Tax Court’s approach in Conrad Black decision “questionable”
Winston Churchill said there is “no such thing as a good tax.” Surely, then, it follows that no good can come from double taxation.
While it’s difficult to feel sympathy for Conrad Black, who earned approximately $3.39 million with another $1.7 million of taxable benefits in 2002, the underlying principles are important to all who rely on tax treaties to avoid double taxation.
Many Canadians are subject to double taxation. Generally speaking, the country where you earn the income (let’s assume it is the U.S.) has the right to tax this income as it is derived from that country. However, Canada may also have a right to tax the income since Canadian residents are taxed on their worldwide income regardless of where they earn it. Therefore an individual may be taxed twice on the same income.
Now what happens if both the U.S. and Canada assert a right to tax your income? The Canada-U.S. tax treaty would allocate taxing authority to either Canada or the U.S., but not both, as one of the primary functions of a bi-lateral tax treaty is to relieve persons from double taxation.
Unfortunately, Black was not able to avail himself of the benefits of Canada’s tax treaty (the Treaty) with the United Kingdom, as the Tax Court of Canada ruled that the Treaty did not apply to his situation. Although Black was factually resident in both Canada and the UK, Article 4(2)(a) of the Treaty, commonly referred to as the tie-breaker rules, deemed Black to be a resident of the UK and liable to taxation therein. The Court stated that the Treaty gives preference or priority for taxation, but is not an override of Canadian domestic law.
At a basic level, treaties are agreements between countries where one country contracts out of the right to tax in certain pre-determined situations. Ordinarily the Treaty would prevail over the Income Tax Act (the Act). However, the Minister asserted that the Treaty did not prevail over the Act in this particular situation since the Treaty only prevails when there is conflict or contradictions between the Act and the Treaty. This unusual result stems from the fact that certain residents of the UK are only subject to taxation when they remit or receive the income in the UK.
In brief, the Court agreed with the Minister and essentially adopted a results-based approach, holding that since Black was not subject to a comprehensive tax system, as his income was not remitted to or received in the UK, he should not be able to benefit from the Treaty. Accordingly, the majority of his income (interestingly determined on an item-by-item basis) was subject to tax in Canada.
The Court’s approach appears to be questionable, as it looked at each type of income separately to determine who had taxing authority. While the Court did consider the residency tie-breaker provisions in Article 4 of the Treaty, it spoke to income on an item-by-item basis and looked to the specific Treaty provisions dealing with each respective type of income to determine how such income should be taxed. This approach appears to bring into question how one should interpret a treaty, as one may have thought that the tie-breaker provisions in the Treaty would have been determinative of his taxing position, thus giving the UK (and not Canada) the right to tax all income. It should be noted that the Article 4 residency provisions precede those provisions in the Treaty which speak to specific types of income.
One cited purpose of tax treaties is to prevent fiscal evasion, and it is interesting to consider how this purpose may have affected the Court’s decision. One also has to consider whether income that is not taxed by the UK’s