Gourdji R. Masri (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Heald J.—Montreal, June 4;
Ottawa, July 10, 1973.
Income tax—Business profits earned in Canada by United
States residents—Whether exempt as a "United States enter-
prise"—Canada-U.S. Tax Convention Protocol, s. 3.
Appellant resided in New York where he carried on
various businesses in partnership with his brother. For a
number of years commencing in 1954 the two brothers,
operating entirely from New York in partnership with two
other men, engaged in the business of buying and selling
land in Quebec, making substantial profits. Appellant was
assessed to tax on these profits for 1960 to 1967.
Held, Article I of the Canada-U.S. Tax Convention
applied to relieve appellant from tax in Canada on such
profits.
Although appellant carried on business in Canada his
"enterprise" as defined by section 3 of the Protocol was a
United States enterprise without a permanent establishment
in Canada.
Tara Exploration and Development Co. v. M.N.R.
[1970] C.T.C. 557, distinguished.
APPEAL.
COUNSEL:
Philip F. Vineberg, Q.C., for appellant.
George W. Ainslie, Q.C., and André P.
Gauthier for respondent.
SOLICITORS:
Phillips, Vineberg & Co., Montreal, for
appellant.
Deputy Attorney General of Canada for
respondent.
HEALD J.—This is an appeal from a re-assess
ment by the respondent of the appellant for the
taxation years 1960 to 1967 inclusive, involving
gains realized from the sale of real estate locat
ed in Canada.
The appellant, 73 years of age, was born in
Iraq, left there for Iran when he was 17. In Iran,
along with his brother, Saleh, he became exten
sively involved in the export-import business as
a commission agent. His business prospered to
the point where his approximate worth when he
left Iran in 1948 was in the order of one million
dollars. He left Iran for the United States of
America in 1948 where he has lived permanent
ly ever since in New Rochelle, New York. It is
agreed that the appellant is not and never has
been a resident of Canada. His brother preceded
him to the United States of America in 1946,
and upon his arrival, the appellant and his broth
er proceeded to invest most of their rather sub
stantial capital in United States' stocks and
bonds, largely of the "blue chip" variety. They
established an office at 150 Broadway Avenue,
New York, which office they still have at the
present time.
The brothers also made some real estate
investments. In 1950, they acquired a 12 stall
parking lot and garage in New York City which
they operated until 1962, selling this property at
a loss. In 1951, they acquired a commercial
property on Long Island housing seven or eight
commercial stores which they held as an invest
ment until 1967. At about the same time, they
acquired another commercial property on Long
Island housing a restaurant and a store. In 1955,
they purchased vacant property on Long Island,
which they sold as vacant property in 1964,
making a profit thereon of $40,000.00 which
was treated as a capital gain by the United
States Internal Revenue Service. On some of
the aforementioned properties, the two brothers
lost money on the resale price which was treat
ed by the I.R.S. as capital losses.
The two partners formalized their partnership
arrangement by an agreement in writing dated
February 2, 1951. This agreement provided that
the name of the partnership was to be Mildred
Management Company, the two brothers were
to be the sole partners and the purpose of the
partnership was to be the operation and man
agement of real property with offices at 150
Broadway Avenue, New York, New York. This
partnership however was limited to the manage
ment of properties owned by the brothers in
New York State. It had nothing to do with
property later acquired in Canada.
The first acquisition of Canadian property by
the two brothers took place in November of
1954 when, in company with one Iny, a resident
of New York, and one Heskel Abed, a resident
of Baghdad, they purchased Lot 128, Parish of
Pointe Claire, a suburb of Montreal. Each part
ner acquired a one-quarter interest in said prop
erty. The property was vacant when purchased,
containing approximately three million square
feet, the purchase price being $170,000.00 pay
able $80,000.00 in cash, with the balance pay
able over 5 years, interest at 5% on the unpaid
balance. The appellant's brother acted on behalf
of himself and the other three partners in
acquiring this property. The appellant said that
he and his brother were desirous of diversifying
their holdings and felt that it would be a good
idea to acquire investments outside the United
States. One of the partners, Abed, had a brother
in the real estate business in Montreal and this
purchase was recommended by the members of
Abed's real estate firm (specifically either by
one Koslov or by Albert Abed).
The appellant had never seen Lot 128 either
before or after purchase, being content to rely
on his brother's judgment. He described himself
as a "silent partner" in this venture. The same
can be said for the other two partners. It is clear
that the appellant's brother was "in charge" so
far as this purchase and sale was concerned. At
time of purchase, Lot 128 was raw land. The
appellant says that at time of purchase, the
partners had no specific intention of any kind
with respect to subject land. He testified that
"we bought it as an investment". The land was
not developed or used in any way after acquisi
tion. The four partners contributed each year
their share of the taxes and the mortgage
payments.
In 1959, one Keyes, an employee of Morgan
Realties Limited, Montreal, approached appel
lant's brother about the possible sale of the
balance of Lot 128 (a small portion thereof had
been expropriated by the Metropolitan Commis-
sion of Montreal in 1957 for street widening,
the compensation therefor amounting to some
$33,000.00). Keyes advised Saleh Masri that
this area formed part of a large scale commer
cial development being planned. After consider
able negotiations, Lot 128 was sold in May of
1960 to a Quebec Corporation, 218 Inc., for
some $913,000.00, being payable $276,000.00
in cash, and the balance being secured by a
mortgage back to the vendors from the purchas
er. The partners paid a commission totalling
$47,000.00 ($41,000.00 to Keyes and $6,000.00
to Albert Abed, the brother of partner Heskel
Abed). The appellant says it was his idea to pay
at least a partial commission to Albert Abed,
because while Keyes was their main selling
agent, Albert Abed, in the appellant's view, also
contributed to the sale and was therefore en
titled to at least a partial commission for his
efforts. Appellant's brother said that they felt
morally obligated to Albert Abed because "he
found the property for us".
Following the same pattern, the four partners
acquired additional property in the City of
Montreal and suburbs as follows:
(a) On October 25, 1955, Lots 105 and 106 in
Pointe Claire for a purchase price of $356,-
000.00, payable one-half in cash, and the bal
ance payable in five equal annual instalments,
interest at 5%.
(b) On May 2, 1957, Lot 107 in Pointe Claire
for a purchase price of $180,000.00 cash.
Here again, the same four partners acquired
said Lots 105, 106 and 107 excepting that the
percentage participation was different than in
the first acquisition. The purpose was the same
as previously, no specific intention to build or
develop, simply an intention to hold. Again the
property purchased was raw land.
Lots 105 and 106 were sold in parts in 1963,
1964 and 1966 at profits totalling approximately
$416,000.00.
Lot 107 was also sold in parts in 1965, 1966
and 1967 at profits totalling approximately
$64,000.00.
The appellant had a 25% interest in Lot 128
and a 22.5% interest in Lots 105, 106 and 107.
It is his share of these profits that form the
subject-matter of this appeal.
After consideration of the evidence, I have no
difficulty in concluding that subject acquisitions
of land were speculations and that the partners
were in the business of buying and selling land.
All of subject land was raw land at date of
acquisition and also at date of sale. No income
was derived therefrom. The partners had to pay
the taxes and the mortgage interest from their
own resources; the only prospect of profit in the
venture was to resell; the partners operated in a
manner similar to the way in which traders in
real estate carry on business; they acquired
their land through real estate agents and they
sold it through real estate agents, commissions
being paid on the sales; "for sale" signs were
placed on some of the properties by the agents
with the knowledge and approval of Saleh
Masri, who acted throughout on behalf of the
other partners.
It is apparent from the evidence of the appel
lant and his partner that the properties were
purchased with an intention to resell at a profit
and, of course, this is what happened. The prop
erties were in fact resold at a substantial profit.
If this were the only question to be decided in
this appeal, I would have no hesitation in hold
ing that subject transactions were trading trans
actions and that this appellant is taxable on his
share of the profits from said transactions.
However, appellant's counsel submits that
appellant was neither a resident of Canada
within the meaning of section 2(1) of the
Income Tax Act nor did the appellant carry on
business in Canada within the meaning of sec
tion 2(2) of the Income Tax Act. The respond
ent, in the pleadings, admits that the appellant is
not and never has been a resident of Canada.
Thus, section 2(1) which applies only to resi-
dents of Canada has no application to the facts
of this case. However, subsection (2) of section
2 reads as follows:
2. (2) Where a person who is not taxable under subsec
tion (1) for a taxation year
(a) . . .
(b) carried on business in Canada at any time in the year,
an income tax shall be paid as hereinafter required upon his
taxable income earned in Canada for the year determined in
accordance with Division D.
This question was carefully discussed by Pres
ident Jackett (as he then was) in the case of
Tara Exploration and Development Company
Limited v. M.N.R. [1970] C.T.C. 557. In that
case, the appellant was incorporated in Ontario
where it had raised capital for the purpose of
carrying on its sole business of exploring for
minerals in Ireland. In issue was whether a
profit realized from a short term deployment of
temporarily unused capital in shares of a
Canadian mining company (bought and sold in
Canada) was subject to tax in Canada. The
general manager and other active officers of the
company were resident in Ireland and had their
offices there. The directors and corporate offi
cers of the company lived there or in Northern
Ireland. Notwithstanding its incorporation in
Ontario; the maintenance of corporate books at
a "head office" in Toronto; a bank account,
solicitors and an auditor in Toronto; occasional
visits to Canada of its directors and officers; the
raising of capital in Canada and certain business
ventures embarked on in Canada, the learned
President held on the above facts, that its cen
tral management and control was in Ireland.
In discussing the application of section 2(2) to
the facts of that case, the learned President said
at page 567 of the judgment:
With great doubt as to the correctness of my conclusion, I
am of opinion that Section 139(1)(e) does not operate to
make a non-resident person subject to Canadian income tax
in respect of a profit from an adventure that otherwise does
not amount to, and is not part of, a "business". With
considerable hesitation, I have concluded that the better
view is that the words "carried on" are not words that can
aptly be used with the word "adventure". To carry on
something involves continuity of time or operations such as
is involved in the ordinary sense of a "business". An adven
ture is an isolated happening. One has an adventure as
opposed to carrying on a business.
A reading of the learned President's judgment
in full makes it clear that he concluded as he did
because in his case, the "adventure" was an
isolated happening, no continuity of time or
operations was involved.
In the case at bar, we do not have an isolated
adventure in the nature of trade as in Tara
(supra) nor do we have a transaction that was
not a part of the "business" which the appellant
was actually carrying on as in Tara (supra).
The facts of this case reveal a far different
situation from the "isolated transaction" situa
tion of Tara (supra). The purchases and sales
which form the subject-matter of this appeal
related to Lot 128, and Lots 105, 106 and 107
in the Parish of Pointe Claire. However, the
appellant and his partners also acquired in 1955,
Lot 196 in the Parish of St. Laurent containing
between three and four million square feet.
Apparently they still own this property and it
has not been developed. Accordingly, in the
case at bar, we have, over a fairly lengthy
period of time, an acquisition and a disposition
of parcels of land. The area of land, in terms of
development property is large, the dollar
amounts involved are large. To me, this is a far
cry from the "isolated transaction" of the Tara
case (supra) and would, in itself, be sufficient to
distinguish the case at bar from Tara (supra).
Additionally, one cannot ignore section 139(7)
of the Income Tax Act which provides as
follows:
139. (7) Where, in a taxation year, a non-resident person
(a) produced, grew, mined, created, manufactured, fab
ricated, improved, packed, preserved or constructed, in
whole or in part, anything in Canada whether or not he
exported that thing without selling it prior to exportation,
or
(b) solicited orders or offered anything for sale in Canada
through an agent or servant whether the contract or
transaction was to be completed inside or outside Canada
or partly in and partly outside Canada,
he shall be deemed, for the purposes of this Act, to have
been carrying on business in Canada in the year.
I have the view that section 139(7)(b) is wide
enough to cover the facts of this case where it is
clear that the appellant, along with his partners,
offered their real property for sale in Canada
through real estate agents, knew that said agents
were in fact advertising said property for sale
by erecting "for sale" signs on the property,
and, on consummation of said sales, paid their
agents a commission for said sales.
I therefore hold that the appellant, a non-resi
dent, was, during the relevant period, carrying
on business in Canada within the meaning of
section 2(2)(b) of the Income Tax Act.
That, however, is not an end of the matter. It
is also necessary to consider the effect of the
Canada-U.S. Tax Convention signed on March
4, 1942 and made applicable as and from Janu-
ary 1, 1941 in the circumstances of this appeal
on the assumption that the appellant is subject
to Part I of the Income Tax Act in respect of the
profits in question.
Articles I and II of said Convention read as
follows:
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, manage
ment 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.
For a proper consideration of said Articles, it
is also necessary to have reference to the fol
lowing definitions referred to in the Protocol to
the Convention:
3. As used in this Convention:
(a) the terms "person", "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 under
taking, 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 enter
prise 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 bran
ches, 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. The use of substan
tial equipment or machinery within one of the contracting
States at any time in any taxable year by an enterprise of
the other contracting State shall constitute a permanent
establishment of such enterprise in the former State for
such taxable year.
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 auth
ority 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.
Learned counsel for the respondent submits
that, on the basis of the above Articles and
definitions, the Canada-U.S. Tax Convention
does not apply to the facts of this case. His
submission is that I should find that this appel
lant's venture in Canadian real estate was, in
fact, a "Canadian enterprise" and not a "U.S.
enterprise" at all by virtue of the above defini
tions. On this basis, he argues the Tax Conven
tion would not apply at all since by Article I, the
Convention applies only to relieve an enterprise
of one contracting State from taxation by the
other contracting State.
In support of his submission that appellant's
"enterprise" was not a U.S. enterprise, he refers
to the definition of "enterprise" in section 3(b)
of the Protocol which includes a partnership.
Thus, he submits that the "enterprise" here is
the partnership of four which acquired the
Canadian property and he says further that this
"enterprise" was not carried on in the United
States as contemplated by section 3(d) of the
Protocol.
With deference, I am unable to agree with this
submission. We are here concerned with the
appellant as an individual, not as a member of a
partnership. In the words of Thurlow J. in
McMahon v. M.N.R. 59 DTC 1109 at p. 1111:
... Only the appellant has been assessed, only his shares of
the profits have been brought into the computation of his
income, and only he is liable for the tax so determined.
Thus, when the definitions in section 3 of the
Protocol are applied to these facts, it must be
remembered that the "enterprise" in question is
the appellant's enterprise, not the partnership's
enterprise.
In this case, the appellant had no office or
place of business in Canada, no telephone list
ing, no bank account for most: of the relevant
period. He lived in New York State, everything
was looked after in New York at his office at
150 Broadway Avenue where his books and
records were kept.
The appellant's "enterprise" in my view,
included his investments in blue chip stocks, his
various interests in property in New York State
and his interest in the Canadian property and on
this basis, appellant's "enterprise" is most cer
tainly a United States enterprise within section
3(d).
Even acceding to respondent's contention
that the entity to be here considered is the
partnership itself, I fail to see how this partner
ship meets the definition of Canadian enterprise
as contained in section 3(e) of the Protocol. A
requirement of said subsection is a "partnership
... created or organized in or under the laws of
Canada."
In this case, there was no evidence whatso
ever of any partnership being organized under
the laws of Canada or any province thereof. In
fact, there was no evidence of an agreement in
writing at all covering the Canadian venture.
The partners lived in New York, they did their
business in New York, the title to the Canadian
land was all taken either in the name of one or
more of the partners as individuals or in the
name of a New York corporation wholly owned
by one or more of the partners.
I have the firm view that regardless of wheth
er the Canadian venture is looked at as merely a
part of the appellant's total enterprise or as a
separate partnership in itself, it can by no means
be considered a Canadian enterprise within the
meaning of the Protocol.
Then, learned counsel for the respondent
argued that even if I had the view that the
"enterprise" in question was a United States
enterprise, that, on the evidence, - said "enter-
prise" had a "permanent establishment" in
Canada and that, accordingly, under Article I,
the profits from that permanent establishment in
Canada were taxable in Canada.
It seems to me that, on this point, the Tara
case (supra) is clear authority against the
respondent. The case at bar is even stronger on
its facts against respondent's contention than
was Tara (supra).
Here, all management and executive decisions
concerning appellant's business and, for that
matter, the so-called partnership, were taken in
New York; there were no employees in Canada;
no office in Canada; no person resident in
Canada having authority to contract or conduct
business on behalf of the appellant or the part
nership; all documentation regarding the acqui
sition and sale of the Canadian property was
executed in New York; all instructions concern
ing the property came from New York; appel
lant and the partnership acted in Canada only
through commission agents and brokers. Coun
sel for the respondent sought to attach signifi
cance to the fact that in the course of the
Canadian land venture, the partners used the
services of two town planners, a land surveyor,
two brokers, two law firms and a notary. In my
view, these circumstances strengthen my con
viction that the appellant cannot be said to have
a "permanent establishment in Canada" because
all of the above noted agents have one thing in
common, they are independent agents, not
employees, performing services on a fee for
service basis. In my view, the nature of their
relationship to the appellant and the partnership
is clearly covered and contemplated in the third
paragraph of section 3(fl of the Protocol quoted
earlier herein.
I have therefore concluded that Article I
applies in this case with the result that this
appellant is not taxable in Canada even though,
but for said provisions of the Tax Convention
and Protocol he would have been taxable in
Canada. By section 3 of the Canada-U.S. Tax
Convention Act, 1943, the terms of said Con
vention and Protocol have the force of law in
Canada and must prevail over any other law to
the extent of any inconsistency therewith.
For the foregoing reasons, the appeal will be
allowed with costs and the assessments
appealed from will be referred back to the
respondent for re-assessment on the basis that
the profits in question are not subject to tax
under the Income Tax Act.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.