers were exempt of taxation in Canada under the Canada- Finland and Canada-Denmark tax treaties, because the amounts at issue, if they were interest, were not derived from sources within Canada.

This Court referred to a South African case, Liquidator, Rhodesia Metals, Ltd. v. Commissioner of Taxes, [1940] A.C. 774, and took the position that “the concept of source was not a legal concept but something which a practical man would regard as a real source of income”. Then, as to the facts, the Court followed the Studebaker Corporation of Australasia Ltd. decision rendered by the High Court of Australia in the context of a different statute.

21. Referring to the recent judgment of the Supreme Court of Canada in Crown Forest Industries Ltd., supra, 95 D.T.C. 5389, the Respondent respectfully submits that the tax treaties which are applicable in the present case should be

interpreted in their own context, according to their terms read as a whole and having regard to the intention of the parties. The applicable tax treaties for the 1975, 1976, 1977, 1980 and 1981 taxation years at issue are not only the Canada-Finland and Canada-Denmark tax treaties, but also the Canada-Norway, Canada-Sweden, Canada-United Kingdom and Canada-US tax treaties.

A. INTERPRETATION OF TREATIES

22. Paragraph 1 of Article 31 of the Vienna Convention on the Law of Treaties to which Canada adhered in 1970 reads as follows:

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

23. Article 32 of the Vienna Convention runs:

Supplementary means of interpretation.

Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31 :

(a) leaves the meaning ambiguous or obscure; or

(b) leads to a result which is manifestly absurd or unreasonable.

24. A similar approach was taken by the Supreme Court of Canada in Crown Forest Industries Ltd. v. R. supra, page 69 (D.T.C. 5393):

In interpreting a treaty, the paramount goal is to find the meaning of the words in question. This process involves looking to the language used and the intention of the parties.

and at page 76 (D.T.C. 5396):

Reviewing the intentions of the drafters of a taxation convention is a very important element in delineating the scope of the application of that treaty.

25. The Supreme Court of Canada emphasized, at page 77 (D.T.C. 5396), the importance of extrinsic materials in ascertaining the intentions of the parties:

Clearly, the purpose of the Convention has significant relevance to how its provisions are to be interpreted. I agree with the intervener Government of the United States’ submission that, in ascertaining these goals and intentions, a court may refer to extrinsic materials which form part of the legal context (these include accepted model conventions and official commentaries thereon) without the need first to find an ambiguity before turning to such materials.

[Emphasis added. ]

26. In the present case, the Respondent submits that the terms of the treaties applicable to the taxation years at issue must be analyzed in the light of:

- their general purpose;

- their specific object and purpose with respect to interest;

- the nature of the taxation of interest under internal law.

B. INTENTION OF THE PARTIES TO THE TREATIES

1. GENERAL PURPOSE OF TAX TREATIES

27. One of the principal purposes of tax treaties is to eliminate double taxation of the same income, as indicated in the preamble of each treaty.

With respect to interest, double taxation may arise from the fact that a withholding tax may be imposed by the payer’s government (Part XIII tax under the Canadian Income Tax Act) and, at the same time, an income tax may be imposed by the recipient’s government (Denmark, Finland, Sweden, Norway, United Kingdom, United States, in this case). In other words, a non resident could be subject to double taxation on interest, in his country by virtue of his residence as well as in Canada by virtue of the source principle.

2. COMPROMISE ADOPTED BY THE PARTIES WITH RESPECT TO INTEREST

28. The Respondent submits that in order to eliminate that double taxation, Canada and the other contracting parties to the treaties adopted the following compromise based on reciprocity:

1. both the State of the recipient’s residence and the State of source of the income retain their right to tax interest;

2. the right to tax of the State of source is restricted to a rate of 15%; and

3. in computing its own tax, the State of the recipient’s residence must take into account the 15% tax paid to the State of source, so as to avoid double taxation.

Neither Canada nor the other contracting parties have ever intended to abdicate their right to tax interest. [2]

29. That intention appears from the language of the treaties as we will see later, and is consistent with the approach proposed in the O.E.C.D. (Organization for Economic Co-operation and Development) 1963 Draft Convention:

In its brief analysis of the Articles of the Draft Convention, the O.E.C.D. Fiscal Committee explains on page 13:

18. The rules of attribution in the Draft Convention represent a balance of reciprocal concessions between the Member countries which favoured taxation by the State of residence and those which favoured taxation by the State of source. The compromise which has been achieved is based...on the division of the right to tax...interest between the State of the recipient’s residence and the State of source of the income. For this purpose, a right to levy tax at a restricted rate is given to the State of source, which tax the State of residence must take into account in computing its own tax so as to avoid double taxation....

[Emphasis added.]

In its Commentary on Article 11 of the Draft Convention concerning the taxation of interest, the O.E.C.D. Fiscal Committee states on page 110:

15. The Fiscal Committee therefore has been obliged to turn towards a compromise solution, first laying down the principle that interest shall be taxed in the State of residence - particularly as this is the practice in the generality of the Member states - but leaving the State of source the right to impose a tax if its law so provide, it being implicit in this right that the State of source is free to give up all taxation on interest paid to nonresidents. Its exercise of this right will however be limited by a ceiling which its tax cannot exceed but, it goes without saying, the Contracting States can agree to adopt an even lower rate of taxation in the State of source. The sacrifice that the latter would accept in such conditions will be matched by a similar sacrifice for the State of residence, since it will have to take into account the tax levied in the State of source in order to prevent the double taxation that the interest would suffer if the State of residence imposed on itself no restriction in the exercise of its right....

[Emphasis added.]

30. It is interesting to note that paragraph 2 of Article 11 of the Draft Convention which reserves a right to tax interest to the State of source lays down nothing about the mode of taxation in the State of source and leaves that State free to apply its own law: see paragraph 20 of the Commentary, on page 111.

31. Further, paragraph 28 of the Commentary (on page 113) states that paragraph 5 of Article 11 of the Draft Convention lays down the principle that the State of source of the interest is the State in which the payer of the interest resides.

32. Canada was in agreement with that general position, but made a reservation about the ceiling of the tax levied in the State of source. Paragraph 2 of Article 11 of the Draft Convention proposed a rate of 10 per cent, but Canada retained a rate of 15 per cent in its bilateral conventions.

33. The same general approach with respect to the taxation of interest was taken in the O.E.C.D., Model Convention of 1977: see paragraphs 1, 2 and 5 of Article 11 of the Model Convention, and paragraphs 3, 9, and 24 of the Commentary on Article 11 on Interest. Again, Canada wishing to retain a 15 per cent rate of tax at source in its bilateral conventions, reserved its position on paragraph 2 of Article 11.

34. The United Nations Model Convention of 1980 took the same general approach: see paragraphs 1, 2 and 5 of Article 11 of the Model Convention, except that paragraph 2 of Article 11 does not propose a 10 per cent rate of taxation by the State of source, but states that the limited rate has to be established through bilateral negotiations: see Commentary thereon.

3. CLEAR LANGUAGE OF THE TREATIES

35. The language used in the treaties applicable to the years at issue conveys that intention of the contracting parties to share the taxation of interest between the State of the recipient’s residence and the State of source, and to eliminate double taxation by the means of a restricted rate in the State of source and a tax deduction in the State of the recipient’s residence.

Tax treaty with Denmark (applicable to 1975, 1976, 1977, 1980 and 1981) and tax treaty with Finland (applicable to 1975, 1976, 1977 and 1980): implicit reference to domestic laws:

36. According to Article III, the profits of a Danish or Finnish enterprise shall not be subject to tax in Canada unless the enterprise carried on a business in Canada through a permanent establishment situated therein; but this does not prevent Canada from imposing a “withholding tax” on interest derived from a source within Canada by a resident of Denmark or Finland which has no permanent establishment in Canada. This Article settles the principle that Denmark or Finland, as the State of the recipient’s residence, may tax interest included in computing the recipient’s profits, and that Canada, as State of source, retains its right to tax the same interest. The reference to the Canadian withholding tax is an implicit reference to Part XIII of the Income Tax Act.

- According to Article VI, the Canadian tax on interest flowing from

Canada to Denmark or Finland is, however, restricted to 15 per cent.

- According to Article XIII, an equivalent tax deduction has to be allowed by the Danish or Finnish government in computing its own tax.

Similar provisions apply where Denmark or Finland is the source State, as a matter of reciprocity.

It is clear from those provisions, read as a whole, and from their object and purpose, that the source State is not the recipient’s residence State, but the payer’s residence State.

Tax treaty with Sweden (applicable to 1975, 1976, and 1977) and tax treaty with the USA (applicable to 1975): express reference to domestic laws.

37. The Canada-Sweden Agreement and the Canada-US Convention refer expressly to domestic laws:

- Paragraph 2 of Article IT of the Canada-Sweden Agreement and Article II of the Canada-US Convention provide that interest received by a resident of a contracting State are taxed separately or together with profits “in accordance with the laws of the contracting States.”

- Article III of the Canada-Sweden Agreement settles the principle that Sweden has the right to tax the profits (including interest) of a Swedish enterprise; there is a similar provision in the Canada-US Convention (Article I).

- Article VI of the Canada-Sweden Agreement and paragraphs 1 and 6 of Article XI of the Canada-US Convention restrict to 15 per cent the Canadian tax on interest flowing from Canada to a resident of Sweden or a resident of the USA. Paragraph 5 of Article XI of the Canada-US Convention refers expressly to the withholding tax and permits to the contracting States to make regulations to ensure that the benefit of the reduced rate is limited to persons entitled thereto.

- Paragraph 2 of Article XV of the Canada-Sweden Agreement provides for an equivalent tax deduction to be allowed by the government of Sweden where “under the laws of Canada” a Canadian tax has been paid; Article XV of the Canada-US Convention provides for a similar deduction.

Similar provisions apply where Sweden or the USA is the source State, as a matter of reciprocity.

Tax treaty with Norway (applicable to 1975, 1976 and 1977): express reference to domestic laws, and source State defined as being the payer's residence State.

38. According to Article 10, interest arising in Canada and paid to a resident of Norway may be taxed in Norway which is the State of the recipient’s residence, and in Canada which is the source State “according to the law of that State”, but in the latter case the rate of tax is restricted to 15 per cent.

Paragraph (4) of Article 10 lays down expressly the principle that the source State is the State of the payer’s residence.

Article 21 provides for a deduction to be allowed by the government of Norway, equivalent to the 15 per cent tax paid to Canada.

The same provisions apply where Norway is the source State.

Tax treaties with the United Kingdom: for 1975, express reference to domestic laws and right of the source State to tax the beneficial owner of the interest; for 1976 and 1977, express reference to domestic laws and source State defined as being the payer's residence State.

39. In the 1966 Agreement, which is applicable to the 1975 taxation year in the present case, Article 6 provides that the profits of a United Kingdom enterprise, excluding interest other than interest connected with a business carried on in Canada through a permanent establishment, are taxed in the United Kingdom.

Article 10 has only the effect of restricting to 15 per cent the Canadian tax on interest “beneficially owned” by a resident of the United Kingdom not having a permanent establishment in Canada.

Article 21 provides for a credit against the United Kingdom tax; such credit is equivalent to the Canadian tax payable “under the laws of Canada” but restricted, under the Agreement, to 15 per cent.

Similar provisions apply to the other contracting State, as a matter of reciprocity.

40. In the 1978 Convention, which is applicable in the present case to the 1976 and 1977 taxation years, Article 11 states that interest may be taxed in the State of the recipient’s residence, and, if the recipient is the beneficial owner, in the source State which is the State of the payer’s residence “according to the law of that State”, but at a restricted rate of 15 per cent.

Paragraph 7 of Article 11 lays down expressly the principle that the source State is the State of the payer’s residence.

Article 21 provides for a credit against the United Kingdom tax; such credit is equivalent to the Canadian tax payable “under the laws of Canada” but restricted, under the Agreement, to 15 per cent. The same provision applies to the other contracting State.

41. In conclusion, the language of the tax treaties is clear as to specific objects and purposes of the provisions related to interest.

First, none of the treaties in issue is designed to exempt interest from taxation by one of the contracting States; they are designed to share the taxation of interest.

Second, they do not alter the pattern of income taxation prevailing in either State, except with respect to the rate of taxation which has to be reduced by the source State to 15 per cent and with respect to the equivalent foreign tax deduction which has to be allowed by the Sate of the recipient or beneficial owner’s residence.

Third, the source State appears to be the State of the payer’s residence, either from the express terms of the treaties or by necessary implication, having regard to the purpose of the treaties, the kind of income dealt with and the nature of the taxation of that kind of income under the laws of the contracting parties to the treaties.

4, CONSISTENCY WITH THE INCOME TAX ACT

42. The relevant provisions of the Income Tax Act are consistent with the intention of the parties to the treaties.

Taxation system for non-residents under the Income Tax Act.

43. It should be recalled that under the Income Tax Act, a non-resident may be subject to tax either under Part I or under Part XIII.

44. A non-resident is subject to tax under Part I on income earned in Canada, derived from the following Canadian sources:

- the carrying on of a business in Canada;

- his employment in Canada.

The rates of tax are the same as those applied to Canadian residents.

A non-resident is also subject to tax under Part I on income derived from a third source in Canada, i.e., the disposal of a Canadian taxable property.

See subsection 2(3) and section 115 of the Income Tax Act.

45. A non-resident may also be subject to a withholding tax under Part XIII on certain types of income, derived from other property sources, such as dividends, interest, or rents. In the context of Part XIII of the Income Tax Act, where the non-resident is liable for tax on interest paid or credited to him by a resident of Canada, it is obvious that the source of the interest is located at the residence of the payer, that is Canada. See also the title of Part XIII which reads “Tax on Income From Canada of Non-Resident Persons.”

Before 1976, the rate of withholding tax applicable to interest in subsection 212(1) was generally 15 per cent. The rate was increased to 25 per cent on January 1st, 1976, except where the recipient of the interest resided in a country with which Canada had a tax treaty providing for a lesser rate (15 per cent in the present case).

See subsections 10(4) and (6) of the Income Tax Application Rules, 1971, which provide that for the purposes of any bilateral tax convention to which Canada is a party, the rate of withholding tax under Part XIII of the Income Tax Act is reduced to 15% or to the rate specified in the convention.

This is consistent with the treaties which provide that a non-resident may be taxed in the State where the source of the interest arises, but at a limited rate.

Purpose of this taxation system for non-residents.

46. The reason why the source of revenue receipts, such as interest, is located, under Part XIII, at the residence of the payer is that it is the place where the tax, if not withheld at source by the payer as required, can be collected the most easily.

See P.W.I. Inc. v. Minister of National Revenue, [1993] 1 C.T.C. 2453, 93 D.T.C. 852, at page 2457 (D.T.C. 855).

47. A parallel may be drawn with the general rule in private international law to the effect that the situs of a debt is the residence of the person paying the debt, the rationale being that it is at the residence of the debtor that the debt may be enforced.

See New York Life Insurance Co v. Public Trustee, [1924] 2 Ch 101 at 119 (Lord Atkin) cited in Cheshire and North, Private International Law, llthed. 1987.

Foreign tax credit.

48. Finally, and consistent with the tax treaties which provide for a deduction of the foreign tax paid otherwise, section 126 of the Income Tax Act provides for a credit in respect of the tax paid by a resident of Canada to the government of another country, on income “from sources in that country”.

Equivalent provisions normally exist in the internal law of the other contracting States, as a matter of reciprocity.

49. The Respondent submits that sections 126 and 4 of the Income Tax Act, which refer to the territorial source of income, should be analyzed in terms of types of income and types of taxation, having in mind subsection 2(3), section 115 and Part XIII of the Income Tax Act under which non-residents are subject to Canadian income tax as explained above.

See Interprovincial Pipe Line Co. v. Minister of National Revenue, [1967] C.T.C. 180 at 67 D.T.C. 5125, at 5128 (Exch. Court), about the structure of the Act and the general purpose of the foreign tax credits provision.

50. In the Interprovincial Pipe Line Co. case, at D.T.C. 5129 (Exch. Court) and 68 D.T.C. 5093 (S.C.C.), the Court had to decide the method to be followed in computing the appellant company’s foreign tax credit. There was no doubt in the mind of the parties and of the Court that the interest paid by the US subsidiary to its parent company in Canada was income from a source in the United States. The State of the debtor’s residence was the source State.

51. Paragraph 31 of the Interpretation Bulletin of Revenue Canada IT-270R concerning the foreign tax credit, is to the same effect:

Where the interest is earned, other than in the course of carrying on a business in a foreign country, the residence of the debtor ordinarily determines the territorial source of income.

See also paragraph 21 of IT-270.

52. The Respondent refers this Court also to the Hilton (sub nom. Hilton v. Minister of National Revenue) case (1963), 31 Tax ABC 389, 63 D.T.C. 336, at page 344 concerning the foreign tax credit. The Court decided that the actual source of interest paid on German and Japanese bonds was located in Germany and Japan, and not in the USA where the interest were paid by the investment broker. The broker was only a conduit pipe. The source State was implicitly the debtor’s State.

53. It is to be noted that the English, Australian and South African decisions referred to by the parties in the Hilton case were based on different statutes and were not dealing with the interpretation of tax treaties. The Respondent submits that those decisions should be considered with caution. As Lord Atkin of the Privy Council said in Liquidator, Rhodesia Metals Ltd. v. Commissioner of Taxes, [1940] A.C. 774, at page 788:

In support of the contention [that the source of the profit in question was where the business was carried on], numerous cases founded on the various Income Tax Acts, English, Australian, New Zealand and South African, were cited chiefly as to business in buying and selling commodities, such as ... Studebaker Corporation of Australasia, Ltd. v. Commissioner of Taxation of New South Wales (Australia)...(our words in square parenthesis).

Their Lordships have no criticisms to make of any of those decisions, but they desire to point out that decisions on the words of one statute are seldom of value in deciding on different words in another statute, and that different business operations may give rise to different taxing results.

In that judgment, it was decided that, under the Rhodesian statute and as a hard matter of fact, profits accruing to a taxpayer resident in England from the sale of foreign immovable property arose in the country where that property was situated (in Southern Rhodesia) although both the contracts of purchase and sale thereof were made in England.

54. In the Australian Studebaker case, which was followed by this Court in the Taran Furs decision of 1985 but not in the Hilton decision, the question to be decided was whether, under the New South Wales statute, interest paid by a New South Wales company to an American company in relation with the purchase of cars according to an agreement concluded in America, arose from business transacted and wholly carried out in New South Wales, and therefore was income of the American company arising from a source in New South Wales, and was assessable to income tax. It was decided that, under the New South Wales statute and as a practical hard matter of fact, the source of the interest was not within New South Wales, but was in America where the business was transacted and wholly carried on. The Respondent submits, however, that the context of the Studebaker case was not the sort of context with which we are concerned in the present case, where the intention of the contracting parties to the treaties is of primary importance. Saying that questions of source depend upon practical matters of fact does not necessarily assist. The wording and purpose of Part XIII of the Income Tax Act are different from those of the New South Wales statute, and even if some terms of the treaties, read in isolation, are similar, their respective contexts are substantially different.

55. Having regard to the intention of the parties to the treaties, to the kind of income dealt with in Part XIII of the Income Tax Act and to the nature and purpose of the taxation of such income under that Part, the source State is, by the very terms of the treaties or by necessary implication, the State of the payer’s residence, that is Canada, in the present case. There is no inconsistency between the treaties and the Income Tax Act.

5. ANOMALOUS RESULTS

56. Adopting the Appellant’s understanding of the tax treaties that the State of source is the State where the agreement was concluded, which is the State of the recipient’s residence or a third State [3] , would lead to anomalous results:

First, no effect would be given to the provisions of the treaties, permitting not only the State of the recipient’s residence but also the source State, being the State of the payer’s residence, to retain their right to tax interest.

Second, non-residents would try to avoid taxation under Part XIII of the Income Tax Act in concluding agreements with residents of Canada outside Canada, which is not the purpose of the treaties. On the contrary, the second main purpose of the treaties is the prevention of fiscal evasion with respect to taxes on income.

C. INTEREST AT ISSUE INCLUDED IN THE MEANING OF INTEREST UNDER THE APPLICABLE TREATIES

1. MEANING OF INTEREST UNDER THE TREATIES APPLICABLE TO THE TAXATION YEARS AT ISSUE:

Meaning under internal law in the treaties with Denmark, Finland and Sweden.

57. The Canada-Denmark, Canada-Finland and Canada-Sweden tax treaties applicable to the years at issue do not contain any definition of interest. In such a case the treaties provide that any term not otherwise defined shall have the meaning it has under internal law (Article II, paragraph 2, of the Danish and Finland treaties and Article II, paragraph 3 of the Swedish treaty). Consequently, the amounts at issue which are interest under Canadian law, as seen above, are also interest for the purposes of those treaties.

Broad definition of interest in the treaties with Norway, the United Kingdom and the USA.

58. In paragraph 3 of Article 11 of the 1963 O.E.C.D. Draft Convention (on page 48), the meaning of interest is very broad and includes interest on any debt-claim.

59. the Canada-Norway and Canada-United Kingdom tax treaties, applicable to the 1975, 1976 and 1977 taxation years at issue, also define very broadly the term interest as including interest on any form of indebtedness: Article 10, paragraph (6) of the Norway treaty and Article 10, paragraph (3) of the Canada-United Kingdom Tax Agreement, 1966 and Article 11, paragraph 5 of the Canada-United Kingdom Income Tax Convention, 1978.

An application of the Canada-Norway tax treaty of 1966 may be found in Maritime Coastal Containers Ltd. v. Minister of National Revenue, [1981] C.T.C. 2227, 81 D.T.C. 213 (T.R.B.), concerning interest on the late payment of the purchase price.

60. The Canada-US tax treaty applicable to the 1975 taxation year at issue is to the same effect: see subparagraph 6(b) of the US Protocol to the treaty, in which the words “shall include” are used, as opposed to the word “means” used in other definitions of the same Protocol.

For an application of the Canada-US tax treaty of 1942 with respect to interest on the late payment of the purchase price, see Sudden Valley Inc. v. R., [1976] C.T.C. 297, 76 D.T.C. 6178 (F.C.T.D.) and [1977] 1 F.C. 617, 76 D.T.C. 6448 (F.C.A.).

2. OPTIONAL CLAUSES PROVIDED FOR IN THE MODEL CONVENTIONS

61. None of the tax treaties applicable to the years at issue exempts interest on any categories of debt or penalty charges, from taxation by the State of source. The Respondent submits that no income can be exempted from taxation by a State without a text in the treaty to that effect.

62. The Commentaries on paragraph 2 of Article 11 of the 1977 O.E.C.D. Model Convention and of the United Nations Model Convention mention that two contracting States may decide to exempt from taxation, by the State of source, interest arising from certain categories of debts, such as interest paid in connection with the sale on credit of merchandise by one enterprise to another enterprise. But such a common intention has to be expressed by an additional paragraph in the convention. As mentioned in the Commentary of the United Nations Model Convention:

...while interest on deferred-payment or credit sales should be considered in the context of the treaty article on interest, the nature of that consideration and the final resolution should be settled through negotiations between the parties.

63. Moreover, the last sentence of Article 11(3) of the 1977 O.E.C.D. Model Convention and of the United Nations Model Convention, which provides that “penalty charges for late payment shall not be regarded as interest for the purpose of this Article”, is optional. Paragraph 20 of the Commentary on Article 11 of the 1977 O.E.C.D. Model Convention states that:

Contracting States are free to omit this sentence and treat penalty charges as interest in their bilateral conventions.

[Emphasis added.]

The Commentary of the United Nations Model Convention reproduces the O.E.C.D. Commentary.

64. The omission of the last sentence of Article 11(3) of the 1977 O.E.C.D. Model Convention from subsequent tax treaties confirms its optional nature: see the Canada-United Kingdom Income Tax Convention, 1978, applicable to the 1976 and 1977 taxation years in the present case.

For comparison, the sentence was also omitted in paragraph 3 of Article 11 of the Canada-Australia Income Tax Convention (1980) [4] . On the contrary, penalty charges were expressly excluded in paragraph 2 of Article 11 of the Canada-New Zealand Income Tax Convention (1980) [5] . Interestingly, both conventions were signed at the same time and had effect in Canada in respect of tax withheld at source, on amounts paid to non-residents on or after January 1, 1976. But the intention of the contracting parties was different in that respect.

65. The last sentence of Article 11(3) of the 1977 O.E.C.D. Model Convention implies also that penalty charges were considered by the members of the O.E.C.D. Committee as included in the ordinary meaning of interest, unless expressly excluded by the parties.

3. NON-RETROACTIVITY OF TREATIES

66. The Canada-Finland Tax Convention (1990) which is applicable only after 1992, the Canada-Sweden Income Tax Convention (1983) which is applicable only after 1984, and the Canada-United States Income Tax Convention (1980) which is applicable, with respect to interest, after September 1984, have exempted interest on certain categories of debt from taxation by the source State.

67. However, none of these treaties has a retroactive effect to the years at issue. When adopting specific dates of entry into force, the parties to the new treaties did not express a common intention to give a retroactive effect to the new provisions on interest. On the contrary, by doing so, they recognize that interest on certain categories of debt were not exempted under the previous treaties.

Article 28 of the Vienna Convention on the Law of Treaties reads as follows:

Non-retroactivity of treaties.

Unless a different intention appears from the treaty or is otherwise established, its provisions do not bind a party in relation to any act or fact which took place or any situation which ceased to exist before the entry into force of the treaty with respect to that party.

68. Of notice, the Canada-Denmark Tax Convention and the Canada-Norway Tax Convention have remained unchanged since 1964 and 1966 respectively, and do not exempt interest on certain categories of debt, from taxation by the source State.

CONCLUSION

69. For all these reasons, the Respondent submits that the Assessments must stand for all the taxation years at issue, and asks this Court to dismiss the Appeal.

After considering the facts, the treaties, the arguments of both counsel and the case law, the Court has come to the conclusion that the four conclusions of counsel for the appellant are ill-founded.

The interpretation of the various conventions by counsel for the respondent is much more convincing than that of the appellant for the purpose of deciding that the source of the income is not outside Canada, but rather in Canada, and that all the amounts paid are interest under the conventions and also under the definition of interest in Ontario (Attorney General) v. Barfried Enterprises Ltd., [1963] S.C.R. 570, 42 D.L.R. (2d) 137. As it is the case of the Canada-Denmark, Canada-Finland and Canada-Sweden conventions, some conventions stipulate that undefined terms must be given the meaning that they have under private international law, under internal law.

Taran Furs did not have a business in foreign countries. Indeed, one need only consider its income tax returns from 1975 to 1981 inclusive. Moreover, at the hearing, the appellant admitted this at subparagraph 5(d) of the reply to the notice of appeal, “that the Appellant did not carry on any business in a country other than Canada”. There is no evidence to the effect that it may have had a permanent establishment or reported and paid income tax in countries of the non-residents during the taxation years in appeal.

For all these reasons, the appeal is dismissed.

Appeal dismissed.