MACLEAN, J.:—This proceeding is one to recover from the defendant the sum of $849.31, for the consumption or sales tax imposed under the provision of the Special War Revenue Act, and for certain statutory penalties. The particulars of the claim for the taxes due and payable, and penalties, are set forth in paragraph 4 of the Information. Assuming that there is liability on the part of the defendant for the taxes and penalties claimed it is agreed that the particulars of the same as set forth in the Information are correct.
The defendant is a manufacturer of mattresses which it sells to the public, but such sales are not involved in this issue. The defendant also renovates and repairs for customers mattresses that have been in use and for which it makes certain charges for material supplied and labour performed. These mattresses are referred to as ‘‘rebuilt’’ mattresses, and it is in respect of such mattresses that it is here sought to recover the sales tax in question, the Crown claiming that such transactions constitutes taxable sales within the terms of the Special War Revenue Act, and this claim the defendant resists. The defendant also purchases from owners old or used mattresses which it rebuilds and sells to the public and it pays the sales tax upon the selling price of the same, and no question arises here as to the sales tax on such transactions.
The labour and services performed, and the material supplied, by the defendant, in connection with the mattresses delivered by customers to it, and with which we are here concerned, are the following. First, any mattress so delivered is sterilized or disinfected by some chemical process. Then the covering or ticking of the mattress is removed and a new cover or ticking is made up, the material for which is supplied by the defendant. The original mattress filling or felt is then put through a picking machine to loosen up or refluff the same, that is to say, any portion of the felt that has become wadded or matted is restored to its original fluffy condition, or nearly so, and the felt as thus treated is then blown into the new mattress cover or ticking.. The final operation is to bind or sew the cover and its contents together, I assume by vertical binding or sewing at predetermined points through the mattress cover. The mattress is then ready for delivery back to the owner or customer. It was stated by Mr. Crux, for the Crown, that in the case where the mattress covering was merely patched or repaired, and the sterilizing and refluffing operations were performed, the sales tax was not claimed.
For the material supplied and the labour performed a charge of $5.75 is made to the customer. This amount is made up as follows, $2.25 would be the charge for the new mattress cover or ticking supplied or sold the customer, 18 cents would be the sales tax on the new cover or ticking supplied the customer and which in all cases here the defendant paid to the Crown and was credited therefor, 50 cents would be the charge to the customer for the sterilization, and the remainder, $2.82, would be the charge for the labour performed in the rebuilding of the mattress. The Crown is here claiming the sales tax upon the total charge to the customer less the tax which has been already paid for the new mattress cover or ticking supplied or sold to the customer; I assume the customer might, if he desired, furnish his own mattress cover or ticking to the defendant. The question for decision then seems to be: Does the material supplied and the labour performed by the defendant in the rebuilding of the customer’s mattress constitute a sale of goods by a manufacturer, within the meaning of s. 86 of the Act?
In the case of The King v. Boultbee Limited, ([19381 Ex. C.R. 187), I decided that the defendant there was not liable for the sales tax where it retreated automobile tires for customers and to whom it returned the identical tires given it for treatment. It would seem to me that what I said in my reasons for Judgment in connection with that class of transactions, and which appear on pages 190 and 191 of the Report of that case, are applicable here and I need not repeat what I there said. I do not think that the transactions here in question fall within the meaning and intendment of sec. 86 of the Special War Revenue Act. It is true that the mattresses in question did undergo quite extensive repairs but I. do not think it can be said that the defendant manufactured and sold the same. My conclusion is that the Information must be dismissed and with costs to the defendant.
Information dismissed with costs.
CONVENTION FOR THE AVOIDANCE OF DOUBLE TAXATION BETWEEN CANADA AND THE UNITED STATES OF AMERICA
EDITORIAL NOTE: The following convention together with its protocol between Canada and the United States of America was signed at Washington on March 4, 1942 by Mr. Leighton McCarthy, K.C., Envoy Extraordinary and Minister Plenipotentiary of Canada and Mr. Sumner Welles, Acting Secretary of State of the United States of America. No ratification, however, has taken place and the instruments of ratification as referred to in Article No. 22 have not yet been exchanged. Nevertheless the importance of this document as presently made known to the public of Canada and the United States cannot be underestimated. It is more than a mere concrete expression of the common desires of its signatory States to reduce an ever growing mass of fiscal legislation on both sides of the border to terms whose common denominator shall be equality of treatment of their citizens and the prevention of double taxation caused by the conflict of their respective tax laws. It is in itself a positive creative document which will, when duly ratified, undoubtedly make new law as well as clarify and simplify the old. Any intelligent study of its articles with a view to ascertaining their meaning in law and their effect in practice upon the lives and fortunes of the taxpayers affected, must be governed by a thorough study of the definitions in the protocol and a comparison of the provisions of the convention with the income tax laws of both countries. It is as yet too early, in view of the absence of any indicative regulations and more particularly because of the pending ratification, to presume to offer any practical analysis of this document. It is the intention, however, that as soon as its content and practical application assume what might be called a static form, that a more lengthy analysis of its effect upon the income tax law of Canada will be provided.
The Government of Canada and the Government of The United States of America, being desirous of further promoting the flow of commerce between the two countries, of avoiding double taxation and of preventing fiscal evasion in the case of income taxes, have decided to conclude a Convention and for that purpose have appointed as their Plenipotentiaries: Mr. Leighton McCarthy, K.C., Envoy Extraordinary and Minister Plenipotentiary of Canada at Washington; and Mr. Sumner Welles, Acting Secretary of State of the United States of America; who, having communicated to one another their full powers found in good and due form, have agreed upon the following Articles:
ARTICLE I
An enterprise of one of the contracting States is not subject to taxation by the other contracting State in respect of its industrial and commercial profits except in respect of such profits allocable in accordance with the Articles of this Convention to its permanent establishment in the latter State.
No account shall be taken in determining the tax in one of the contracting States, of the mere purchase of merchandise effected therein by an enterprise of the other State.
ARTICLE II
For the purposes of this Convention, the term ‘‘industrial and commercial profits’’ shall not include income in the form of rentals and royalties, interest, dividends, management charges, or gains derived from the sale or exchange of capital assets.
Subject to the provisions of this Convention such items of income shall be taxed separately or together with industrial and commercial profits in accordance with the laws of the contracting States.
ARTICLE III
1. If an enterprise of one of the contracting States has a permanent establishment in the other State, there shall be attributed to such permanent establishment the net industrial and commercial profit which it might be expected to derive if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions. Such net profit will, in principle, be determined on the basis of the separate accounts pertaining to such establishment.
2. The competent authority of the taxing State may, when necessary, in execution of paragraph one of this article rectify the accounts produced, notably to correct errors and omissions or to reestablish the prices or remunerations entered in the books at the value which would prevail between independent persons dealing at arm’s length.
3. If (a) an establishment does not produce an accounting showing its own operations, or (b) the accounting produced does not correspond to the normal usages of the trade in the country where the establishment is situated, or (c) the rectifications provided for in paragraph two of this article cannot be effected the competent authority of the taxing State may determine the net industrial and commercial profit by applying such methods or formulae to the operations of the establishment as may be fair and reasonable.
4. To facilitate the determination of industrial and commercial profits allocable to the permanent establishment, the competent authorities of the contracting States may consult together with a view to the adoption of uniform rules of allocation of such profits.
ARTICLE IV
1. (a) When a United States enterprise, by reason of its participation in the management or capital of a Canadian enter- prise, makes or imposes on the latter, in their commercial or financial relations, conditions different from those which would be made with an independent enterprise, any profits which should normally have appeared in the balance sheet of the Canadian enterprise but which have been, in this manner, diverted to the United States enterprise, may be incorporated in the taxable profits of the Canadian enterprise, subject to applicable measures of appeal.
(b) In order to effect the inclusion of such profits in the taxable profits of the Canadian enterprise, the competent authority of Canada may, when necessary, rectify the accounts: of the Canadian enterprise, notably to correct errors and omissions or to reestablish the prices or remuneration entered in the books at the values which would prevail between independent persons dealing at arm’s length. To facilitate such rectification the competent authorities of the contracting States may consult together with a view to such determination of profits of the Canadian enterprise as may appear fair and reasonable.
2. The same principle applies, mutatis mutandis, in the event that profits are diverted from a United States enterprise to a Canadian enterprise.
ARTICLE V
Income which an enterprise of one of the contracting States derives from the operation of ships or aircraft registered in that State shall be exempt from taxation in the other contracting State.
The present Convention will not be deemed to affect the exchange of notes between the United States of America and Canada, dated August 2 and September 17, 1928, providing for relief from double income taxation on shipping profits.
ARTICLE VI Wages, salaries and similar compensation paid by the Government, or any agency or instrumentality thereof, of one of the contracting States or by the political sub-divisions or territories or possessions thereof to citizens of such State residing in the other State shall be exempt from taxation in the latter State.
Pensions and life annuities derived from within one of the contracting States and paid to individuals residing in the other contracting State shall be exempt from taxation in the former State.
Article VII
1. A resident of Canada shall be exempt from United States income tax upon compensation for labor or personal services performed within the United States of America if he conforms to either of the following conditions:
(a) He is temporarily present within the United States of America for a period or periods not exceeding a total of one hundred and eighty-three days during the taxable year and such compensation (A) is received for labor or personal services performed as an employee of, or under contract with, a resident or corporation or other entity of Canada and (B) does not exceed $5,000 in the aggregate during such taxable year; or
(b) he is temporarily present in the United States of America for a period or periods not exceeding a total of ninety days during the taxable year and the compensation received for such services does not exceed $1,500 in the aggregate during such taxable year.
2. The provisions of paragraph 1 (a) of this Article shall have no application to the professional earnings of such individuals as actors, artists, musicians and professional athletes.
3. The provisions of paragraphs 1 and 2 of this Article shall apply, mutatis mutandis, to a resident of the United States of America deriving compensation for personal services performed within Canada.
ARTICLE VIII
Gains derived in one of the contracting States from the sale or exchange of capital assets by a resident or a corporation or other entity of the other contracting State shall be exempt from taxation in the former State, provided such resident or corporation or other entity has no permanent establishment in the former State.
ARTICLE IX
Students or business apprentices from one of the contracting State residing in the other contracting State for purposes of study or for acquiring business experience shall not be taxable by the latter State in respect of remittances received by them from within the former State for the purposes of their maintenance or studies.
ARTICLE X
Income derived from sources within one of the contracting States by a religious, scientific, literary, educational or charitable organization of the other contracting State shall be exempt from taxation in the State from which the income is derived if, within the meaning of the laws of both contracting States, such organization would have been exempt from income tax.
ARTICLE XI
1. The rate of income tax imposed by one of the contracting States, in respect of income derived from sources therein, upon individuals residing in, or corporations organized under the laws of, the other contracting State, and not engaged in trade or business in the former State and having no office or place of business therein, shall not exceed fifteen per centum for each taxable year.
2. Notwithstanding the provisions of paragraph 1 of this Article, income tax in excess of five per centum shall not be imposed by one of the contracting States in respect of divi- dens paid by a subsidiary corporation organized under the laws of such State, or of a political subdivision thereof, to a parent corporation organized under the Jaws of the other contracting State, or of a political subdivision thereof: Provided, however, that this paragraph shall not apply if the competent authority in the former State is satisfied that the corporate relationship between the two corporations has been arranged or is maintained primarily with the intention of taking advantage of this paragraph.
3. Notwithstanding the provisions of Article XXII of this Convention, paragraph 1 or paragraph 2, or both, of this Article, may he terminated without notice on or after the termination of the three-year period beginning with the effective date of this Convention by either of the contracting States imposing a rate of income tax in excess of the rate of 15 percent prescribed in paragraph 1 or in excess of the rate of 5 percent prescribed in paragraph 2.
4. The provisions of tnis Article shall not be construed so as to contravene the Tax Convention between Canada and the United States of America, effective January 1, 1936, to April 29, 1941.
ARTICLE XII
Dividends and interest paid on or after the effective date of this Convention by a corporation organized under the laws of Canada to individual residents of Canada, other than citizens of the United States of America, or to corporations organized under the laws of Canada shall be exempt from all income taxes imposed by the United States of America.
ARTICLE XIII
Corporations organized under the laws of Canada, more than 50 percent of the outstanding voting stock of which is owned directly or indirectly throughout the last half of the taxable year by individual residents of Canada, other than citizens of the United States of America, shall be exempt from any taxes imposed by the United States of America with respect to accumulated or indistributed earnings, profits, Income or surplus of such corporations. With respect to corporations organized under the laws of Canada not exempt from such taxes under the provisions of this Article the competent authorities of the two contracting States will consult together.
ARTICLE XIV
1. (a) The United States income tax liability for any taxable year beginning prior to January 1, 1936 of any individual resident of Canada, other than a citizen of the United States of America, or of any corporation organized under the laws of Canada, remaining unpaid as of the date of signature of this Convention may be adjusted on a basis satisfactory to the Commissioner: Provided, That the amount to be paid in settlement of such liability shall not exceed the amount of the liability which would have been determined if—
(A) the Revenue Act of 1936 as modified by the Tax Convention between Canada and the United States of America, effective January 1, 1936, to April 29, 1941 (except in the case of a corporation organized under the laws of Canada more than 50 percent of the outstanding voting stock of which was owned directly or indirectly throughout the last half of the taxable year by citizens or residents of the United States of America) and
(B) Articles XIJ and XIII of this Convention, had been in effect for such year. If the taxpayer was not, within the meaning of the Revenue Act of 1936, engaged in trade or business within the United States of America and had no office or place of business therein during the taxable year, the amount of interest and penalties shall not exceed 50 percent of the amount of the tax with respect to which such interest and penalties have been computed.
(b) The United States income tax liability remaining unpaid as of the date of signature of this Convention for any taxable year beginning after December 31, 1935, and prior to January 1, 1941 in the case of any individual resident of Canada, other than a citizen of the United States of America or in the case of any corporation organized under the laws of Canada shall be deter- mined as if the provisions of Articles XII and XIII of this Convention had been in effect for such year.
2. The provisions of paragraph 1 of this Article shall not apply—
(a) Unless the taxpayer files with the Commissioner within two years from the date of signature of this Convention a request that such tax liability be so adjusted together with such information as the Commissioner may require;
(b) In any ease in which the Commissioner is satisfied that any deficiency in tax is due to fraud with intent to evade the tax.
ARTICLE XV
In accordance with the provisions of Section 8 of the Income War Tax Act as in effect on the day of the entry into force of this Convention, Canada agrees to allow as a deduction from the Dominion income and excess profits taxes on any income which was derived from sources within the United States of America and was there taxed, the appropriate amount of such taxes paid to the United States of America.
In accordance with the provisions of Section 131 of the United States Internal Revenue Code as in effect on the day of the entry into force of this Convention, the United States of America agrees to allow as a deduction from the income and excess profits taxes imposed by the United States of America the appropriate amount of such taxes paid to Canada.
ARTICLE XVI
Where a taxpayer shows proof that the action of the revenue authorities of the contracting States has resulted in double taxation in his case in respect of any of the taxes to which the present Convention relates, he shall be entitled to lodge a claim with the State of which he is a citizen or resident or, if the taxpayer is a corporation or other entity, with the State in which it was created or organized, if the claim should be deemed worthy of consideration, the competent authority of such State may consult with the competent authority of the other State to determine whether the double taxation in question may be avoided in accordance with the terms of this Convention.
ARTICLE XVII
Notwithstanding any other provision of this Convention, the United States of America in determining the income and excess profits taxes, including all surtaxes, of its citizens or residents or corporations, may include in the basis upon which such taxes are imposed all items of income taxable under the revenue laws of the United States of America as though this Convention had not come into effect.
ARTICLE XVIIT
The competent authorities of the two contracting States may prescribe regulations to carry into effect the present Convention within the respective States and rules with respect to the exchange of information.
The competent authorities of the two contracting States may communicate with each other directly for the purpose of giving effect to the provisions of the present Convention.
ARTICLE XIX
With a view to the prevention of fiscal evasion, each of the contracting States undertakes to furnish to the other contracting State, as provided in the succeeding Articles of this Convention, the information which its competent authorities have at their disposal or are in a position to obtain under its revenue laws insofar as such information may be of use to the authorities of the other contracting State in the assessment of the taxes to which this Convention relates.
The information to be furnished under the first paragraph of this Article, whether in the ordinary course or on request, may be exchanged directly between the competent authorities of the two contracting States.
ARTICLE XX
1. The competent authorities of the United States of America shall forward to the competent authorities of Canada as soon as practicable after the close of each calendar year the following information relating to such calendar year:
The names and addresses of all persons whose addresses are within Canada and who derive from sources within the United States of America dividends, interest, rents, royalties, salaries, wages, pensions, annuities, or other fixed or determinable annual or periodical profits and income, showing the amount of such profits and income in the case of each addressee.
2. The competent authorities of Canada shall forward to the competent authorities of the United States of America as soon as practicable after the close of each calendar year the following information relating to such calendar year:
(a) The names and addresses of all persons whose addresses are within the United States of America and who derive from sources within Canada dividends, interest, rents, royalties, salaries, wages, pensions, or other fixed or determinable annual or periodical profits and income, showing the amount of such profits and income in the ease of each addressee.
(b) The names and addresses of all persons whose addresses are outside of Canada and who derive through a nominee, or agent, or custodian in Canada income from sources within the United States of America, and who are not entitled to the reduced rate at 15 percent with respect to such income provided in Article XI of this Convention, showing the amount of such income in the case of each addressee.
(c) The names and addresses, where available, of persons whose addresses are outside of Canada and who derive dividends during the calendar year from corporations organized under the laws of Canada, more than 50 percent of the gross income of which is derived from sources within the United States of America, showing the amount of such dividends in each ease.
(d) The names and addresses of all persons whose addresses are within the United States of America and who beneficially or of record own stocks or bonds, debentures or other securities, or evidences of funded indebtedness, of any company taxed in Canada as a Non-Resident-Owned Investment Corporation. The term "‘Non-resident-Owned Investment Corporation” shall have the same meaning as when used in the Income War Tax Act of Canada.
ARTICLE XXI
1. If the Minister in the determination of the income tax liability of any person under any of the revenue laws of Canada deems it necessary to secure the cooperation of the Commissioner, the Commissioner may, upon request, furnish the Minister such information bearing upon the matter as the Commissioner is entitled to obtain under the revenue laws of the United States of America.
2. If the Commissioner in the determination of the income tax liability of any person under any of the revenue laws of the United States of America deems it necessary to secure the cooperation of the Minister, the Minister may, upon request, furnish the Commissioner such information bearing upon the matter as the Minister is entitled to obtain under the revenue laws of Canada.
ARTICLE XXII
This Convention and the accompanying protocol which shall be considered to be an integral part of the Convention shall be ratified and the instruments of ratification shall be exchanged at Washington as soon as possible.
This Convention and protocol shall become effective on the first day of January 1941. They shall continue effective for a period of three years from that date and indefinitely after that period, but may be terminated by either of the contracting States at the end of the three-year period or at any time thereafter provided that (except as otherwise specified in the case of Article XI) at least six months prior notice of termination has been given, the termination to become effective on the first day of January following the expiration of the six-month period.
Done in duplicate, at Washington, this Fourth day of March, 1942.
LEIGHTON McCarthy,
SUMNER WELLES.
PROTOCOL
At the moment of signing the Convention for the avoidance of double taxation, and the establishment of rules of reciprocal administrative assistance in the case of income taxes, this day concluded between Canada and the United States of America, the undersigned plenipotentiaries have agreed upon the following provisions and definitions:
1. The taxes referred to in this Convention are:
(a) for the United States of America: the Federal income taxes (including surtaxes) and excess-profits taxes.
(b) for Canada: the Dominion income taxes (including surtaxes) and excess-profits taxes.
2. In the event of appreciable changes in the fiscal laws of either of the contracting States, the Governments of the two contracting States will consult together.
3. As used in this Convention:
(a) the terms ‘‘persons, "‘individual’’ and "‘corporation,’’ shall have the same meanings, respectively, as they have under the revenue laws of the taxing State or the State furnishing the information, as the case may be:
(b) the term ‘‘enterprise’’ includes every form of undertaking, whether carried on by an individual, partnership, corporation or any other entity ;
(c) the term "‘enterprise of one of the contracting States’’ means, as the case may be, "United States enterprise”” or "‘Canadian enterprise’’’ ;
(d) the term "‘United States enterprise’’ means an enterprise carried on in the United States of America by an individual resident in the United States of America, or by a corporation, partnership or other entity created or organized in or under the laws of the United States of America, or of any of the States or Territories of the United States of America.
(e) the term "‘Canadian enterprise’’ is defined in the same manner mutatis mutandis as the term ‘‘United States enterprise’’ ’ ;
(f) the term " " Permanent establishment ’ ’ includes branches, mines and oil wells, farms, timber lands, plantations, factories, workshops, warehouses, offices, agencies and other fixed places of business of an enterprise, but does not include a subsidiary corporation.
When an enterprise of one of the contracting States carries on business in the other contracting State through an employee or agent established there, who has general authority to contract for his employer or principal or has a stock of merchandise from which he regularly fills orders which he receives, such enterprise shall be deemed to have a permanent establishment in the latter State.
The fact that an enterprise of one of the contracting States has business dealings in the other contracting State through a commission agent, broker or other independent agent or maintains therein an office used solely for the purchase of merchandise Shall not be held to mean that such enterprise has a permanent establishment in the latter State.
4. The term "‘Minister'', as used in this Convention, means the Minister of National Revenue of Canada or his duly authorized representative. The term "‘Commissioner,'' as used in this Convention, means the Commissioner of Internal Revenue of the United States of America, or his duly authorized representative. The term ‘‘competent authority,’’ as used in this Convention, means the Commissioner and the Minister and their duly authorized representatives.
o. The term ( "United States of America’’, when used in a geographical sense, includes only the States, the Territories of Alaska and Hawaii, and the District of Columbia. The term "‘Canada'' when used in a geographical sense means the Provinces, the Territories and Sable Island.
6. The term "‘subsidiary corporation” referred to in Article XI of this Convention means a corporation all of whose shares (less directors’ qualifying shares) having full voting rights are beneficially owned by another corporation, provided that ordinarily not more than one-quarter of the gross income of such subsidiary corporation is derived from interest and dividends other than interest and dividends received from its subsidiary corporations.
7. (a) The term ‘‘rentals and royalties’’ referred to in Article II of this convention shall include rentals or royalties arising from leasing real or immoveable, or personal or moveable property or from any interest in such property, including rentals or royalties for the use of, or for the privilege of using, patents, copyrights, secret processes and formulae, goodwill, trade marks, trade brands, franchises and other like property ;
(b) the term ‘‘interest’’ as used in this Convention shall include income arising from interest-bearing securities, public obligations, mortgages, hypothecs, corporate bonds, loans, deposits and current accounts.
(ce) The term ‘‘Dividends’’ as used in this Convention shall include all distributions of the earnings or profits of corporations.
8. The term ‘‘pensions’’ referred to in Article VI of this Convention means periodic payments made in consideration for services rendered or by way of compensation for injuries received.
9. The term ‘‘life annuities’’ referred to in Article VI of this Convention means a stated sum payable periodically at stated times, during life, or during a specified number of years, under an obligation to make the payments in consideration of a gross sum or sums paid by the recipient or under a contributory retirement plan.
10. The terms ‘‘engaged in trade or business’’ and ‘‘office or place of business’’ as used in Article XI of this Convention shall not be deemed to include an office used solely for the purchase of merchandise.
11. The provisions of the present Convention shall not be construed to restrict in any manner any exemption, deduction, credit or other allowance accorded by the laws of one of the contracting States in the determination of the tax imposed by such State.
12. The citizens of one of the contracting States residing within the other contracting State shall not be subjected to the payment of more burdensome taxes than the citizens of such other State.
Done in duplicate, at Washington, this fourth day of March, 1942.
LEIGHTON McCarthy,
SUMNER WELLES.