[author: Holly Cunliffe]
In Black v. The Queen (2014 TCC 12), Lord Conrad Black argued that he was not subject to tax in Canada on certain income and taxable benefits. Both Lord Black and the CRA agreed that he was a resident of both Canada and the U.K. in 2002, and that under Article 4(2)(a) of The Canada-United Kingdom Income Tax Convention (the “Convention”) he was a “deemed” resident of the U.K. for the purposes of the Convention.
Lord Black had filed his Canadian tax return for 2002 on the basis that approx. $800,000 of income from the duties of offices or employments performed by him in Canada was taxable in Canada. However, Lord Black did not include certain other remuneration and benefits totalling $5.1 million in his Canadian income, including approx. $2.8 million of income from the duties of offices or employments performed outside Canada, $326,177 of taxable dividends, $365,564 of shareholder benefits, and $1.3 million of benefits arising as a result of his use of an airplane owned by Hollinger International Inc.
In the Tax Court hearing, Lord Black argued that by virtue of his “deemed” U.K. residency these other amounts were not taxable in Canada. As it happens, since he was not domiciled in the U.K., Lord Black was subject to tax in the U.K. only on the portion of his non-U.K. source income that was remitted to or received in the U.K.
The CRA alleged that, notwithstanding Lord Black being deemed a U.K. resident for the purposes of the Convention, he was subject to Canadian tax on income and benefits that were not covered by the Convention.
The Tax Court dismissed Lord Black’s appeal and held that he could be a deemed resident of the U.K. for purposes of the Convention and also be a resident of Canada for purposes of the Canadian Income Tax Act. Chief Justice Rip noted that the arguments presented on behalf of Lord Black had no supporting authority and were contrary to the liberal and purposive approach that must be taken when interpreting a tax treaty.
In adopting the liberal and purposive approach to his analysis of Article 4(2) of the Convention, the Tax Court noted that the tie-breaker rule at issue merely provided a preference to the taxing authority of the U.K., but did not extinguish Canada’s claim to tax. Lord Black’s argument that there was an inconsistency between the Income Tax Act and the Convention was incorrect as it did not take into account the role of Article 4 in allocating taxing jurisdiction to avoid double taxation. As such, Lord Black was unable to point to any provision in the Convention that would result in double taxation if he were resident in Canada.
Lord Black also sought to rely on Article 27(2) of the Convention, which addressed the tax treatment of non-domiciled residents of the U.K. who are required to pay tax on foreign income only when it enters the U.K. Article 27(2) essentially provides that where a person is subject to income tax in the U.K., and the Convention provides for tax relief in Canada, the tax relief will only be in respect of the amount of income that is actually taxed in the U.K. Thus, Lord Black argued that the Minister could not assess his non-Canadian income because none of the income was remitted or received in the U.K., and so there was no tax from which he could have been relieved in Canada.
Since the Tax Court had already determined that Lord Black was a resident of Canada for purposes of the Income Tax Act, the argument based on Article 27(2) could not succeed. The Tax Court agreed with the CRA that the Convention allocates the right to tax between Canada and the U.K. on an item-by-item basis, and any items not covered by the Convention were thus subject to tax on the basis of Lord Black’s residence in Canada. As a resident of Canada, Lord Black was subject to tax on his worldwide income, including income earned in the U.S.
We note that both parties agreed that subsection 250(5) of the Act, which deals with the deemed non-residency of Canadians where the individual is deemed a resident in another country by virtue of a tax treaty, did not apply. This was because of the “grandfathered” application of subsection 250(5) (i.e., the provision is not applicable to a Canadian resident individual who was (i) a resident of two countries and (ii) deemed resident of one of those countries under a tax treaty at the time the subsection became effective in 1999). If subsection 250(5) had applied, then Lord Black would not be a resident of Canada for the purposes of the Income Tax Act.
On January 22, 2014, Lord Black filed his appeal in the Federal Court of Appeal (File # A-70-14).