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Some implications of the Canadian tax law on foreign investments in Canada : a German perspective Reuter, Michael F. M. 1987

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SOME IMPLICATIONS OF THE CANADIAN TAX LAW ON FOREIGN INVESTMENTS IN CANADA - A GERMAN PERSPECTIVE  b y  MICHAEL F.M. REUTER A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF LAWS  in THE FACULTY OF GRADUATE STUDIES (The Department of Law)  We a c c e p t t h i s t h e s i s as conforming to the r e q u i r e d standard  THE UNIVERSITY OF BRITISH COLUMBIA April ©  1987  M i c h a e l F.M. R e u t e r , 1987  In  presenting  degree  this  at the  thesis  in  partial fulfilment  of  University of  British Columbia,  I agree  freely available for reference copying  of  department publication  this or of  thesis by  this  his  for or  and study.  Department of The University of British Columbia 1956 Main Mall Vancouver, Canada V6T 1Y3 Date  M^Tt  i^gy  that the  representatives.  may be It  thesis for financial gain shall not  permission.  requirements  I further agree  scholarly purposes her  the  is  an  advanced  Library shall make it  that permission  for extensive  granted  head  by the  understood be  for  that  allowed without  of  my  copying  or  my written  ABSTRACT  Some I m p l i c a t i o n s of the Canadian Tax Law on F o r e i g n Investment i n Canada — A German P e r s p e c t i v e  Canada investment concern  i s one o f t h e c o u n t r i e s d e p e n d i n g on f o r e i g n to a f a i r l y  about  in  extent.  foreign investment  Review A c t (FIRA) was election  high  favour  a more p o s i t i v e " I n v e s t m e n t of  f o r e i g n investment  larger  criteria  f o r investment  One o f t h e s e as  were e n t i t l e d investment October  result years  t a x l a w . And  t o 1980, a l l p r i v a t e  corporations  income. A f i r s t  tax i n respect  longer  tax i n r e s p e c t  limitation  o f t h e November  "earns"  o f income  that date,  refundable  taxation  after  i i  than  were d e n i e d  from r e a l  any  property  1979. F i n a l l y ,  as a  for taxation  investment  tax unless  year.  of t h e i r  introduced i n  other  12, 1981 b u d g e t ,  a Canadian-controlled-private relevant  was  corporations  commenced  commenced a f t e r  of a  i s the Canadian  t o the refundable  taxation years  as p a r t  decisions.  Canadian-controlled-private  for  and c h a n g e d FIRA t o  be s e e n o n l y  o f 1973, whereby c o r p o r a t i o n s  refundable  the stand  which d e t e r m i n e s the economic  criteria  one example, p r i o r  again  took  C a n a d a " . Anyway, t h e c o n t r o l  should  economic p o l i c y ,  Investment  With the f e d e r a l  2  government  of f o r e i g n investment  some t i m e o f  the Foreign  1  implemented.  i n 1984 t h e C a n a d i a n  After  income no  the c o r p o r a t i o n  corporation  was  throughout the  The  Canadian  i n Canada,  taxation  including  the t a x a t i o n  non-Canadian-controlled companies, will  i s unequal  g i v e some  foreign  and d i s c r i m i n a t i n g .  Canadian-German D o u b l e  is  a part  of f o r e i g n  relation  to other  against  This  sometimes t o t h e  the  taxation  that  as the  will  criteria  d e c i s i o n s , the  be e v a l u a t e d i n f o r investments i n  become o b v i o u s , t h e r e a r e r e a s o n s i n tax p o l i c y  on one hand and r e a s o n s  i t on t h e o t h e r h a n d . As a c o n c l u s i o n ,  opinion  thesis  t a x a t i o n of  as w e l l  investment  investments  of the Canadian  the  of f o r e i g n  Tax C o n v e n t i o n . S i n c e t a x p l a n n i n g  investment  Canada. As i t w i l l  referring  Tax C o n v e n t i o n  of g e n e r a l economic  taxation  favour  the Canadian  i n Canada,  O.E.C.D. Model D o u b l e  o f C a n a d i a n and  c o m p a n i e s and b r a n c h e s  i d e a s about  investment  o f r e s i d e n t s and n o n - r e s i d e n t s  i t i s worthwhile  of f o r e i g n  I am o f  t o c o n s i d e r changes i n  investment.  TABLE OF L I S T OF  vi i i  TABLES  1.  Introduction  2.  The  3.  D e f i n i t i o n of  Canadian Concept  of  International Taxation  5  3.2  R e s i d e n c e of C o r p o r a t i o n s and o f Permanent E s t a b l i s h m e n t R e s i d e n c e of  Individuals  5 Definition 10  Trusts  13  R e a s o n s f o r D i s t i n c t i o n of T a x a t i o n R e s i d e n t s and N o n - R e s i d e n t s (Technical)  4.2  Aspects J u s t i f y i n g Discrimination Itself  4.2.3  Legitimate 5.1  5.2  A s p e c t s of  of  4.1  4.2.2  ...3  Residence  R e s i d e n c e of  4.2.1  5.  1  3.1  3.3 4.  CONTENTS  17  C o l l e c t i n g Taxes  ....17  in 18  Economic and O t h e r R e a s o n s f o r D i f f e r e n t T r e a t m e n t of Non-Residents' Investment i n Canada  19  Assumption: Foreign Investors Repratriate Their P r o f i t s Instead of R e - I n v e s t i n g Them i n Canada  25  Assumption: Foreign I n v e s t o r s Buying Abroad, Canadians are Buying Canadian  28  Forms of D i s c r i m i n a t i o n  Discrimination  i n Tax  in International  are  Law  ...31  Law  31  5.1.1  G e n e r a l I d e a s on D i s c r i m i n a t i o n I n t e r n a t i o n a l Law  5.1.2  P r o h i b i t i o n of D i s c r i m i n a t i o n I n t e r n a t i o n a l Law  in  in  33 35  5.1.2.1 Examples of P r o h i b i t i o n s of D i s c r i m i n a t i o n i n I n t e r n a t i o n a l Law  37  5.1.2.2 The I n t e n t of P r o h i b i t i o n s of D i s c r i m i n a t i o n  42  C o n s t i t u t i o n a l and Administrative P r o h i b i t i o n s of D i s c r i m i n a t i o n iv  47  5.2.1  O b l i g a t i o n of t h e A d m i n i s t r a t i o n t o F o l l o w t h e P r i n c i p l e of Equality  47  5.2.2  T i e s of t h e L e g i s l a t i o n t o t h e P r i n c i p l e of E q u a l T r e a t m e n t  49  5.2.3  The P r i n c i p l e of E q u a l i n C o n s t i t u t i o n a l and Administrative  5.2.4 5.3  7.  Law  49  Conclusion  53  D i s c r i m i n a t i o n i n I n t e r n a t i o n a l Tax Law 5.3.1 Non-Discrimination According to A r t . 24 of the OECD M o d e l D r a f t Convention 5.3.2  6.  Treatment  The A p p l i c a t i o n of t h e of N o n - D i s c r i m i n a t i o n  56  Principle 58  5.3.3  D i s c r i m i n a t i o n R e l a t i n g to Nationality/Citizenship  5.3.4  D i s c r i m i n a t i o n of Branches  5.3.5  Discrimination According C o n t r o l of C a p i t a l  5.3.6  Conclusion  Canadian Taxation  ....54  to  the  59 62  the  65 66  of N o n - R e s i d e n t s  1  67  6.1  Prepayment  of T a x e s  68  6.2  Witholding  Tax  69  6.3  Evaluation  6.4  Election  6.5  Conclusion  71  of F i l i n g  a Return  75 77  N o n - C a n a d i a n C o n t r o l l e d Companies  78  7.1  Intercorporate Dividends  78  7.2  Small  79  7.3  Thin  7.4  Investment Through a C o r p o r a t i o n  84  7.5  O i l and  87  Business Capitalization  Gas v  81  7.6  Evaluation  of the T a x a t i o n of  Non-Canadian  Controlled  8.  Non-Resident-Owned  9.  Foreign  Companies  Investment  87  Corporation  Companies O p e r a t i n g i n Canada  (Branch  Tax) 9.1 10.  94 Evaluation  o f t h e B r a n c h Tax  97  Economic C r i t e r i a f o r I n v e s t m e n t D e c i s i o n s 10.1 E c o n o m i c a l C r i t e r i a I n c l u d i n g T a x Consequences f o r Investment D e c i s i o n s i n F a v o u r o f Canada 10.1.1 Main a r e a s o f German I n v e s t m e n t i n Canada 10.2  G e n e r a l Economic Implications 10.2.1  Criteria  a n d Tax  11.  12 .  99 100  100 Including  Human  Resources  10.4  99  100  Stability  10.2.2 R e s o u r c e s  10.3  91  101  10.2.3 T r a n s p o r t a t i o n  101  10.2.4 M a r k e t i n g / S a l e s  102  10.2.5 T a x e s Comparison t o Investment States Statistics t h e U.S  on I n v e s t m e n t  103 i n the United  104  i n Canada and i n 1 05  P r o p o s a l s f o r an A l t e r n a t i v e A p p r o a c h Changes i n t h e Income Tax A c t 11.1  Canada and A r t . 24 OECD M o d e l Convention  11.2  Some P r o p o s a l s  and Some  D o u b l e Tax  110 110 114  Conclusion  117  FOOTNOTES  119  BIBLIOGRAPHY  1 99  vi  APPENDIX A INTERPRETATION BULLETINS ON THE TAXATION OF NON-RESIDENTS, NON-CANADIAN-CONTROLLED COMPANIES AND RELATED ISSUES  228  APPENDIX B INFORMATION CIRCULARS ON THE TAXATION OF NON-RESIDENTS, NON-CANADIAN-CONTROLLED COMPANIES AND RELATED ISSUES  231  INDEX OF CASES  232  vii  L I S T OF  TABLES  D e v e l o p m e n t o f German I n v e s t m e n t i n t h e U.S. and i n Canada from 1975 t o 1984  106  D i r e c t and I n d i r e c t German I n v e s t m e n t i n t h e U.S. and i n Canada f r o m 1976 t o 1983  107  Number o f German Companies I n v o l v e d i n I n v e s t m e n t i n t h e U.S. and i n Canada from 1976 t o 1982  107  A n n u a l G r o s s o f t h o s e Companies  108  E m p l o y e e s o f t h o s e Companies  109  vi i i  1. The of  Canadian  the s u b j e c t s  written  about.  technical  taxation  of f o r e i g n  where t h e r e Most  investment  i s one  a r e many books and a r t i c l e s  o f them a r e d e a l i n g  d e t a i l s of t a x a t i o n  reasons behind concept  3  INTRODUCTION  rather  i t and e v a l u a t i n g  with the  than  looking  f o r the  the c o n s i d e r a t i o n s the  i s b a s e d on, e s p e c i a l l y n o t i n an i n t e r n a t i o n a l  context. The context  Canadian  taxation  of f o r e i g n  i s supposed t o i n c l u d e  non-residents  in general,"  by n o n - r e s i d e n t s  companies  and t h e t a x a t i o n  foreign The  companies.  in  general.  concentrate this  sense  discussion  have l e a d  8  I will  other  industrialized in this  on f o r e i g n  necessary  f a r as f o r e i g n  and t h a t  countries  t o an countries  thesis Canada i n  s i m i l a r tax  as w e l l  when  with the t a x a t i o n of  t r y to concentrate  and t h e g e n e r a l  structure  investment  many t e c h n i c a l d e t a i l s .  as  i s to contribute  between  rules dealing  non-residents.  principles  thesis  i s not a s p e c i a l country  implementing  taxation  of Canadian branches of  on C a n a d a , one h a s t o be aware t h a t  considerations  principles  non-resident  When a l l e x a m p l e s u s e d  7  of companies  6  purpose of t h i s  international  o r by  5  in this  the t a x a t i o n of  the taxation  controlled 3  investment  t o understand  investment  of t h e Canadian  without  Therefore  on t h e g e n e r a l  getting  I will  into too  explain the  the Canadian  taxation  i s c o n c e r n e d . But I won't  1  2 deal  with the t a x a t i o n  separately on and  some  in detail.  political, necessary  general  foreign  concept  r u n . In my  competition,  in this  that  The t a x a t i o n  aware t h a t as may  the c r i t e r i a  is  going  this  as long  The  taxation  i s based  on a  and i n v e s t m e n t a r e  involved,  this  concept more  at least in of free  fair  economical  investment, e s p e c i a l l y  treatment  thesis  in this  as the t a x a t i o n  and t r a d e  with.  f o r t h e consumer i n  of f o r e i g n  But even  t o be i n c l u d e d  investment  free trade  of r e s i d e n t s and  of t h i s concept.  I am  i s based on, as w e l l  consequently developed  be c r i t i c i z e d .  satisfied,  thesis  i n t a x law, i s a p a r t  the concept  background  and d e c e n t r a l i z e d  a non d i s c r i m i n a t i n g , e q u a l non-residents  residents  i n Canada.  p o l i c y does a l l o w  d e v e l o p m e n t and l o w e r p r i c e s 9  of  of the Canadian  understanding  a stronger  concentrate  t r y t o get i n t o the  for a l l countries  and investment  general.  in taxation  investment  followed  understanding,  long  I will  the p r i n c i p l e s d e a l t  be t h e e v a l u a t i o n  most a d v a n t a g e o u s  trade  of t h i s  and I w i l l  to understand  towards  The  b r a n c h o f t h e economy  e c o n o m i c a l and p s y c h o l o g i c a l  issue w i l l  the  Instead  reflected differences  non-residents,  policy  of every  from t h i s  case  I would  of f o r e i g n  i n the general  policy in Canada.  1 0  be  investment  discussion 1 1  basis,  of f r e e  2. THE  CANADIAN CONCEPT OF  INTERNATIONAL  Most c o u n t r i e s a r e t a x i n g person  resident.  income o f t h e i r addition,  most  non-residents a  source  income  taxes  Canadian  country.  non-residents  property  royalties,  1 6  levying Under  there  1 8  taxes:  which extent  on  taxed  of  be  dividends, types  of  from o u t s i d e  i s no r u l e  rents, income  of " h i s "  outside  on t h e i r  their  country.  against  i s free to determine,  situated in their  i n the U n i t e d  double  i f and t o  income  territory,  as w e l l as  territory.  be t a x e d  i n Canada. T h i s o b v i o u s l y  i t w o u l d n ' t be f a i r  3  derived  2 0  could  be  2 1  S t a t e s , the p r o f i t  i n the S t a t e s c o u l d  and o n c e  But  taxable  I f , f o r example, a C a n a d i a n r e s i d e n t  h i s operation  fair.  of  and t h e o t h e r  to tax non-residents  on b u s i n e s s  once t h e r e  Canada  1 5  i t w o u l d be p o s s i b l e t h a t a t a x p a y e r  twice.  carries  has income  law t h e r e  income a n d p r o p e r t y  Therefore  in Canada.  on t h e d i s p o s i t i o n  h i s home c o u n t r y  f r o m and p r o p e r t y  imposes  1 7  Each country  1 9  from  a r e ( a t l e a s t ) two t a x a u t h o r i t i e s  international  taxation.  income t a x on  a r e employed i n  f e e s and s i m i l a r  sources.  Whenever a p e r s o n country,  who  and on i n t e r e s t s ,  management  from C a n a d i a n  world  In  1 3  As an example, Canada  c a r r y on b u s i n e s s  1  every  f o r e i g n c o m p a n i e s d e r i v i n g income  on n o n - r e s i d e n t s  C a n a d a ' o r who also  wherever r e s i d e n t .  c o u n t r i e s a r e l e v y i n g an and  income o f  Some c o u n t r i e s a r e t a x i n g t h e  1 2  citizens,  in this  taxes  the world  TAXATION  twice,  out 2 2  would not  a l s o , i f none o f  these  4 countries  would  Canada  impose  taxes  taxes.  2 3  i t s r e s i d e n t s on t h e b a s i s o f t h e i r  worldwide  income.  of  i s l o c a t e d , the Canadian r e s i d e n t i s t a x a b l e  income  for  2 4  T h i s means t h a t w h e r e v e r t h e s o u r c e  a l l h i s w o r l d w i d e income  taxed 2(3)  only  on t h e i r  I.T.A.,  C a n a d i a n income. As s p e c i f i e d  non-residents  (a) a r e e m p l o y e d  at  Contrary  of the y e a r .  i f they  or  2 5  2 6  as w e l l as e n t e r p r i s e s  i n the other  don't  c a r r y on b u s i n e s s  establishment.  2 9  under t h e  D o u b l e Tax C o n v e n t i o n  taxed  I.T.A..  in Canada,  t o s e c . 2 ( 3 ) I.T.A.,  Canadian-German 2 7  i n Canada,  i n sec.  of taxable Canadian property  any t i m e  people  are taxable  are  i n Canada,  (b) c a r r y on a b u s i n e s s (c) d i s p o s e  i n Canada. N o n - r e s i d e n t s  2 8  self-employed  a r e not going  t o be  C o n t r a c t i n g S t a t e as l o n g as they  This  through  a permanent  rule prevails  over  s e c . 2(3)  3 0  These c r i t e r i a international  t a x a t i o n . But l e t ' s  some o f t h e d e t a i l s non-residents  seem r e a s o n a b l e  i n terms of  have a c l o s e r  look at  of the Canadian t a x a t i o n of  and n o n - C a n a d i a n c o n t r o l l e d  companies.  3. In  the  DEFINITION OF  Canadian  Income Tax  definition  of  residence  definition  we  find  sec.  248  t o be  i s the  I.T.A. I t r e a d s :  resident  help  who  of  definition  P e r s o n s who  183  Since residence,  I will  don't  3.1  RESIDENCE OF  Under common law  spend v e r y  the  transferred project.  v.  help. of  not Sec.  resident a  This  3 2  doesn't  i n Canada are  definition it first  for  then  for  trusts  p h y s i c a l presence  time t h e r e . For  i s not  a l w a y s a major  — a taxpayer even  can  be  t h o u g h he  example,  may  in Erickson  i n Canada but  t o I r e l a n d f o r two  years  t o work on  he  returned that  h e l d t o be 3 4  be  of  lived  Cadwalader,  for a  deemed t o  normally  was  in  INDIVIDUALS  taxpayer  Although  he  only  means  f o r c o r p o r a t i o n s and  10-day p e r i o d d u r i n g family,  year,  into  resident in a country little  no  a non-resident  sojourn  have any  in e s t a b l i s h i n g residence t o be  is  250(1)I.T.A..  t r y to look  second  estates.  33  of  a resident.  normaly  to sec.  still  and  M.N.R.  The  definition  d a y s or more i n t h e  we  individuals,  found  3 1  "'Non-resident'  is "ordinarily"  residents according  factor  (I.T.A.) there  i n C a n a d a . " T h i s answer d o e s n ' t  either.  period  Act  found.  2 5 0 ( 3 ) I.T.A. i n c l u d e s i n t h e person,  RESIDENCE  an  time  American  a mining  for only  one  to v i s i t  h i s wife  and  citizen  5  was  t o Canada  r e s i d e n t here. who  Also had  v.  i n Cooper  rented  a  6 house held  i n Scotland  f o r two months a y e a r  t o be a r e s i d e n t  I.R.C. v . L y s a g h t , England  of I r i s h  position live  of  Lords upheld  o f t h e U.K. f o r t a x p u r p o s e s . In the taxpayer,  who was b o r n i n  p a r e n t s and p a r t i a l l y  permanently with h i s family  taxpayer  the Commissioners'  was r e s i d e n t  retired  meetings, Very  often,  resident  factor  In R u s s e l l ,  found  ships  7  a U.S. c i t i z e n  that  t o be  36  sufficient.  within a  i n f i n d i n g a person  the taxpayer  m a t r i m o n i a l home i n Canada and was f o u n d h e r e , a l t h o u g h he h i m s e l f  The House  f i n d i n g of fact  h a v i n g a home a n d f a m i l y  i s a major  there.  in Ireland.  once a month f o r d i r e c t o r s '  which the Commissioners  jurisdiction  3  from h i s  i n t h e U.K. A l t h o u g h he h a d no  home i n E n g l a n d , he r e t u r n e d  Malion,  was  a s managing d i r e c t o r o f an E n g l i s h company, went  to  the  3 5  f o r vacation  t o be  had a t o be r e s i d e n t  was n o t p r e s e n t .  Also, in  w o r k i n g a s a seaman on U.S.  b u t h a v i n g a home i n Canada was h e l d  t o be r e s i d e n t  i n C a n a d a . However, t h e p r e s e n c e o r a b s e n c e o f a home a n d family  i s not always d e t e r m i n a t i v e .  captain Scotia for  resident  i n New York bought  i n which h i s daughter  annual holidays  a l s o made s h o r t close  visits  a house  Board h e l d  i n Nova stayed  port  of c a l l  was  he was n o t r e s i d e n t  I n York v . M.N.R.,  i n Canada a t one p o i n t ,  a sea  two weeks e a c h summer. He  t h e meaning o f s u b s e c t i o n  Income War Tax A c t .  38  a n d a t w h i c h he  when h i s C a n a d i a n  b y . The Tax A p p e a l  i n Canada w i t h i n  lived  of about  lived  In Meldrum,  39  9(1) of the  t h e t a x p a y e r had  b u t i n 1973 he  separated  7 from h i s w i f e children twice  a n d moved t o t h e U.S. He v i s i t e d h i s  three  or four  i n 1977 on b u s i n e s s ,  assessed  not a resident  and  owned a house  was  t e n u o u s and t h e r e  not  return  despite  will  the f a c t s  that  he h a d a  i n Canada: h i s c o n n e c t i o n was no i n d i c a t i o n  here t o l i v e .  conclusive  court  f o r which the M i n i s t e r  h i m a s a r e s i d e n t . The Tax Review B o a r d h e l d he  was  to  t i m e s a y e a r a n d came t o Canada  factors  that  with  Canada  he  intended  Thus a home a n d f a m i l y in determining  family  residence  per  se a r e  - the  examine t h e n a t u r e of t h e t a x p a y e r ' s  r e l a t i o n s h i p w i t h h i s home o r f a m i l y  before  deciding the  quest ion. It the  should  be n o t e d  house  year,  qo  a British  that  was h e l d  t o be r e s i d e n t  t o work minister  denied  ground  but  this  that  their  housing  claim  costs  i n Shpak  t h e y moved t o  o f W a s h i n g t o n . They intended  continued  t o move b a c k . The  f o ra dividend  t h e y were no l o n g e r  that  20 weeks e a c h  i n t h e U.K. A l s o ,  but never  was o v e r t u r n e d  stated  high  i n the State  i n Vancouver  the  Board  but t o a v o i d  Roberts  abode a n d  two t a x p a y e r s h a d l i v e d i n  1  Vancouver,  who moved from h i s  had no f i x e d  t o t h e U.K. f o r a p p r o x i m a t e l y  Shpak v . M.N.R.,"  Point  subject,  i n London a n d t h e r e a f t e r  returned  of  i t i s not a requirement  t a x p a y e r have a home a t a l l t o be a r e s i d e n t . I n  Levene v. I.R.C.,  and  that  t a x c r e d i t on  Canadian  residents,  by t h e Tax Review B o a r d . The  the t a x p a y e r s had dual  w h i c h was Canada — a l t h o u g h  Point  residency,  one  R o b e r t s was t h e i r  8 domicile,  the  centre  c o n v e n i e n c e s was A detailed of N a t i o n a l  considered  in order  especially  f o r the  within the  Canada. As  dewelling  property like  and  allowance If  primary  other  residence  remains a  residence  a b r o a d does not  Canada as  double  are  a  seen  there  ties  residence,  i n Canada and t o be  as  personal  Other  seasonal  ties  family  significant. establishing a  i s a presumption dual  that  residence  is  someone e s t a b l i s h e s a permanent mean he  in another tax  be  has  is a  country,  convention  become a r e s i d e n t of  reference  should  between Canada and  an  example  I will  C a n a d i a n - G e r m a n D o u b l e Tax of d u a l  residence.  refer  t o A r t . 4 of  Convention,  4 4  the  which  be  that  country. As  cases  individual.  Canada. I f someone  w e l l as  made t o the other  of  that  residential  ties  Canada. S i n c e  the  non-resident  the  Canada w i t h o u t  possible,  have t o  d e p e n d e n t s , and  a l s o seen  r e s i d e n t of fact  of  insurance,  elsewhere  for  determination,  memberships  payments a r e  Department  " r e g u l a r l y , normally  residential  of an  health  and  r e s i d e n t of Canada  where he  spouse or  someone l e a v e s  permanent he  or  is a  t o make t h i s  ties  life  It  4 3  i s i n Canada." A l l f a c t s  place,  a provincial  v i e w of t h e  in IT-221.  determination  social  professional  place  the  down  individual  lives  social  4 2  is laid  i f the  or c u s t o m a r i l y  interests,  d e s c r i p t i o n of  Revenue  purposes,  their  Canada.  d e t e r m i n e s t h a t an tax  of  excludes  9 It  reads: 4  "Article Resident  (1) F o r t h e p u r p o s e s o f t h i s Agreement, t h e t e r m "resident  of a C o n t r a c t i n g  S t a t e " means any  person  who,  liable  t o t a x t h e r e i n by r e a s o n  residence, criterion not  place  o f management  of a s i m i l a r  i n c l u d e any p e r s o n  that in  u n d e r t h e laws o f t h a t  State  that  in respect  State  or c a p i t a l  (2) Where by r e a s o n paragraph  only  States,  other  But t h i s  i s liable  term  does  to tax i n  o f income from  sources  situated therein.  of the p r o v i s i o n s of  1 an i n d i v i d u a l  Contracting  of h i s d o m i c i l e , o r any  nature. who  State, i s  i s a r e s i d e n t of both  h i s status  shall  be  determined as f o l l o w s : (a) he s h a l l State  be deemed t o be a r e s i d e n t o f t h e  with  relations  which h i s p e r s o n a l are closer  and e c o n o m i c  ( c e n t r e of v i t a l  interests); (b)  i f the State vital  (c)  i n w h i c h he h a s h i s c e n t r e o f  i n t e r e s t s cannot  be d e t e r m i n e d ,  or i f  he  h a s n o t a permanent home a v a i l a b l e t o h i m  in  either State,  he s h a l l  resident  of the State  habitual  abode;  be deemed t o be a  i n w h i c h he has an  i f he h a s an h a b i t u a l abode  i n both S t a t e s or  10 in  e i t h e r of  resident  of  them, he the  shall  State  of  be  deemed t o be  w h i c h he  a  is a  nat i o n a l ; (d)  i f he  i s a n a t i o n a l of  neither the  of  Contracting  question  by  (3) Where by paragraph a  competent  mutual  reason  of  of  shall  the  settle  provisions  other  a u t h o r i t i e s of to  of  the  agreement.  t h a n an  both C o n t r a c t i n g  endeavour  or  c o m p e t e n t a u t h o r i t i e s of  States  1 a person  resident  shall  them, t h e  both States  the  settle  of  individual is  States,  the  Contracting  i t s status  by  States mutual  agreement." This d e f i n i t i o n over  the  p r e v a i l s over  definition  I.T.A. T h e r e f o r e , it  will  be  individual  3.2  of  by  the  RESIDENCE OF  d e f i n i t i o n s and  deemed r e s i d e n c e  f o r the  sufficient  other  p u r p o s e of  to determine  definition  of  CORPORATIONS AND  this  the  the  in sec.  also  250(1)  thesis, I  residence  think  of  an  Convention.  DEFINITION OF  PERMANENT  ESTABLISHMENT R e s i d e n c e of  a corporation  p u r p o s e s has  been h e l d  and  management of  Beers C o n s o l i d a t e d central  the  and  the  t o be  where the  corporation  M i n e s L t d . v.  management and  directors  f o r Anglo-Canadian  control  company h o l d  income  central control  actually abides:" Howe."  6  The  i s generally their  tax  place where  m e e t i n g s and  De  5  of the the  11  conduct was  of a f f a i r s  confirmed  L t d . v.  i s decided.  in Egyptian  Todd,  where  4 7  a company, whether real  business'  This  Delta  i t was  British  location.  judged  or  as  i s the  residence company  not,  States,  the  regardless  of  real  control-test  p r e v a i l s over  not  appear  a company Canadian  t o be  incorporated  or  5 0  of  26,  simple  residence,  1965  formal  4 8  where  sec.250(4) and  income a c c o r d i n g  the  the  to  c e n t r a l management  sec.250(4)  and  I.T.A.  international taxation problem  i n Canada  shall  and  i s done o r of  Any  there  does  in determining  is "really"  a  if  resident  43  important  establishment."  is treated  e n t i r e t a x a t i o n year  particular  incorporated  Another  business  any  company.  an  I.T.A.. But  purpose of  followed of  notion  April  business  i t s world  sec.3  the  the  deemed r e s i d e n c e  s e c . 2 ( l ) and  For  residence  i n Canada. The  I.T.A. a p p l i e s t h r o u g h o u t on  then  a corporation  incorporation creates  i s assessed  was  of  its  some s t a t u t o r y d e f i n i t i o n s .  resident  d i r e c t o r s a c t . The  company  the  i n Canada a f t e r  where t h e  residence  i s e s t a b l i s h e d by  for individuals,  incorporated  the  Co.  incorporated.  i s e x t e n d e d by  of  that  This c r i t e r i o n  United  case  deemed t o be  aspect  the  the  r e s i d e n t where i t i s As  be  In  criterion  Land & Investment  in a l l future d e c i s i o n s regarding companies.  fundamental  issue  Under t h e  i s to determine a  I.T.A., c o r p o r a t i o n s  r e s i d i n g i n Canada, but  i n C a n a d a , and  "permanent  disposing  carrying  not on  of c e r t a i n t y p e s  of  1 2 Canadian p r o p e r t y  a r e s u b j e c t t o t a x a t i o n i n Canada.  However, t h e C a n a d i a n - G e r m a n provides in  Canada  i s not s u b j e c t profits  establishment  a branch,  f a c t o r y , workshop o r mine b u t d o e s n o t broker  find  determines  i s wholly  p l a c e s o f management,  o f t h e German  preparatory  storage,  sites  only  last  through  branches,  establishment  as a  which the b u s i n e s s carried  o f an  on. I t i n c l u d e s  offices,  mines, and  f o r the s o l e purpose of  o r any o t h e r  activity  of a  c h a r a c t e r . B u i l d i n g and  c o n s t i t u t e a permanent more t h a n  I have t o r e f e r  at  i n Canada. A r t . 5 of the  or p a r t l y  or a u x i l i a r y  construction i f they  of h i s  o f a permanent  a permanent  but not f a c i l i t i e s  maintenance,  details  he h a s  i n t h e C a n a d i a n - G e r m a n Tax C o n v e n t i o n ,  place of business  wells,  or agent, p r o v i d e d  the d e f i n i t i o n  f o r German a c t i v i t i e s  enterprise  includes  and i s a c t i n g i n the o r d i n a r y course  establishment  fixed  are a t t r i b u t a b l e  a u t h o r i t y t o c o n t r a c t on b e h a l f  b u s i n e s s . We  Convention  i t h a s a permanent  A permanent e s t a b l i s h m e n t  i n c l u d e an i n d e p e n d e n t  corporation  business  income t a x on i t s  i n Canada and t h e p r o f i t s  office,  no g e n e r a l  t o Canadian  i n Canada, u n l e s s  that establishment.  least  Convention  t h a t a German c o r p o r a t i o n c a r r y i n g on  business  to  D o u b l e Tax  establishment  12 months. F o r f u r t h e r  to A r t . 5  itself.  5 1  1 3 3.3  RESIDENCE OF  TRUSTS  Canada t a x e s t r u s t s r e s i d e n t is  the only  s e c t i o n which  determination generally  I.T.A. i m p l i e s  is  only  all  that  resident  jurisdiction  Act,  the r e s i d e n c e  difficulties  of  property." this  i s vested  trustees  own  explicit  contrary  a test for  of a m u l t i p l e  o f t h e t r u s t would  be  a r e two legal  major  the  trustee residence  title  difficulties  with  to the t r u s t  i n a l l of the t r u s t e e s . A l l of the  i n t e n t i o n de  Second,  subject  jure c o n t r o l  otherwise, decisions  to  is also  of the  must be unanamous. T h e r e c a n be no m a j o r i t y  has  trustees  i n a l l the t r u s t e e s . U n l e s s the t r u s t  document p r o v i d e s  trustees  Tax  great  seem t o i m p l y  the t r u s t p r o p e r t y .  the t y p i c a l  that  " h a v i n g ownership or c o n t r o l of the t r u s t  property  in  trustees  i t is clear  are m u l t i p l e  of the r e s i d e n c e  test. First,  equally  there  jurisdictions.  However, t h e r e  possible  vested  are m u l t i p l e  o f t h e t r u s t . However,  the r e s i d e n c e  the t r u s t e e s  sec.104(1)  of the t r u s t i s  o r where t h e r e  I.T.A. would  determination  trust;  that  It is  5 2  o f i t s t r u s t e e s . Where  a r i s e when t h e r e  104(1)  I.T.A.  i s , f o r t h e p u r p o s e o f t h e Income  in d i f f e r e n t  Sec.  104  to the  i n t h e same j u r i s d i c t i o n ,  that  the  the residence  trustee,  Sec.  of a t r u s t .  t h e commentators  by t h e r e s i d e n c e  one  resident  i s relevant  of the residence  t h o u g h t by  determined  i n Canada.  t r u s t , no  single trustee  e i t h e r complete  trustees  rule.  Thus,  or group of  ownership or complete  de  1 4 j u r e c o n t r o l of  the  trust  s e c . 1 0 4 ( 1 ) I.T.A. was of  the  residence  clearer  and  For v. The  intended  of a t r u s t  Furthermore, i f  to d e a l  with  the  question  i t c o u l d have been much  explicit.  the  foregoing  Queen  provisions  property.  that  5 3  f o r the  reasons,  the  i t was  Income Tax  determination  held  Act  of  i n Thibodeau  contains  the  no  residence  of  a  trust. M.A.  Cohen  residence "central  of  a trust  c o n t r o l and  residence  of  regard He the  of  Green  to the  suggests  adopting  determination important the  the  of  trust.  5  In  considers  the the  management  of  is silent  residence  with  of a  trust.  considered:  jurisdiction  in  the  jurisdiction  in  property  statutory  of  the  trust  Trust  only decision in respect  p r o v i s i o n s and  1)  is situated.  I know, T h i b o d e a u F a m i l y  i s the  the  t r u s t e e s ; 2)  which the  58  determine  Beers t e s t  f a c t o r s t o be  i s c o n t r o l l e d ; 3)  Queen,  Act  the  trust  f a r as  De  f a c t o c o n t r o l and  which the  As  the  This test  5 5  states that  5 7  of  Courts  5 6  three  residence  the  management" u s e d t o d e t e r m i n e  t h e de  corporation. R.A.  by  that  a corporation.  jurisdiction the  suggests  5 4  the  i s s u e of  of  the  v.  the  The present  residence  of  a  9  seeking  J u s t i c e Gibson Crown t h a t  he  to  r e s o l v e the  J. expressly should  i s s u e of  residence,  r e j e c t e d the  employ a De  Beers  a r g u m e n t s of  formula  of  the  central  15 management and  c o n t r o l and  could  have a d u a l  is  j u r e c o n t r o l which  de  determination  of  because each personally him  by  residence.  the  trustee  settlor.  reason, be  1980  the  Bulletin  i s not  guideline,  relevants question generally  decision that  Bulletin, binding  case  fact;  2)  controls  multiple  fact  Department  where the  manages o r  than  the  the  trustees,  the  or  be  in  management and  resides;  4)  the  l o c a t i o n of  the  departing For  case view  no  this  cannot that  purposes.  restricted new  to  law.  Revenue  6 2  issued  such a  e s p e c i a l l y in light a number  resident of  other  of  of  of  a trust  is a  a trust is legal  representative  resides;  c o n t r o l of legal  consideration;  an  practise  trust residence  the  relevant  the  i s merely a  trust assets the  the  IT-447. While  of  is a  should  residence  trustee the  to  It contains  1)  for  for taxation  relevant  law.  that  i t creates  50%  assets  to  trust context.  of N a t i o n a l  No. and  propositions: of  is  d i s c r e t i o n reposed  contrary  of  i t is clearly  s c a r c i t y of  that i t  the  justification  i n the  authority  that  Interpretation  are  clear  p a r t i c u l a r f a c t s and In  the  no  i s a question  They s u g g e s t its  an  for  implies  a t r u s t . This  c o m m e n t a t o r s have h e l d  considered  residence  clearly  question  f i d u c i a r y duty  t r u s t and  f a c t u a l approach  the  of  in  6 1  Gibson J . gives from t h i s  trust  is relevant  i s under a the  the He  6 0  residence  exercise  the  that  5)  3)  there  i s where more the  trust  r i g h t s and the  if  trust  residence  of  16 the  beneficiaries  "other  person"  management  with  a substantial  and c o n t r o l  consideration Interpretation central  is irrelevant;  w h i c h may Bulletin  management  determination  6) t h e r e s i d e n c e o f an p o r t i o n of the  of the t r u s t  i s a relevant  be d e t e r m i n a t i v e .  6 3  seems t o be a d o p t i n g  and c o n t r o l  concept  used  of r e s i d e n c e of a c o r p o r a t i o n .  This t h e de f a c t o i n the  4. REASONS FOR DISTINCTION OF TAXATION OF RESIDENTS AND NON-RESIDENTS As  a b a s i s f o r the f u r t h e r understanding  taxation like  of n o n - r e s i d e n t s '  t o look  investment  a t the p o s s i b l e reasons  g e n e r a l may d i s c r i m i n a t e between  of the  i n Canada I would why a t a x s y s t e m i n  r e s i d e n t s and  non-residents.  4.1  (TECHNICAL) ASPECTS OF COLLECTING TAXES  One  of the t e c h n i c a l  taxation country taxes  likes  t o make s u r e  from t h e t a x p a y e r .  the c o u n t r y unable  requirements  payor  amount  i tactually  I f the taxpayer  every  receives  isa  and t h e r e f o r e t h e t a x department  like  the taxes. C e r t a i n the w i t h o l d i n g t a x  o f prepayment  of t a x e s  stay i n  might be  technical  6 4  and the  6 5  may h e l p  witholding tax i s a tax l e v i e d  to achieve  on payments  t o t h e payee a n d i s t o be d e d u c t e d  t o be p a i d by t h e p a y o r .  One t y p i c a l  from  from t h e example f o r  w i t h o l d i n g t a x i s t h e d i v i d e n d t a x c r e d i t : The  company p a y i n g taxes  dividends  at source,  shareholder her  i s that  goal. The  the  that  between t h e  c h a n c e s a r e t h a t he o r she d o e s n ' t  to c o l l e c t  instruments  the  fordistinction  of r e s i d e n t s and n o n - r e s i d e n t s  non-resident,  this  reasons  to their  shareholders  deducts  p a y s o u t t h e d i f f e r e n c e and t h e  may c l a i m t h e d i v i d e n d t a x c r e d i t  own income t a x r e t u r n .  17  i n h i s or  18 In o t h e r from g r o s s  instances  r e s i d e n t s have t o w i t h o l d  amounts t o be  p a i d to n o n - r e s i d e n t s .  s y s t e m of w i t h o l d i n g t a x  in general  Canada a g a i n s t d i f f e r e n t  kinds  Whereas t h e d i v i d e n d t a x  credit  neutrality  in respect  corporation payment of in  and  g e n e r a l , the  system  to provide  r e s i d e n t s and collection fits  the  4.2  from t h i s  doesn't doing  apply  and  of p r e p a y m e n t  paying  do  their  Often  In t h e  different  Canadian  as  tax  of  not  an  The  6 8  reason,  c o m p a n i e s , as we  6 9  towards  doesn't  favourable Canadian treatment  see  of  easy  way  of  same p u r p o s e  their  MNR money  like as  and  ITSELF  we  taxpayer find  an  t h e way  —  is living  or  own  to give non-residents  a  i t s gives to i t s  I.T.A. t h e r e a r e v a r i o u s of  has  non-residents.  areas  residents, non-residents,  c o m p a n i e s and  will  Speaking  6 7  t a x e s : The take  the  i s a common  w h i c h — by  non-resident  policy  controlled  a  taxes.  in this country,  a country  treatment  residents.  technical  and  taxes.  tax  treatment  allows  tax d e p a r t m e n t .  when t h e  business  understanding  of  tax  ASPECTS JUSTIFYING DISCRIMINATION IN  Apart  tax  of w i t h o l d i n g t a x  that non-residents  walk away w i t h o u t  allow  for non-residents.  non-residents  instrument  to ensure  non-payment of  should  for a similar  f o r the  Revenue  f o r r e s i d e n t s , i t guarantees  in i t s e l f concept  The  6 6  t o moneys r e c e i v e d t h r o u g h  directly  taxes  of  safeguards  taxes  later  non-Canadian  more d e t a i l e d .  controlled Since  tax  19 policy like  i s a p a r t of  to look  explain  at  the  the  general  bacground  the d i f f e r e n t  tax  economic p o l i c y ,  of  this policy  treatment  of  I would  which  may  non-residents  in  Canada.  4.2.1  ECONOMIC AND OF  the  Most of  border  populated of  i s the  a relatively  people.  the  with  highest  manpower and  largest  them a r e  living  the U n i t e d  i n the  S t a t e s , the  living  resources  a b i t of  making  to develop  selling  big quantities.  reasons  being  build  them up.  build  up,  there  are.  but  New they  Productivity United  belt  rest  along  of Canada  i n Canada  resources,  the  is  is  one  resource  to  i s low  are  and  industries  the  few and  copper,  industry i s  industries  industries  production  not  n a t u r a l gas  r e s o u r c e s , and  Compared  cannot  but  aluminum, n i c k e l ,  a l a c k of c a p i t a l  S t a t e s , Japan  million  them. T h e r e a r e a  g o l d . The  western c o u n t r i e s , Canadian the  km  wood, o i l and  coal,  and  i t s money by  selling  standard  25  world  world.  like  silver  i n the  of a b o u t  i n a 200  a l a r g e amount o f  capital  CANADA  country  small population  resources, e s p e c i a l l y  mineral and  second  s p a r e l y . The  Canada has  major  DIFFERENT TREATMENT  NON-RESIDENTS' INVESTMENT IN  Canada with  OTHER REASONS FOR  they  are  in other  s m a l l , one  technology are  of  to  trying  to  process  a s many r e s o u r c e s  as  compared  to countries l i k e  the  or West Germany. E s p e c i a l l y  the  U.S.  20 companies are able and  producing  l a r g e r q u a n t i t i e s and  t o p r o d u c e much c h e a p e r . therefore  Therefore  the  market  In  Canada t h e  for production  C a n a d i a n c o m p a n i e s do  not  they  are  population  i s much  produce  smaller.  big  quantities. As could low  the  Grey Report  specialize  efficient  full  product  or c o s t  example of  line  effective.  refrigerator  were n i n e  C a n a d a . The plant  was  p r o d u c e d an  The  mainly natural  production  are  the  of  one  and  cattle,  and  sell  the  to  few  to  gives  be one  the  may  report,  refrigerators produced  in fact  each  in per  plant  130,000. exports, pulp,  importing  s o l d cheaply, take  cars  back  is  p a p e r , and  processed  and one  Canada  the  exporting  various  goods.  processing  The  i s done  example: Canada i s producing  cars,  t o Canada and  make  create the  processing. Canadian businessman  charge us.  calculation.  t i m e of  refrigerators  c o a l t o J a p a n . They a r e  employment,  they  fish,  Canada. L e t ' s  money out  At  and  i n Canada, w h i c h  200,000, w h i l e  imports  resources  exporting  As  at  wheat,  resources outside  t o be  companies  high q u a l i t y  Grey Report  manufacturers producing  a v e r a g e of  Looking  at  U.S.  i n numbers t o o  optimum number o f  found  i n the  c o m p a n i e s have had  helpful for i l l u s t r a t i o n :  there  out,  mass p r o d u c t i o n  p r i c e s , whereas C a n a d i a n  p r o d u c e the  be  on  points  But  They  our  s a i d " "We  price i s included  incorporate  the  c o s t s of  charge in  them,  their  the  resources  21  into  the c o s t s of the p r o d u c t ,  add o t h e r  costs  l a b o u r , management, e t c . a n d add p r o f i t s . the  resources, gets  them back p r o c e s s e d ,  profits  and t h e r e f o r e Canada  general  factor,  itself  is selling  find  o i l to other  the p r o d u c t i o n  of p l a s t i c  these  b a c k . So Canada  products  countries and  imports  resources "Canada people and  and t h e r e a s o n  and  why  i s not n e g a t i v e  f o r C a n a d i a n s " and  Canadian products  resource  i s relying  the balance  be  The m a n u f a c t u r i n g was  growing  and  cellulose  in  over  about  30%.  7 0  we  find  the  exports  car  i n d u s t r y was  countries  between  they  Many  Canadians  should  support  to other c o u n t r i e s . of  self  increased. and p r o c e s s i n g years.  i n d u s t r y i n Canada  Exports  of pulp,  10% of C a n a d i a n  o f m a c h i n e s and p a r t s were  b i g p a r t of these  of a u t o - p a r t s very  exports  the slogan:  country.  that  were making a b o u t  One  other  "Buy C a n a d i a n " t o h e l p t h e  feel  the l a s t  1983 and e x p o r t s  on  buys  a r e t h e huge q u a n t i t i e s o f  and n o t " g i v e h e l p "  should  use i t f o r  and Canada  By h e l p i n g C a n a d i a n c o m p a n i e s t h e l e v e l sufficiency  industry  t h e same phenomenon:  in fuel,  up t h e i r  Canadian businessmen  h a s t o pay  c o u n t r i e s , they  Canada h a s . T h e r e f o r e  o f Canada b u i l d  sells  i s t h e dilemma."  In t h e o i l i n d u s t r y we Canada  So Canada  i s l o o s i n g money a s a  even i f t h e m i n e r a l  makes money. T h i s  like  weak  exports  t o the U n i t e d in relation  Canada and t h e U.S.  entered  paper  exports making  c o n s i s t s of  S t a t e s . Since the to other  i n t o an  western "auto-pact"  22 some t i m e a g o , p r o v i d i n g parts-production p a r t s over  f o r t h e s e t up o f p l a n t s and  i n Canada  the border  and a l l o w i n g  without  The C a n a d i a n i n d u s t r i e s in  the i n t e r n a t i o n a l  to p r o t e c t takes, would  their  until like  do n o t f e e l  industry,  good q u a l i t y  got onto her f e e t  to get i n t o the  lobby asked f o r  Canadian products against  t h e U.S.  which can produce l a r g e r q u a n t i t i e s a t  f o r very  competitive  prices,  whereas t h e  C a n a d i a n p r o d u c t s a r e much more e x p e n s i v e . different  industry.  share of the i n t e r n a t i o n a l  m a r k e t . So t h e C a n a d i a n i n d u s t r i a l  garment  and w h a t e v e r e l s e i t  t o t h e C a n a d i a n garment  just  to protect  t o compete  m a r k e t , and t h e y want t h e g o v e r n m e n t  Whereas t h e U.S. has a l a r g e  tariffs  able  become c o m p e t i t i v e . As an example, I  to refer  m a r k e t , Canada  trade of  tariffs.  m a r k e t by t a r i f f s  they  free  programs t o b u i l d  7 1  There a r e  up C a n a d i a n i n d u s t r i e s , and  there are tendencies  t o keep t h e money  reinvested  and i n c r e a s e C a n a d i a n employment  t h e same  i n Canada  t o be at  time.  As an example, are  i n Canada  t o be f o u n d  provincial  special  programs h e l p i n g C a n a d i a n s  i n the o i l i n d u s t r y .  7 2  F e d e r a l and  programs t r y t o g e t companies t o d r i l l f o r  more o i l .  They want more C a n a d i a n i n v o l v e m e n t  the money  i n C a n a d a . R e g u l a t i o n s make i t a d v a n t a g e o u s f o r  Canadians to p a r t i c i p a t e order  and t o keep  i n e a c h and any p r o j e c t s i n  t o keep i t f e a s a b l e .  So 100% U.S.-owned and o t h e r  f o r e i g n - o w n e d p r o j e c t s w o u l d have t o pay more o i l  23 charges,  whereas  50:50 U . S . - C a n a d i a n  foreign-Canadian Alberta only  t o pay  P e t r o l e u m I n c e n t i v e s Pogram  t o C a n a d i a n s , t h e government  e a c h $1.00 for  p r o j e c t s have  spent  geological  development  on d r i l l i n g  preparation  well  program  provides  forcing  U.S.  i t pays  C a n a d i a n company. U.S.  less.  Under  applies  p a y s a i d o f $0.35 f o r including  f o r an e x p l o r a t i o n  $0.20 f o r e a c h $1.00 incentives  t o make a j o i n t companies  the  (APIP), which  expenses  f o r some o t h e r  companies  o r 50:50  expenses  well.  For a  spent.  as  The  well,  venture with a  by t h e m s e l v e s do n o t g e t  any moneys a t a l l . Under (FPIP),  the F e d e r a l  which a p p l i e s  off-shore  drilling  Petroleum Incentives outside Alberta,  i n the Beaufort  p a y s $0.80 on e a c h $1.00 Canadian also  o i l industry  restrictions  restrictions quantities gas  on  Program  especially for  Sea, t h e  government  s p e n t . These programs  h e l p the  and Canadian companies. T h e r e a r e selling  natural  on t h e p r o d u c t i o n  of o i l , t o keep  gas t o t h e U.S.  o v e r and above  the p r i c e  and  certain  o f o i l and  natural  up. A different  t r e a t m e n t of Canadian  companies  and n o n - C a n a d i a n c o n t r o l l e d  seen a l s o  i n terms of t a x a t i o n ,  more d e t a i l Special small  later  as w e l l  companies  I will  refer  i s t o be to i t in  on.  i n c e n t i v e s are given  businesses.  capital  and  controlled  Programs  as cheap  f o r the development  support  financing.  them w i t h Tax  of  initial  incentives  allow  24  a lower tax r a t e ( s m a l l b u s i n e s s abatement) i n o r d e r t o h e l p them b u i l d So  i t can  up. be seen t h a t the g e n e r a l  economic p o l i c y  i n Canada t r i e s t o g i v e i n c e n t i v e s f o r Canadians  and  Canadian companies, e i t h e r by t a r i f f s or by d i r e c t or i n d i r e c t s u b s i d i e s . D i r e c t s u b s i d i e s a r e the APIP  and  FPIP Programs. I n d i r e c t s u b s i d i e s are a l l k i n d s of i n c e n t i v e s spread t h r o u g h t o u t the  by  tax  I.T.A.  L o o k i n g at the Canadian tax law we  w i l l see  those  tax i n c e n t i v e s f o r investment i n d i f f e r e n t a r e a s .  7 3  of them have been mentioned a l r e a d y .  general,  Speaking i n  Some  t o encourage p e o p l e t o i n v e s t money i n , f o r example, r e a l e s t a t e , o f t e n a government i n c r e a s e s depreciation  or a l l o w s  the  the r a t e  of  investor to s h e l t e r other  income by l o s s e s r e s u l t i n g from those i n v e s t m e n t s . " 7  Other examples c o u l d be the S c i e n t i f i c R e s e a r c h Credit  (SRTC) by which Canada t r i e d t o  investment i n r e s e a r c h given  companies  f o r the Canadian gas and  75  and  investment i n s c i e n t i f i c  stimulate tax  incentives  o i l industry,  i n s t r u m e n t s of w r i t e - o f f s are u s e d . research  7 7  Tax  As an  where the  7 6  incentive for  companies  the  government t r i e d t o implement tax c r e d i t s f o r  the  investor  Another  ( i n d i v i d u a l as w e l l as c o r p o r a t e ) .  7 8  example might be the Canadian movie i n d u s t r y , where investment i n m o t i o n - p i c t u r e write-offs.  7 9  films allows  for  25 In  a l l these cases,  u s e d as  a part  investment  of  the  Canadian or  bottom  investment and  tax  Canadian  rules are  line  of  this  benefits  assumptions along  are  buying  buy  Canadian  other  their  sound b a s i s  4.2.2  supply  see,  for  i f or  taxation  create that and  line  instead  Canadian  economic  nonresidents' f i t this  i s that  of  i s that  growth  goal.  foreign  re-investing foreign  them  investors  a b r o a d , whereas C a n a d i a n s t r y have a c l o s e r up  look  to which extent  at  to  both  they are  a  policy.  ASSUMPTION: FOREIGN INVESTORS REPRATRIATE THEIR PROFITS INSTEAD OF The  their  is  residents  i s that  seen t o  this  assumption  goods. L e t ' s  a r g u m e n t s and  policy  i s not  repatriate profits  i n C a n a d a . One  for  t o Canada, whereas  One  investors  only  i s supposed to b r i n g  i n s i d e Canada  the  law  d i s i n c e n t i v e s i t happens  investment of  tax  c o n t r o l l e d companies.  i n Canada  economic  and  government's p o l i c y t o  i n c e n t i v e s or  these advantageous  The  where t a x a t i o n  assumption  profits  discussed of F I R A .  that  instead  of  i n the- r e p o r t s Foreign  8 0  investments  require  interest.  Even  i s made, t h e  foreign  dealing  payments  i f importing  with  the  were s u p p o s e d  intending  r e s u l t was  investors  CANADA  repatriate  r e - i n v e s t i n g them i n Canada  investors  i n Canada  They a l s o  RE-INVESTING THEM IN  to  i n the  implementation to  repatriate form of  capital  undertake profits.  dividends  when t h e  s u p p o s e d t o be  was  a very  or  investment complex  26  s e r i e s of i n f l o w and o u t f l o w r e l a t i o n s of c a p i t a l which d e f y c o h e r e n t a n a l y s i s . However, i n 1970  the Gray Report  suggested t h a t f o r e i g n d i r e c t investment would have a deficit  impact on Canada w i t h i n ten y e a r s of  investment On  the  itself.  the o t h e r hand, i t was  noted t h a t Canadian  i n v e s t o r s themselves o f t e n p r e f e r t o e x p a t r i a t e p r o f i t s and  i n v e s t o u t s i d e of Canada, p r e f e r a b l y i n the  United  S t a t e s . P a r t of the e x p l a n a t i o n f o r the Canadian exodus of c a p i t a l may  be t h a t Canadians s u b s i d i a r i e s of American  p a r e n t s a r e o f t e n w h o l l y owned by the p a r e n t  company.  r e s u l t i s t h a t Canadians cannot i n v e s t i n those s u b s i d i a r i e s , but must i n v e s t i n the p a r e n t  The  Canadian  company i n  the U n i t e d S t a t e s i n order t o g a i n an e q u i t y p o s i t i o n . F u r t h e r m o r e , the Canadian m e n t a l i t y was be one  of extreme c a u t i o n and  lacked entrepreneurship  c o n t r a s t t o the U n i t e d S t a t e s l e n d e r s and who  g e n e r a l l y had the r e s o u r c e s and  take more s p e c u l a t i v e i n v e s t m e n t s . the Gray Report t h e r e was c a p i t a l which was circumstances  perceived  in  equity players  the i n i t i a t i v e The  to  r e s u l t was  to that in  seen t o be s u f f i c i e n t Canadian  j u s t not a p p l i e d p r o p e r l y t o Canadian  but t r a n s f e r r e d abroad. F u r t h e r m o r e , the  economic development i n the U n i t e d S t a t e s was and h e a l t h i e r over the l a s t  much f a s t e r  10 y e a r s than i n Canada. So  many Canadian companies were expanding i n t o the S t a t e s , s e t t i n g up new  United  p l a n t s t h e r e and c o n c e n t r a t i n g  on  growth and p r o f i t s t h e r e i n s t e a d of f u r t h e r development  27 in  Canada. Last,  t o do (a)  but  investment  In  the  find  least,  i n the  there  United  a r e a s of c o r p o r a t e  a  favourable  profits  tax  i n order  to give  rate  b u s i n e s s e s was Canada, s i n c e  an  i n the  first  US  1,  1985  abatement  Can  taxation  profits than  for half  tax  the  in  net  the  small  U.S.  r a t e was  f o r the  of  of  i n the  $100,000 i n e a c h y e a r  than  in  applied  for  whereas t h e r e  small  January,  normal  was  business  tax  rate  income f r o m a  p r i v a t e company as  1985 for  the  Canadian  specified  i n sec.  gains  on  125  8 2  introducing  favourable states  of  of  the  estate.  8  the  real  t o do  when the  U.S.  capital  estate  real  tax  i n Canada,  estate  providing  proceeds are  it  investment  the was  i n some  f o r exemption re-invested  in  of  capital  real  3  Depreciation - apart  re-invest  i s lower  more f a v o u r a b l e  $200,000 of  disposition  gains  to  i n Canada. However, s i n c e  controlled  (c) A f t e r  we  non-distributed  U.S.  a favourable  Canada a l l o w s  I.T.A.  U.S.  undistributed  the  accumulative account  first  incentives  8 1  Before Janurary  the  for  i n the  incentives  corporate  tax  States:  rate  company. F o r  tax  were m a j o r  taxation  moneys i n t h e  Canada. (b)  not  from o l d e r  was  a l s o higher  MURB b u i l d i n g s  i n the - the  U.S.,  where  depreciation  28 is  limited  t o 5%  p.a.  of  the v a l u e  Canada. * T h e r e f o r e , comparing 8  investments  i n Canada and  seems t o be a s i m i l a r  of  investments,  to take  C a n a d a . However, payments o f d i v i d e n d s interests  are  chances are repatriate  least)  foreign  profits  Gray Report (at  t o be made f o r f o r e i g n  that  up  concluded, 8 5  in  to a very  profits  out  of  and/or  likely  investment  As  may  i n balance  and  to  high degree.  "a m i l d c o s t e f f e c t  there  shareholders  i n v e s t o r s are  foreign  building  non-residents'  Canadian  tendency  the  the  have  of  payments."  4.2.3  ASSUMPTION: FOREIGN INVESTORS ARE CANADIANS ARE With  found  regard  the  imports figure  c o m p a n i e s bought services  from  businesses of  developed in  bulk,  import  95%  drops  o n e - t h i r d of  it  was  their  95%  the  t o 24%.  Only  their  sources. Only from  Canadian  Canadian  subsidiaries'  advantages granted i n t h e U.S.  If automobiles  or more of  Canadian  bought  by  supply,  i n the Grey Report  i n 1969.  i m p o r t a t i o n by  explained of  imports,  S u b s i d i a r y f i r m s were r e s p o n s i b l e f o r 40%  Canadian  excluded,  level  BUYING CANADIAN  that subsidiaries  purchases. total  to  BUYING ABROAD,  were  of  Canadian  s u p p l i e s and 11%  of  foreign  sources. This  subsidiaries  by  owned  high  could  d e s i r e for constant  be source  the parent, c o n t r a c t s  market, p a r e n t  d e s i r e t o keep U.S.  36%  of  unions  companies' happy and  purchases  simply  29 because degree  they a r e f o l l o w i n g  o f i m p o r t a t i o n was seen  down t h e C a n a d i a n efficient services  suppliers  based  on sound b u s i n e s s p r i n c i p l e s  degree  suppliers  of buying  of both  abroad  to high  Canadians.  right,  at least  It benefits problem  from a b r o a d on  but a r e s t i l l  that  foreign  imports a t a r e l a t i v e l y that  since  that  investors higher  ratio  t o some e x t e n t .  of f o r e i g n  t o a n a l y z e t h e e c o n o m i c c o s t s and investment  be t h a t  i n C a n a d a . The r o o t  Canada  i s t o o s m a l l t o compete  of t e c h n o l o g y , c a p i t a l ,  materials.  on t h e  those assumptions a r e  t h e U n i t e d S t a t e s and t h e r e f o r e w i l l  importer  damaging  raw m a t e r i a l s and s e r v i c e s .  and b u y i n g C a n a d i a n  So we f i n d  may be h a r d  may w e l l  purchases are  I do n o t have any s t a t i s t i c s  t i m e . But we have t o c o n c l u d e contribute  squeezing out  i n f o r m a t i o n . U s u a l l y import  Unfortunately,  with  sector,  to slowing  o f b o t h m a t e r i a l s and  and h a v i n g d e c i s i o n s  to Canadian  than  to contribute  manufacturing  Canadian  insufficient based  standard procedures. This high  The p r o b l e m ,  i t must  skills,  But i f Canada depends on f o r e i g n  foreign  investment  be a n e t  and some form o f  be e m p h a s i z e d ,  degree.  i s part  always  i s one o f  investment,  of t h e economic development of  Canada and c r e a t e s g r o w t h and b e n e f i t s a t l e a s t  t o some  extent.  that for  Speaking  i n terms of t a x a t i o n ,  Canadian  tax p o l i c y  foreign  investment  would  one c o u l d  implement  i n a r e a s where  imagine  tax i n c e n t i v e s  i t i s needed o r  30 desireable n o t . As try  and  tax d i s a d v a n t a g e s  I discuss  t o put my  the d i f f e r e n t  f i n g e r on  considerat ions.  those  i n a r e a s where  i t is  a r e a s of t a x a t i o n ,  economic  benefit  I  will  5. L E G I T I M A T E FORMS OF D I S C R I M I N A T I O N I N T A X LAW As a  we d i d s e e , t h e r e  distinctive  There  taxation  seems t o be a l s o  domestic explain  and foreign  a  of residents  investments  from  legal  considerations  framework  i n Canada which  t o determine  controlled I would  forms of d i s c r i m i n a t i o n  a  I would  discrimination will in  like  like  on t h e s p e c i a l  to establish  forms and  i n t a x l a w . To  t o introduce  in international  concentrate  law i n general aspects of  taxation.  The  term  non-discrimination  law  into  i n t e r n a t i o n a l law and i n t e r n a t i o n a l  law.  8 6  The word  "discriminare" meaning term  I N INTERNATIONAL  "todiscriminate" i n the l a t i n  of t o d i s t i n c t ,  i s used  i n t h e sense  distinct."  against  originally  business came  from  which had t h e  In French  8  8  8 7  Today t h e  and i n German  of " t o see a d i f f e r e n c e " "discrimination" somebody worse  rights  somebody." T h i s  Anglo-American  t o see a d i f f e r e n c e .  More o f t e n  t h e same  from  language,  sense of " t r e a t i n g  giving  LAW  i s taken  has d i f f e r e n t meanings.  negative "not  before I  discrimination  DISCRIMINATION  "to  give  some p r o b l e m s o f  5.1  it  may  companies. But  legitimate  illegitimate background  implications of  i n Canada a r e not g i v e n t o  and non-Canadian  those  reasons f o r  and non-residents.  d i f f e r e n t economic  why t a x i n c e n t i v e s  non-residents apart  a r e some t e c h n i c a l  9  0  i s used than  and i n the  others,"  to a l l " or "to discriminate  dual  31  meaning  seems  8 9  t o b e common  32 in  F r e n c h and E n g l i s h  discrimination behaviour  "principle term  political  of equal more  groups  or c o u n t r i e s ,  treatment."  in a neutral  justified Hereby  different  signified  law.  as u n j u s t i f i e d  or u n d e s i r e a b l e since  9 9  Only  and  purposes  shall  9 8  serve  concept  It often  1 0 1  relatively  of the  t h e term in a  legal  I f , however, t h e s t a n d a r d s  the term  exist  discrimination  factors  1 0 0  term.  i s vague  and can t h e r e f o r e i n c i t a t i o n to  receives  discrimination in a legal  only i n a  or p o l i t i c a l  i t s economic  r e g a r d t o the purposes  constant tenor  could  i t i s c o n s i d e r e d as  "discrimination"  T h e r e f o r e the term  treatment  treatment  f o r are included  change t h e s t a t u s quo. The t e r m  for.  of u n d e s i r e a b l e  i t i s p e r c e i v e d as  s e r v e s as a hidden  tenor only with  in  9 6  we g e t an e c o n o m i c a l sector  9 4  i n the sense of  A different  because  i t contains variable  be m i s u s e d .  policy  used  because  term.  of the term  the p o l i t i c a l  because  of d i s t i n c t i o n ,  i t i s c o n t r a r y t o the i n t e n t i o n  we g e t a l e g a l  political In  i n commerce t h e  i f t h e s t a n d a r d s and the purposes  discrimination context,  social  i t i s n o t e x p l a i n e d why a d i f f e r e n t  be  unlawful  sense  treatment.  c o n s i d e r e d as u n j u s t i f i e d .  9 7  defines  n e g l e c t i n g the  i n the sense  is  unjust  While  9 3  and i n law i t i s o f t e n  9 5  or  9 2  i n any d i s a d v a n t a g e f o r  s c i e n c e i t i s used  treatment not  result  social  i s used  Therefore F r a n c i s  9 1  as a l l k i n d s of treatment  which  individuals,  too.  i t serves  c a n o n l y have a  context.  1 0 2  33  E q u a l and d i f f e r e n t exclude  each other  are alternative  "not  to treat  equally."  non-discrimination requires  equal  principle negative  5.1.1  of the o t h e r .  d i f f e r e n t " as w e l l  means  as " t o  Consequently, the p r i n c i p l e of  prohibits  treatment  a different  treatment and  a t t h e same t i m e . T h e r e f o r e , t h e  of n o n - d i s c r i m i n a t i o n worded p r i n c i p l e  GENERAL  time  the p r i n c i p l e of n o n - d i s c r i m i n a t i o n  t o be a l l o w e d  have t o t r e a t  They  a n d a r e s u p p l e m e n t s a t t h e same  b e c a u s e one i s t h e c o r r e l a t e Therefore  terms.  represents  of equal  itself  treatment.  as a  1 0 3  IDEAS ON DISCRIMINATION IN INTERNATIONAL  LAW As general  a principle  but f o r m a l p r o h i b i t i o n  is derived countries.  from 1 0  countries  rights  survival,  legal  international  obligations countries  of e q u a i l t y  bodies  a 1 0 4  It  of the  effects  of  them  self-determination, of e q u a l  equality.  there  f o r every c o u n t r y .  1 0 8  Apart  i s no g e n e r a l  law w h i c h r e q u i r e s  in international  of  (we would c a l l  1 0 6  the p r i n c i p l e  of formal  status  these a r e fundamental  1 0 7  the p r i n c i p l e  the p r i n c i p l e  rudimentary  of d i s c r i m i n a t i o n .  international  of c o u n t r i e s " )  like  self-esteem,  in  the equal  as i n t e r n a t i o n a l  principles  and  the p r i n c i p l e  law i n c l u d e s  5  Concerning  "human  the i n t e r n a t i o n a l  1 0 9  equal  from  those  prohibition  r i g h t s and  The e q u a l i t y  law means t h a t  treatment,  each  of the country  34 can  plead  i t srights  obligations. foreigners companies are  reference  to the treatment of  - however, n o t o f f o r e i g n - and t h e i r  1 1 1  recognized  allowed  With  1 1 0  and has t o f u l f i l i t s  by c u s t o m a r y  to short  foreigners  assets,  which  certain  i s granted  prohibition  international  of d i s c r i m i n a t i o n  international  law f o r t h e p r o t e c t i o n  of  i s widely  legal  action,  addition, of  as a l e g a l  the e s s e n t i a l  accepted, subject,  rights  protection  grave and i n t o l e r a b l e  allots  principle  means an e q u a l  considered  criminal  of s p e c i a l  people  mentioned  i s the  rights  for their recognition t o take  offence. a  1 1 3  In  "prohibition  of the i n t e r n a t i o n a l  of the c o u n t r i e s  non-nationals  f o r example:  law i n c l u d e s  obligations  of  o f t h e human  encroachments."  a relative equality  that  This  1 1 2  r e l a t i n g to  there  against  this  law.  of l i b e r t y , the r i g h t  the i n t e r n a t i o n a l  A general  law. I t i s n o t  i n accordance with  general  of  rights  o f t h e minimum l e g a l p o s i t i o n o f  s t a n d a r d by c u s t o m a r y  recognition  minimum  international  minimum  foreigners  l e g a l e n t i t i e s or  treatment 1 1 4  in financial apart  r e s t r i c t i o n . Discriminations t o be an u n f r i e n d l y unless a special  signifies  the c o n t r a r y .  1 1 5  r i g h t s and  and - i n d i r e c t l y - t h e i r  i s not a c c e p t e d  retortion  law w h i c h  from t h e above  are only  a c t which  statute  matters  justifies  of i n t e r n a t i o n a l  law  35 5.1.2  PROHIBITION OF In  international  implement Apart law  the  from  the e q u a l  of  in a modified  a r e bound by equal  the  treatment  clause  limits  reciprocal contracting clause"  relation  reciprocal  The  1 1 6  equal  parties.  1 1 8  to l i m i t third  agreements  and  clause  their they  citizens,  in accordance  excluded  - mostly  1 2 0  1 2 1  d i d f o r the c i t i z e n s ,  by  Within  mutual  1 2 2  the  ships, vehicles companies,  this  f a v o u r a b l e treatment  the c o n t r a c t i n g p a r t i e s treatment  the  the  clause. system  treatment  - to  with.  nation  with  reciprocally.  of  for of  s c o p e of  a  the  grant  granted  and  and  goods  ships, vehicles  c o u n t r i e s they  who  1 1 9  the c o n t r a c t i n g p a r t i e s  favoured  to  this  the agreement  t h e most the  of  the  "reciprocity  goods of By  appears  f o r the c o n t r a c t i n g c o u n t r i e s  companies,  for  to a contract  n a t i o n s , however, t h i s  be  the  international  a most-favoured-nation  most-favoured-nation  treatment  title  Therefore  Sometimes t h e  clause.  themselves  1 1 7  obligations  most-favoured-nation  favourable  parties  leads to d i f f e r e n t  each c o u n t r y . T h i s can  oblige  of a l l i n  c l a u s e which g r a n t s  obligations rights  with  first  of a s p e c i a l  f o r e a c h of t h e m .  to  agreements.  standard c l a u s e s which  form.  LAW  into  i s a l w a y s r e q u i r e d . The  reciprocity  the  serves  treatment  the proof  INTERNATIONAL  a requirement  number of c a s e s ,  to a l i e n s ,  treatment  t h e r e was  equal  i n c l u d e s a number of  often  In  rule  law  a limited  relating  law  DISCRIMINATION IN  ever  t h e most is  and  negotiate  i s extended  This clause  as  always  favoured  specially  36 implemented  in treaties  Navigation.  Being  clause  rights  26, 1885 t o d a y  interest.  treatment  t h e most which  1 2 7  citizens,  The l e g a l  nationals,  the n a t i o n a l  compared  vehicles  which determine  with  o r goods a r e  the n a t i o n a l  the procedure  o f t h e law form  and t h e  the "treatment" f o r  w h i c h h a s t o be e x t e n d e d  foreigners without  to the favoured  any e x c e p t i o n . The n a t i o n a l  clause i s  o f t e n i n F r i e n d s h i p , Commerce and N a v i g a t i o n either  favoured-nation Since  ships,  consequence,  of a p p l i c a t i o n  Treaties,  treatment  to the  w i t h t h e n a t i o n a l s h a s t o be d e c i d e d  statutes.  very  and t h e i r  1 2 6  to foreigners,  companies,  to the f a c t s  used  country  who a r e i n t h e same p o s i t i o n . Whether t h e  according  the  historicl  i s the treatment of  situation.  f o r an e q u a l  t h e same p o s i t i o n  kind  o n l y an  favoured nation clause r e f e r s  i s granted  provides  nationals foreign  or t h i r d  i n a corresponding  While  clause  country  of e q u a l  by t h e C o n g o - A c t o f  Tertium comparationis  contracting  citizens  in  1 2 5  this  of the open-door  first  deserves  agreements  The p r i n c i p l e  1 2 3  w i t h i n t h e scope  a s i t was r e a l i z e d  1 2 4  February  each  in international  i s e v e n more e f f e c t i v e .  economic policy  used  on F r i e n d s h i p , Commerce and  by i t s e l f clause.  or i n combination  w i t h a most-  1 2 8  t h e U n i t e d S t a t e s became one o f t h e s u p e r  powers o f t h e w o r l d ,  a more s p e c i a l i z e d  understanding of  the p r i n c i p l e  of n o n - d i s c r i m i n a t i o n spread out i n  international  law.  1 2 9  In a n e g a t i v e  sense t h e  37 non-discrimination  clause determines  equal  by p r o h i b i t i n g  treatment  1 3 0  the c o n t r a c t i n g p a r t i e s .  is  tied  especially  restrictions.  to the d i s t i n c t i o n  discrimination"  different  The c l a u s e  1 3 1  of a d m i n i s t r a t i v e p l a n n i n g quantitative  the o b l i g a t i o n of  1 3 2  treatment f o r  i s used  i n areas  i n t h e a r e a of  According  to i t s origin i t  of "unreasonable,"  "arbitrary  i n c o n t r a s t to the "reasonable  classification"  1 3 3  which developed  as a consequence of  the  interpretation  of the "Equal  the  1 4 t h Amendment  t o t h e U.S. C o n s t i t u t i o n . The  non-discrimination  clause  Protection Clause" i n  i s found  in political  agreements as w e l l as i n t r a d e agreements because more a d a p t a b l e nation for  1 3 4  treatment  than  the standard  and treatment  of the  of n a t i o n a l s .  t h e p r o t e c t i o n o f human r i g h t s ,  minorities, European  1 3 5  i n the area  is  most-favoured I t was  used  especially for  of i n t e r n a t i o n a l  t r a d e and  integration.  5.1.2.1  Examples of P r o h i b i t i o n s  International Since  of D i s c r i m i n a t i o n i n  Law  t h e 15th c e n t u r y  there e x i s t s c o n t r a c t u a l  agreements which p r o t e c t the equal international in  i t  t h e form  law  1 3 6  o f most  especially favoured  treatment i n  i n the area  of trade  nation clauses  i n trade  a g r e e m e n t s and F r i e n d s h i p , Commerce a n d N a v i g a t i o n Treat ies. In t h e B e r l i n rights  Document o f F e b r u a r y  f o r economic a c t i v i t i e s  were l a i d  1885 e q u a l down f o r t h e  38  Congo-Basin  ("egalite  commercial")  open-door p o l i c y . S i m i l a r for  regions  different  belonging  of  in  regions.  Versailles  the  of  first  the  time  the  In  1 3 9  word  i n the  discrimination Danzig.  In  third  the  addition,  country  or  preference"  to  the  the  routes  the  by  peace-treaty  of  are  Polish minority Treaty to  of  not  used of in  Versailles  or  the  nationality  g r o u p of  prohibitions the  of  malevolent  discriminations  intended  to prevent  the  in order  and  well  order  (see of  as  Convention  Import  and  as  to the  f o r the  Export  import  malveillantes").  misuse  and  protect  were  of  export  the  essential Abolition  of  "arbitrary  The  restrictions  of  1 4 1  should eliminate  which a l l o w  a  preference") r e l a t i n g  ("discriminations  regulations  to  "discrimination  discrimination"  specially  for  discriminate  to undertake  transportation  p a r t i c u l a r , one  prohibition  clauses  f o r m e r enemy compared  transportation.  discrimination  countries  a prohibition  bound not a  commercial  contractural  1 3 8  the  of  contracting  ( " d i s t i n c t i o n ou of  means of In  and  1 4 0  f o r a complete  1919  the  following  sphere  "discrimination"  against  t r a d e of  interest  f o r m of  German E m p i r e was  against  the  June 2 8 t h ,  which c o n t a i n the  the  c i t i z e n s of 1 3 7  called:  a g r e e m e n t s were  powers, a s s i g n i n g  equality those  to  - also  public  security of  d a t e d November  the 8,  security interests  Restriction 1927).  1 4 2  39 There a r e f u r t h e r p r o h i b i t i o n s of discriminations alien  goods  of c i t i z e n s ,  Distinctions  R a i l r o a d and Ocean regarding  q u o t e d a s an example discrimination.  prohibition  (3)  only  for a  Traffic."  the ship's  c a r s or  1 4 3  flag  were  malevolent  II there  were  agreements i n c l u d i n g  non-discrimination  sec.  railroad  1 4 4  W o r l d War  multilateral  bilateral  ships,  i n t h e "Geneva C o n v e n t i o n on  International  After  malevolent  b i l a t e r a l and numerous  c l a u s e s . As an example  of d i s c r i m i n a t i o n l a i d  t r e a t y we c a n r e f e r  down  f o r the  in a  t o A r t . V s e c . ( 3 ) , XII  ( 3 ) , XIV s e c . ( 3 ) , XVII s e c . (3) and X I I I s e c . o f t h e F r i e n d s h i p , Commerce a n d N a v i g a t i o n  between  the United  Germany o f O c t o b e r Several their  1954.  Republic  of  1 4 5  declare  i n t e n t i o n t o g e t r i d o f and t o a v o i d  discrimination.  1 4 6  VIII  International prohibits  29,  and t h e F e d e r a l  international organizations  special  Article  States  treaty  s e c . (3) o f t h e Agreement  M o n e t a r y Fund o f December  27,  on t h e 1945 " 1  7  d i s c r i m i n a t o r y p r a c t i c e s i n the p o l i c y i n  international  c u r r e n c i e s . The G e n e r a l  Tariffs  and T r a d e o f 1947 (GATT)  general  most-favoured-nation clause  Agreement on  includes  not o n l y a  f o r the area of  c u s t o m s d u t i e s and d e c l a r a t i o n s a n d t h e f o r m a l i t i e s connected with  them  1 4 8  but i t i n c l u d e s  also  40 regulations  for  quantitative  1  enterprises  platform  provides between  international  GATT-Conferences  the  in  any  abolishment  an  explicit  provision  part  Treaty  of  the  prohibitions  of  coal  GATT c r e a t e s  as  liberalization  well  to  The  Steel  as  every  against  of  the  (MUV)  there well  1 5 2  includes  practices"  4(b)  steel  which cause  industry.  countries,  prohibits a  b u y e r s or Contrary  consumers  to  discrimination  the which  h e r e b y a g e n e r a l and  ( p r o d u c e r s , merchants, consumers) i s  7 and  Art.  prohibition  equal  of  MUV  the  1 5 3  and  the  8 MUV of  enterprises.  1 5  treatment  has  The  of  the  administration to  ensure  discrimination "  as  many  of  created  is  European  obligation market  one  discrimination  E E C - T r e a t y as  Article  prohibition  f o r the  a  discrimination  between p r o d u c e r s ,  and  international suited  1 5 1  a general clause  discrimination  In  1 5 0  discriminations.  "measures and  the  every  Foundation  C o a l and  for  of  refers  exception. of  socialist  i n t e r n a t i o n a l business unless  Community of  all  OEEC c o d e x of  member c o u n t r i e s  them. The  of  countries.  the  of  discriminations.  GATT t h e  the the  As  t r a d e of  i n the  remove  application  a prohibition  m o n o p o l i e s owned by  of  the  for  and  9  and  to  Like  non-discriminatory  restrictions "  discrimination  addition,  the  as  in  i t s observance. directly  administration  of  direct  participants  defined  is  of  Art. This  effects the  community  41 (Art. it.  8 MUV) a n d a l l member c o u n t r i e s  The g e n e r a l p r o h i b i t i o n  specified  have t o obey  1 5 5  of d i s c r i m i n a t i o n i s  by a number o f i n s t r u c t i o n s . The  administration  i s not a l l o w e d  discriminating  r e s t r i c t i o n s f o r p r o d u c t i o n s and  consumptions observe MUV) The  (Art.  t o determine  58 (2) MUV). I t h a s t o s p e c i a l l y  the p r o h i b i t i o n  of d i s c r i m i n a t i o n  f o r mergers and a c q u i s i t i o n s treaty  relating  to prices  transport  the p r o h i b i t i o n (Art.  regulations  national salary  includes  (Art.  ( A r t . 4(b)  66 (2) MUV).  of d i s c r i m i n a t i o n  60 (1) MUV), f r e i g h t a n d  (Art.  70 MUV) and r e l a t i n g t o  and a l i e n e m p l o y e e s ,  especially  and t h e i r working c o n d i t i o n s  for their  ( A r t . 69 (4)  MUV) . Also Foundation  the (EURATOM-Treaty)  of d i s c r i m i n a t i o n  97. T h e s e a r t i c l e s  atomic m a t e r i a l citizens,  prohibitions  the  access  the  guarantee  and e n t e r p r i s e s .  the  This  52, 68, 93  the a v a i l a b i l i t y of  includes  intend  to abolish  t o q u a l i f i e d employment  construction  includes  their a supply and  f o r a l l o f them. F u r t h e r m o r e ,  ( A r t . 96 EAG-V) a s w e l l  plants,  in Article  f o r a l l member c o u n t r i e s ,  customs p o l i c y e q u a l  field  of the  o f t h e E u r o p e a n A t o m i c Community  prohibitions and  Treaty  1 5 6  of s c i e n t i f i c  b a s e d on n a t i o n a l i t y .  the l i m i t a t i o n of i n the nuclear  as the p a r t i c i p a n t s i n or i n d u s t r i a l atomic 1 5 7  42 5.1.2.2 The The  Intent.of Prohibitions  prohibition  of d i s c r i m i n a t i o n  a l w a y s a command of e q u a l favoured well  as  of equal of  of t h e  agreement a s  equal  to determine  treatment  as  the p a r t i e s  an  treatment.  which determines  the  i n each  According  s h o u l d be  taken  the p r i n c i p l e have t o be  international  of d i s c r i m i n a t i o n law. we  In a c c o r d a n c e  must d e c i d e  reasons  1 5 9  the  1 6 0  refers with  whether  for a different  means of a s i t u a t i o n  and  i n which  of t h e  as  i d e a of relating  view equality to  the  in international  law  1 6 1  The  treatment.  determined  according  1 6 2  u n l e s s the  t o the the  two  ensure  of e q u a l  law  To  equal  t o t h e p o i n t of  in a c a s e .  are  they  t e r m s of  case.  which c r i t e r i o n s ,  of d i s c r i m i n a t i o n  norms of  law.  situations.  t o a c o n t r a c t wanted t o  prohibitions  Therefore  the  therefore i t i s  i d e a s and  the c o n t e n t s  have t o d e c i d e  on  as  i s binding to  i s w h i c h main a s p e c t  relation  based  form  in different  content  i t i s used  question  situation,  clause  in international  treatment  i t i s worded  necessary  equal  most  respective contractual international  i t s special  The  The  1 5 8  the n a t i o n a l  treatment  determine  we  includes  the n o n - d i s c r i m i n a t i o n c l a u s e  principle  extent  treatment.  n a t i o n c l a u s e and  principle The  of D i s c r i m i n a t i o n  to  prohibition  respective national  r e s p e c t i v e p o i n t of or more s i t u a t i o n s  treatment. intended  the  by  The the  view  give  contents parties  and  43 determine  i t s d i f f e r e n t understanding.  non-discrimination treatment they  include  economic the  special  limited scope.  other  is limited.  clause  i s only  1 6 4  i n the p r i v a t e  administrative  positions.  does n o t g r a n t  any p o l i t i c a l  hand, t h e p r o h i b i t i o n s limitations within  XXV, GATT, and A r t . Liberalization. factural  consideration application.  with  1 6  the access  power.  1 6 5  t o p u b l i c and clause  On t h e o t h e r  t h e scope of A r t .  are  determined  subject  X I I , XXIV,  8 OEEC Codex o f r e g i o n a l and  other  can only  provisions  treatment or  be d e t e r m i n e d  and i n  clause  scope o f  and t h e n a t i o n a l  a r e worded a s p o s i t i v e and take  reference  is valid  f o r the negative  of d i s c r i m i n a t i o n f o r the r e s p e c t i v e  prohibitions  to a fixed  o f c o m p a r i s o n . The r e s p e c t i v e  prohibition  also  7  clause  comparison  status  of the c o u n t r y of  of the f a c t s of the r e s p e c t i v e  discrimination  standard  order  of d i s c r i m i n a t i o n  most-favoured-nation  treatment of  the  f o r the l e g a l  The n a t i o n a l  of d i s c r i m i n a t i o n  the context  The  In g e n e r a l ,  The p e r s o n a l ,  1 6 6  Usually  1 6 3  Therefore,  scope of t h e p r i n c i p l e of e q u a l  prohibition in  countries.  accepted  r e s i d e n c e and does not g r a n t  to  a different  s i t u a t i o n s which e f f e c t the  r e l a t i o n s with  foreigners  prohibit  in a special  obligation  national of  only  clauses  Most  l e v e l of  worded  and has t o be provision.  1 6 8  I t can  44 refer  to  the  treatment  of  nationals  refer  to  the  treatment  of  foreigners  from t h e  treatment  prohibition  of  of  nationals.  discrimination  indicating  the  situation.  Sometimes t h e  taken  points  from the  provision accepted Article  of  14  includes  of  1 7 0  obligation clause  to  authorized determine of  1 7 2  liberties  of  can  14  nationals  be  i n the  unless  be  creation  i n s t r u c t how  Therefore,  the  the  p o s i t i o n of or  the  quo.  of  respective the  legal  r e f e r s to national  the  points  legislation  application  the national  the country  is  which  compared of  to  that  the  national  view of  for nationals  single  "favoured"  The  view  and  1 6 9  gives  foreigners  of  Rights  of  1 7 1  the  of  Human  the  foreigners  p o s i t i o n of  is  for every  obliged  be  independent  to t r e a t  points  It  asserted.  of  most-favoured-nation. Therefore, authority  an  l e t open  status  to  other  i t i s combined w i t h  keep t h e  the  disrimination  prohibitions  also  on  example:  and  cannot  the  to d e c i d e the  the  most-favoured-nation clause  d o e s not  nationals.  of  E u r o p e a n C o n v e n t i o n of  freedom  treatment  context  by  view have  the  discrimination  complete  of  p r o h i b i t i o n of  Article  differs  defined  the  wording  c o u n t r y . The  points  also  respective  be  same t r e a t y . F o r  r i g h t s and  violition The  of  which  The  can  i t can  view w h i c h d e c i d e  systematic  the  that  of  but  the or  the  standard the  of  foreigners  45 from  most  favoured  n a t i o n s . The  required  by  the p r o h i b i t i o n  absolute  or  relative.  If  an  equal  treatment  of d i s c r i m i n a t i o n  appropriate equality  i n c u r s as  absolute  equal  equal  treatment  of  nationals.  market  treatment  I f , however, t h e  1 7 3  i s d i s a r r a n g e d by  of  clauses only create  o p p o r t u n i t i e s , e.g.,  the m o s t - f a v o u r e d - n a t i o n  be  a  consequence of a w e l l - b a l a n c e d c o n s t e l l a t i o n power, t h e  can  i n the or  form  the  free  of  treatment  acting  of  the  a planned  economic  action  w i t h a c o n t r a r y t r e n d the  existing  equality  must  replaced  one  by an  the d i f f e r e n t relative Article regard  artificial efficiency  equality XIII  has  the q u a l i t a t i v e  discrimination  of  the  countries  i n terms of  principle  of  formal an  equal  treatment  external-formal  depend  and  the  their  in a  formal  sense  objective connection  therefore actually  efficiency  can  only  permits  quota.  be  of  to into  the The  1 7 5  regarded  formal  more  i f i t offers i n an  formal o b l i g a t i o n  t h a t the  treatment  t h e one  and  with  The  takes  e x t e r n a l treatment  An  *  to  quantitative  It i s called  i n an  1 7  according  equality  import  on c o n d i t i o n s w h i c h on  "general" any  relative  economic  sense.  non-discrimination  realized  treatment  or e s s e n t i a l .  equal  of e a c h c o u n t r y .  t o be  GATT. The  which c o r r e s p o n d s  be  do  hand  not  can  are  have t o  have  the d i s c r i m i n a t i o n  discriminate certain  of  groups  of  and  46  people which to avoid  should  a circumvention  prohibition  treatment  result  negative  aspect,  of the e s s e n t i a l t r e a t m e n t . As a  has a p o s i t i v e and a  A discrimination  1 7 8  Trying  1 7 9  because  and c a n r e q u i r e i t has t o take  difference equal  t o r e a c h an e q u a l  treatment  from  1 8 1  The r e l a t i v e e q u a l equal  1 8 2  the a c t u a l In t h i s  case  the a c t u a l  treatment  treatment  stands  a qualitative discrimination comparison.  of the  treatment  of comparison.  of the r e s p e c t i v e  while  the e q u a l i t y  into consideration  t h e r e l a t i v e one o n l y  comparison  the p r i n c i p l e of  o f t h e n o n - c o m p a r a b l e w o u l d be a  the a c t u a l  discrimination  away  a different  of the o b j e c t s  discrimination. differs  can give  c a n mean t o  and t o t r e a t t h e  under d i f f e r e n t c i r c u m s t a n c e s  1 8 0  Every  because of the a l t e r n a t i v e n a t u r e of  non-discrimination means  of  law s h o u l d  treatment.  the non-comparable e q u a l l y  status  that  kind  of d i s c r i m i n a t i o n  comparable d i f f e r e n t .  the  the p r o h i b t i o n  means e q u a l  term of e q u a l i t y .  treat  respective  i s the r e a l equal  this really  prohibition  the  A special  1 7 7  In o r d e r  1 7 6  r e l a t i n g to i n t e r n a t i o n a l  interpreted.  equal  equally.  of the  of d i s c r i m i n a t i o n  discrimination be  be t r e a t e d  for a objects  equality  i n t h e manner quantitative of  can a l s o  of the o b j e c t s  of  require  47 5.2 CONSTITUTIONAL  AND  ADMINISTRATIVE PROHIBITIONS OF  DISCRIMINATION The  p r i n c i p l e of e q u a l i t y  implemented of  of the c i t i z e n s b e f o r e  i n every c o n s t i t u t i o n  o f t h e member  t h e E u r o p e a n Community w i t h t h e e x c e p t i o n  Netherlands. embodied United  5.2.1  The p r i n c i p l e o f e q u a l i t y  1 8 3  i n the c o n s t i t u t i o n  States  of  America.  law i s countries  of t h e  i s also  of S w i t z e r l a n d "  and the  1 8  1 8 5  OBLIGATION OF THE ADMINISTRATION  TO FOLLOW THE  PRINCIPLE OF EQUALITY In is  the Netherlands  a general  principles  includes  discrimination  t a k e up p u b l i c  administration.  only  several  offices, 1 8 8  equality. affairs. The principle  1 9 0  from  It i s also  the permission to  and p r o t e c t i o n  c a s e b o o k s on a d m i n i s t r a t i v e i n taxes  prohibitions  t h e same p r o t e c t i o n f o r  1 8 7  of Dutch c i t i z e n s .  equality  The D u t c h  1 8 6  special  which should grant  persons and p r o p e r t y affairs  equality  p r i n c i p l e o f law. I t i s one o f t h e g e n e r a l  o f an o r d i n a r y  Constitution of  the g e n e r a l p r i n c i p l e of  1 8 9  f o r the r e l i g i o u s  In t h e N e t h e r l a n d s  law d e r i v e  the g e n e r a l accepted  the p r i n c i p l e of  p r i n c i p l e of  i f i t i s used  in public  1 9 1  adminstrative of o b l i g a t i o n  law i n F r a n c e d i d n o t d e v e l o p t h e of the a d m i n i s t r a t i o n  the  p r i n c i p l e of e q u a l i t y  the  French Council  to  follow  r e l a t i n g t o the p r e c e d e n t s of  of State  (Counseil  d'Etat) i n  48  accordance with principle area  the C o n s t i t u t i o n  of a d m i n i s t r a t i v e  counterbalance  I t concerns  1 9 3  the e q u a l i t y  services  (services publiques).  administration (regulative  (distributive  Conseil  d'Etat  economy  i s i n f r i n g e d with  de can  considers  (an a c t i o n  that  interest. The  Italian of S t a t e  and i n  of the e c o n o m y .  1 9 5  the a d m i n i s t r a t i o n  The  of the  of equal  as "detournement  i n an " a c t i o n en  de  contestation  administrative  provision  acts)  i s l e d from  those of the p u b l i c  administration  that  jurisdiction  d o e s not d e r i v e  t o the p r i n c i p l e  3 of t h e I t a l i a n  principle  in public  19 6  administration Art.  t h e law, t h e  as the  to set aside  from  groups  "Eingriffsverwaltung"  the p r i n c i p l e  the contested  motives which d i f f e r  Council  that  i f the p l a i n t i f f  prove  main  administration)  a n d has t o be r e p e a l e d  validite"  three  under  as w e l l  scope of the a d m i n i s t r a t i o n  pouvoir"  strong  I t unites the  1 9 4  of the  administration)  "Daseinsvorsorge"  treatment  as the  c h a r g e s and t h e e q u a l i t y  i n the area  d'Etat  of a p p l i c a t i o n of  of e q u a l i t y c o v e r s  under p u b l i c  i n the  the C o n s e i l  The a r e a  equality  the  Particularly  1 9 2  t o f u r t h e r a u t h o r i t i e s and t h e  French p r i n c i p l e cases:  general  of n o n - d i s c r i m i n a t i o n  d e p e n d e n c e on t h e e c o n o m y .  of  law.  of t h e economic a d m i n i s t r a t i o n  regards the p r i n c i p l e  the  but as a  the t i e s of equal  Constitution  the a d m i n i s t r a t i o n  1 9 7  of the  of the treatment  from  but from the  has t o be  independent  49 from  the  political  concerning the  the  Italian  principle  of  an  as  i n the  di  potere).  abuse of  of  The  violation  the  i s derived of  administration well  i s the  as  legislator  i n the  from  the  is  considered  legal  same i n F r a n c e  sense (eccesso  2 0 0  to the  above m e n t i o n e d member c o u n t r i e s ,  Federal  the  2 0 3  administration  law.  ties status  the  Republic  principle  c o n s t i t u t i o n and  guarantee,  The  equal  d i s c r e t i o n , as  the  2 0 1  1 9 8  1 9 9  precedents. This  Luxembourg the  of  e q u a l i t y by  Contrary  from  principle  Constitution.  as  Belgium,  parties.  2 0 4  but,  of  of G e r m a n y  equal  2 0 2  treatment  governs a l l of  the  in  and i s taken  public  even w i t h o u t any c o n s t i t u t i o n a l  i t would be  one  of  the  important  p r i n c i p l e s of  2 0 5  5.2.2  T I E S OF  THE  LEGISLATION TO  THE  PRINCIPLE OF  EQUAL  TREATMENT It Italy  i s e s s e n t i a l that and  2 0 6  legislator This  is tied  is valid  States.  5.2.3  i n the  Federal to  the  Republic  principle  in Switzerland  too  2 0 8  of G e r m a n y of  equal  and  the  2 0 7  as  the  treatment. United  2 0 9  THE  PRINCIPLE OF  AND  ADMINISTRATIVE  The  i n s e v e r a l member c o u n t r i e s  principle  application  of  the  of  EQUAL TREATMENT IN LAW  equal  law.  CONSTITUTIONAL  treatment  Following  requires  Aristoteles'  an  equal  command  of  50 a  relatively  quique."  By  equal treatment this  social  reality  Having  real  limited. But relevant case?  s h o u l d be  to a l l o t  in society into  in reality  and  "suum  i n the  consideration. the e q u a l i t y  2 1 0  shall  t h e d e c i s i v e q u e s t i o n i s : Which d i f f e r e n c e s and  justify  If a f f a i r s  are q u a l i t a t i v e l y  a relatively  the p o i n t s  equalization  be  characteristics comparison  and  comparison.  The  the p o i n t  enumeration  of the  characteristics. complete.  In an  characteristics point  the  The  2 1 4  require, 2 1 2  the c h o i c e of the The  2 1 3  f o r comparison  democratic  the  decisive of  of view  have  for  partly  n e g a t i v e by  enumeration  i s not  c a s e where t h e n e g a t i v e  do not c o u n t  the r e s p e c t i v e  f o r comparison  order determine  principle,  valid  (constitution)  has  determined. According to Ipsen, p r i n c i p l e s constitutional  on  different  However, t h i s  o f view  depend  of t h e s e o b j e c t s  "Grundgesetz"  individual  of  object  t u r n s w i t h the p o i n t s  irrelevant  The  respective  intention  the c h a r a c t e r i s t i c s  German  individual  f o r a comparison  for comparison.  c o n s i d e r e d by  and  equal t r e a t m e n t ?  f o r comparison,  are  e q u a l , which  for comparison.  determines  i n an  are relevant  being relevant  o f view  o f view  specifies  a discrimination  differences  characteristics  positive  taken  has  2 1 1  therefore,  t o be  the d i f f e r e n c e  differences  quantitative  point  t h e law  valid  t o be of  the comparison,  the p r i n c i p l e  of  law  like:  the  and o r d e r , t h e  51 separation  of a d m i n i s t r a t i v e ,  l e g i s l a t i v e and  power, t h e s o c i a l e l e m e n t  and t h e c h a r a c t e r  authority.  of a d m i n s t r a t i v e  points  In t h e a r e a  2 1 5  of view  relating  f o r comparison  t o the i n t e n t i o n  have  t o be  judicial  of a  federal  discretion  specified  and t h e l i m i t s o f t h e  d i sc r e t i o n . An  important  comparison.  2 1 6  c r i t e r i o n i s the scope  Relating  principle  of equal  different  than  trade driven  t o the p o l i t i c a l  treatment  relating  law o r t h e r i g h t  to expropriate.  discrimination  i n economic  of  than  interventionist discrimination the a  in a liberal  economy. only  2 1 8  T h e r e f o r e an  2 1 7  are treated  treatment  r e l a t i n g to different (in  which  i s granted  to the  the p r i n c i p l e  i n the scope of a d m i n i s t r a t i o n  actions.  inconsistency  are  only  given,  2 1 9  Therefore,  of  an a b u s e o f d i s c r e t i o n  with the p r i n c i p l e " i f there  is  i t l i m i t s the  of the l e g i s l a t o r o n l y as p r o h i b i t i o n  and  of  hand, t h e a d d r e s s e e a n d h i s c o m p e t e n c e s  u n d e r s t o o d a s an a b u s e o f d i s c r e t i o n ,  arbitrary  scope  the p r o h i b i t i o n  addressee are important. While  discretion  of  manner).  the margin of d i s c r e t i o n  equal  I f an economy i s  i f two c a s e s w h i c h a r e e q u a l  On t h e o t h e r  of  international  law has a more s p e c i f i e d  aims of the i n t e r v e n t i o n  respective  interpreted  the p r o h i b i t i o n  measure v i o l a t e s  discriminatory  and  has t o be  r i g h t s the  t o t a x law, t r a d e ,  by i n t e r v e n t i o n i s t s ,  application  f o r the  of equal  treatment  i s no r e a s o n a b l e argument  which  52 derives  from t h e  logical  reason  treatment." The  for  interpretation  "the  most  the  of of  the  does not  of  equal  necessary  but  equal  which  be  the  of  the  the  idea  to  the  interpretation  in  Switzerland. the  of  law)  general  an  valuation  of  to  "most  the  equal  For  2 2 3  matter  2 2  This  i n the  expedient,"  the  relating principle  are  taken  to  treat  and  a  is  into  relevant  actions legal  example, "  The  l e g i s l a t o r . It  different  for  the  solution  not  Arbitrary  arbitrary  are  only  determination  i f the  legality  is disregarded  relating  interpretation United  discretion  the  of  action  is placed.  case with  terms r e s e r v e  for  reason  by  Therefore  2 2 1  prohibition  c o n s i d e r e d which are  individual  or  corresponds  S t a t e s of  America  and  2 2 5  a m a r g i n of  interpretation  as  2 2 2  equality.  natural  c o n s i d e r e d as  the  l e g i s l a t o r has  investigated."  to  As  other  treatment.  a l l real differences  appropriate  of  equal  "fairest"  model.  equally.  i s a part  of  chose  the  situations  not  " i f an  cannot  need t o  is binding  that  consideration  given  any  i s extended  principle  or  treatment  situations  or  legal discrimination  r e a s o n a b l e " or  a d e t e r m i n e d aim  relevant  matter  discretion  to  not  the  2 2 0  margin  legislator  n a t u r e of  (prohibition  for  By  opposite  discrimination  the  this  to  a  infringe  2 2 6  to  an  the  definition  the  abuse of  difficulties  definite  term e q u a l i t y regard  of  is  in a  special  abstract tasks  and  noun.  The  are  53 responsibilities or  which a r e a s s i g n e d  t h e l e g i s l a t i o n by d e c l i n i n g  to the  administration  of the c o n t r o l of  e x p e d i e n c y and t h e r e s t r i c t i o n o f t h e c o n t r o l of discretion. Whether a d i s c r i m i n a t i o n relating  to the p r a c t i c a l e f f e c t  individual  a i m t o r e a l i z e an e s s e n t i a l  equality  a n d n o t t o be a  countries  From t h e m e n t i o n e d examples o f p r o h i b i t i o n  2 2 7  in international  and a d m i n i s t r a t i v e  law and i n law o f t h e member  o f t h e EEC we c a n l e a r n  discrimination  that  the p r o h i b i t i o n of  d e p e n d s on  the  area  and  on t h e p o s s i b i l i t y t o make d i f f e r e n c e s  real  o f power o f t h e a d d r e s s e e o f t h e p r o h i b i t i o n  relations  the be  r e a l i z e d as a general value  order,  on, a n d  s y s t e m o f norms who t h e i d e a  valid  b a s e d on  o r i n t h e scope of the l e g a l  s p h e r e t h e y have e f f e c t s  of e q u a l i t y  clause with  f o r the d e f i n e d  factual  regard  should to the  scope.  CONCLUSION As that  a conclusion  that  we c a n s e e :  non-discrimination  principle (b)  formal  treatment has  constitutional  (a)  f o r the  of equal  discrimination  5.2.4  of a r u l e  the p r i n c i p l e  formal o n e . of  h a s t o be s e e n  a c t and not i n a c c o r d a n c e w i t h a  reason. Therefore the  exists  of equal  i s a negative  wording of t h e  treatment,  non-discrimination  and equal  treatment a r e  54 principles  o f i n t e r n a t i o n a l law,  (c) t h a t t h e r e a l i z a t i o n  of those  principles  actually  depends on t h e c o u n t r i e s i n v o l v e d and t h a t t h e main instruments treatment  t o implement  are i n t e r n a t i o n a l  (d) t h a t even w i t h o u t standard  and g u a r a n t e e  those  treaties,  treaties  there  law:  said  in his a r t i c l e  In i n t e r n a t i o n a l  non-discrimination. and  law we  2 2 8  t a x a t i o n . On t h e o t h e r  equal  treatment."  provision  2 2 9  about d i s c r i m i n a t i o n find  " i t belongs  are determined  equal  absolute of  sense,  fairness,  different line is  to the circumstances,  treatment  to the b a s i c  2 3 0  implements a  treatment.  e x a c t l y i n each because  does n o t mean a l e g a l  Those case  the p r i n c i p l e of  equality  i n an  but i t i s a consequence of the p r i n c i p l e  that equal  h a s t o be t r e a t e d e q u a l l y a n d  has t o be t r e a t e d d i f f e r e n t l y .  the l e g i s l a t i o n  interpreting  of c r i t e r i a i n  by t h e p r i n c i p l e o f  a general equal  g u i d e l i n e s have t o be d e t e r m i n e d according  i s t o o vague  systems t h a t a l l r e g u l a t i o n s and  A r t . 3 Grundgesetz  guaranteeing  i n tax  the p r i n c i p l e of  determination  hand,  e l e m e n t s o f modern l e g a l o f any c o u n t r y  international  However, i t s c o n t e n t  not enough f o r an e x a c t  actions  LAW  a w e l l known German w r i t e r on  taxation,  i s a minimum  i n i n t e r n a t i o n a l law.  5.3 DISCRIMINATION IN INTERNATIONAL TAX Debatin,  equal  Following  this  o f t h e German c o u r t o f c o n s t i t u t i o n  the p r i n c i p l e  of equal  treatment  i n the  55 way  of d i s a l l o w i n g  where a s o u n d f a c t s and missing,  is.  seen  T h i s has  reason  are  t o be  the nature  in a legal  a different  i s extremely  difficult  a r e a s of  the l e g i s l a t i o n  In  t h e German t a x law  order  Those were not even  i f we  since  and  way.  in taxation  But  the t a x a t i o n  also  of  to apply  and to  between i s not  those  different  criteria, be  seen  constitution.  treatment.  in fact  residents  at l e a s t  Critical  this  and in  itself,  in a  from  income  s o u r c e s of a  i s the d e t e r m i n a t i o n ,  treatment  international  in  o f w o r l d wide  income d e r i v e d o n l y  2 3 2  taxation,  to c r i t i c i z e  n o n - r e s i d e n t s a r e t o be c h o s e n of  being  as c a n  of e q u a l  the t a x a t i o n  f o r the d i f f e r e n t  the p r i n c i p l e s  are  international  differences  c o u n t r y make a d i f f e r e n c e . which c r i t e r i a  is a  treatment.  the b i g g e s t d i f f e r e n c e s  t h e r e have t o be  technical  i f there  actually  legal  the p r i n c i p l e  a r e a . Making a d i s t i n c t i o n non-residents  and  a l o t o f c h a n g e s were n e c e s s a r y i n  i n the a r e a s of  find  too,  application  i f situations  o f t h e German c o u r t o f  t o comply w i t h  the  illegitimate.  while guaranteeing a subtle d i f f e r e n t a t i o n in  of  is  in taxation  they are  sense  justifying  reason  legitimate,  determined  treatment,  arbitrary  the c e n t r a l  f o r them. I f n o t ,  as d i f f e r e n t  It  of  in taxation  i t has  an  t o be a p p l i e d  i t i s where one  fact,  from  therefore disallowing  2 3 1  Therefore  in  reason, being taken  Differences  sound  or d i s c r i m i n a t i n g  the c i r c u m s t a n c e s , or a p r o p e r  distinction. hence  unequal  of  residents  in d e t a i l ,  according  and  constitutional  56 law. From take  the a b s t r a c t  r u l e s d e v e l o p e d above we c a n o n l y  a b s t r a c t g u i d e l i n e s , t h a t an a r b i t r a r y  discrimination taxat i o n .  5.3.1  i s not j u s t i f i e d  ininternational  23 3  NON-DISCRIMINATION ACCORDING TO ART. 24 OF THE OECD MODEL DRAFT CONVENTION The p r i n c i p l e  "break-through," and  recognition  implemented Taxation  i t s wide  i n t e r n a t i o n a l acknowledgement  i n A r t . 24 o f t h e OECD M o d e l D r a f t  the p r i n c i p l e  the  principle  of n o n - d i s c r i m i n a t i o n  convention  More was which t h e  given  The f a c t  2 3 5  was made p a r t  d i d n o t make i t b i n d i n g  l a w . The model  i n double  Double  o f t h e OECD gave o u t a s a d r a f t  a l l i n t e r n a t i o n a l tax c o n v e n t i o n s .  recommendation  "  recommendation  for  international  2 3  of n o n - d i s c r i m i n a t i o n  of the f i r s t  OEEC a s p r e d e c e s s o r  OECD model  its  i n i n t e r n a t i o n a l t a x a t i o n when i t was  a subject  clauses  got  C o n v e n t i o n on Income and C a p i t a l .  correctly, already  of n o n - d i s c r i m i n a t i o n  convention  itself  by OECD t o implement  tax conventions  model that  of the  i n terms of i s only a  t h e model  t o be n e g o t i a t e d  by i t s  member c o u n t r i e s . So t h e recommendation  t o implement t h e  principle  a  too.  of n o n - d i s c r i m i n a t i o n  But t h e OECD model  thriving double  impact  i s only  convention  recommendation  a c t u a l l y had a  on t h e n e g o t i a t i o n o f i n t e r n a t i o n a l  tax conventions,  and n o n - d i s c r i m i n a t i o n  i s a well  57 established  criterion  i n the concept  of  modern  conventions. The  principle  different in  intentions  different  doing  of n o n - d i s c r i m i n a t i o n has and  reasons.  Its roots are  a r e a s : Those a r e c i t i z e n s h i p ,  business  and  got  t h e dependence on  the  the  laid  down  fact  of  of  the  source  capital. a)  In  relation  t o t h e c r i t e r i o n of  countries are foreign  not  country  D o u b l e Tax citizens.  allowed  which  a  of  a  t h e OECD M o d e l  more burdensome t h a n  their  own  T r e a t i e s f o l l o w i n g t h e OECD M o d e l D r a f t  principle one  to tax c i t i z e n s  i s a member of  Convention  Convent ion n a t u r a l l y  only  citizenship,  of  equal  exception  t h i r d country,  convention.  Here  reciprocity.  But  the p r i n c i p l e sufficient  of  do  include stateless  treatment. left  for people  where t h e r e the  In t h i s  reason  i t i s not  i s no  into  case  there i s  being c i t i z e n s double  necessary  of  to forget  n o n - d i c r i m i n a t i o n . I t would  where t h e o t h e r c o u n t r y  treatment  of  tax  i s the p r i n c i p l e  to r e f u s e the e q u a l  this  about  be  i n the  area  is taxing discriminatory  itself. b)  In r e l a t i o n principle  of  t o the  same b r a n c h  n o n - d i s c r i m i n a t i o n does not  burdensome t a x a t i o n of country the  than  of b u s i n e s s  foreign  i t i s granted  same b u s i n e s s . Here we  the  allow  branches of  to domestic  a more  another  companies  have the most  in  important  58 effect  of the p r i n c i p l e  grants  t h e same t r e a t m e n t  branch as  i t i s given  Therefore,  in this  non-discrimination  c)  of n o n - d i s c r i m i n a t i o n . I t in taxation  f o r domestic  area  In r e l a t i o n  to the d i f f e r e n t  f a r as taxes  sources  f o r companies  or p a r t l y ,  directly  possession  of persons  living  being  control  under  treatment. the  But  principle  does not a l l o w  includes  capital  in a different  i t i s important only  where t h e  people.  t o keep  i n the country  The  a  factor  i n mind,  and not t h e t a x a t i o n o f p e r s o n s  control  o r own  the c a p i t a l  APPLICATION OF  THE  that  the t a x a t i o n of the  itself  THE  of  different  company  5.3.2  the  a more  or i n d i r e c t l y  c o n t r o l of t h o s e  of the c a p i t a l  of c a p i t a l  d o e s not a l l o w  totally  or  of  are concerned,  treatment  burdensome t a x a t i o n is  of  does not i n t e n d n e u t r a l i t y  as  of equal  companies.  the p r i n c i p l e  competition  principle  for a foreign  who  o f t h e company.  PRINCIPLE  OF  NON-DISCRIMINATION The double  principle  tax conventions  convention. taxation taxes,  Usually  does  those  included  being  a p a r t of  include a l l taxes  a r e income  of c a p i t a l . Other taxes,  a r e not  principle the  of n o n - d i s c r i m i n a t i o n  taxes  under t h e  and  especially  the  indirect  i n the p r o t e c t i o n of the  of n o n - d i s c r i m i n a t i o n .  i n t e n t i o n of the p r i n c i p l e  of  The  result  d o e s not meet  non-discrimination.  59 There  i s a need o f t h i s  taxation the  which  principle  specific basic  Therefore extend  f o r a l l areas of  i n double  of n o n - d i s c r i m i n a t i o n they  would r e a l i z e  of i n t e r n a t i o n a l  tax conventions.  opposite  tax  of double  tax conventions  d o e s mean  d i s c r i m i n a t i o n of a l l k i n d and independent  Convent i o n .  of  its  Draft  The i d e a and i n t e n t i o n o f t h e p r i n c i p l e o f  non-discrimination possible.  i n t h e OECD Model  do  on a l l t a x e s .  of n o n - d i s c r i m i n a t i o n  name, a s i t i s i n c l u d e d  to the  conventions.  of n o n - d i s c r i m i n a t i o n  the p r i n c i p l e  If  would n o t i n c l u d e  ideas  double  t h e modern c o n c e p t  the p r i n c i p l e  Therefore any  i s included  taxes  idea  principle  require to realize  Double d r a f t  include a l l kinds  i t as f a r as  tax conventions  of taxes  actually  i n the p r i n c i p l e  do  of  non-discrimination.  5.3.3  DISCRIMINATION RELATING TO THE NATIONALITY/CITIZENSHIP Looking  is  laid  are  down  at the p r i n c i p l e  i n t h e OECD d o u b l e  not allowed  than  their  own  discrimination burdensome t h a n T h i s means to  tax convention,  to tax f o r e i g n c i t i z e n s citizens. wherever  Therefore  we  a r e taxed  t h a t a more burdensome t a x a t i o n  of n o n - d i s c r i m i n a t i o n .  countries  more burdensome  t h e same  i s not allowed  which  find a  foreign citizens  n a t i o n a l s under  the n a t i o n a l i t y  principle  of n o n - d i s c r i m i n a t i o n  more  circumstances. relating  because of the Because of t h e  only  60  nationality, o t h e r s . The necessary  somebody must not reason  does not m a t t e r .  of  foreigners.  non-discrimination convention,  we  is laid  g r o u p of p e o p l e  people  of  a convention.  who  or  have t o be In t h e  non-discrimination  the  r e s i d e n t i n one latter  regard  of  help  as  the  so c a l l e d  down i n s e c .  Income Tax  person  actually  Act.  has  the c o u n t r y .  A different  non-residence  in i t s e l f  circumstances. itself.  The  Therefore  of  for a  t o the  origin  the c o u n t r i e s  for c i t i z e n s are  of  of one  of  resident in a  only e x i s t s  real are  i s important  t h e German who  and  "beschrankte"  i t is laid  tax  if a  foreign  a national  under  D i f f e r e n c e s i n t a x a t i o n based  legal  This  of  the p r i n c i p l e  i f they  the n a t i o n a l i t y ,  discrimination. the  case,  i s t a x e d more burdensome t h a n  of  i t i s not  i s the  i f i t is related  country. A discrimination  distinctions any  Therefore,  i f i t is a principle  would n o t  same c i r c u m s t a n c e s .  than  I f the p r i n c i p l e  t h e c o u n t r i e s of a c o n v e n t i o n  citizen  worse  down i n t h e d o u b l e  have t o l o o k  of  third  taxed  t h a t t h e p u r p o s e of a p r o v i s i o n  discrimination  certain  be  and  t o pay  without  not  as  understood  "unbeschrakte"  This  ( 1 ) , (2) and i s not  taxes  treatment does not  of  tied  inside  or  residence  originate  i t i s not  OECD p r i n c i p l e  circumstances,  a  f o r the d i s t i n c t i o n  1 para. 2 3 6  on  from  of  taxation, (3) to  of  the  outside and the  a discrimination  same in  of n o n - d i s c r i m i n a t i o n d e f i n e s  citizens  not  o n l y as  individuals,  but  also  as a l l l e g a l  entities  and  p a r t n e r s h i p s which are e s t a b l i s h e d i n  61  accordance with Therefore, law  t h e law o f t h e r e s p e c t i v e  a criterion  f o r the " c i t i z e n s h i p " there  o f i n c o r p o r a t i o n . We  whenever outside  a legal  than  incorporated have a l s o  legal  case  inside that  t o compare  i s resident  he i s r e s i d e n t  German  entities  being  i s taxed  or  incorporated more  partnerships  country.  But, of course here  we  i t s s i t u a t i o n u n d e r t h e same i s lacking  i f i n one c a s e  i n the t a x i n g outside  country  of that  law t h e d i f f e r e n c e between  "unbeschrankter"  i s the  have a d i s c r i m i n a t i o n  e n t i t y or p a r t n e r s h i p  circumstances. This entity  therefore  of the c o u n t r y of t a x a t i o n  burdensome  country.  taxation  the l e g a l  and i n t h e o t h e r  country.  In the  " b e s c h r a n k t e r " and  i s b a s e d on t h i s  difference.  According  t o s e c t i o n one o f t h e German C o r p o r a t e Tax A c t ,  a company  i s resident  i n Germany  i f the center f o r  management  or c o n t r o l  difference  of " b e c h r a n k t e " and " u n b e s c h r a n k t e "  is  i s i n s i d e Germany. C o n s e q u e n t l y t h e  not a d i s c r i m i n a t i o n  principle given  of n o n - d i s c r i m i n a t i o n ,  In a c c o r d a n c e w i t h t h e  a discrimination  i f a company w h i c h m a i n t a i n s a p l a c e  within that  in i t s e l f .  t h e c o u n t r y and b e i n g  country  incorporated do n o t happen weakness  i s treated according very  this  i s only  o f management  as a r e s i d e n t of  t h a n a company w h i c h i s  to foreign  often,  law. I f c a s e s  like  i s n o t an argument  this  f o r the  of the p r i n c i p l e of d i s c r i m i n a t i o n . I t i s only  t o be s e e n a s a p r o o f often.  treated  worse  taxation  that  t h o s e c a s e s do n o t happen  very  62  5.3.4 DISCRIMINATION The has  OF  prohibition  BRANCHES  of d i s c r i m i n a t i o n  the aim to grant a t l e a s t  competition domestic double  as t h e y  enterprises.  t h e same c o n d i t i o n s o f  f o r the r e s p e c t i v e a c t i v i t y of  B a s e d on t h e t y p i c a l  tax conventions  allowed  convention  than  country,  c o n d i t i o n s of  t h e OECD c l a u s e s a y s : I t i s n o t  t o s e t up more burdensome t a x e s  being maintained  taxing  exist  forenterprises  by a company f o r a company i f they  for a  branch  of the other c o u n t r y of the being  are doing  resident  t h e same  i n the  kind of  business. Therefore related it  the p r i n c i p l e  t o t h e e n t e r p r i s e . More e x a c t l y  i s related  resident  i n the country  The  principle  non-discrimination double company taxing  by  means  that  under  the t r e a t y .  the p r i n c i p l e of  T h i s means  that  taxation.  2 3 7  The  of n o n - d i s c r i m i n a t i o n i s d i r e c t e d By t h i s  the p r i n c i p l e of  i s implemented  tax conventions  i n the concept of  which o n l y a l l o w t a x i n g a  i f i t does not m a i n t a i n a branch c o u n t r y . The b u s i n e s s c a r r i e d  foreign  i n s i d e the  on by t h e b r a n c h i s  t o be t a x e d worse t h a n a s i f i t would be c a r r i e d a domestic  against  he  does n o t m a t t e r .  towards branches.  not  which does g r a n t  be s u b j e c t t o t h e " u n b e s c h r a n k t e "  citizenship  this  t o t h e e n t r e p r e n e u r . He has t o be a  non-discrimination must  of n o n - d i s c r i m i n a t i o n i s  company. T h i s p r o t e c t i o n  a more burdensome t a x a t i o n  of  i s directed "beschrankte"  on  63  against  "unbeschrankte"  difference  taxation.  This  from a d i s c r i m i n a t i o n b a s e d  c i t i z e n s h i p which  does  i s the b a s i c on n a t i o n a l i t y o r  not take the d i f f e r e n c e of  " b e s c h r a n k t e r " and " u n b e s c h r a n k t e r " t a x a t i o n consideration. branches exactly for  does  The p r o h i b i t i o n o f d i s c r i m i n a t i o n o f aim a t a t a x a t i o n  of branches  which i s  t h e same f o r t h e " b e s c h r a n k t e " t a x a t i o n  as i t  is  the "unbeschrankte." Here we have a s i g n  non-discrimination foreign  that  the  t h e p r i n c i p l e of  of branches does  enterprises.  2 3 8  The r e a s o n  mean t o b u i l d up t h e t a x a t i o n  not give i s that  favours to  this  would  o f . f o r e i g n e n t e r p r i s e s on  f a v o u r a b l e tax treatment of the "unbeschrankte"  taxation.  The d i f f e r e n c e between  "unbeschrankte" this  would  cannot  i s part  n o t be v a l i d  be i n c l u d e d  restricted  " b e s c h r a n k t e " and  o f a l l modern t a x s y s t e m s and any l o n g e r .  I t i s c l e a r that  this  i n the p r i n c i p l e of  non-discrimination. is  into  The p r i n c i p l e o f  non-discrimination  on t h e p r o h i b i t i o n t o t a x b r a n c h e s  burdensome t h a n d o m e s t i c  enterprises  more  d o i n g t h e same  business. In  order to define  t h e p r o h i b i t i o n of d i s c r i m i n a t i o n  we have t o d i s t i n g u i s h between t h e e f f e c t s o f t a x a t i o n referring  t o t h e b r a n c h and t h e b u s i n e s s o f t h e p l a n t  one  hand and t o t h e s c o p e  the  o t h e r hand. T h i s  in  a sense  of t a x a t i o n  on  o f t h e e n t i t y on  i s n o t t o be s e e n a s a c o n t r a s t o r  of a s e p a r a t i o n  between t h e t a x a t i o n o f  64 c o m p a n i e s and d e p e n d s on  individuals.  the  income and  there  elements  compared w i t h the individual. of  the  This  taxation  corporate  in taxation e l e m e n t s of  of  the  i n the  other  domestic  hand, c o u n t r i e s  amount as  tax  enterprises  free  as  branch  the  domestic  on  companies. to  fact the  if  area  which  p r i n c i p l e of  non-discrimination.  covered  by  the  p r i n c i p l e of  d i s c r i m i n a t i o n , there  individual.  Taxing  somebody w i t h i n  according  to h i s personal  principle  of  of  non-discrimination.  discrimination  are  b a s e d on  opposite t h e y do  to not  the the  there  are  specific kind  belong  to  of  the  at  the  r e s u l t of  the  a low  tax  Not  of  are  the  the  bracket for  O u t s i d e of  the p r i n c i p l e  e l e m e n t s of of  amount of  of the  the  the  taxation  which  i n d i v i d u a l as  b r a n c h , even i f  income of  t o compare t a x a t i o n tax  is  is neutral  a l l kinds  business  t a x p a y e r . Anyway, i n o r d e r look  income  taxation  be the  the  the  same  foreign  the of  on  the  the  w h i c h has  outside  to  the  the  to grant  for  taxation  relating  be  clause  by  taxation  this,  income of  covered  e l e m e n t s of  to  business c a r r i e d  obliged  f o r the  i n s i d e or  of  to  i n a c e r t a i n c a s e d e p e n d s on is situated  s p i t e of  e n t e r p r i s e . But  not  r u l e of  In  in order  traditional  the  f o r b r a n c h e s and  t h e y do  Therefore, applied  are  branches  branches which can  branches according  branch to the  of  company  taxation  i s expressed of  the  taxes.  O E C D - f o r m u l a , w h i c h d o e s compare by  taxation  c h a r a c t e r i s t i c s of  determine are  The  2 3 9  p r o v i s i o n s . The  the we  have  to  taxation  of  65 a b r a n c h must not companies. Therefore  be  higher  D i f f e r e n t kinds i t i s not  than  the t a x a t i o n  of t a x a t i o n  a discrimination  domestic  matter.  i f the kind  of a b r a n c h d i f f e r s  domestic  company u n l e s s  the t a x a t i o n  i s more burdensome.  have t o compare  the t a x a t i o n  of the branch  the  taxation  business. domestic branch the  of a d o m e s t i c  However, t h i s company  element  company, d o i n g t h e  comparison  i s not always  i s not a l e g a l  the t a x a t i o n  of  taxation  We  from  do n o t  of  of a s e p a r a t e l e g a l  an  have t o  e n t i t y as a  fiction  Therefore  we  important  as  i t can  having  the  be done  same k i n d .  of a  branch  This  taxes.  f o r a domestic  has  taxing capital  is especially The  sole  corporate  t o be  compared  examined  the t a x a t i o n  of  with the t a x a t i o n  of  corporation.  THE  CONTROL OF  p r i n c i p l e of n o n - d i s c r i m i n a t i o n  the domestic  indirectly,  does not  CAPITAL allow  company more burdensome b e c a u s e i t s  does not b e l o n g  principle  be  t a x e s of  proprietorship  a s a b r a n c h . But  DISCRIMINATION ACCORDING TO The  add  corporation.  f o r e i g n company c a n n o t  t h e same e l e m e n t s  a domestic  5.3.5  of  branch  a domestic  a  have t o compare a f o r e i g n company t o a  f o r the c o r p o r a t e  a domestic  and  the  we  t o the s i t u a t i o n of a f o r e i g n  one  same  because  idea  according  domestic  and  between a b r a n c h  possible  e n t i t y . As  of a  to persons  totally who  does not a l l o w  or p a r t l y , d i r e c t l y  are residents  taxing  domestic  abroad.  The  or same  c o m p a n i e s more  66 burdensome resident  i f they are  a b r o a d . The  holding  the  shares  itself.  The  fact  should The  not  be  sense of  a  for  the  became  5.3.6  3.  tax  the  persons  to  tax  the  i s coming  from  i s o b v i o u s but  that  kind  i t i s not kind  taxation.  of  very  of  company  abroad  f o r a more burdensome  p r o h i b i t i o n of  are  effective  discrimination  CONCLUSION  The  therefore  can  p r i n c i p l e of t o an  conclude: non-discrimination  equal  treatment  The  p r i n c i p l e of  equal  for  c o m p a n i e s as  well  I t a l s o commits and  We  still  operating being  as  as  d o e s commit taxation.  has  t o be  have t o  for i n d i v i d u a l s .  well  of  taxation  of  t r e a t b r a n c h e s of  treatment  to a domestic  residency  Canadian c o n t r o l l e d  foreign  i n s i d e a c o u n t r y d i f f e r e n t from  c o n s e q u e n c e of  considered  non-Canadian c o n t r o l l e d companies.  incorporated  different  in  treatment  to a comparable  non-residency  c o m p a n i e s and 4.  capital  reason  to  company but  system because that  countries 2.  i n the  i s not  p e r s o n s who  rare.  We 1.  tax  topic  that  the  discrimination  c o n t r o l l e d by  the  there, of  the  but  only  branch  different legal  to the is a  more burdensome.  companies extent  as  logical  status.  company, a b r a n c h s h o u l d  companies  not  Compared be  taxed  a  6. CANADIAN Non-resident business  persons  116 I . T . A . ) ,  primarily  going  into  just  Contrary to  when t h e y  permanent  I ( s e c . 2, 115 receiving  income  I.T.A. I tax, without  As I a l r e a d y p o i n t e d o u t  a r e not always s u b j e c t c a r r y out business  to Canadian  i n Canada.  unless  i n the other  establishment  t o Canadian  Non-residents  there  their  i s such  country.  2 4 1  permanent  i n Canada, b u s i n e s s  t a x a t i o n . Employment  isa  income i s  income i s  t o s e c . 2 ( 3 ) ( a ) , 115 I.T.A..  of t a x a b l e Canadian I would  by n o n - r e s i d e n t s , of f i l i n g  s e r v i c e s from  I f there  are also subject to c a p i t a l  the d i s p o s i t i o n Furtheron  Self-employed  a r e deemed t o r e n d e r  taxable according  election  Canadian  i d e a on P a r t  establishment.  home c o u n t r y ,  establishment  taxes  240  t o t h e p r o v i s i o n o f s e c . 2 ( 3 ) I.T.A. t h e r e h a s  professionals  subject  under P a r t X I I I  t o o many d e t a i l s .  be a permanent  their  under P a r t  g i v e a rough  German n o n - r e s i d e n t s taxation,  of t a x a b l e  whereas n o n - r e s i d e n t s  f r o m Canada a r e t a x e d I will  NON-RESIDENTS  who a r e employed o r c a r r y on  i n Canada o r d i s p o s e  property a r e taxed and  TAXATION OF  like  gains  property.  t a x on  2 4 2  t o d e s c r i b e t h e prepayment o f  t h e w i t h o l d i n g t a x , and t h e  a return.  67  68 6.1 PREPAYMENT OF TAXES The  most common a n d i m p o r t a n t  taxes  i s the d i s p o s i t i o n  of r e a l  When a n o n - r e s i d e n t to  prepay  taxes  provision  according  a reasonable  believe,  the non-resident  Canada."  other  t o pay t a x e s  resident  credit. other  person  f o r t h e prepayment o f  dividend tax c r e d i t .  up t o t h e t o t a l  F o r non r e s i d e n t s h a v i n g those  dividends  a n d he a c t u a l l y  they  shareholders,  a s w e l l a s t h e non from  the o v e r a l l  income  i s not worth  i t . T h i s consequence of  but i t r e s u l t s  By t h e way, we f i n d  t h e company  any C a n a d i a n  i s not a p o l i c y  of t h e system  are paid tothe  of the d i v i d e n d tax  the c r e d i t  looses  Assuming  company, t h e company  , w h i c h may r e d u c e  itself.  where non r e s i d e n t s a r e e l i g i b l e  Germany.  on t h e p u r c h a s e r ,  was n o t r e s i d e n t i n  receive the d i v i d e n d  t a x burden  technicallity  credit.  This  he h a d no r e a s o n t o  on d i v i d e n d s b e f o r e  the d i v i d e n d t a x c r e d i t resident  inquiry  The r e s i d e n t s h a r e h o l d e r  one w i l l  than  anything  24 4  f o r taxes  common c a s e  w e l l as a tax c r e d i t  Canadian  116 I.T.A.  t o be p a i d by a C a n a d i a n  shareholder.  as  very  i s t h e so c a l l e d  dividents has  e a t a t e , he h a s  24 5  The taxes  2 4 3  of r e a l  t o sec.  "unless a f t e r  f o r t h e prepayment of  estate.  disposes  imposes a l i a b i l i t y  that  case  a g a i n s t non  out of the  T h i s becomes  obvious  t o use the d i v i d e n d tax  t h e same d i f f i c u l t y  i n West  69 6.2 WITHOLDING TAX In a d d i t i o n t o a n y t a x w h i c h m i g h t non-resident Part  XIII  gross  under P a r t  amounts p a i d o r c r e d i t e d  other  upon a  i s a tax l e v i e d  I.T.A. w h i c h , g e n e r a l l y s p e a k i n g ,  non-residents, than  business. by  I there  be l e v i e d  arising  personal 2 4 6  by C a n a d i a n s t o  investments  employment  i s a t a x on  and f r o m  sources  o r t h e c a r r y i n g on o f  The t a x i s r e q u i r e d t o be w i t h e l d a t s o u r c e  the Canadian  credited,  from  under  payor  from t h e g r o s s  without.deductions  amounts p a i d o r  of expenses,  t o be r e m i t t e d t o t h e R e c e i v e r  General  i f a n y , and i s  o f Canada a s  provided  i n sec.  215 I . T . A . .  The  general  r a t e o f w i t h o l d i n g t a x i n Canada i s  25%. 15%  In most d o u b l e  2 4 8  2 4 9  o r even  Subject  10%.  24 7  tax conventions  2 5 0  t o w i t h o l d i n g t a x a r e : management  interests,  2 5 2  e s t a t e or t r u s t  royalties,  2 5 4  timber  dividends,  2 5 7  pension  benefits,  2 5 9  Unemployment Profit  income,  royalties,  retiring  benefits,  Plan  payments,  payments, 2 6 4  other  2 6 3  Deferred Education  2 6 0  Retirement Savings  Energy Conversion  payments,  Grants,  2 6 9  patronage  2 5 6  2 6 1  RRSP,  2 6 2  payments,  Plan  2 6 8  Plan  Supplementary Deferred  2 6 7  Annuity  2 6 5  payments,  Income Fund p a y m e n t s ,  Plan  2 5 1  rents,  Income A v e r a g i n g  annuity  R e g i s t e r e d Home O w n e r s h i p S a v i n g s  fees,  Canada P e n s i o n  2 5 8  allowances,  2 5 3  alimony,  2 5 5  B e n e f i t Plan payments,  Sharing  Contract  i t i s reduced t o  2 6 6  Registered  Home I n s u l a t i o n o r  Dividends,  2 7 0  and other  70 forms of  income as  The  Income Tax  non-residents  free  circumstances. With there  2  Act  the date  the o b l i g a t i o n  i s s u e of the  of  The all  subject will  1985,  this  who  are  just  exemption  1989.  w i t h o l d i n g tax  the  years  from  1986  budget  f o r such  debt exemption  provided  Bank f o r I n t e r n a t i o n a l  to w i t h o l d the  going  taxes  tax  to Part  to a non-resident  from  interest  to a non-resident  withold  tax  from d i v i d e n d s  shareholders,  non-resident.  is liable 2 7  "  are  XIII  I.T.A. I  have t o w i t h o l d  to  to has  t o pay  tax  non-resident from  interests  bank; c o r p o r a t i o n s have payable  on  l a n d l o r d ; banks have  payable  e t c . Where a p e r s o n  that person  i s imposed  t o make payments w h i c h  payable  the  of  exemption  i s being  c u s t o m e r s ; c u s t o m e r s have t o w i t h o l d t a x  taxes,  25%  In a d d i t i o n , an  some e x a m p l e s : t e n a n t s  from r e n t p a y a b l e to w i t h o l d  the  payor  five  This  2 7 2  but  to w i t h o l d i n g tax a c c o r d i n g  give  to  7 3  obligation  those  of  p a i d to the 2  within  end  issued before  Settlements.  more t h a n  obligation.  obligations  non-resident  where t h e  the  extension  interest  interest  i n many  w i t h o l d i n g tax  p r o p o s e d an  for  t h e payment o f  o b l i g e d to repay  amount of  to e x p i r e at  from t h e  I.T.A.  t o c o r p o r a t i o n s r e s i d e n t i n Canada,  i s not  of  allows  212  of w i t h o l d i n g t a x  i s g e n e r a l l y no  principal  down i n s e c .  7 1  respect  corporation  was  laid  to  non-resident failed  the  tax  to on  withold behalf  of  71  6.3 EVALUATION Both the instrument tax  are technical  against  provide  In i t s e l f  an e q u a l  non r e s i d e n t s  walking paid, are  between  Revenue  on  countries  taxes  that  t a x i s t o be exception,  both  t h e Department of certificate  without  a s w e l l . The d i f f e r e n c e i n respect  that  of the tax  t h e non r e s i d e n t h a s  involved  as w e l l  o f t h e non r e s i d e n t t o be p a i d  on t h o s e  rents  t h e non r e s i d e n t income  f i t depends on  a s on t h e p e r s o n a l t a x taxpayer. Looking at  on r e n t s ,  only  i s taxed  i n h i s home  assumptions w i l l  runs a l o s s w i t h h i s p r o p e r t y , on  residence  the s a i d  o f h i s w o r l d wide  taxes  t o say  a minimum t a x i n C a n a d a . On t h e o t h e r  I f those general  witholding  gains  and non r e s i d e n t s  i t i s t o be assumed  the b a s i s  i t i s fair  real  n o t have an a d v a n t a g e by  i s b a s e d on t h e a s s u m p t i o n  situation  pay  gains),  i s to issue  residents  country. the  (capital should  and non  h a s t o pay t a x e s on  f o r non r e s i d e n t s  t o pay a t l e a s t hand  of r e s i d e n t s  t h e same way t o o , s i n c e  payment  rate  instruments are necessary to  e.g. under the p r i n c i p a l  National  Canada  when t a x e s a r e t o be  away. As f a r a s no c a p i t a l  treated  any  both  a resident  transactions  t o s a f e g u a r d Revenue  arising  treatment  r e s i d e n t s . While  witholding  of taxes o r , a t l e a s t , a g a i n s t  difficulties  collected.  that  instruments  non-payment  possible  estate  o f prepayment o f t a x e s and  a C a n a d i a n would  i f he makes a p r o f i t .  I f he  he w o u l d n o t pay any t a x  h i s income a t a l l . F o r t h e n o n - r e s i d e n t  the witholding  72 tax  i s t o be  Therefore  even  calculation r e n t s do there  of  not  i s no  disposition years.  calculated 10%  of t h e  therefore  the  gross  gross  may  that p a r t i c u l a r  cover  the  annual effect  property  gains  of  e s t a t e , i f i t i s kept  would be  of  t o be  25%  similar  p a i d on  capital  a tax  the  a t West Germany,  capital real  tax  income.  a l o t , i f the  expenses. Looking  A prepayment  2 7 5  on  the  more t h a n  gains  two  taxes  burden a Canadian  would  face. We  also find  context.  some s t r a n g e  L e t ' s take  An  investor likes  an  investment  is  subject  an  consequences  up  i n Canada. H i s  a loan  t o w i t h o l d i n g t a x of 15%  in  i n Canada, would be for  a  interest  subject  loan given  to  payment  according  to A r t .  West Germany, f i n a n c i n g an payments f r o m Canada 15%  f o r the  witholding tax. same amount by  the  of  Since tax  on  the  would n o t  s u b j e c t t o any  be  f i n a n c i n g bank has  interests  to  Bank  2 7 6  investment bank  Canadian which  c o r p o r a t i o n and  i s only not  witholding  i n c l u d e the  in i t s calculation,  AG  I n t e r e s t payments  a branch  banking  the  legal  t o the  Bank of Commerce, F r a n k f u r t / M a i n , the Canadian  sec. of  a  the Royal  Imperial  subsidiary,  to  bank  respectively.  bank b e i n g  take  finance  to the  11(2)  Convention,  by any  o u t s i d e of C a n a d a . I f we  Frankfurt/Main,  25%  according  This a p p l i e s to loans given  i n Germany t o  interest  Canadian-German Double T a x a t i o n  entity  this  example:  to take  2 1 2 ( 1 ) ( b ) I.T.A. o r  in  a  tax.  witholding  loans given  by  73  subsidiaries  of Canadian  banks a b r o a d  Canada have t o be more e x p e n s i v e branches  of C a n a d i a n  banks a b r o a d .  whenever a b r a n c h o f a C a n a d i a n into a s u b s i d i a r y ,  2 7 7  from  the M i n i s t e r  t o be  that  interests  know t h e r e a s o n s  foreign derived  creditors  for this. s h o u l d pay  a principle  foreign  bank d o i n g  this  i s n o t a bad  financing  at  all.  On  interests is  t o be p a i d  creditor.  benefit  f o r Canada  be  imposing giving  witholding  banks.  "legitimate" banks. are  and  to get  i n terms  financing  their  a loans tax  abroad  the  f o r the  overall  provision. It banks and,  t o be p a i d  of the  by  abroad, of  would  the be  Canadian  of Canadian profits  do  on  not on  t h r o u g h one  of p r o t e c t i o n  to repatriate  since  tax  the p r o v i s i o n  subsidiaries  have t o  to Canadian  of t h i s  interests  In t h i s c a s e  Assuming,that  supposed  t a x on  seems  on  giving  t o promote b u s i n e s s f o r C a n a d i a n  incentives  Canadian  idea,  w o u l d ask  out  National  f o r loans taken  on C a n a d i a n s  resulting  one  witholding  T h e r e f o r e one  a  reason  taxes  subject  by C a n a d i a n s  imposed  foreign  could  be  t h e o t h e r hand, any  technically  One  i n Canada by  f r o m o u t s i d e Canada would n o t  i n Canada  27 9  from Canada as d o m e s t i c  t o o . As  of  change  under  to obtain  Revenue a c c o r d i n g t o s e c . 212(14) I . T . A . . I don't  would  t h a n b e f o r e . However,  of exemption  by  Consequently,  bank a b r o a d  circumstances i t i s possible  certificate  loans given  the l o a n s f o r investments  2 7 8  would.be more e x p e n s i v e certain  than  for investments in  companies  (as one  of  the  74 reasons  for a different  investors  i n Canada was  surprising interests  for loans given  to be),  different by  of p r o m o t i o n and  given,  the  tax  p r o v i s i o n should  exempt  the  other  justify  the  reason  i s t o be  seen as  safeguarding  of  look  at the  one to  of  10%  the  on  interests  t a x a t i o n of  taxes  on  the  same i d e a s h o u l d  between be  2 8 0  profit  t o 25%,  but  the  the w i t h o l d i n g tax  the  equal  main t a x a t i o n of  ones, a w i t h o l d i n g  tax  they  burden  derived  and,  for  are they  likely will loan.  international  s i n c e the  between  f o r those  us  loans: If  from t h a t  r a t e f o r the  something  being  i f this  f o r domestic  implemented  as  branch  from  hand,  an  banks  from any  interests,  overall  banks a b r o a d  r e f i n a n c i n g and  10%  libor,  by  be  political  seems t o h i g h . L e t  interests  r e f i n a n c e i t . In t h e i r  loans given  to  international  "Big F i v e " charges  have t o pay The  t o 25%  the  p r o v i s i o n , and  of  of  banks a b r o a d ,  bank a b r o a d  does not  rate  treatment  loans  reason  l o a n s and  still  p r o t e c t i o n af Canadian  t o w i t h o l d i n g t a x . On  domestic  i t is  Canadian  s u b s i d i a r y of a C a n a d i a n  subject  for foreign  l e g a l • s e t - u p . Taking  reason  any  treatment  ought  to e x p l a i n the  d e p e n d i n g upon t h e i r  and  tax  gross  loan 1/4  loans  up  is unlikely  and  1  should  be  treatment  of  adjusted accordingly. On  the other  residents'  hand, c o m p a r i n g  interest  income w i t h  the  r e s i d e n t s w o u l d have t o pay  the  progessive  the  tax  t h a t of a tax  rate structure, while  non  residents,  rate according the  non  to  residents  75 are paying  between  10%  and  25%.  bank a c c o u n t s  i n Canada t h e  t o A r t . 11(2)  of  Convent i o n . are  up"  on  In t h i s  better  tax b r a c k e t  tax  deriving  ELECTION OF  elect  under P a r t  under  file  better As t o pay  credits  from  w e l l as  same amount  an  b e c a u s e of  including  from  as  (rental  i f the  he  the  would  be  paying  those  income t a x  important  income), return  taxpayer  his l i a b i l i t y 2 8 4  interests return  a  case  2  8  2  non-resident and  2 8 3  In  this  being  pay  tax  I.T.A.  case  The  were a r e s i d e n t but  f o r tax o t h e r w i s e a non-resident  payable may  be  taxes:  a general  rule  i t i s cheaper  Part I tax  than  Part XIII  without  "gross  the  German s o u r c e s .  t h e most  income t a x  I I.T.A.  tax  German  small  Canada and  i n h i s german  o f f i n t e r m s of  witholding  the  I I.T.A. i n s t e a d of u n d e r P a r t X I I I  effecting  Part  only a r e l a t i v e l y  intersts  estate  is calculated  without  interests  F I L I N G A RETURN  real  to  foreign  " P r o g r e s s i o n s v o r b e h a l t . " Given  circumstances,  income from  according  tax c a l c u l a t i o n ,  german t a x e s  t h e r e as  the  i f the  having  Tax  i n Germany, as a r e s u l t  off deriving  In c e r t a i n  tax  the  the w i t h o l d i n g tax  than  may  even  would have t o pay  witholding  6.4  case,  t o p of h i s o t h e r  highest  15%  the Canadian-German Double  german s y s t e m of  and  r a t e would be  i n c l u d e d i n the domestic  taxpayer  F o r Germans  2 8 1  is calculated deductions  on  for a  non-resident  tax, because the the  g r o s s payments  for expenses,  2 8 5  25% or  whereas P a r t  76 I t a x i s c a l c u l a t e d on p r o f i t s If by  a non-resident  filing  a return  2 8 7  the taxes w i l l  The t a x p a y e r  tax s i t u a t i o n  filing  will  most c a s e s , rents  p a i d a r e t o be  receive  a refund  i f too  o r p r e p a y e d . So, d e p e n d i n g on  a non r e s i d e n t  a Canadian  2 8 6  be c a l c u l a t e d by t h e  taxes already  much t a x has been w i t h e l d the  earnings.  e l e c t s t o pay t a x e s under P a r t I  department. W i t h o l d i n g considered.  or net  may be b e t t e r  income t a x r e t u r n  where non r e s i d e n t  o f f by  o r by l e a v i n g  i t . In  taxpayers are d e r i v i n g  from Canada, t h e y a r e b e t t e r  o f f by f i l i n g  a  return. But  contrary  non-residents backward. About kind  to the taxation  a r e not a l l o w e d  the reasons being  low e q u i t y  that  aspect  real  Canadian  residents, carry  I can just  estate  forward or  guess t h a t  as w e l l  be c o n c e r n e d a b o u t  t r y to build  taxes.  holdings  distinction  that  non r e s i d e n t s  But l o o k i n g  I can guess might  a t the s i t u a t i o n of  be t h e  a r e t o be p r o d u c i n g  b o o k s , e s c p e c i a l l y by d e p r e c i a t i o n , some e c o n o m i c a d v a n t a g e  other  would be  to allow  f o r w a r d a n d b a c k w a r d . So t h e o n l y  this  as  up an i n v e s t m e n t by  one w o u l d n o t have any d i f f i c u l t y  losses  as a  kind.  one m i g h t  non r e s i d e n t s  saving  losses  Revenue Canada does n o t l i k e t o  i n v e s t m e n t s o f t h e same The  to carry  2 8 8  of tax p o l i c y  finance  of r e s i d e n t s ,  reason f o r  expectation  losses  in their  while there  f o r them, whereas  to  is still  residents  77 "deserve"  this  distinction  k i n d of  tax  relief.  is "illigitimate"in  Therefore  this  the terms d e s c r i b e d  before.  6.5 In  CONCLUSION the o v e r a l l  t a x e s as w e l l are  s e t up  technical to  as  the  i n the  position  than  S i n c e non  and  to  r e s i d e n t s are  can  use  (compared w i t h bracket)  provision backward justified  a different  with  t h e r e a r e no not  of subject  eligible  in a  the  low  rate  the Canadian  to reduce  worse  treatment  international  reasons  a l l o w i n g to carry  f o r non either.  residents.  bracket  overall  where  as  i t . There losses  in  I showed,  is also  forward  This provision  tax  i t i s hard  as p o i n t e d out  l o a n s and,  justifying  of  50%  their  However, t h e r e a r e c i r c u m s t a n c e s  connection  they  r e s i d e n t s . They a r e even b e t t e r o f f  tax  understand  out  r e s i d e n t s are  i n g e n e r a l t h e y a r e not  t h e German 56%  burden.  of  of w i t h o l d i n g t a x a s  whenever non  sometimes, b e c a u s e t h e y witholding  of p r e p a y m e n t  I.T.A. f i t a need r e s u l t i n g  taxation.  a return,  instruments  instrument  difficulties  Canadian  filing  scheme t h e  or  i s not  the  7. NON-CANADIAN CONTROLLED COMPANIES There  i s a d i f f e r e n c e between C a n a d i a n  non-Canadian  c o n t r o l l e d companies  Tax A c t . A n o n - C a n a d i a n in  28 9  of shares  50:50 o w n e r s h i p that  there  between  where  a r e a s of  the  Therefore  non-residents  controlled private  ownership  i n favour  (NCCPC). C a n a d i a n  companies  Income  i s defined  and  means company  controlled  non-Canadian-  are treated d i f f e r e n t l y  i n the  taxation.  7. 1 INTERCORPORATE DIVIDENDS Intercorporate are  taxfree.  dividend  extracted  and  no  negative this  t o t h e t i m e when t h e d i v i d e n d s  f r o m t h e company. F o r c o m p a n i e s ,  controlled  by n o n - r e s i d e n t s ,  c a n be p a i d  no  and  there  dividends  out  t o the non-Canadian  same s i t u a t i o n i s g i v e n  t o be p a i d  company. The  i s no way  reason  a  are are  dividends  of tax d e f e r r a l controlled  for intercorporate  by a C a n a d i a n company f o r the d i s t i n c t i o n  78  tax  allows  which  intercorporate  taxfree  company. The dividends  corporations  i t i s common t o see a f l o w t h r o u g h o f  a r e t r i g g e r e d . In t h e r e s u l t  d e f e r r a l up  by p a y i n g  So  between C a n a d i a n  payments between companies  consequences tax  2 9 0  dividends  a  of  makes t h e company a n o n - C a n a d i a n  p r i v a t e company  following  r e s i d e n t s and  a Canadian  (CCPC), wheras a 49:51  controlled  as a c o r p o r a t i o n  i s owned by n o n - r e s i d e n t s .  is still  non-residents  i n the Canadian  controlled corporation  s e c . 1 2 5 ( 7 ) ( b ) I.T.A.  majority  and  to a  between  foreign the  79 taxation foreign a  of  intercorporate dividends  companies  i s obvious,  foreign corporation  investment  between C a n a d i a n  since dividend  do  not  have any  i n Canada and  the  financial  payments  to  p o s i t i v e impact  on  situation  Canadian c o r p o r a t i o n  i s improved. T h e r e f o r e  reason  to give  a tax  deferral  reason  f o r the  distinction  and to  those  see,  Canada and  the  intercorporate financial  7.2 Only  tax  of  situation  of  are  their  deferral  dividends  there  no  is  no  A  between C a n a d i a n c o n t r o l l e d  since both c o r p o r a t i o n s centre  of  dividends.  non-Canadian c o n t r o l l e d c o r p o r a t i o n s  C a n a d a , have t h e in  on  and  i s not  incorporated  management and  by  allowing  companies  easy  in control  taxfree  does a c t u a l l y improve  those  that  the  i n Canada.  SMALL BUSINESS the  Canadian  favourable  tax  abatement.  2 9 1  abatement  c o n t r o l l e d companies are  treatment In g e n e r a l  effects  the  s u c h as  the  terms the  first  eligible  small  small  $200,000 of  for a  business business  net  income  from a  C a n a d i a n c o n t r o l l e d p r i v a t e company, c a r r y i n g on  an  active  reducing  the  business  tax  on  This "active" was  this  specified  businesses overall  in order  c o m p a n i e s . The  in sec.  amount t o about  favourable  a l s o an  profits  as  to  tax only  treatment before  limit  o f Can  limit  tax  policy  was  25%.  125  I.T.A.,  2 9 2  was  January  restricted 1,  $1,000,000  b e n e f i t s to  to h e l p  1985.  to There  accumulated  small  them b u i l d  up  their  80 business,  and t h e a c c u m u l a t i v e  implement  a fixed  limit  capital  f o r those  hidden  the years a l l kinds of p r o f e s s i o n a l s , CA's,  p h y s i c i a n s and other  carrying  o u t an a c t i v e  self  account  subsidies.  especially  benefits dealing their and  services  under  "normal"  business, started  e t c . i n order  estate could s p l i t  t o s e t up  their  remaining  I just  the accumulative  explained,  in practice  b u s i n e s s e s which never  i t was a p p r o p r i a t e a t a l l .  in  t h e 1985 b u d g e t restriction  the Canadian  o f now 50%  account  1, 1985 a l m o s t  for  t h e s m a l l b u s i n e s s abatement controlled  capital  and f o r r e a l  time  small  i t was q u e s t i o n e d  government  everybody  short,  gave up on t h e worked,  i s eligible  i f he r e c e i v e s income  private  account  was  was r a t h e r  of the abatement, which never  s i n c e January  a Canadian  f o r the  To make a l o n g s t o r y  and  accumulative  capital  made much p r o f i t  if  formal  Can $200,000  rate  scheme, b u t t h e c a l c u l a t i o n  consuming, not c l e a r  rate  t h e r a t e . On an income range o f  Can $ 100,000 t h e t o p m a r g i n a l  this  people  into  i n B.C. o n l y w i t h now 27%, a n d o n l y  were a p p l i e d . O n l y limiting  f o r the tax  income  Can $300,000 p . a . t h e r e f o r e t h e f i r s t  were t a x e d  from  to qualify  o u t o f an a c t i v e  s e t up i n t h e manner t h a t  were t a x e d o n l y w i t h h a l f total  some k i n d o f  income w h i c h was t a x e d a t t h e n o r m a l  up t o Can $200,000 r e s u l t i n g  business,  lawyers,  t h e s m a l l b u s i n e s s a b a t e m e n t . Even  in real  Over  employed p e r s o n s n o t  management c o m p a n i e s p r o v i d i n g them w i t h secretarial  was t o  company. The  was d r o p p e d , a n d  thousands  81 of m e d i c a l dentists  i n c o r p o r a t i o n s of p h y s i c i a n s , i n 1985 i n o r d e r  took p l a c e  a b a t e m e n t . Now we f i n d , taxable  that people  at the topmarginal  b e n e f i t s and a r e only  taxed  small  business  the  businesses  first  familiy tax or  2 9 3  members  to allow  growth  f o r small  changed t o a g e n e r a l  And i f t h e r e  even h i g h e r  tax benefit f o r  i s any c h a n c e t o  a r e chances  t o g e t some  i n v o l v e d i n t h e company,  amounts e v e r y  year  t o keep up t h e i d e a t h a t  this  there  operation  a n d t h e t a x b e n e f i t , some m i n o r  is  further  details  following  7.3  i fthere  I will  sections  refer  be a t l e a s t  b e n e f i t out of the  f o r an i n v e s t m e n t  o n l y an a b a t e m e n t ,  , Can $600,000  should  between t h e economic  As an example  favourable  f o r a f a m i l y u n i t . In  some l i n k  exist.  f o r the  So t h e o b j e c t i v e o f t h e  be a p p l i e d f o r Can $400,000  r a t e might  order  the rate  Can $200,000 p . a . , i f t h e r e  incorporate.  f o r the  who a r e u s u a l l y  at half  Can $200,000 e a c h y e a r .  Canadian  to qualify  rate, are receiving tax  first  abatement  surgeons,  are five  restrictions  corporation  there  employees. F o r  t o s e c . 125 a n d t h e  I.T.A.  THIN CAPITALIZATION  Under t h e t h i n  capitalization  debts to non-resident deduction relates  f o r Canadian  rules interest  shareholders  i s d i s a l l o w e d as a  tax purposes t o the extent  t o t h e debt which exceeds t h r e e  shareholders'  p a y a b l e on  that i t  times the  e q u i t y of the Canadian company. " Sec. 2 9  82 18(4)  I.T.A. r e s t r i c t s  which would o t h e r w i s e amount  of  the debts  'specified  defined  those  t o be  t h e c o r p o r a t i o n and whom t h e y do o f any  and  other  with  limited  class  dividends. be  further The  by  times  Such s p e c i f i e d who  2 9 6  either  the  are  alone  issued c a p i t a l who  do  not  the  non-residents shareholders  or w i t h  'thin  to a s s i m i l a t e  the  of  the  of  to  are  in  persons at  least  the c o r p o r a t i o n  d e a l a t arm's l e n g t h capitalization'  of d e d u c t i o n s  calculation  expressed  where t h e g r e a t e s t  a c o r p o r a t i o n i n the year  shareholders. This  go  deduction  d e a l a t arm's l e n g t h , own  to a p r o h i b i t i o n  does not  may  who,  expense  exceeds three  persons  not of  2 9 5  non-residents  such  allowed  non-residents' equity.  25%  be  interest  owing by  shareholders'  with  the  of  interest  principal interest  is and  repayments  to  disallowance  following formula:  (a/b)c=d where: a = g r e a t e s t amount o u t s t a n d i n g t o s p e c i f i e d n o n - r e s i d e n t s minus t h r e e t i m e s e q u i t y b = g r e a t e s t amount o u t s t a n d i n g t o s p e c i f i e d n o n - r e s i d e n t s c = i n t e r e s t p a i d o r p a y a b l e on d e b t s owing t o non-residents d=interest disallowance  Only  interest  calculation  b e a r i n g debt  of  di sallowance.  2 9 7  i s taken  t h e amount of  the  into  interest  account  i n the  83 Speaking thin  capitalization  restriction in  frankly,  order  rules.  of i n t e r e s t  to prevent  non-residents" discourage  I do n o t know t h e r e a s o n s I could  expense d e d u c t i o n  low e q u i t y  shareholders  introduced "specified  from e x t r a c t i n g  out of a c o r p o r a t i o n i n terms of  instead  i n terms of d i v i d e n d s . Apart that corporate  was  of companies and t o  profits  consideration  t h a t the  f i n a n c i n g where  are shareholders  non-resident  imagine  f o r the  interests  from the  f i n a n c i n g by  shareholders'  l o a n s d o e s n o t g i v e a s much s e c u r i t y  for creditors  equity  there  risk is  f i n a n c i n g and t h a t  of i n s o l v e n c y , o b v i o u s l y  a guaranteed  a chance or  a r e made. The s h a r e h o l d e r  interest-income  a l l other  interests the  t h e company,  shareholder.  XIII  and t h e r e f o r e  The r e a s o n  the t h i n  shareholders'  shareholders' loans  9  8  level of  I might guess f o r rules  on t o p o f t h e  up d i s i n c e n t i v e s f o r l o a n s . Compared t o r e s i d e n t  the s i t u a t i o n  f o r the d i s t i n c t i o n  non-resident  2  on  the w i t h o l d i n g tax e f f e c t s  o f low e q u i t y f i n a n c i n g  seems t o be t h e same, a s w e l l a s t h e g u a r a n t e e d reason  i f no  be t a x e d  a t t h e company's  capitalization  tax i s to b u i l d  non-resident  will  even  i n terms o f w i t h o l d i n g t a x ,  would be t a x e d  interests  d i v i d e n d s . To d i s a l l o w t h e d e d u c t i o n  hits  implementing Part  i n form of  r e t u r n f o r the s h a r e h o l d e r  whereas d i v i d e n d s as  income  i s a higher  t o e x t r a c t moneys o u t o f t h e company  low p r o f i t s  his  in general  than  might  return. A  be t h e a s s u m p t i o n  i n v e s t o r s always l i k e  t o e x t r a c t and  that  84 re-patriate can. and  a s much money from C a n a d i a n  But even  2 9 9  i f they  would do s o , t h e w i t h o l d i n g t a x  the t a x a t i o n of d i v i d e n d s  would  a p p r o p r i a t e . F o r an a s s u m p t i o n likely  payment  by p u s h i n g  over  indication.  the  seem t o be  that non-residents are  t o e x t r a c t moneys i n t e r m s o f g u a r a n t e e d  voluntary  as  (simulated)  an economic  l o a n s and  sound l i m i t ,  And a s I f e e l ,  r e s i d e n t ones a r e i n t e r e s t e d  of non-resident  contrasting  resident shareholders'  by d i v i d e n d s  7.4 INVESTMENT THROUGH A Another  subject  "investment  loans  o r by  loans I do n o t s e e  economy i f t h e y a r e interests.  CORPORATION  t o t a x a t maximum  investment  r a t e on t h e i r  income," c o m p r i s i n g  I.T.A. one s i x t h income  3 0 0  of  companies. P r i v a t e c o r p o r a t i o n s  income a n d t a x a b l e c a p i t a l  it  negative  i s s u e i s the t a x a t i o n of investment  non-Canadian c o n t r o l l e d  129  i n v e s t o r s as w e l l  shareholders'  much o f a d i f f e r e n c e f o r t h e C a n a d i a n profits  i s no  i n a h e a l t h y p r o f i t of  company. As I do n o t s e e any o t h e r  extracting  interests  interest  there  non-resident  indications  are  companies as they  non-dividend  g a i n s . But t h e n ,  worldwide property under s e c .  of the c o r p o r a t i o n ' s Canadian i s refunded  t o t h e c o r p o r a t i o n when  p a y s t a x a b l e d i v i d e n d s . The same goes f o r f o r e i g n  investment Prior entitled  income.  3 0 1  t o 1980, a l l p r i v a t e c o r p o r a t i o n s were  to the refundable  tax i n r e s p e c t of t h e i r  85 investment  income. A  October  1973,  of  first  limitation  whereby c o r p o r a t i o n s  Canadian-controlled-private refundable for  tax  in respect  t a x a t i o n years  result years  of  the  commenced a f t e r  longer  "earns"  of  12, that  refundable  taxation  had  the  addition,  the  tax  non-resident  shareholders  the  Canadian  and  43-1/3% t o 57.5%  from  witholding  tax  absence  holds  i f the  e l e c t s t o pay  pursuant  to sec.  a  taxation income  no was  throughout  the  50%,  this Canadian  33-1/3% t o 50%. tax  tax  to  In  a p p l i e s upon  f o r m of  taxable  effectively  on  increased  investment  of any  tax  income  treaty,  treaty  with  real  respect  estate  to  216  holds  i n Canada on I.T.A., t h e  the  property  h i s net  Canadian  the  which a  through a Canadian c o r p o r a t i o n .  tax  3 0 2  15%.  rates apply  non-resident  the  a f t e r - t a x income t o i t s  i n s i t u a t i o n s where a  r e n t a l income f r o m C a n a d i a n  contrast, and  i n the  example, t h e s e  non-resident  as  corporation  i n c r e a s i n g the  i n the  r a t e of  t o 62.5%  net  for  any  property  Finally  the  r a t e of  amendment has  f r o m 50%  For  1979.  corporation  corporation's  Thus, the  reduces the  were d e n i e d  investment  Canadian w i t h o l d i n g of  from  of  rate  distribution  overall  tax  effect  corporate  the  than  from r e a l  unless  in  year.  effective  dividends.  other  budget,  date, tax  Assuming a c o r p o r a t e limitation  income  1981  a Canadian-controlled-private relevant  introduced  corporations  commenced a f t e r  November  was  By  directly  r e n t a l income tax  i s only  46%  86 i n the case of a c o r p o r a t i o n , and a maximum of 50% case of an  individual.  3 0 3  Each p r i v a t e c o r p o r a t i o n has a " c a p i t a l a c c o u n t " to which i s c r e d i t e d the other one-half  dividend  (non-taxable)  of c a p i t a l g a i n s r e a l i z e d by i t . The  c o r p o r a t i o n may  i n the  then, upon making the  e l e c t i o n , d e c l a r e and pay  private  appropriate  a " c a p i t a l d i v i d e n d " from such  a c c o u n t . C a p i t a l d i v i d e n d s are not  i n c l u d e d i n the  of a r e s i d e n t Canadian s h a r e h o l d e r  and are t h e r e f o r e  s u b j e c t to t a x . However, n o n - r e s i d e n t  income not  shareholders  r e c e i v i n g a c a p i t a l d i v i d e n d are l i a b l e f o r w i t h o l d i n g tax t h e r e o n ,  j u s t as f o r t a x a b l e  I f i n s t e a d , the n o n - r e s i d e n t  dividends. were to use a Canadian  p r i v a t e c o r p o r a t i o n to h o l d the p r o p e r t y , gains  taxable  capital  r e a l i z e d by t h a t c o r p o r a t i o n would be t r e a t e d as  investment income. Not at h i g h e r  o n l y would he s u f f e r Canadian tax  r a t e s on such t a x a b l e c a p i t a l g a i n s , " 3 0  but  would a l s o become l i a b l e t o the Canadian w i t h o l d i n g of 25% or 15%,  of the c a p i t a l g a i n s by way  d i v i d e n d s . In the absence of any Canadian tax burden now gain.  3 0 5  tax  r e s p e c t i v e l y , upon the d i s t r i b u t i o n of  non-taxable one-half  t r e a t y , the  the  of  overall  i s 43.75% of the t o t a l  Where t h e r e i s a t r e a t y r a t e of 15%  he  capital  on  d i v i d e n d s , the o v e r a l l Canadian tax burden becomes 36.25% of the c a p i t a l  gain.  3 0 6  87  7.5  OIL AND  GAS  As I p o i n t e d out b e f o r e , e s p e c i a l l y i n the a r e a of t a x a t i o n f o r o i l and gas companies the Canadian government  t r i e d t o g i v e i n c e n t i v e s f o r Canadians.  T h e r e f o r e numereous t a x b e n e f i t s , e s p e c i a l l y i n the form of w r i t e o f f s , a r e g r a n t e d f o r Canadian and Canadian c o n t r o l l e d o i l and gas c o r p o r a t i o n s , e x p l o r a t i o n w e l l s and d r i l l i n g u n d e r t a k i n g s . I t would be t o f a r f o r the purpose of t h i s t h e s i s t o go i n t o the t e c h n i c a l  details,  and whoever i s i n t e r e s t e d might look them up i n the I.T.A. Here i t i s enough t o see the concept of t a x a t i o n p o l i c y f o r o i l and gas, and t o r e a l i z e the e c o n o m i c a l and p o l i t i c a l background as I e x p l a i n e d i t f o r t h i s a r e a of the Canadian e c o n o m y .  7.6  307  EVALUATION OF THE TAXATION OF NON-CANADIAN CONTROLLED COMPANIES  In o r d e r t o e v a l u a t e the t a x a t i o n of c o n t r o l l e d companies  non-Canadian  I would l i k e t o r e f e r t o the  d i f f e r e n t a r e a s of t a x a t i o n mentioned above and t o compare the c i r c u m s t a n c e s f o r Canadian and  non-Canadian  c o n t r o l l e d companies. As we c o u l d see t h e r e i s a t o t a l l y different s i t u a t i o n for intercorporate dividends  flowing  between Canadian companies compared t o the payment of d i v i d e n d s from a Canadian t o a f o r e i g n c o r p o r a t i o n . In the f i r s t case the moneys remain i n Canada and a Canadian c o r p o r a t i o n i s g i v e n some t a x d e f e r r a l i n o r d e r t o  88 improve  the f i n a n c i a l  situation.In  the second case the  moneys a r e p a i d a b r o a d and do n o t have any p o s i t i v e s t i m u l u s on i n v e s t m e n t legitimate Comparing  to treat  i n Canada. T h e r e f o r e i t  both cases d i f f e r e n t  intercorporate  dividend  no d i f f e r e n c e ,  since  i s advantageous  positive  impact  the  purpose  if  of  to stimulate  situation,  t h e C a n a d i a n company  Canadians  company a n d a  business a c t i v i t y . For  dividend  companies i t does  i s actually  taxation,  intercorporate dividends companies  discrimination  n o t make a d i f f e r e n c e c o n t r o l l e d by in taxation  f o r C a n a d i a n and  i s not j u s t i f i e d  of non-Canadian  to allow  and t o improve  or n o t . T h e r e f o r e the d i s t i n c t i o n  controlled  there i s  be a c h i e v e d on t h e f i n a n c i a l  f o r Canadian  financial  companies  f o r a Canadian  of i n t e r c o r p o r a t e  a tax d e f e r r a l their  will  allowing  between  i n both of those cases the t a x  deferral  situation,  in taxation.  payments  C a n a d i a n a n d non C a n a d i a n c o n t r o l l e d  is  non-Canadian  and t h e  controlled  companies i s  illigitimate. For  a different  non-Canadian there  businesses businesses, towards almost  companies  were sound  implemented.  t r e a t m e n t o f C a n a d i a n and  Over  i n the area of small b u s i n e s s e s  r e a s o n s when t h e p r o v i s i o n s the years the taxation  included  not only  but the s m a l l  a tax s h e l t e r everybody.  Even  were  policy  f o r small  low b r a c k e t and low income  b u s i n e s s abatement  f o r the f i r s t  was  changed  Can $200,000 p . a .  i f the s i t u a t i o n  f o r Canadian  for  89 controlled ago,  now  c o m p a n i e s w a s somehow d i f f e r e n t  i t i s not d i f f e r e n t  non-Canadian longer only  controlled  justified  to Canadian Referring  factual  deduction  to the thin  of shareholders'  the  payment o f i n t e r e s t s  Therefore  there loan  the thin  discriminating  through to  investments a Canadian  wheras  residents. system  to non-resident  a r e t h e same companies.  capitalization  This  taxes  non-resident  rules are loans and  companies without  a r e undertaken  by  a  non-residents  corporation, disadvantages  work  accumulate  o u t a s an i n c r e a s e o f t a x a r o u n d  negative  impact  up t o a c e r t a i n  t a x up t o a n o t h e r  resentment  appropriate  of those  on t o p o f i t .  shareholders'  controlled  Since  shareholders i s  to limit  deduction  and t h e  i t d o e s n o t make a m a j o r d i f f e r e n c e f o r  non-residents  by  controlled  i s no r e a s o n  abatement  rules the  interests  c a n be e x p l a i n e d b y t h e  of the dividend tax credit  witholding  i t i s not  reason.  amounts which  1/3,  loan  non-resident  non-Canadian  legitimate If  capitalization  interest  of  companies.  t o w i t h o l d i n g t a x and t h e payment  shareholders'  effect  private  and non-Canadian  guarateed,  years  the small business  of low e q u i t y f i n a n c i n g  Canadian  is  companies. Therefore  controlled  for  subject  to the situation  to restrict  circumstances  some  against to adjust  degree, degree,  foreign those  i n respect to by t h e t r i g g e r f o r b u t t o some  investment.  rules,  leaving  degree  Iti s no  different  90 treatment of  o t h e r than  technical  t h e ones w h i c h a r e n e c e s s a r y  reasons  implemented subsidies  the Canadian  government  government a i d i n t o  t h e t a x law,  giving  to Canadian  r e s o u r c e s . To of  o i l and  and  restrict  gas  c o m p a n i e s and  exploitation subsidies  t h e common p r i n c i p l e s  of  to  natural  to domestic  companies i s  of economic p o l i c y  i n every  c o u n t r y . H e r e t h e t a x b e n e f i t s a r e not  restricted  Canadian  controlled  c o r p o r a t i o n s , but  corporations. doubtful they  Looking  what t h e  justify  reasons  a different  b e f o r e , the p r i n c i p l e  law  does not because  of the  in  the  other  o i l and  It taxation  allowing case.  that  the  of  be  a r e and i f law..As  we  situation company  as a  companies  shareholders are  of tax b e n e f i t s  to  Canadian  gas  which i s  non-Canadian  i s not  based  on  a  reason  it is  3 0 8  i s therefore concluded  that  of n o n - C a n a d i a n c o n t r o l l e d  illigitimate,  i n tax  treatment  than d i s c r i m i n a t i o n . T h e r e f o r e  illigitimate.  i t might  i n t h e a r e a o f o i l and  gas  only to  of n o n - d i s c r i m i n a t i o n i n tax  limitation  same f a c t u a l  controlled  s e t of r u l e s  reasons  companies  distinction,  f o r the d i s t i n c t i o n  allow a d i f f e r e n t  non-residents. A controlled  to Canadian  at t h i s  saw  only  5.  gas  promote e x p l o r a t i o n  one  4 and  as d e s c r i b e d i n c h a p t e r  In t h e a r e a o f o i l and  because  the  discriminating  companies i s  i f t h e r e a r e not d i f f e r e n t  for different  tax treatment  in a  circumstances particular  8.  NON-RESIDENT-OWNED INVESTMENT CORPORATION  A non-resident-owned defined which  in sec.  fulfills  It  has  248(1), the  t o be  I33(8)(d)  following  NRO  i f incorporated  until must All  the  end  of  issued  later,  non-residents, non-resident by The  a  by  from  relevant as  trustees  income o f  a NRO or  may  only  a  year  and  NRO. other  owned  funded  by  benefit  unborn  rents,  hire  of  derive  t r a d i n g or d e a l i n g  debentures, mortgages, b i l l ,  of  i s s u e s , or  chattels,  or  from  owned  notes;  charterparty  annuities,  royalties,  the  10%  total  maximum of or  disposition According a Canadian  refunded  dividends  to  the  dividends; of  to or  Generally,  of  capital sec.  134  private  estates  fees  up  to  revenue;  trusts,  or  property. I.T.A. a NRO  i s deemed n o t  to  corporation.  NRO  p a y s a 25%  the  NRO  when i t p a y s d i v i d e n d s  are  money,  or  only  an  in turn  shares,  lending  but  gross or  the  i n bonds,  renumerations,  interests  is  1971  NRO.  o w n e r s h i p of  be  taxation  f o r the  their  18,  i t s incorporation  beneficially  p e r s o n s or  is  corporation  from June  a l l d e b e n t u r e s , and  i n d e b t e d n e s s must be  a  (NRO)  i n Canada,  election  shares,  I.T.A. as  continuously  the  have made an  corporation  requirements:  incorporated  must have been an or,  investment  subject  91  r a t e of  tax.  to witholding  This and  tax  tax  the  under  92 Part  XIII  resident  I.T.A. I f the in a treaty  dividends 15%.  will  In t h e s e  distributed the  result  be  country,  reduced  i n the i s an  year  which,  i f paid directly  t h e NRO,  interest,  w o u l d be  the  treaty  unless  an  i t i s earned  immediate  (i.e.,  of  dividends  the w i t h o l d i n g  to the  circumstances,  income  of  recipient  25%  tax  rentals, to the  tax  rate,  is  on  the  generally  NRO's income i s  by  way  of  r a t e on  types  royalties,  of  dividends)  non-resident  s u b j e c t to a lower  dividends,  shareholder  r a t e of  Canadian  tax. One  of  the  corporations tax  should  neutrality  investments holding  p u r p o s e s of  investments  payments  free  interest  payments a r e t o a 25%  not to  situated tax  such in  gains  on  Under  witholding tax.  r e c e i v e d by  i s not  capital  gains  by  Canadian w i t h o l d i n g  not  to  degree  an  NRO,  of  hold compared  sec.  receive certain  subject  to  212(1)(b)  interest If  such  they  with  to tax,  respect  i n Canada. S i m i l a r l y ,  Therefore are  wishing  investment  are  tax.  realized  such  capital  acceptable  directly.  may  of C a n a d i a n  A non-resident capital  an  a Canadian c o r p o r a t i o n as  I.T.A., a n o n - r e s i d e n t  subject  to o f f e r  to a non-resident  through  those  be  non-resident-owned  inter  to c a p i t a l an  NRO  alia, property  i s not  subject  g a i n s . However, d i s t r i b u t i o n an NRO tax.  by  way  on  of d i v i d e n d s  of  results  3 0 9  non-resident-owned  investment  a u s e f u l v e h i c l e f o r investment  and  corporations are  not  often  93 used.  S i n c e the concept  investment  of t a x a t i o n of n o n - r e s i d e n t  c o r p o r a t i o n s was p l a n n e d  a c c e p t a b l e degree of t a x n e u t r a l i t y neutrality achieved, behind  an  and as a t a x  as f o r C a n a d i a n - c o n t r o l l e d companies 3 1 0  those  provisions just  i s not  do n o t f i t t h e i d e a  them, we c a n n e g l e c t them f o r t h e e v a l u a t i o n o f  legitimate  or i l l i g i t i m a t e  in  detail,  the concept  it  was  intended  circumstances. non-resident illegitimate. into  to offer  owned  was p r o p e r  t o implement  owned  investment  Implementing proper  discrimination.  treatment  the a c t u a l  i t more because  f o r equal  t a x a t i o n of  corporations i s  the g o a l s of those p r o v i s i o n s  legislation  of t h e l e g i s l a t o r  Saying  and l e g i t i m a t e  an e q u a l  But a s i t i s now,  a technical  intention  discrimination.  would  f i t the  and e l i m i n a t e t h e  9.  FOREIGN COMPANIES OPERATING Part  XIV  I.T.A. p r o v i d e s  corporations, on  business  is  to  other  impose a s p e c i a l  business  tax  through a branch  corporation.  The  the  tax  would be  the  operations  Canadian  tax  so  profits  the  f o r m of d i v i d e n d s . i n the  corporations therefore  Specifically, jurisdiction  "  but  Canada  s i n c e June  219  I.T.A.  c a r r y i n g on  of  a  subsidiary  Part  equivalent  XIII  through  s u b s i d i a r y had  The  tax  of  is  non-resident  a  returned  company a b r o a d  branch  to  I.T.A. i f  i t s parent  in  normally  corporation.  than Canadian c o r p o r a t i o n s ,  a corporation  tax  resident  i f i t has  not  18,  in a  i n Canada c o u l d  be  been c o n t i n u o u s l y 3 1 5  it  may  corporations.  incorporated  1971.  and  The  r a t e of  foreign liable  resident tax  for in  payable  is  3 1 6  The  amount on  d e p e n d s on was  3 1  carrying  by  i s roughly  t o some r e s i d e n t  branch  25%.  to  on  derived  been c o n d u c t e d  i f the  TAX)  I.T.A. i s a p p l i c a b l e t o a l l  other  apply  3 1 3  sec.  profits  i n s t e a d of  context  XIV  the  from t h e  3 1 2  i n Canada had  i t s net  However, P a r t  on  imposed  s u b s i d i a r y and  of  (BRANCH  a d d i t i o n a l tax  p u r p o s e of  p a y a b l e under  all  thought  f o r an  The  3 1 1  corporations  that  CANADA  than Canadian c o r p o r a t i o n s ,  in Canada.  non-resident  IN  not No  whether  resident  the  branch  tax  i s computed  non-Canadian c o r p o r a t i o n  i n Canada d u r i n g  branch tax  b r a n c h of  which the  under P a r t  a corporation  3 1 8  XIV  which  94  the  year.  I.T.A.  was  3 1 7  i s payable  i s i n the  or  by  a  transportation  95 business, ore,  in communications,  3 1 9  or  3 2 1  The  i s a non-resident  i n t e n t i o n of  approximately  the  the  insurance  branch tax  same o v e r a l l  whether a n o n - r e s i d e n t  i n the mining  3 2 0  company.  Canadian  tax  on  business  through a Canadian c o r p o r a t i o n  or  through a  Since  3 2 3  non-resident are  not  corporation  subject  Act,  even  paid  i s earned  tax  to the  though the  liability,  business  dividends  i n Canada, t h e r e be  a decided  the  non-Canadian c o r p o r a t i o n i s required  be  described  as  t o pay  Act  i t s after  of  tax  to  normal Canadian c o r p o r a t e  the  3 2  r a t e of b r a n c h t a x  same r a t e a p p l i c a b l e t o t h e  respect with  The  taxation year.  to corporations  w h i c h Canada has  treaty.  The  therefore, C a n a d a by same a s  effect  of  tax  the  tax  generally  that  in  i s in addition would  be  reduced  r e s i d e n t s of  to  tax  payable  of on  this  with  countries  i n t o a comprehensive  total  t h a t would be  i n Canada,  payment of d i v i d e n d s  a non-Canadian c o r p o r a t i o n  the  tax  i s normally  imposition  the  a  income e a r n e d  This  which are  entered  i s to render  "  than  what may  taxable  on  where a  business on  is  further  in carrying  that  25%  the  dividend  provides  for that  payable.  p r o v i s i o n s of  rather  on  a  i n Canada  a branch  Canada the  tax  by  would, without  carries  a tax  Canadian  business  advantage  means of  eligible  shareholders  c a r r y i n g on  witholding  Therefore,  it  to  is  that  i n Canada  income from w h i c h the  i n Canada by  subsidiary.  paid  3 2 2  i s to ensure  carries  branch.  of  tax  branch  tax,  income e a r n e d  approximately i f that  in  the  income  had  96 been and  e a r n e d by a C a n a d i a n then d i s t r i b u t e d  corporation,  by way  tax p a i d  of d i v i d e n d  thereon  to the f o r e i g n  s h a r e h o l d e r . However, by i m p o s i n g a b r a n c h t a x on income,  whether  or not d i s t r i b u t e d  office,  the u t i l i z a t i o n  more a t t r a c t i v e distributions  since  c a n be p o s t p o n e d paid.  s u b s i d i a r y may  be  such time as  S i n c e the Canadian assumption  branch  that a l l  a r e g o i n g t o be c a s h e d o u t e a c h y e a r , i t i s more  expensive  than the Canadian  susidiaries.  r e a s o n , why Canada  branches of f o r e i g n subsidiaries, a Canadian  companies  incorporated  legal  entity,  C a n a d i a n company under of Canadian least  t a x e s imposed  citizens  the m a j o r i t y  in Canada.  Canadian  influence  stronger  than  understanding,  i s the assumption  would  be e a s i e r  t h e CBCA  to c o n t r o l .  F o r a B.C.  h a s t o be a r e s i d e n t  3 2 9  Even  "Canadian  companies  the d e c i s i o n s  Each  shall  company  of B . C .  be p e r s o n s  3 2 8  3 2 7  and  ordinarily  i f i t seems o b v i o u s t h a t t h e  i n Canadian  i n branches  that  has t o have a m a j o r i t y  32 6  subsidiaries  of f o r e i g n  would  companies,  be  i n my  i n f l u e n c e " d e p e n d s more on t h e  s e t up t h a n on t h e l e g a l  international  disincentives for  i n Canada and t h e r e f o r e b e i n g  of the d i r e c t o r s  resident  imposes  as d i r e c t o r s .  one d i r e c t o r  determine  on C a n a d i a n  3 2 5  Another  factual  t o t h e head  t a x on t h e d i v i d e n d  until  i s b a s e d on t h e u n r e a l i s t i c  profits  at  of a Canadian  the w i t h o l d i n g  dividends are a c t u a l l y tax  back  current  s t r u c t u r e . The way most  operate today  i s more l i k e l y t o  f o r t h e whole company by  97 decisions the  o f t h e c e n t r a l b o a r d of t h e mother company o r  divisional  headquarters.  Disencouragement operations incentive  to e s t a b l i s h a Canadian operation  company, we  disadvantage of  of h a v i n g Canadian  seems t o have worked p r e t t y  where t h e C a n a d i a n foreign  3 3 0  would  well  as  subsidiary.  an Still,  i s a s a l e s department  have t o compare  of the w i t h o l d i n g  the s u b s i d i a r y  branch  the  tax a g a i n s t  t a x - t r e a t m e n t over the  of a  the  advantage  branch  tax-treatment.  9.1  EVALUATION OF  The  operation  of b r a n c h e s of  and  i t s legal  s e t up  different is  are  f r o m any  determined  that  profits not  within  on a s e t o f that  Canadian  tax there  s u b s i d i a r i e s and  a Canadian  taxfree,  and  have t o be  to ensure  and  i n f a c t . The  since  i n Canada payments  to  some s p e c i a l t a x  i n t e n t i o n of the branch t a x , as taxation  of  the t a x a t i o n  foreign  branches  of  stated,  foreign  f o r e i g n branch operations.  have t o compare  are  corporation  government has  i f the branch tax p r o v i s i o n s  enterprises  i n Canada  f a c t s which  e n t i t y a r e not s u b j e c t  to a c h i e v e a comparable  would  f o r e i g n companies  r e s u l t i n g from a branch o p e r a t i o n  t h e same l e g a l  determine  TAX  i s based  operation  by. The  p r o v i s i o n s . The  out  BRANCH  t r a n s f e r r e d abroad  witholding  was  THE  In o r d e r  to  are l e g i t i m a t e ,  we  domestic  i n Canada as  i t turned  main d i f f e r e n c e s a r e , as p o i n t e d  out,  3 3 1  98 that  the  that  a l l profits  apply  branch  operations are  cashed  i n most c i r c u m s t a n c e s ,  realistic. appropriate  In o r d e r  to t r e a t  to adjust  the  amounts p a i d f r o m t h e corporation this up  are  or  w o u l d ask  capital  to  out.  branch  as e q u a l  tax a c c o r d i n g  branch  implementation  f o r branches be  a c o n c l u s i o n , the  l e g i t i m a t e because situation.  even g r e a t e r d e t a i l  the  other  i f this  branch  i t c o u l d be to get  the  hand,  of a k i n d o f  tax  is  is  justified legal  worked o u t  r i d of  paid  their  system  i t follows a different  in order  to  be  to the f o r e i g n  i n respect to  questioned  However,  not  i t would  Canadian  f o r the  does  equal  practical.  anomalies.  this  assumption  i s not  i t may  factual  Since  the  the assumption  "income", and  and  on  i t s s h a r e h o l d e r s . On  account  As  taxed  smaller  and in  10.  ECONOMIC CRITERIA FOR INVESTMENT  DECISIONS  When we l o o k a t t h e c o n s i d e r a t i o n s and t h e economical for  assumptions  toward  the t a x a t i o n  n o n - r e s i d e n t s , NCCPC's and C a n a d i a n  foreign  consequences  investment legal, about  decision  f o r investment  has d i f f e r e n t  these d i f f e r e n t  criteria  of t a x a t i o n .  3 3 2  residents'  investment  general  government by g i v i n g  intended  important  I'd l i k e  taxation  h a s t o be seen  decisions  the  Canadian  behaviour  for foreign  taxation  i s not the  B u t i t i s one o f t h e major  h a s t o be c o n s i d e r e d t o g e t h e r w i t h o t h e r o n e s .  like  t o c o n c e n t r a t e on t h e a s p e c t s o f German  10.1  ECONOMICAL CRITERIA INVESTMENT  Especially that  i s part  o f non  t h e economic  and d i s i n c e n t i v e s  factor.  to talk  i n the context of  Obviously  to influence  For investment  Each  commercial,  Since the tax p o l i c y  situation.  incentives  investment.  and  Canadian  i n Canada.  i n order t o determine the  t h e g e n e r a l economic p o l i c y ,  most  branches of  elements:  p o l i t i c a l , and p s y c h o l o g i c a l .  importance  the  policy  c o r p o r a t i o n s , we s h o u l d have a l o o k a t t h e  practical  of  leading  I just  investment.  INCLUDING TAX CONSEQUENCES FOR  DECISIONS IN FAVOUR OF CANADA  f o r German  investments  under an e c o n o m i c a l  areas worthwhile  factors  point  i n Canada  o f view  i t turns out  t h e r e a r e n o t many  t o do b u s i n e s s o r i n v e s t m e n t  99  i n Canada.  100 10.1.1  MAIN AREAS OF GERMAN  The German divided  into  three almost  manufacturing investment gives  investment  industry  manufacturing  control  industry  Canada, e s p e c i a l l y  B.C.  industry. real  10.2  In B.C.  e q u a l amounts:  we  portfolio  mainly  i n the E a s t of  w i t h an e m p h a s i s  investment  no  is  in Ontario  manufacturing  i n B.C.  i s concentrated in  AND  IMPLICATIONS  3 3 4  TAX  STABILITY  stability decision  salaries,  o f where  and  trade unions  companies s t i l l Europe over Canada  economical number one  t o go a h e a d w i t h d i r e c t  T h i s i s the reason  together with  why  prefer  and some o t h e r  investment  investment  foreign  disadvantages criteria  3 3 5  many  i n N o r t h A m e r i c a and  i n LDC's.  i s one o f t h e p o l i t i c a l  t h e economy  for a  d e s p i t e h i g h wages and  some o f t h e f o l l o w i n g  the world. T h e r e f o r e  However,  political  of the h o s t c o u n t r y as f a c t o r  investment.  of  find  i s almost  Most c o m p a n i e s p r e f e r  and  The  3 3 3  estate,  of b u s i n e s s . Investment i n the  GENERAL ECONOMIC CRITERIA  10.2.1  real  i n bonds and s h a r e s e t c . , b u t  Canada  there  So German  estate.  i s in general  i n O n t a r i o . Real e s t a t e investment  spread out a l l over and  i n Canada  and p o r t f o l i o .  i s investment  no a c t i v e  INVESTMENT IN CANADA  i t qualifies  i s not that  most  stable countries  f o r investment.  stable  sometimes.  3 3 6  101 10.2.2 RESOURCES INCLUDING HUMAN RESOURCES Companies to  find,  d e a l i n g with  e v a l u a t e and e x p l o i t  more s p e c i f i c , the  wherever  k i n d of r e s o u r c e s  sort  really their  i t is profitable.  i t is likely  investments.  natural  resources,  be t h e most  more r e l i a b l e Canada resource  3 3 7  of the m a t e r i a l s or companies  those  and p r o c e s s i n g , have more o f a production. Besides the  t h e human r e s o u r c e s , manpower, factor.  the production  The h i g h e r  the s k i l l s  can take  place.  has a l o t of n a t u r a l r e s o u r c e s . i s good. People  hand, wages a n d s a l a r i e s a r e f a i r l y  10.2.3  strong  education,  are at a f a i r l y  the  have a v e r y  The human  have a good  and t h e work m e n t a l i t y  i n some a r e a s  high  i s n o t bad e i t h e r .  On  h i g h and,  o f t h e economy, t h e t r a d e  position.  and  3 3 8  3 3 9  standard,  especially  seem t o  a r e , the e a s i e r and the  general. Professional s k i l l s  other  don't  companies, e s p e c i a l l y  of the people  situation  some  t o do  of t h e i r  determining  education  D e p e n d i n g on  are going  i n manufacturing  c h o i c e of the l o c a t i o n  a r e , or  t o have a t l e a s t  c h o i c e where t h e y Other  a l w a y s have  wherever they  e v a l u a t i o n , these  have a f r e e  involved  in  these  of p r o c e s s i n g a t the l o c a t i o n  n e a r b y . So, i n my  the  natural resources  unions  3 4 0  TRANSPORTATION  Another  b i g item  transportation. transportation  i s t h e e a s e and c o s t s o f  Especially  the i n f r a - s t r u c t u r e ,  companies, access  to sea-harbours,  existing access  102 to  international shipping The  general  lines,  e t c . are i m p o r t a n t .  i n f r a s t r u c t u r e and t h e t r a n s p o r t a t i o n  i s a c c e s s t o t h e A t l a n t i c and P a c i f i c  o c e a n s w i t h h a r b o u r s on b o t h c o a s t s . developed  i n the East,  developed  that  much.  transportation  by l o o k i n g  there  transportat i o n .  even  distances  i f costs are  a t t h e g e o g r a p h y one would instead  of East-West.  borders are c u t t i n g the United  into parts  are geographical  system i s  i n t h e West i t i s n o t  North-South  the p o l i t i c a l  a n d Canada  The t r a i n  Because of the l a r g e  3 4 2  assume a l o t o f t r a d e since  while  i s a major c o n c e r n ,  reasonable. Just  States  system i n  i s g o o d . T h e r e a r e a l o t o f good h i g h w a y s and  roads and t h e r e  But  3 4 1  i n an E a s t - W e s t d i r e c t i o n ,  disadvantages with  respect  to  34 3  10.2.4 MARKETING/SALES Marketing have a s t r o n g definition  and s a l e s  impact. Depending  of the r e l e v a n t  whichever market t o have an a c c e s s c ircumstances. The relation  will  on t h e " p r o d u c t "  market  be d e f i n e d ,  small  will  3 4 4  which the  be d i f f e r e n t ; but  the i n v e s t o r  population,  to the large area,  200-mile  factors  would want  under t h e  34 5  relatively  populated  are other  t o i t as easy as p o s s i b l e  somehow d i f f i c u l t .  a  forecast  3 4 6  makes m a r k e t i n g  But s i n c e  and people a r e l i v i n g limit  at l e a s t i n  the East almost  o f t h e U.S. b o r d e r ,  and s a l e s  i s more d e n s e l y  exclusively  within  the s i t u a t i o n i s  1 03 actually  not  worthwhile  too  bad.  E v e n , mass p r o d u c t i o n  i n r e s p e c t to the  could  be  States.  10.2.5 TAXES Taxation this  thesis.  under an is  i s the But  criterion  even  I am  i f i t i s the  e c o n o m i c e v a l u a t i o n of  o n l y one  of  land-masses, a high  living  topic  an  several c r i t e r i a .  investment.  is,  especially  the  important The  fairly  and  a  some  non-Canadian and  so c a l l e d  disincentives investment restricts  controlled  i n v e s t i n C a n a d a , one  to tax  exist  companies are  is  no  3 4 9  The  not  abatement.  thin  heaven  vivos transfer  a lot  more  eligible  3 4 8  than  So for  Tax owned  capitalization  expense d e d u c t i o n  'specified  taxed  companies.  also for non-resident  interest  a c o r p o r a t i o n to  base.  of  Non-residents  companies a r e  small business  by  inter  that taxation  western c o u n t r i e s i t i s  Canadian c o n t r o l l e d  companies. the  large  i n g e n e r a l . However, t h e r e a r e  non-Canadian c o n t r o l l e d the  decision i t  disadvantages  h i g h compared  Compared t o o t h e r  reasonable,  residents  thesis,  relatively  of d i s i n c e n t i v e s f o r f o r e i g n investment. and  in  factors.  taxation is fairly  countries.  this  i t seems t o me  for a d e c i s i o n to  i n most  S i n c e Canada has  standard  Therefore  3 4 7  of  investment  small p o p u l a t i o n , there are already for  interested  rule  for debts  non-residents'.  for n o n - r e s i d e n t s  3 5 2  3 5 1  at  3 5 0  owing There cost  1 04 As  a conclusion  economic  criteria  implications,  I see  as  not  an  investment  very  i n Canada  attractive.  The  d i s c r i m i n a t i n g non-residents  tax  and  their  c o m p a n i e s , make i t even w o r s e . However, Canada the  politically  world like  and  most  stable countries  i t i s c l o s e to the U n i t e d  t o have a  look at a comparable  under  i n the  i s one  of  western  S t a t e s . So  I would  investment  in  the  States.  10.3 If  COMPARISON TO  we  have a  United  look  why  there  Canada d u r i n g  in  business general,  stability,  the  therefore  U.S.  without  the  passing  in  t h e U.S.,  investments  in  and  why  U.S.  there  i t becomes  to the  in  i s a l o t of  States.  economic c r i t e r i a  Speaking  like  transportation  i s b e t t e r o f f than  Canada  f o r f o r e i g n investment.  than  border.  in C a n a d a .  3 5 4  controlled  f o r the  the  investment  human r e s o u r c e s ,  lower  the  German  access In  f o r s m a l l companies,  treatment of  years  interesting  even n o n - A m e r i c a n  taxation  last  no  would g i v e a d i r e c t  disadvantage  tax  i s almost  resources,  more  UNITED STATES  r a t h e r advantageous taxes,  under g e n e r a l  minimum wages a r e the  "comparable"  from Germany g o i n g  marketing/sales,  in  at  States with  obvious  new  INVESTMENT IN THE  first  company p r o f i t s ,  3 5 3  A  to the  companies get  a  i f t h e money r e m a i n s  i n the  The  market i s no  the  IRC  favourable  $100,000 e a c h y e a r . in general,  and  production  t a x a t i o n there s i n c e under  and  i s more  Also,  the  generous  company. Some  105 states  exempt  gains  taxes,  After  January  lot.  3  5  The  5  U.S.  investors  totally  i f they are w i l l i n g 1,  1987  b i g tax  investments different  foreign  t h e U.S.  incentives  a r e gone by  attitude  now,  more  of  f a v o u r a b l e than  changed - e s p e c i a l l y  t h e money.  taxation  system  for real  estate  and  towards r e a l  investment  capital  to re-invest  we  changed a  a l r e a d y see a  e s t a t e investment  So compared w i t h Canada one  implications  from  until  can  say  that  t h e end  of  i n the  the  1986  tax were  i n Canada, whereas t h e  situation  in real  January  estate - after  1,  1 987.  10.4  S T A T I S T I C S ON Let's  in North  l o o k a t some s t a t i s t i c s  America  investments couple  INVESTMENT IN CANADA AND  over  again  political  last  i n North America  o f y e a r s ago,  America  the  i n the l a s t  few  because  t h e U n i t e d S t a t e s many German  investment States, But The  3 5 7  investment German  were r e l a t i v e l y  weak a North  y e a r s . Because of of  investment  investors  the  incentives  were and  America.  U.S.  still  While  i n c e n t i v e s a r e v e r y s t r o n g i n the U n i t e d  let's  following  1984.  y e a r s . While  t o t u r n more t o N o r t h  t h i n g s are going  investment  on German  t h e r e i s a t r e n d towards  c l i m a t e and  are w i l l i n g  IN THE  see table  slow  in Canada.  3 5 6  some numbers: shows t h e d e v e l o p m e n t  i n t h e U.S.  and  i n Canada  from  o f German 1975  to  in  106  D e v e l o p m e n t o f German I n v e s t m e n t i n t h e U.S. and i n Canada f r o m 1975 t o 1984  US 1 975 1 976 1 977 1 978 1979 1980 1981 1 982 1 983 1 984  to the  from 24,867.6 - 1984  Canada t h e s e f i g u r e s  investment  from  development  (only)  changes.  The  from next  show a slow down o f German breakdown from  1982  t o r e c o v e r i n 1984. In t h e U.S.  o f German  500 m i l l i o n  dropped  3,234.6  1981 t o 1982, a t o t a l  1983 and a t e n d e n c y  w i t h minor  254.9 316.9 371 .0 407.7 407.5 421 .5 479.0 382.3 -14.2 208.0  748.3 1 , 138.4 1 ,338.8 1,885.8 3,692.6 3,380. 1 3,402.8 3,274.5 2,748.8 3,257.5  Total 1975 For  Canada  i n v e s t m e n t s i s more c o n t i n u o u s  The slow down f r o m German M a r k s ,  382 t o minus 14 schedule refers  3 5 8  1982 t o 1983 made  w h i l e i n Canada i t  million. t o German  investments i n  Canada and t h e U.S. by t h e end o f 1983 i n terms o f t o t a l assets.  3 5 9  107  Direct  and I n d i r e c t German Investment i n the U.S. and i n Canada from 1976 t o 1983  End o f  US  1 976 1977 1978 1979 1980 1981 1982 1 983 While  Canada  f i v e times  t h e number  relations  1830 1580 1 479 1764 231 6 2752 3460 3967  investment  i n c r e a s e d by l e s s  Similar at  6630 8247 1 0842 1 4840 18260 25721 28078 34518  t o t a l German  i n c r e a s e d about  Canada  over  than  will  a s s e t s i n t h e U.S.  the y e a r s , those i n  two a n d a h a l f  become o b v i o u s  o f German c o m p a n i e s  3 6 0  doing  times.  when we l o o k business  Canada a n d t h e S t a t e s , t h e a n n u a l  gross of those  c o m p a n i e s a n d t h e number  employees.  of t h e i r  3 6 1  3 6 2  Number of German Companies Involved i n Investment i n the U.S. and i n Canada from 1976 to 1982 US 1976 1 977 1 978 1979 1980 1981 1982  629 713 854 1113 1 406 1 639 1 752  Canada 360 40 1 419 461 489 526 513  in  108  While U.S.  t h e number o f c o m p a n i e s d o i n g almost  tripled,  those  Annual Gross  investment  i n Canada d i d n ' t  of those  Companies  US 1 976 1 977 1978 1979 1980 1981 1 982  increase  of a s s e t s :  five  times  i n t h e U.S.,  half  times  i n Canada.  3 6 3  3.3 3.0 3.3 4.8 5.4 7.1 7.5  27.8 33.0 46.7 71 . 8 85.4 118.1 121.9  to the d i f f e r e n c e s i n  The a n n u a l while  even d o u b l e .  Canada  The d i f f e r e n c e s h e r e a r e s i m i l a r the  i n the  g r o s s went  i t didn't  up a b o u t  r e a c h two and  one  109 Employees of those Companies 3 6 4 Canada  US  78 100 216 349 376 391 355  1 976 1 977 1 978 1 979 1980 1981 1982 Given  the fact  that  U.S. o r C a n a d i a n benefit  from  overlooked. The in  investment  t o the investment  Canada does n o t p r o v i d e a f a v o u r a b l e  c l i m a t e . While  i n former  times  o f Canada had r e a s o n a b l e c h a n c e s  return,  t h e r e a r e o n l y some h i g h r i s k  nowadays. The C a n a d i a n foreign  economic changes Canadian  t h e economic  s h o u l d n o t be  c o n c l u s i o n of the comparison  investment  of  respectively,  3 6 5  t h e U.S. i s t h a t  favour  most e m p l o y e e s o f t h o s e c o m p a n i e s a r e  residents,  foreign  1 1 12 13 15 17 16 18  taxation  investors causes  situation.  investments i n  of g i v i n g  areas  of foreign  disincentives  investment,  left i n v e s t m e n t and  on t o p o f t h e  T h e r e f o r e I am p r o p o s i n g t o c o n s i d e r  i n t h e Income Tax A c t i n a way t h a t taxation  a good  from  but i n s t e a d  discriminating c r e a t e s some  prevents  against  foreign  incentives.  11.  PROPOSALS FOR AN ALTERNATIVE APPROACH AND SOME CHANGES IN THE INCOME TAX ACT  Background that  f o r the proposals  a supply-side  market p o l i c y  discrimination  o f open  t o l e a d to net b e n e f i t s f o r  see there  are only  clause  few a r e a s  where no  at the  a n d i t s main  i m p l i c a t i o n s , an  tax i n c e n t i v e f o r f o r e i g n investment i n  Canadian  t a x law w o u l d be t o g e t r i d o f some o f  disincentives. its  and a c o n c e p t  i s p r a c t i s e d . Looking  non-discrimination important  oriented policy  are going  C a n a d a . As we c o u l d  f o l l o w i n g i s the b e l i e f  Speaking  i n general,  reservation regarding  Convention and i n t r o d u c e treatment  Art.  Canada s h o u l d  wave  24 O.E.C.D. M o d e l  a non-discriminating  f o r non-residents  its  and n o n - r e s i d e n t  and e q u a l controlled  companies.  11.1  CANADA AND ART. 24 OECD MODEL DOUBLE TAX CONVENTION It  i s apparent  paragraph effect capital by  why Canada has r e s e r v e d :  6 of A r t i c l e  that  24 o f t h e O.E.C.D. s t a t e s i n  E n t e r p r i s e s o f one C o n t r a c t i n g  of which  f o r example,  i s wholly  r e s i d e n t s of the other  or p a r t l y Contracting  State, the  owned o r c o n t r o l l e d State,  shall  subjected  t o more burdensome t a x t h a n one would by  residents  of the o t h e r .  capitalization advertising  Canada's b r a n c h t a x ,  n o t be  thin  r u l e s and d e n i a l of d e d u c t i o n f o r  i n c e r t a i n non-resident-owned media, a r e  examples o f p r o v i s i o n s w h i c h would a p p e a r  11 0  to violate  such  111 provisions. It most  3 6 6  i s understood  frequently  areas  particularly credit  r u l e s , small  Canada's  against  is  plain  business  gets  pertain to  deduction  discriminates creed,  take  against  against  As p o i n t e d  i s essentially  against  t o say that  Canada  r e g a r d l e s s of therefore,  i t does n o t d i s c r i m i n a t e  of "the other"  and d r a f t m e n  some a r e a s — t o a p o i n t there  i s another's  o r n a t i o n a l i t y . Canada,  o u t by R o b e r t s o n  p o l i c y makers  whether  fair  a l l non-residents  the p o s i t i o n that nationals  i t this  private  as d i s c r i m i n a t i n g  I t i s probably  colour  tax c r e d i t . I t  g i v i n g an i n c e n t i v e t o r e s i d e n t s  n o t be c o n s t r u e d  non-residents.  tax p a i d as  of the small  incentive  As I u n d e r s t a n d  Canada's v i e w , t h a t should  through the d i v i d e n d  one man's  and  f o r corporate  restriction  thin  non-residents  to Canadian-controlled  that  discrimination.  deduction  r e f u s a l to give  t o see, as with  corporations,  business  t a x on d i v i d e n d s  does f o r r e s i d e n t s  tax  Canada  i n the d i s c r i m i n a t i o n area  it  can  the o b j e c t i o n s  such as p r e v i o u s l y mentioned: n o n - u n i v e r s a l  capitalization  race,  that  where  Contracting  State.  and B i s s e t t ,  have been v e r y i t is difficult  i s d i s c r i m i n a t i o n . F o r example,  3 6 7  Canada's  skilful in to conclude Canada  deems c e r t a i n n o n - r e s i d e n t s  t o be r e s i d e n t s , a s i n s e c .  214(9) a n d 212(13.2) I.T.A.  I t would be d i f f i c u l t  non-resident against  t o complain  that  when he i s r e q u i r e d  he i s b e i n g  to perform  fora  discriminated  t h e same  11 2 witholding  o b l i g a t i o n s as r e s i d e n t s  Canada h a s i n t h e p a s t the  cases.  i t s course  to avoid  3 6 8  a p p e a r a n c e o f d i s c r i m i n a t i o n . I n 1963 t h e Budget  called  f o r an e x t r a  resident  5% w i t h o l d i n g  corporations  C a n a d i a n . To a v o i d  the  p r o v i s i o n as f i n a l l y  reduction the  It  i s also  provision the  enacted provided  ownership. understood  and  that  citizens  the p r o v i s i o n .  definition, paragraph also  3 7 0  include  includes taxation  nationals  in.  not only "which  However, t h e t r e a t y than n a t i o n a l s ,  because  i s other"  of tax treatment,  as i n  took t h e  to i n d i v i d u a l s  there  was no b r e a c h  3 7 1  The O.E.C.D.  "more burdensome"  State.  when  by t h e O.E.C.D.  corporations.  inequality  that  9  and t h e r e f o r e  wider  follows  6  refer only  Nationals,  i n the other  burdensome.  3  rather  could  therefore,  The  non-discrimination  As I u n d e r s t a n d , Canada  not t o c o r p o r a t i o n s  but  the  speaks of c i t i z e n s  O.E.C.D. A r t i c l e .  position  achieving  i n t h e Canada-U.S. t r e a t y was c o n s i d e r e d  provision  than  f o r a 5%  tax f o r corporations  b r a n c h t a x was b r o u g h t  the  from  the appearance of d i s c r i m i n a t i o n ,  in witholding  25% C a n a d i a n  on d i v i d e n d s  where s h a r e o w n e r s h i p was l e s s  25%  of  changed  in certain  than  taxation  the t a x a t i o n of  The O.E.C.D. p a r a g r a p h i s ,  i t appears t o apply  t o any  whether o r n o t more  37 2  new C a n a d i a n - G e r m a n D o u b l e Tax C o n v e n t i o n t h e 1977 O.E.C.D. model c o n v e n t i o n  nationals  o f one o f t h e c o n t r a c t i n g  in providing  States  w i l l not  1 13 have a more burdensome t a x nationals  of  According  to para.  include  that  one  2,  of  the  term  contracting  other the  establishment  status  state  will  not  s t a t e where t h e  than e n t e r p r i s e s 6 of A r t .  24  of  adopted. T h i s thin for  3 provides  in that  treaty  rules  and  3 7 4  surrender  the  these p o i n t s .  contained in para.  capital  of  i n the  4 of  which  partly-owned or  c o n t r o l l e d by  state,  be  will  similar  not  enterprise  in a t h i r d  state.  i s made t o  the  which  the  subject the In  rate  enterprise  itself  mentioned above —  w o u l d not  existing  law.  Canadian  in i t s tax  a  rule  O.E.C.D.-model 24.  Enterprises  of  i s wholly-owned,  residents  to tax  of  the  other  more burdensome t h a n  resident  of  which are  i n the  is located, be  and  and  3 7 5  O.E.C.D.-model t r e a t y ,  shareholders  5  been  of  Therefore,  Art.  shareholders  the  in  located  s t a t e . Paragraphs  i t s lower  the  load  i s b e c a u s e Canada would d i s c r i m i n a t e  adopted  state,  in  O.E.C.D.-model t r e a t y have not  from t h a t  was  a  resident  is  force  the  that  Canadian c o n t r o l l e d p r i v a t e c o r p o r a t i o n s ,  different  only  in  have a more burdensome t a x  resident the  law  following  enterprise  3 7 3  and  permanent e s t a b l i s h m e n t  capitalization  would have t o  one  an  than  clause).  from t h e  states. Also  of  State  " n a t i o n a l s " d o e s not  O.E.C.D.-model c o n v e n t i o n , p a r a . permanent  other  also partnerships  deriving their  the  i n the  (non-discrimination  i n d i v i d u a l s but  corporations in  State  load  resident reference  state  which —  on  in  as  in accordance with  S h o u l d Canada s o f t e n  a  the  the  1 14 discrimination  provision  residents  also  11.2  will  any t r e a t y ,  German  benefit.  SOME PROPOSALS For  t h e Income Tax A c t I would  eliminate  disincentives  controlled sections and  i n other  non-residents  which  just  non-residents taxes  should  content  tax w i l l  The  provisions  be c o l l e c t e d  i n s t r u m e n t s . But t h e  of those p r o v i s i o n s  i n the taxation  should  of r e s i d e n t s  gains  f o r w a r d o r backward o f l o s s e s ,  no  inter  vivos  and  at cost  3 7 7  and  base t o s p o u s e ,  o r t r u s t s a s i n s e c . 74, 75, a n d 7 5 ( 2 ) 3 7 8  witholding  interests Canada,  transfer  be s t r a i g h t e n e d  The  revised.  3 7 6  carry  should  be  t a x e x e m p t i o n a s i n t h e 1986  no  I.T.A.  from  like:  capital  minors,  residents  t a x and t h e p r e p a y m e n t o f  be k e p t a s t e c h n i c a l  non-residents  between  the a c t .  witholding  and e x t e n t  budget,  that  the change of a l l  treatment  throughout  like  Differences  no  including  unequal  make s u r e  t o propose to  f o r n o n - r e s i d e n t s and non-Candian  corporations,  providing  like  payable  i n order  international  out.  tax p r o v i s i o n s for financing  to get e a s i e r  financing.  3 7 9  should  exclude  from s o u r c e s and cheaper  outside  access to  1 15 For  Canadian companies t h e r e  neutrality. t h i s concept intended not  to  For  3 8 0  non-resident  doesn't remedy  apply.  The  situations  i s the  concept  controlled  of  tax  corporations  following proposals  where t h i s  are  neutrality  is  achieved: The  distinction  private  corporations  accordingly the  entitled  should  be  eliminated,  a l l private corporations,  residence  their  between C a n a d i a n - c o n t r o l l e d  of  t o the  their  shareholders,  dividend  investment  refund  income,  and  other  and  regardless should  in respect  i n c l u d i n g income  of  be of a l l o f  from  real  property. Private be  corporations  allowed  their  t o d e c l a r e and  non-resident  witholding The  small  only  tax.  the  abatement  i n Canada  country,  non-resident of  an  f r e e of any  should  be  to  leave  Canadian  should  be  no  should  be  income by  an  tax  excluded  NRO  by  benefits  Canadian-  o f f e r e d to  companies as  witholding  since a l l  net  to  an  well. NRO  way  on  which  i f r e c e i v e d by from the  NRO's income. A l s o , d i s t r i b u t i o n  interest  to  a p p l i c a b l e not  c o m p a n i e s and,  payments r e c e i v e d by  w o u l d be  should  dividends  a l l incentives given  non-Canadian-controlled  there  capital  is likely  companies  interest  control)  3 8 1  for Canadian-controlled  controlled  Any  pay  shareholders  business  investment for  ( r e g a r d l e s s of  of  of  a  computation such  dividends  should  1 16  not  be s u b j e c t  The  Income Tax A c t s h o u l d  such c a p i t a l An  NRO's  equal  gains  permit  income s h o u l d  i f such  non-resident  be s u b j e c t  t o a r a t e of tax  tax that  f o r the Part  be c h a n g e d t o have no d i f f e r e n t  taxable income.  i n v e s t o r s of Canadian  t o make t h e t h e use by  corporations  Canadian p r o p e r t i e s and earn 38 2  t a x a t i o n of  companies.  t a x s y s t e m more n e u t r a l a s r e g a r d s  non-resident  to i t s  X I V t a x ("Branch T a x " )  proposed changes would c o n t r i b u t e  Canadian  would be  income were p a i d d i r e c t l y  b r a n c h e s and s u b s i d i a r i e s of f o r e i g n The  witholding tax.  shareholders.  provisions  should  an NRO t o d i s t r i b u t e  f r e e of Canadian  to the r a t e of w i t h o l d i n g  payable  The  to witholding tax.  Canadian  to hold  investment  12. The  Canadian  government c h a n g e d  policy  towards  policy  i s the Canadian  not is  t h e most  foreign  some o f t h e C a n a d i a n  investment. Part t a x l a w . Even  important part  dealing  foreign  towards  foreign  seems f a i r  with the i m p l i c a t i o n  when t a l k i n g  about  i n terms  of t h i s  of Canadian  t a x law  seems t o be w o r t h the general  investment w i t h i n  t o say, that  general  o f an i n v e s t m e n t d e c i s i o n , i t  investment, t a x a t i o n  considering  of t h i s  i f the t a x a t i o n i s  one o f t h e main e l e m e n t s . A t l e a s t  thesis, on  CONCLUSION  approach  Canada. T h e r e f o r e i t  the current  Canadian tax  treatment  of n o n - r e s i d e n t s and n o n - C a n a d i a n - c o n t r o l l e d  companies  imposes  which and  i s unequal  Canadian  definition an  perceived  also  would  Canadian  to law  imposed Even  on  residents  if.the  Canadian treatment,  tax incentives  s h o u l d be  r e s i d e n t s and n o n - r e s i d e n t s i n c l u d i n g would  eliminate  and v e x a t i o u s b i a s .  what They  h e l p t o overcome some i n c o n s i s t e n c y i n The new p r o g r a m and p r o v i n c i a l  incentives  i s likely  investment  including  as a s i g n i f i c a n t  policy.  investor.  investment  e x c l u d e s unequal  Furthermore, changes  the f e d e r a l give  companies.  of d i s c r i m i n a t i o n  corporations.  and  controlled  between  on f o r e i g n  t o the tax burden  equal tax treatment  achieved  is  a t a x burden  3 8 4  for foreign  t o impose As a p a r t  "Investment  Canada"  3 8 3  e n t r e p r e n e u r programs t r y investment, while the tax  d i a d v a n t a g e s on t h e f o r e i g n of the o v e r a l l  i n Canada, a d i f f e r e n t  11 7  scheme f o r f o r e i g n  approach  i n the  1 18 Canadian  Income Tax  Act  would  be  appropriate.  1 19 FOOTNOTES  1 In o l d e r the  days  the  import  U n i t e d Kingdom. In t h e  government  reports  which  Canada. So a t t h e end the  Gray  (December  reports  investment possible  had  12,  concluded that  of the F o r e i g n  Investment  Both  the Watkins  existing  c o n t r o l s on  By  this  of t h e t o t a l  time  went on  the c o n t r o l  foreign  national  business a c t i v i t y  and  i n Canada was  finally  and  the  foreign  to consider of  investment  w e a l t h , and  in  the b e g i n n i n g of which  were i n s u f f i c i e n t ,  of  investment  reached a l e v e l  1973).  extensions to l i m i t  ownership.  1960's and  from  a series  c r i t i c i s e d foreign  i n the l e g i s l a t i o n  Review A c t  came m a i n l y  1960's t h e r e was  of the  1970's t h e c o n c e r n s  resulted  10%  of c a p i t a l  foreign accounted  one-third  controlled  by  of  for  total  foreign  interest. Since last  few  the Canadian  years, foreign  more t h a n e v e r . As investment  economy got investment  the Watkins  seems t o be  not  2 see Bakken; Beck; F i s h e r ;  3 See  Spence/Rosenfeld  Bibliography.  trouble  seems t o be  Report  over  the  needed  indicated,  so much t h e c a u s e  e c o n o m i c m a l a i s e , but a v i c t i m  O'Sullivan;  into  foreign  of Canada's  of i t .  Hughes; Graeme;  Nixon/Burns;  1 20 4 See  chapter  6.  5 See  chapter  7.  6 See  chapter  9.  7 The  idea l a i d  countries. developed  out  General  shall  apply  between  c o n s i d e r a t i o n s with  c o u n t r i e s (LDC's) s h a l l  not  industrialized respect to  be  an  less  i s s u e of  this  thesis.  8 To  deal with  a l l of  them w o u l d be  too broad  for  this  thesis.  9 See  the d i s c u s s i o n s i n economics over  y e a r s or  s o , where t h e c o n c e p t s  governmental F.A.  i n f l u e n c e i n the  Hayek, M i l t o n F r i e d m a n  the  of more or  last  100  less  economy were d i s c u s s e d .  and  the  so c a l l e d  See  Chicago  School.  10 See  in detail  11  convinced,  the  I'm  tax-,  countries, way  below.  that d e s p i t e other  investment-, we  and  trade-policies  co-operations  c o u n t r i e s . In a way,  the  found  in  o f many  have t o c o n s i d e r t h e s e p r i n c i p l e s  t o w a r d s more e c o n o m i c a l  industrialized  tendencies  on  the  between  situation  today  121  is  not  years  different ago,  from the  when t h e  domestic  cheaper and/or b e t t e r they  situation  general  agreement  restrictions situation  is -  communities goal  and  free  like  trade  the  EEC,  (GATT) we  r i d of  where t h e  the  see  that  we  of  foreign trade  9000 pages!  12  Like  13  so  14  see  sec.  2(3)(a)  I.T.A.  15  see  sec.  2(3)(b)  I.T.A.  etc.,  listing  of  that  a  so many the  Even  written  restrictions,  afraid  Even a f t e r  - schizophrenic.  is  in  and  declared  actually US  find  report  a l l of  on  them,  Canada.  the  USA  and  defined  2(3)(c)  barriers.  hundred  from a b r o a d  i n a more s o p h i s t i c a t e d f o r m . The  restrictions  16 as  imported  imposed d i s a d v a n t a g e s ,  i n a way  i s to get  them, j u s t  on  of  e c o n o m i e s were so  products  implemented heavy t r a d e  a couple  the  in sec.  Philipines.  2 4 8 ( 1 ) and  115(1) I.T.A., see  sec.  I.T.A.  17  they are  see  chapter  subject 6.2.  to witholding  tax,  Part  XIII  I.T.A.;  1 22 18 means: c o u n t r y  where he  worldwide  see  income,  19  see. Schaumburg, p .  20  ibid  21  i n t e r m s of  residency this  t a x e d on  his  above.  5.  taxation.  is different  is different  i s usually  In Canada t h e d e f i n i t i o n  i n tax  law  and  of  i n immigration  i n t h e U n i t e d S t a t e s , where t h e s e  law; are  linked.  22  According  countries,  to i n t e r n a t i o n a l  Canada a n d  h i s worldwide  of  the concept we  find  24  see  25  see:  26  see  both  on  Credits,  e v e r y c o u n t r y , we  taxation, the concept  especially of Tax  find the  some concept  Exemptions  of E x e m p t i o n s w i t h P r o g r e s s i o n . In most  double  tax  s e c . 2(1)  I and  conventions.  I.T.A.  XIII  I.T.A.; S e c .  2(3)  I.T.A.  and  cases  Keyes  Part  on  income.  to a v o i d double  F o r e i g n Tax  theoretically  t h e U n i t e d S t a t e s , c o u l d t a x him  23 T h e r e f o r e , d e p e n d i n g concepts  law,  reads:  1 23  Sec. 2(3) , (3) Tax who  payable  by n o n - r e s i d e n t s persons. Where a  i s not t a x a b l e under s u b s e c t i o n  person  (1) f o r a t a x a t i o n  year (a) was  employed  (b) c a r r i e d  on a b u s i n e s s  (c) d i s p o s e d at  any  shall  i n Canada,  time  i n Canada, o r  of a t a x a b l e Canadian i n the year  or a p r e v i o u s y e a r ,  an  income t a x  be p a i d a s h e r e i n a f t e r r e q u i r e d upon h i s t a x a b l e  income e a r n e d accordance  i n Canada  with  f o r the year  Division  28 see A r t . 7 Canadian-German  29 F o r t h e d e f i n i t i o n chapter  determined  in  D.  27 see A r t . 14 Canadian-German  D o u b l e Tax  D o u b l e Tax  o f permanent  Convention.  Convention.  establishments  see  3.2.  30 f o r t h e US  and Canada  Tax C o n v e n t i o n  (1980).  31  property,  see A r t . V, Canada-U.S.  Income  s e e : Hansen  32 The  section  reads: Sec.  (3) O r d i n a r i l y  250(3)  r e s i d e n t . In t h i s  Act, a reference to a  person  resident  i n Canada  includes  the  relevant  33  [1980] CTC  34  (1904),  35  (1928)  36  [1949] C.T.C.  37  (1964),  35 Tax A.B.C. 420;  38  (1958),  2 Tax A.B.C. 63; DTC  39  [1980] CTC  40  [1928] A.C.217  41  [1981] CTC  time o r d i n a r i l y r e s i d e n t  2117;  5T.C.  80 DTC  1118  2429;  i n Canada.  (T.R.B.)  536  64 DTC  80 DTC  1749  81 DTC  366  information  12, shown  IT-221R  o f an I n d i v i d u a l ' s  1. The p u r p o s e o f t h i s  Bulletin  Department's p o s i t i o n concerning o f an  449  232  see IT-221  "INTERPRETATION BULLETIN  determination  was a t  [1928] A.C.234  13; 4 DTC  2845;  Determination  who  101  13 T.C.511;  42 F o r more  a person  (May  below:  26,  residence  1980) status  i s to explain  the  the  i n d i v i d u a l ' s residence  status  for  income t a x p u r p o s e s .  General  Comments  2 . The t e r m  "resident"  i s not d e f i n e d  Income Tax A c t . The c o u r t s have h e l d individual if  Canada  routine  that  an  i s resident  i n Canada  f o r tax purposes  i s the place  where he,  i n the  of l i f e ,  customarily all  i n the  regularly,  lives.  settled  normally or  In making t h i s d e t e r m i n a t i o n ,  of the r e l e v a n t  facts  i n e a c h c a s e must  be  considered. Leaving 3.  Canada  Where an  individual  date of t h i s be t a k e n whether Canada  bulletin,  into  l e a v e s Canada a f t e r the f o l l o w i n g  consideration  the i n d i v i d u a l  will  the  factors  will  in determining remain  a resident  of  f o r tax purposes while abroad:  (a) permanence  and p u r p o s e  of s t a y  (b) r e s i d e n t i a l  ties  within  (c) r e s i d e n t i a l  ties  e l s e w h e r e , and  (d) r e g u l a r i t y Permanence  Canada,  and l e n g t h o f v i s i t s  and P u r p o s e  of Stay  4. In o r d e r f o r an i n d i v i d u a l non-resident permanence resident reason) presumed  i s absent for less  t o Canada.  Abroad t o become a  o f Canada, t h e r e must  to h i s stay  abroad,  be a d e g r e e of  a b r o a d . Where a  from Canada  than 2 y e a r s ,  t o have r e t a i n e d  Canadian  ( f o r whatever he w i l l  h i s residence  be status  while that  abroad, he  unless  severed  a l l residential  Canada. I f t h e r e t o Canada was departure return that  i s an e v i d e n c e  (e.g., a c o n t r a c t  on l e a v i n g  that h i s return  f o r employment  a l lresidential  upon  presume ties  on  Canada.  Where an  individual  or longer,  satisfies  i s absent  he w i l l  become a n o n - r e s i d e n t  status  ties  the Department w i l l  he d i d n o t s e v e r  2 years  establish  f o r s e e n a t the time of h i s  t o Canada),  leaving 5.  he c a n c l e a r l y  the other  f r o m Canada f o r  be presumed  t o have  o f Canada, p r o v i d e d  requirements  that  he  for non-resident  o u t l i n e d i n 6 t o 12 b e l o w .  Residential  Ties Within  6. The p r i m a r y  Canada  residential  ties  o f an  individual  are h i s (a) d w e l l i n g p l a c e (b)  spouse and dependents,  (c) p e r s o n a l 7. An that  property  individual  who  a dwelling place  occupancy  i s kept  occupation  and  and s o c i a l  ties.  l e a v e s Canada, b u t e n s u r e s suitable for  i t (vacant  months)  t h e l e a s e on s h o r t  will  for his or  by l e a s i n g i t a t non-arm's  l e a s i n g i t a t arm's l e n g t h w i t h  terminate  year-round  a v a i l a b l e i n Canada  by m a i n t a i n i n g  otherwise), by  (or p l a c e s ) ,  notice  l e n g t h , or  the r i g h t (less  g e n e r a l l y n o t be c o n s i d e r e d  to  than  3  t o have  severed 8.  his residential  If a married  t i e s w i t h i n Canada.  individual  l e a v e s Canada, but h i s  spouse or dependants remain individual a  will  i n Canada, t h e  g e n e r a l l y be c o n s i d e r e d  t o remain  r e s i d e n t of Canada d u r i n g h i s a b s e n c e . An  exception and  t o t h i s may  occur  h i s spouse a r e l e g a l l y  individual  ties  tenuous nature  and  severed  a person  person  his  he w i l l  where  l e a v e s Canada  f o r 2 years  be a n o n - r e s i d e n t  indicate a single  dwelling  t h a t he person  maintained  and,  after  that  person  considered  residential  and, i n t h e m a j o r i t y o f c a s e s , i f  absence, unless other  Canada  and t h e  a r e f r e q u e n t l y o f a more  e s t a b l i s h e s residence elsewhere,  that  individual  a l l other  t i e s w i t h i n C a n a d a . The  of a s i n g l e  such  an  separated  has p e r m a n e n t l y  residential  where  o r more  i t is likely  o f Canada  important  during  ties within  i s n o t . F o r example,  i s supporting  and o c c u p i e d  h i s departure,  by him  he c o n t i n u e s  i n t h e d w e l l i n g , he w i l l t o have s e v e r e d  someone i n a i n Canada to  support  n o t be  his ties within  Canada. 9.  G e n e r a l l y speaking,  an i n d i v i d u a l  Canada and becomes a n o n - r e s i d e n t any  residential  property  ties  i n t h e form  (e.g. f u r n i t u r e ,  bank a c c o u n t s ,  credit  who  will  leaves  not  retain  of p e r s o n a l  clothing,  automobile,  cards, e t c . ) or s o c i a l  ties  (e.g.  resident  c l u b memberships,  etc.) within  Canada a f t e r h i s d e p a r t u r e . Where s u c h t i e s a r e retained within examine  Canada, t h e Department  the reasons  determine  i f these  conclude that resident  for their ties  r e t e n t i o n to  are s i g n i f i c a n t  the i n d i v i d u a l i s a  enough t o  continuing  o f Canada w h i l e a b s e n t . O t h e r  ties  may  a l s o be r e l e v a n t  the  retention of:  (a)  p r o v i n c i a l h o s p i t a l i z a t i o n and m e d i c a l  insurance (b)  in this  may  residence  i n Canada,  (c) p r o f e s s i o n a l o r o t h e r (on  a resident  (d)  family  i n Canada  Ties  payments.  Elsewhere  10. The C o u r t s have h e l d (a)  e v e r y o n e must  (b)  i t i s quite  resident  membership  b a s i s ) , and  allowance  Residential  that:  be r e s i d e n t  possible  i n more t h a n  somewhere, and  f o r an  one p l a c e  i n d i v i d u a l t o be a t t h e same  time  tax purposes.  Accordingly, abroad,  where a r e s i d e n t  elsewhere,  remains a r e s i d e n t  that  an  o f Canada  goes  but d o e s n o t e s t a b l i s h a permanent  residence he  are  coverage,  a seasonal  for  determination  that  there  i s a presumption  of Canada. A l s o ,  that  the f a c t  i n d i v i d u a l e s t a b l i s h e s a permanent  residence  a b r o a d d o e s n o t , i n any p a r t  and by  itself,  mean t h a t t h e i n d i v i d u a l  non-resident  of C a n a d a .  11. Where an  individual  and,  a t t h e same t i m e ,  country  by  i t s laws,  any t a x c o n v e n t i o n have w i t h Regularity  purports  r e s i d e n t i n another  r e f e r e n c e s h o u l d be had t o  of V i s i t s  individual  l e a v e s Canada  will  p e r s o n a l or b u s i n e s s visits  particularly basis,  this  and  h i s tax s t a t u s  n o t g e n e r a l l y be  by o c c a s i o n a l r e t u r n v i s i t s  such  may  t o Canada  t o become a n o n - r e s i d e n t ,  as a n o n - r e s i d e n t  for  t h a t Canada  country.  and L e n g t h  12. Where an  i s r e s i d e n t i n Canada  or agreement  the other  has become a  t o Canada,  reasons.  affected whether  However,  where  a r e more t h a n o c c a s i o n a l , where factor  the v i s i t s together  with  ties  above) w i l l  be e x a m i n e d t o d e t e r m i n e  significant  the  individual  enough  on a r e g u l a r  other  residential  are  that e x i s t  occur  ( a s s e t out i n 9  in total  whether  to conclude  they that  i s a c o n t i n u i n g r e s i d e n t of C a n a d a .  43 s e e above  44 s e e a l s o A r t . IV Canada-U.S.  Income Tax  Convention  (1980) .  45 s e e : F a r n s w o r t h ;  Pyrcz;  S t a p e l s ; Wang; Ward  1 30  46  [1906] A.C.455; 5T.C.  198;  Loreburn).  Being  determined  upon a s c r u t i n y  and  t r a d i n g and  47  1929  48  sec.250(4)(a)  49  For  see  a mere q u e s t i o n of  not  of  according  (per  95L.T.221  fact,  the course  Lord  i t i s to  be  of t h e  business  t o r e g u l a t i o n s or  by-laws.  AC 1  the  t a x a t i o n of n o n - C a n a d i a n c o n t r o l l e d  chapter  50  see:  51  Article  I.T.A.)  companies  7.  Spence  5 of  t h e C a n a d i a n - G e r m a n D o u b l e Tax  Convention  reads: Article Permanent (1) F o r  the purposes  "permanent through partly (2) The  of  5  Establishment  t h i s Agreement, the  e s t a b l i s h m e n t " means a  which the b u s i n e s s carried term  p l a c e of  "permanent e s t a b l i s h m e n t "  a)  a p l a c e of management;  b)  a  business  e n t r e p r i s e i s wholly  on.  specifically:  branch;  of an  fixed  term  includes  or  131 c ) an  office;  d) a f a c t o r y ; e) a workshop; f ) a mine, place  and  an o i l o r gas w e l l ,  a quarry  of e x t r a c t i o n of n a t u r a l  (3) A b u i l d i n g project  site  or c o n s t r u c t i o n or  twelve  (4) N o t h w i t h s t a n d i n g Article,  the term  other  resources.  c o n s t i t u t e s a permanent  l a s t s more t h a n  o r any  installation  establishment  only  ifit  months.  the p r e c e d i n g  "permanent  p r o v i s i o n s of  establishment"  this  shall  be  deemed not t o i n c l u d e : a) t h e use o f f a c i l i t i e s storage,  d i s p l a y or d e l i v e r y  belonging  belonging  c) the maintenance  processing  of a s t o c k  of goods  or merchandise  f o r the purpose of  o f goods  or merchandise  f o r the purpose of  enterprise;  of a f i x e d  the purpose of p u r c h a s i n g  p l a c e of b u s i n e s s goods  solely  or m e r c h a n d i s e o r f o r  i n f o r m a t i o n , f o r the e n t e r p r i s e ; of a f i x e d  p l a c e of b u s i n e s s  t h e p u r p o s e o f c a r r y i n g on,  other  or merchandise  delivery;  by a n o t h e r  e) t h e m a i n t e n a n c e for  of a stock  t o the e n t e r p r i s e s o l e l y  d) t h e m a i n t e n a n c e  collecting  o f goods  to the e n t e r p r i s e s o l e l y  s t o r a g e , d i s p l a y or  belonging  f o r the purpose of  t o the e n t e r p r i s e ;  b) t h e m a i n t e n a n c e  for  solely  activity  of a p r e p a r a t o r y  f) the maintenance  of a f i x e d  solely  f o r t h e e n t e r p r i s e , any or a u x i l i a r y  character;  p l a c e of b u s i n e s s  solely  1 32 for  any c o m b i n a t i o n  of a c t i v i t i e s  s u b p a r a g r a p h s a) t o e) p r o v i d e d of  the f i x e d  combination (5)  place  of business  Contracting the  an a u t h o r i t y  deemed t o have a permanent o f any a c t i v i t i e s  for  the e n t e r p r i s e ,  are  limited  through a f i x e d  make t h i s  fixed  place  under  An e n t e r p r i s e  general  commission  (7)  the ordinary The f a c t  Contracting which  that State  which c a r r i e s  behalf in a  be State i n  undertakes  of such  person  i n paragraph 4 which, i f  place  of b u s i n e s s ,  would n o t  paragraph.  n o t be deemed t o have a permanent State  State  o r any o t h e r  provided  that  of t h e i r  controls  agent  o f an  such persons a r e a c t i n g business. i s a resident  of a  o r i s c o n t r o l l e d by a company  of t h e other  on b u s i n e s s  merely because i t  through a broker,  a company w h i c h  i s a resident  person  the a c t i v i t i e s  i n that  course  shall  i n that  t h e p r o v i s i o n of t h a t  agent  status,  enterprise  which that  in a Contracting  on b u s i n e s s  in  on  o f b u s i n e s s a permanent  shall  carries  independent  1 a n d 2,  to conclude c o n t r a c t s i n  that  t o those mentioned  establishment  of paragraphs  establishment  unless  exercised  (6)  character.  and h a s , a n d h a b i t u a l l y e x e r c i s e s ,  State  establishment  or a u x i l i a r y  this  6 applies — i s acting  name o f t h e e n t e r p r i s e ,  respect  from  activity  t h a n an a g e n t o f an i n d e p e n d e n t  t o whom p a r a g r a p h  of an e n t e r p r i s e  the o v e r a l l  resulting  the provisions  where a p e r s o n - o t h e r status  that  i s of a p r e p a r a t o r y  Notwithstanding  mentioned i n  i n that  Contracting other  State  State, or (whether  1 33  through a permanent not  of  itself  establishment  constitute either  establishment  of  Green;  the  52  see:  53  [1978] C.T.C. 539  54  C a n a d i a n Tax  55  De  or o t h e r w i s e ) , company a  shall  permanent  other.  Noble  (Fed.  P a p e r No.  Beers C o n s o l i d a t e d  ct. —  39,  T.D.)  1964  at  p.38.  M i n e s L t d . v . Howe [1906]  A.C.  455.  56  Under  this  residence  57  21  58  supra  59  The  gain  f o r tax  Can.  Tax  issue  on  J.  the  were r e s i d e n t  by  a corporation  217  the  basis  T h i b o d e a u c a s e was Thibodeau Family of  Canadian  dual  t r u s t e e had  appoint  t r u s t e e s . The  whether a Trust  residence.  i n Bermuda, a t h i r d  Canadian  majority  have a  (1973).  C a n a d a . The new  may  purposes.  i n the  realized  t o tax  test,  trustee the  Two  the  subject trustees  resident  s o l e power  trustees could  d e c i s i o n , a l l m e e t i n g s of  was  capital  only  in  to  act  by  t r u s t e e s were  held  1 34 in  Bermuda, and  were l o c a t e d  60  He  the  trust assets  formula  case  "a  that  the  to determine  Thibodeau Family T r u s t " employ  their  administration  i n Bermuda.  r e i t e r a t e d h i s view  "statutory  and  judicial  and  statute  the  that  provided  residence  therefore  formula a p p l i c a b l e  to  of  he  the  no  the  would f a c t s of  alone". "As  to  the  ...  even  submission  i f i t also  i n Bermuda,  residence  i n Canada  this  by  analogy  c a s e s of  determining  submission formula  cannot  delegate  co-trustees. masterly  and  on  adopt for  the  the  A  any  on  Law  evidence,  tax  such  judicial  because  authority  cannot  adopt a  commented upon  of  Trusts  none of  such p o l i c y . T h e r e f o r e  and  the  in  trustees to  in  Trustees  trustees  i t i s not  residence  my  " p o l i c y of  as  a t r u s t t o have a d u a l  cited  a corporation,  their  has  i n Canada  income  view,  The  trustees  trustee  the  i n my  valid.  of  it  p r i n c i p l e s i n the for  a  paramount  c a r r i e d on  residence  to  inactivity"  Underhill  to  respecting  apply  that  in relation  i s a l s o not  view, cannot  find  the  the  case  t r u s t has  of  corporations,  for this  the  in this  part  t r u s t was  applying  p u r p o s e s of  Court  i t should  in that  supreme a u t h o r i t y  management of  the  finds that  residence  or  that  ...  did  possible  for  income  the  135 tax  p u r p o s e s , and t h e r e f o r e  find  that  direct  part  i t i s not p o s s i b l e t o  o f t h e paramount o r " s u p e r i o r and  authority"  o f a t r u s t i s a n d was i n two  places.  I n any e v e n t , a f i n d i n g o f d u a l  of  trust  this  The  logic  been h i g h l y rule  i s n o t made i n t h i s  o f t h e above p a s s a g e  criticized.  i s not r e l e v a n t  However, i t i s r e l e v a n t residence  case."  i s unclear  I t seems t h a t  t o the question  and has  the non-delegation of dual  to the question  i n the t r u s t context  residence  residence.  o f whether  i s a de f a c t o  or not  o r a de j u r e  concept.  61  However,  i n many i n s t a n c e s  judgment a n d e x p e r t i s e this  will  of h i s c o - t r u s t e e ,  After  J.  then  even  though  r e j e c t i n g t h e s u b m i s s i o n s o f t h e Crown, identified  considered  relevant  to the determination  t h e t r u s t : 1) t h e m a j o r i t y  of the residence  of the trustees  i n Bermuda; 2) t h e t r u s t document  majority  r u l e ; 3) t h e C a n a d i a n  trustees  located  resident  i n Bermuda;  trustee  i n Bermuda; 4) t h e t r u s t r e s was  5) some b e n e f i c i a r i e s r e s i d e d  On  the b a s i s  of the f i r s t  that  a  d i d not c o n t r o l  Canada; a n d 6) no t r u s t b u s i n e s s was done  held  were  permitted  of  Court  Gibson,  a number o f f a c t o r s w h i c h he  resident  the  r e f e r to the  i s t e c h n i c a l l y a breach of h i s duty.  62  of  a trustee  outside  i n Canada.  two f a c t o r s e n u m e r a t e d , t h e  t h e t r u s t was n o t r e s i d e n t  i n Canada.  136 See a l s o F l a n n i g a n , p.83; D.B. CR.  1985 E s t a t e s  Morris,  [1979] C R .  and T r u s t s  Quarterly,  414; L . A m i g h e t t i ,  [1979]  652.  63 T h i s  Bulletin  reads:  [ I n t e r p r e t a t i o n B u l l e t i n No.  IT-447]  Residence of a t r u s t or e s t a t e .  1. The  residence  of a t r u s t  or e s t a t e  referred  t o a s a t r u s t ) i n Canada  province  or t e r r i t o r y  fact  t o be d e t e r m i n e d  generally considered executor,  or i n a p a r t i c u l a r  Canada,  i n each c a s e .  i s a question However,  t o r e s i d e where  administrator,  representative who  within  (hereinafter  a trust is  the t r u s t e e ,  h e i r or other  legal  ( h e r e i n a f t e r r e f e r r e d to as the  manages t h e t r u s t  of  or c o n t r o l s t h e t r u s t  trustee)  assets  resides. 2. The t r u s t e e who trust, trust the (a)  h a s management a n d c o n t r o l of t h e  while  he may  assets,  will  not have p h y s i c a l p o s s e s s i o n be t h e p e r s o n  f o l l o w i n g powers o r  who  has most  of the  o r a l l of  responsibilities:  c o n t r o l over changes i n the t r u s t ' s  investment  portfolio, (b)  responsibility or  (c)  property  f o r t h e management o f any  owned by t h e  responsibility  business  trust,  f o r any b a n k i n g , a n d  financing  1 37 arrangements  f o r the t r u s t ,  (d)  c o n t r o l o v e r any o t h e r  (e)  ultimate trust of  (f)  a c c o u n t s and r e p o r t i n g  power t o c o n t r a c t  one t r u s t e e  t r u s t . I f one s u c h t r u s t e e  the  the t r u s t w i l l  others,  which the t r u s t e e exercise  clearly  reside  equal  portions  the t r u s t w i l l i t may  will  reside  trustees  e x e r c i s i n g more reside  than  i n one  i n that  jurisdiction.  n o t be c l e a r who has management  examine o t h e r  to determine  than  o f t h e management and  c o n t r o l o f t h e t r u s t and i n t h e s e  Department  a more  i n the j u r i s d i c t i o n i n  o f t h e t r u s t , and t r u s t e e s  I n some c a s e s  exercises  over  o f t h e management a n d c o n t r o l  o f s u c h management a n d c o n t r o l  trust  may be  r e s i d e s . Where two o r more  relatively  jurisdiction,  and  trust  i n e x e r c i s i n g t h e management a n d c o n t r o l  portion  4.  with  and l a w y e r s .  more t h a n  substantial  50%  to the b e n e f i c i a r i e s  w i t h and d e a l  e.g., a u d i t o r s  In c e r t a i n c a s e s ,  control  of the  t h e t r u s t , and  involved the  assets,  r e s p o n s i b i l i t y for preparation  advisors, 3.  trust  residence.  s i t u a t i o n s the  factors relating The most  t o the  important  of these  factors are: (a)  t h e l o c a t i o n where t h e l e g a l the  (b) The  trust assets  are enforceable,  t h e l o c a t i o n of the t r u s t residence  domicile  r i g h t s with  respect  to  and  assets.  o f t h e b e n e f i c i a r i e s o f a t r u s t and  of the s e t t l o r  a r e not c o n s i d e r e d  t o be  relevant  1 38 except 5.  in situations  Normally  residence  as d e s c r i b e d  residence  of a t r u s t  of the t r u s t e e  i n 5 below. i s dependent  or t r u s t e e s  management and c o n t r o l  of the t r u s t .  the  that  facts  may  indicate  management and c o n t r o l as the be  residence  of t h i s other  the determining  factor  provisions  with  control  of a t r u s t ,  determined  control  of a t r u s t ,  exercises  d e t e r m i n e d b a s e d on t h e n o r m a l residence  the  general  rule  and  control  of a t r u s t  trust  office outside  situations  regardless  o f any  individual i s  tests for  t h e management and of that  factual  corporation i s  tests for  of a c o r p o r a t i o n .  An e x c e p t i o n t o  i s exercised  by a b r a n c h o f a  i s located  the t r u s t  may be  i n t h e j u r i d i c t i o n where t h e b r a n c h  even t h o u g h t h e c o r p o r a t i o n  itself is  jurisdiction.  8. I n some s i t u a t i o n s , may  such  may be e n c o u n t e r e d where t h e management  resident  that  person  be c o n s i d e r e d t o  of that  company. In t h e s e c i r c u m s t a n c e s ,  determined  it  may  of the  individual.  the r e s i d e n c e  determining  In t h e s e  factual  o f an  portion  t h e management and  the r e s i d e n c e  7. Where a c o r p o r a t i o n  situations  agreement.  exercises  the residence  I n some  of the t r u s t  b a s e d on t h e n o r m a l  determining  exercise  some o t h e r  person  i n the t r u s t  Where an i n d i v i d u a l  who c a n  a substantial  the s e t t l o r or the b e n e f i c i a r i e s .  contrary 6.  rests  upon  be d e t e r m i n e d  notwithstanding  that  after  that  examination  a trust  another  of a l l  i s resident  country  factors,  i n Canada  may c o n s i d e r t h e  1 39 trust 9.  t o be r e s i d e n t i n t h a t  Pursuant  resident Canada is  to paragraph  i n Canada may  country.  94(c) a t r u s t  otherwise  be deemed t o be a r e s i d e n t i n  f o r the purposes of P a r t  such  not  I of the Act i f the  t h a t t h e amount o f t h e income o r c a p i t a l  distributed  a t any t i m e  d e p e n d s upon failure  by any p e r s o n  t o be  t o any b e n e f i c i a r y o f t h e  t h e e x e r c i s e by any p e r s o n t o e x e r c i s e , any  trust  trust  o f , or the discretionary  power. 10. S u b s e c t i o n transferred condition it,  may  to a trust  or p r o p e r t y  be d i s p o s e d  of o n l y  loss  from t h e p r o p e r t y ,  i s attributable  while  he  i s r e s i d e n t i n Canada.  attribution  his  the  concurrence,  gain or a l l o w a b l e  or property  to that person  on  persons  his lifetime with  1934  substituted for  or pass t o  by him o r t h a t d u r i n g  may  property i s  created after  income o r l o s s o r t a x a b l e c a p i t a l  capital  in  t h a t , where  r e v e r t to that person  property  it,  by a p e r s o n  that the p r o p e r t y ,  designated  any  75(2) p r o v i d e s  submitted  for  during h i s lifetime  In s u c h  situations  a p p l i e s whether o r n o t t h e t r u s t  i s resident  Canada.  11. The  f o r e g o i n g a r e the c o n s i d e r a t i o n s viewed  relevant estate factors estate  i n determining  the r e s i d e n c e of a t r u s t  in ordinary situations. where  or  be had t o o t h e r  residence  of a t r u s t  or  a p p e a r s t o have been m o t i v a t e d  by r e a s o n s  of tax  avoidance.  the p u r p o r t e d  R e g a r d may  as  1 40  64 see below, c h a p t e r  6.2  65 see below, c h a p t e r  6.1  66 see below  67 I t w i l l  be shown l a t e r  disadvantages for  resulting  that  there are c e r t a i n  out of the d i v i d e n d tax  credit  non-residents.  68 I w i l l  69 l i k e  refer  people  residents  who  are l i v i n g  i n Canada,  of the  o r German c o m p a n i e s w h i c h have a permanent  establishment  i n Canada  and t h e r e f o r e b e i n g h e r e  actually  being a resident c o r p o r a t i o n .  70 s o u r c e : F i s c h e r W e l t a l m a n a c h 1986,  71 The U.S. imports  but a r e  of Germany a c c o r d i n g t o t h e d e f i n i t i o n  Convention,  without  t o some a n o m a l i e s l a t e r .  garment  i n d u s t r y and  f r o m Hong Kong,  72 see a l s o  s.  343  i t s lobby are  fighting  Taiwan, South Korea.  Olsen  73 I t i s n o t my  intention  to cover  a l l o f them n o r t o go  141 i n t o a very eligible  d e t a i l e d d i s c u s s i o n . Most of  for non-residents,  as  them a r e  f o r example,  not  the o i l  incent ives.  74  see  the  C a n a d i a n MURB - P r o g r a m s , where a  some c a s e s buildings  10%  depreciation  (MURB) was  income; see  Reg.  75  see  sec.  37  I.T.A.  76  sec.  65,  66  I.T.A.  77  Reg.  1208;  78  Even  so c a l l e d  this  tax  Sch.  Reg.  deductible  Sch.  "quick  79  see  80  Watkins Report, Gray  81  In Canada t h e  As  a result  derived  at  there  flips" the  II, Class  earned  the  unit residencial other  sources  of  beginning  of  10  were i n the  12 and  Act  the  Reg.  government.  1104(2)  proposes tax n e u t r a l i t y .  same t a x  level  burden  for  profits  i n means of d i v i d e n d s  personally.  company  in  32.  p o l i c y of  10,  and  Report  Income Tax i s the  31,  II, Class  from a c o r p o r a t i o n  to p r o f i t s taxed  Sch.  against  II, Class  program w i t h i n  Reg.  for multiple  5%  and  In  the  i n the  U.S.  compared  dividends  hands of  the  are  1  shareholders, allowing  for total  a consequence if  without having a dividend  42  tax c r e d i t  t a x n e u t r a l i t y a s i t i s i n C a n a d a . As  i t i s cheaper  t o do i n v e s t m e n t  one e x p e c t s t o r e - i n v e s t  profits  i n t h e U.S.  made by a company.  82 s e e below  83 A f t e r  t h e U.S. Tax Reform  A c t 1986, i n v e s t m e n t  from r e a l e s t a t e  are l i m i t e d to  84 F o r t h e f i r s t  year only,  losses  income.  half  the r a t e ,  e q u a l s 2.5%,  applies.  85 i n s e r t from  me  86 Bode, p . 4; Zimmermann, Diskriminierung,  p. 29;  Jaenicke,  p . 387; K i p p , p . 137  87 L a n g e n s c h e i d ' s T a s c h e n w o r t e r b u c h Schmidt,  Grundfragen,  88 L a r o u s s e du X X Lepointe, Schmidt,  s  p . 12; Zimmermann,  siele,  Encyclopedique  1960  p . 29  V o l . 2, " d i s c r i m i n e r " ;  "discrimination"; Grundfragen,  Lateinisch-Deutsch;  Bertaux-  von Ackermann, p . 3 and  p . 12; Le g r a n d  ibid;  Larousse  "discrimination"  89 Das g r o s s e D u d e n l e x i k o n , V o l . 2,  "diskriminieren,"  143 "Diskriminierung";  Mackensen,  "diskriminieren,"  Diskrimination"  90 L o e r k e , p . 15  91  Zimmermann,  discriminate"; 1,  p . 29 F n . 35; L e a r n e r ' s D i c t i o n a r y " t o Schindler,  p . 67; H e r b s t , W o r t e r b u c h , V o l .  "discrimination"  92 S t a a t s l e x i k o n ,  V o l . 2, p . 990,  "Diskriminierung"  93 G r u n d s a t z d e r  Gleichberechtigung  94 Bode, p . 5; K r u s e , p . 279, 530 f . , 518f  95 IMF: A n n u a l R e p o r t  1965, p. 4; S a n n w a l d - S t o h l e r ,  p . 65  96 Bode, p . 5  97 In o r d e r  to stress  i t the term  " d i s c r i m i n a t i o n " has  supplements as " i n j u s t e , " " m a l v e i l l a n t , " " i n j u s t , " "unlawful," like  "unfair." It also  "against,"  98 Zimmermann, the  "au d e t r i m e n t "  p. 2 9 f , d e f i n e s  r e s u l t s from o r "au  discrimination."  prejudice."  t h e term d i s c r i m i n a t i o n i n  l e g a l sense a s : " d i s a p p r o v e d  unlawful  supplements  by law, u n j u s t i f i e d o r  1 44  99 In t h i s  sense J a e n i c k e ,  the term of d i s c r i m i n a t i o n  100 s e e H e s s e ,  101  p . 32 f , 86 d e f i n e s  "inadmissable treatment"  p . 170 f , 187, 211  S c h m i d t , G r u n d f r a g e n , p . 13  102 s e e I p s e n , E q u a l i t y , equality the  Begriffe,  i n the p u b l i c  p . 113 f o r t h e s t a t u s o f  law; B e r b e r , volume  1, p . 210 f o r  i n t e r n a t i o n a l law.  103 J a e n i c k e ,  Discrimination,  p. 390; Zimmermann, p . 51;  S c h m i d t , G r u n d f r a g e n , p . 13/14, p . 62; K i p p , p . 143; Zerr,  p . 16 f ; A. L o e r k e , p . 19  104 J a e n i c k e Berber,  i n : S t r u p p - S c h l o c h a u e r , volume  volume  1, p . 392;  1, p . 210 f f ; S c h w a r z e n b e r g e r ,  volume  1,  p. 229 f .  105 J a e n i c k e ,  s u p r a ; t h e same t e r m . p . 145;  Schwarz-Lieberman,  von W a h l e n d o r f ,  Guggenheim,  1, p . 164 f ; O p p e n h e i m - L a u t e r p a c h t ,  volume  p . 19; Z e r r ,  volume  1, p . 238 f f , S c h w a r z e n b e r g e r ,  volume  1, p . 163.  106 s e e E r l e r ,  p . 109;  p. 26 f , Dahm,  p . 141, 159 and see V e r d r o s s , p . 229  1 45  107 B e r b e r ,  volume  1, p.  179, 221  f.  108 B e r b e r ,  volume  1, p .  179-184;  see a l s o  148  Schaumann, p.  f ; K i s s : L ' a b u s de d r o i t en d r o i t i n t e r n a t i o n a l ,  1953.  109 see E r l e r ,  110 J a e n i c k e ,  111 p.  p.  B e g r i f f , p.  see Guggenheim,  volume  1, p. 309; B e r b e r ,  Discrimination,  volume  1,  i n : Strupp-Schlochauer,  388; S c h w a r z e n b e r g e r , S t a n d a r d s ,  409, 412; Dahm, volume 189, 377; S c h i n d l e r ;  113 see Thieme, p . Kipp,  i n : QIL 2 ( 1 9 4 8 ) ,  1, p. 505, B e r b e r ,  see a l s o E r l e r ,  1 3 f f , 73-77;  p. 149; S c h i n d l e r ,  114 J a e n i c k e , in:  143 f f ; Schaumann, p . 3  397  112 see J a e n i c k e , p.  159  1, p.  49  Ipsen, E q u a l i t y ,  p.  135;  p. 54  Discrimination,  Strupp-Schlochauer,  p.  volume  p.  volume  s u p r a , p. 392; 1, p 694  Leibholz,  f f , Elsbernd,  p.  47  115 B a s e d on h i s p r e c i s e  examination  of the p r i n c i p l e of  1 46 discrimination,  Kiss,  p . 80 f f , 85; s e e a l s o  Terms, p . 11 f ; t h e same, D i s c r i m i n a t i o n , same, E q u a l i t y , 231  Jaenicke,  p . 387;  p . 690 f f ; S c h w a r z e n b e r g e r , volume  f ; H e l d , p . 12; E l s b e r n d ,  580 f ; I p s e n , E q u a l i t y ,  p . 47; Dahm, volume  29.11.1952; D V B l .  2, p .  court  t h e judgement o f  of the province  Baden  of the  1953, p. 242  116 s e e S c h w a r z e n b e r g e r , S t a n d a r d s , p . 402-418; volume  1, p .  p. 132; K i p p , p . 143; R o s s , p .  154 f ; T h i e m e , p . 13 f f , 69; s e e a l s o the a d m i n i s t r a t i v e  the  t h e same,  1, p . 229 f f , 240; S c h e u n e r , p. 54  117 Zimmermann,  p . 39  118 Zimmermann,  supra;  S c h w a r z e n b e r g e r , volume  1, p . 229  f  119 Zimmermann,  supra  120 R i t t e r s h a u s e n ,  p . 259; S c h w a r z e n b e r g e r ,  S t a n d a r d s , p.  410  121  s e e S c h w a r z e n b e r g e r , volume  Most-favoured volume  nation  t r e a t m e n t , p. 96-114;  1, p . 99 f ; Dahm, volume  122 Dahme, volume  1, p . 24 f ; t h e same,  2, p . 593  Guggenheim,  2, p . 593, 595  147  123  see E r l e r ,  p. 131 f and a l s o A r t i c l e  124 s e e S c h e u n e r ,  p. 56; S c h w a r z e n b e r g e r ,  I I GAT  S t a n d a r d s , p.  p. 410  125  see E r l e r ,  p. 52 f , 72  126  Schwarzenberger,  s u p r a ; t h e same, volume  127 K i p p , p . 144; S c h w a r z e n b e r g e r ,  128 Zimmermann, Schwarzenberger,  1, p . 232  s u p r a , p . 409 f  p . 40; J a e n i c k e , E q u a l T r e a t m e n t , p . 691; volume  1, p . 231  f , 240  129 K i p p , p . 137; J a e n i c k e , D i s c r i m i n a t i o n ,  p . 388-390  130 s e e K i p p , p . 143  131  Schwarenberger,  132 S c h w a r z e n b e r g e r ,  133  S t a n d a r d s , p . 408 f f  s u p r a ; see a l s o  see J a e n i c k e , D i s c r i m i n a t i o n ,  134 S c h w a r z e n b e r g e r ,  supra  Erler,  p . 388  p . 53 f  1 48 135  see  Article  2 of  the  U.S.A.: "...  the  without  also  the  general  7 of  the  declaration:  are  declaration  " A l l are any  equal before  discrimination  and  against  any  discrimination."  See  f o r the  activity  for  the  Protection  136  see:  137  see  the  B-mandates  Article  the of  Prevention Minorities,  E r l e r , p.  Article  76  22  the  trust-areas;  138  RGB1.  139  Article  104,  d)  of  687  cipher  Danzig-Polish-Treaty  of  the  of  the  the  the  Article  law  and  to  such  UN and  for  38.  League o f  Treaty  Nations  for  of V e r s a i l l e s ;  P r i n c i p l e of  examples:  See  389  see  the  U.S.A. f o r  E r l e r , p.  71  f.  ff.  5;  see  also  November  9,  Article  Article  265  of  the  Treaty  of V e r s a i l l e s  141  Article  323  of  the  Treaty  of  142  LNTS volume 97,  391;  see  33  of  the  1920  140  p.  of  Discrimination  s u p r a , p.  scope of  further  p.  of  5 of  kind."  of  i n v i o l a t i o n of  incitement  Zimmermann, p.  cipher  i n the  letter  1919,  99;  any  discrimination  this Declaration  Commission  human r i g h t s  d i s t i n c t i o n of  p r o h i b i t i o n of  e n t i t l e d without  of  Versailles  also A r t i c l e  45  of  the  1 49 Havana C h a r t e r , A r t . 20 of t h e GATT; A r t . of the C o n v e n t i o n e s t a b l i s h i n g the European F r e e Trade A s s o c i a t i o n (TEFTA-Treaty) i n : UNTS 5 (1960), p. 370 f f .  143 see A r t . 4, 20 of t h e R a i l r o a d - A c t , A r t . 6, 7 of t h e Seaport-Act.  144 see M a r t e n s , N.R.G. 3, volume 19, p. 19, p. 240  145 UNTS 2, p. 39 f f .  146 see A r t . 44g of t h e agreement about t h e I n t e r n a t i o n a l C i v i l A v i a t i o n O r g a n i z a t i o n (ICAO) of December 7, 1944; Art.  I GATT (LNTS 55 I , p. 196) t h e new v e r s i o n i n : A r c h  VR 7 (1958-59), p. 424 f f ; A r t . 7a of t h e codex of the l i b e r a l i z a t i o n of t h e OEEC i n the e d i t i o n of March 5, 1959 i n : Supplement of t h e BAnz. No. 78 of A p r i l 24, 1959; A r t i c l e  1(c) of the agreement of t h e O r g a n i z a t i o n  f o r Economic C o - o p e r a t i o n and Development (OECD) of December 14, 1960-BGBl 1961 I I , p. 1151-1158; A r t i c l e V I I of  t h e S t a t u t e s of the I n t e r n a t i o n a l Monetary Funds (IMF)  of J u l y  1 and 22, 1944 - BGB1. 1952 I I , p. 631-646.  147 UNTS 2, p. 39 f f .  148 A r t . I GATT  1 50  149 s e e A r t i c l e Article  14  22, 23 Havana C h a r t e r ; A r t i c l e  XVII  EFTA-Treaty  150 A r t i c l e  29 o f t h e Havana C h a r t e r ;  GATT; A r t i c l e  14 o f t h e  Article  XVII o f  22(a),  23 o f t h e  EFTA-Treaty.  151 A r t . 3 ( e ) , 7 ( a ) , 8, 9,  10, 2 0 ( e ) ,  codex.  152 Of A p r i l  29, 1952 - B G B l .  1952 I I , p . 445  153 Zimmermann, p . 22, 26, 27  154 Zimmermann, p . 23  155 s e e A r t . 86 MUV;  156 B G B l .  Zimmerman,  p . 27  1957 I I , p. 1014  157 s e e von Ackermann, p . 28-31  158 K i p p ,  GATT;  p . 143  159 s e e J a e n i c k e ,  Discrimination,  Zimmermann, p . 41; K i p p ,  160 s e e J a e n i c k e ,  supra  p . 140 f f  supra,  p. 3 9 0 f ;  151  161 see Zimmermann, p. 41  162 K i p p , p. 143; J a e n i c k e , B e g r i f f e , p. 22  163 K i p p , 142, 144  164 Zimmerman, p. 43  165 see Zimmermann, p. 43  166 A u s w e i c h k l a u s e l n ,  Ausnahmeklauseln,  R i i c k t r i t t s k l a u s e l n and w a i v e r s  167 Zimmermann, p. 42; J a e n i c k e , Equal Treatment, p. 692 f.  168 Zimmermann, p. 43  169 see European Commission  of Human R i g h t s , Documents  and D e c i s i o n s 1955, 1956, 1957, p. 199; K i p p , p. 144  170 Schwarzenberger, volume 1, p. 240f  171 see A r t i c l e I GATT combined w i t h t h e l i s t s of concession  172 K i p p ,  173  p.  144  s e e Zimmermann,  p. 4 4 f  174 s e e S c h w a r z e n b e r g e r ,  175  see Kipp,  176  Kipp,  p.  p.  147; S c h e u n e r ,  Begriffe,  143;  147  p.  p . 408 f .  146 f ; Z i m m e r m a n n , p .  177 J a e n i c k e , Kipp,  Standards,  p.  44  44  p. 8 6 f , 102, 1 l 0 f ;  Schindler,  178 s e e p . 7  179  see Advocate General  the  Re SA  180 K i p p ,  181  closing  argument  13/63 - Sa I X , p. 409 f  p.  Lagrange,  consultatifs,  148  supra; serie  see CPJI, A/B, No.  "Minderheitenschulen  182 s e e a l s o  183  Largange,  Kipp,  see Belgium:  p.  Arrets  64, p.  et Avis  19 -  i n Albanien"  148  Article  6 paragraph  2 of the  i  153 Constitution  of F e b r u a r y  17,  Germany: A r t . 3 p a r a g r a p h German  "Grundgesetz")  preamble  paragraph  o f t h e May  of the October  December  27,  because  protection  p. 79 Anm.  of t h e of the  186 Donner, p. p.  France: the  1958;  Luxembourg: A r t . 11  of October  17,  1968; of  the  201  154;  Constitution 1 and  Zerr,  i n 1868  ("equal  p.  d e r P o t , p.  154;  443,  95-98  Constitution  1 of the Dutch  s e e : A r t . 175  p.  2  f f , 2 0 3 f ; Van  189 F o r t h e same p r o t e c t i o n  Stellinga,  of Swiss of  laws")  188 A r t . 4 p a r a g r a p h  190  (the  2 of the  14th amendment  187 A r t . 5 o f t h e D u t c h  churches  1949;  of  1947  see L e i b h o l z ,  Vegting,  4,  21,  1 of the C o n s t i t u t i o n  184 A r t . 4 o f t h e F e d e r a l  185  Republic  1 and  2 of the C o n s t i t u t i o n  A r t . 3 paragraph  Federal  1 of the C o n s t i t u t i o n  and A r t . 2 p a r a g r a p h s  Constitution  Italy:  1831;  Constitution  f o r the a s s o c i a t i o n  of the Dutch  of  Constitution  K r a n e n b u r g - V e g t i n g , p.  186  1874;  1 54 191  s e e S t e l l i n g a , p . 254  192 Z e r r ,  p . 98; De L a u b a d e r e ,  p. 205 f f ; s e e a l s o  Jeanneau, p. 7 f f ; L e t o u r n e u r ,  193 The p r i n c i p l e o f e q u a l i t y administration,  lecture,  Baden-Baden  p. 99; I p s e n ,  relating  p. 1 9 6 f ; L o e r k e ,  51  aaO.  see L o e r k e ,  the s p e c i a l p r o h i b i t i o n s  t o the c o n s t i t u t i o n  same s a l a r y  1961  p. 2 3 f .  196 s e e CE 29.6.1951; CE 12.2.1960;  197 s e e a l s o  p . 430  i n t h e economic  194 J e a n n e a u , p. 7-39; L o e r k e ,  195 s e e Z e r r ,  p. 27 f f ; W a l i n e ,  p . 24  of d i s c r i m i n a t i o n  i n A r t . 37 ( p r i n c i p l e o f t h e  f o r men a n d women f o r t h e same work) a n d A r t .  ( p r i n c i p l e that  every c i t i z e n  c a n t a k e up p u b l i c  offices)  198 s e e M o r t a t i ,  p . 714  199 s e e B e s c a r e t t i  200 s e e Z e r r ,  201  d i Ruffia,  p . 233; d ' E u f e m i a ,  p . 131  p . 105  s e e A r t . 6 and 112 o f t h e B e l g i u m  Constitution;  the  1 55 summary p.  of j u r i s d i c t i o n  100; V i g n y  i n S a r o t , p . 107 f . ; a l s o  p . 37; B u t t g e n b a c h ,  same, T h e o r i e , p .  s e e A r t . 11 p a r a g r a p h  the October  M a n u e l , p. 82 f f . ;  the  84ff.  202 s e e A r t . 3 o f t h e "German  203  Zerr,  Constitution"  1 and 2 o f t h e C o n s t i t u t i o n o f  17, 1868  204 see B V e r f G E  1, p . 321  ( 3 2 7 ) ; 5, p . 334  (338);  1, p .  208 f f  205  BVerfGE  1, p . 208 f f . , 233  206  see C e r e t i ,  p . 117  207 s e e L e i b h o l z , von  p . 239-243; I p s e n , E q u a l i t y ,  Mangold-Klein,  2. e d i t i o n  A r t . 3 Anm. I l l  208 see D e c i s i o n s o f t h e F e d e r a l C o u r t  of S w i t z e r l a n d  volume 6, p . 178, volume 32, p. 637; L e i b h o l z ,  209  see Zimmermann,  States of America. Supreme C o u r t 1142 f .  p . 139 f . ;  p . 33; C o n s t i t u t i o n  p . 48  of the U n i t e d  A n n o t a t i o n s o f c a s e s d e c i d e d by t h e  of t h e U n i t e d S t a t e s t o June  30, 1952, p .  156 210 see Zimmermann,  211  Zimmermann,  p . 34  supra  212 s e e I p s e n , p . 180  213  Raiser,  equality  P r i n c i p l e o f E q u a l T r e a t m e n t , p . 91: "The  i n t h e s e n s e o f law i s a l w a y s b a s e d on s e l e c t i n g  and v a l u i n g  equalization";  see Hueck, p . 172  214 s e e A r t . 3 p a r a g r a p h 3 o f t h e German  215  I p s e n , p . 184  216  see Zimmermann,  p . 35, 36  217 The A d v o c a t e G e n e r a l L a g r a n g e final  plea  ReSa  218 L a g r a n g e ,  219 281;  referred  to t h i s i nh i s  13/63 S a . IX, p . 409; Hueck, s u p r a  supra  see H.J. R i n c k  i n : DVBl.  1961, p . 1; B V e r f G E  2, p .  4, p . 155; BGHZ 13, 265; BVerwGE 2, 1953; 257 f .  220 s e e B V e r f G E  221  "Grundgesetz"  4, p . 155  s e e Zimmermann,  p . 37; see B V e r f G E  4, p . 155  222 B V e r f G E aaO.;  223  1, p . 52; H.J. R i n c k ,  supra.  B V e r f G E aaO.  224 B V e r f G E Coing,  225  9, p . 349; see a l s o R a d b r u c h ,  p . 157-176;  p . 118 f f ; S t r a t e n w e r t h .  see t h e i n d i c a t i o n  o f L e i b h o l z , p. 80; Zimmermann  36, F n . 55.  226  s e e Zimmermann, p . 37; L e i b h o l z , p . 215  227  see BVerfGE  228  DStZ  8, p . 51, 64  1970, p . 130 r e f e r r i n g  Diskriminierung  p . 391; Neumeyer, I n t e r n a t i o n a l e s  Verwaltungsrecht  229 D e b a t i n ,  230 of  1936, V o l . IV p . 432  ibid  Constitution  ("Basic  law") f o r t h e F e d e r a l R e p u b l  Germany  231  232  BVerfGe  ibid  to Jaenicke,  1, 14 (15, 52)  1 58  233 130;  234  Klein, Gleichheitssatz Debatin,  Draft  Capital  from J u l y  236  DStZ  t o be  238  p.  Convention  pay  on  Koln  Income  OECD-Doc. C  1966,  (63)  and  87;  see  3,  1959;  see  also  also  130  " l i m i t e d " and  "unlimited"  taxes  unlimited  Sass,  Zur  Auslegung der  in  Doppelbesteurungsabkommen  ubernommenen O E C D - K l a u s e l uber N i c h t d i s k r i m i n i e r u n g Betriebsstatten,  239  p.  289  (59)147 from J u l y  1970,  to  Steuerrecht,  130  1963,  t r a n s l a t e d as  obligation  237  30,  1963,  OEEC-Doc. C  Debatin  1970,  Double T a x a t i o n  D e b a t i n , AWD  235  DStZ  und  Contrary:  Munchen  1968,  AWD  1965,  Raupach, Der p.  240  SEE:  HUGGETT  241  Art.  14  p.  von  106  Durchgriff  im  Steuerrecht,  88  Canada-German D o u b l e Tax  Convention  1 59 242 s e c . 2 ( 3 ) ( c ) , 115, 116 I.T.A. The $500,000 gains  exemption  provides  only  i m p l e m e n t e d by t h e 1985/86  capital  budget  f o r Canadian r e s i d e n t s .  243 s e e : W a l k e r  244 I t r e a d s :  SEC.  116. D i s p o s t i o n by non-resident person  of c e r t a i n  property. (1) Where any  a non-resident  property  t h a t would,  Canadian  property  property  or excluded  before  (a)  (other  p r o p e r t y ) , he may, send  t o d i s p o s e of o f i t , be than  taxable  depreciable  a t any  time  to the M i n i s t e r a notice  forth  t h e name and a d d r e s s proposes to dispose section  (b)  proposes  i f he d i s p o s e d  of t h a t person  the d i s p o s i t i o n ,  setting  person  referred  a description  of the person  t o whom he  of the p r o p e r t y  (in this  t o as the "proposed  of the p r o p e r t y  purchaser"),  sufficient  to  identify i t , (c)  the estimated  amount  of the proceeds of d i s p o s i t i o n  t o be r e c e i v e d by him f o r t h e p r o p e r t y , and (d)  t h e amount property  of the a d j u s t e d  a t the time  of the sending  Sec. (2) C e r t i f i c a t e a non-resident  c o s t b a s e t o him o f t h e of the n o t i c e .  116(2)  i n respect of proposed d i s p o s i t i o n . Where person  who  has sent  to the M i n i s t e r a  1 60  notice  under  disposition (a)  subsection  (1) i n r e s p e c t o f a  o f any p r o p e r t y h a s  p a i d to the Receiver tax  under  25%  o f t h e amount,  amount  this  (b)  General,  Part payable  set forth  paragraph the  proposed  a s o r on a c c o u n t o f  by h i m f o r t h e y e a r ,  i f a n y , by w h i c h  the estimated  i n the n o t i c e i n accordance  (1)(C) exceeds  n o t i c e i n accordance  t h e amount with  set forth in  paragraph  f u r n i s h e d t o the M i n i s t e r s e c u r i t y  disposition  forwith issue to the non-resident  and the proposed  prescribed fixing  or  the property,  the M i n i s t e r s h a l l person  (l)(d),  acceptable to  the M i n i s t e r i n r e s p e c t of t h e proposed of  with  form  therein  purchaser  a certificate in  i n respect of the proposed an amount  the  "certificate  set  forth  limit")  (in this equal  disposition,  section  referred  to the estimated  i n the n o t i c e i n accordance  with  t o as  amount  paragraph  (D(c). Sec. (3) N o t i c e who  to Minister.  i n a t a x a t i o n year  taxable  Canadian  depreciable later  than  116(3) Every  h a s made a d i s p o s i t i o n  p r o p e r t y of t h a t person  property  or excluded  10 d a y s a f t e r  to the M i n i s t e r ,  notice  forth  (a)  t h e name and a d d r e s s  than  s h a l l , not the d i s p o s i t i o n  by r e g i s t e r e d  of the person  person  o f any  (other  property)  t h e d a y on w h i c h  was made, send setting  non-resident  mail, a  t o whom he  161 disposed  of the p r o p e r t y  (in this  section  referred  to as the " p u r c h a s e r " ) , (b)  a description identify  (c)  the  and t h e amount o f i t s a d j u s t e d  disposition,  that (d)  sent  person  of the  cost  base  the d i s p o s i t i o n , h a s , a t any t i m e  before  t o t h e M i n i s t e r a n o t i c e under  (1) i n r e s p e c t o f any p r o p o s e d d i s p o s i t i o n o f  p r o p e r t y and the purchaser to  (e)  before  the non-resident  subsection  to  of the proceeds of d i s p o s i t i o n  t o him i m m e d i a t e l y unless  sufficient  i t , and  a statement property  of the p r o p e r t y  was t h e p r o p o s e d p u r c h a s e r  referred  i n that n o t i c e ,  the estimated accordance greater  amount  with  than  set forth  paragraph  i n that notice i n  (1) ( c ) i s e q u a l  t o or  the proceeds of the d i s p o s i t i o n  of the  p r o p e r t y , and (f)  t h e amount  set forth  i n that notice in  with  paragraph  cost  base t o t h e n o n - r e s i d e n t  property  ( l ) ( d ) does not exceed  immediately  before  Sec. (4) C e r t i f i c a t e Where a n o n - r e s i d e n t a  n o t i c e under  of (a)  person  accordance  the a d j u s t e d of the  the d i s p o s i t i o n .  116(4)  i n r e s p e c t of p r o p e r t y d i s p o s e d o f . person  subsection  who  has s e n t  to the M i n i s t e r  (3) i n r e s p e c t o f a  disposition  any p r o p e r t y has p a i d to the Receiver  General,  a s o r on a c c o u n t  of  162 tax  under  this  25%  o f t h e amount,  disposition cost the (b)  Part payable  by him f o r t h e y e a r ,  i f a n y , by w h i c h  of the p r o p e r t y  the proceeds of  exceed the a d j u s t e d  b a s e t o him o f t h e p r o p e r t y  immediately  before  d i s p o s i t i o n , or  f u r n i s h e d t o the M i n i s t e r s e c u r i t y the M i n i s t e r i n r e s p e c t  acceptable to  of the d i s p o s i t i o n  of the  property, the M i n i s t e r s h a l l person in  f o r w i t h i s s u e t o the n o n - r e s i d e n t  and t h e p u r c h a s e r  a certificate  i n p r e s c r i b e d form  r e s p e c t of t h e d i s p o s i t i o n .  S e c . 116(5) (5) L i a b i l i t y in a t a x a t i o n year non-resident  (a)  the purchaser, no r e a s o n  person pay, of (i)  in certain  cases.  has a c q u i r e d  (other  than  property), unless after  reasonable  to b e l i e v e that  as t a x under  this  the non-resident  Part  of  he  is liable  f o r the year  to  on b e h a l f  person,  so a c q u i r e d ,  i s s u e d under  person  of t h e  i f no c e r t i f i c a t e  subsection  the d i s p o s i t i o n  non-resident  inquiry  the non-resident  15% o f t h e c o s t t o t h e p u r c h a s e r  been  person's  depreciable  was not r e s i d e n t i n Canada,  property  Where  from a  any o f t h a t n o n - r e s i d e n t  property  or excluded  had  purchaser  a purchaser  person  t a x a b l e Canadian property  of  has  (2) i n r e s p e c t  of the property  by t h e  to the purchaser,  or  1 63 (ii)  i n any o t h e r (A)  case,  the l e s s e r of  15% o f t h e c o s t property  (B)  exceeds the c e r t i f i c a t e  limit  fixed  by t h e c e r t i f i c a t e  under  subsection  is entitled  person  to deduct  by t h e  to the  or w i t h o l d  purchaser,  from any  by him t o t h e n o n - r e s i d e n t  person  or otherwise  person  any amount p a i d by him as s u c h t a x ;  a t such  time,  subsection respect liable  under  is  i f a n y , a s any c e r t i f i c a t e  this  this  the purchaser t h e month  remit  the purchaser  subsection  Part  person;  ceases  t o be  on b e h a l f  of the  and  shall,  within  30 d a y s a f t e r  i n w h i c h he a c q u i r e d General  t h e end  the p r o p e r t y ,  t h e t a x f o r w h i c h he  under p a r a g r a p h ( a ) .  Sec.  116(5.1)  (5.1) Idem. Where a n o n - r e s i d e n t or proposes  under  t o pay any amount a s  f o r the year  to the Receiver  liable  from t h e n o n - r e s i d e n t  (4) i s i s s u e d t o him by t h e M i n i s t e r i n  non-resident  of  recover  of the p r o p e r t y ,  t a x under  issued  (2) i n r e s p e c t o f t h e  of the p r o p e r t y  amount p a i d o r c r e d i t e d  of  of the p r o p e r t y  so a c q u i r e d  non-resident  (c)  i f any, by w h i c h t h e  to the purchaser  disposition  (b)  of the  so a c q u i r e d , and  25% o f t h e amount, cost  and  t o the purchaser  to dispose  of a l i f e  person  insurance  has d i s p o s e d policy  in  1 64  Canada, a p r o p e r t y  described  or  (d) o r any p r o p e r t y  of  i t , be t a x a b l e  that  Canadian  i n paragraph i s o r would,  property  59(2) ( a ) , i f he  (c),  disposed  of t h a t person  other  than (a)  excluded  property,  (b)  property  t h a t h a s been  on to  or a f t e r  any p e r s o n  with  by way  of g i f t  inter  than  the f a i r  value  of i t or proposes  be, t h e f o l l o w i n g  (c)  the reference of  market  proposed  to dispose  rules  be r e a d  to dispose  of  as r e f e r e n c e s  property  the p u r c h a s e r read  (f)  the reference  i t " , (3) a n d (4) t o " t h e  of the p r o p e r t y "  before  market  value  be  of the  (5) t o " t h e c o s t t o so a c q u i r e d "  to "the f a i r  market  i t was a c q u i r e d " ;  in subsection  shall  the d i s p o s i t i o n " ;  of the p r o p e r t y  a t the time  to "the f a i r  a t t h e t i m e he  in subsection  as r e f e r e n c e s  property  to "the proceeds  as a r e f e r e n c e  to "the f a i r  immediately  the r e f e r e n c e s  a t t h e t i m e he so  of i t , as the case  (1)(C)  i n subsections  proceeds of d i s p o s i t i o n read  f o r no  apply:  of the property  the references  person  t o be r e c e i v e d by him f o r t h e  shall  value  or t o a  thereof  a t arm's l e n g t h  thereof  in paragraph  disposition  property"  or d i s t r i b u t e d  or f o r proceeds of d i s p o s i t i o n  market  may  (e)  vivos  whom he was n o t d e a l i n g w i t h  disposed  (d)  transferred  h i s d e a t h and as a consequence  proceeds of d i s p o s i t i o n less  or  shall  value  be  of the  and  (5.3) t o t h e "amount  165 payable  by  acquired" market  the  taxpayer  shall  value  be  of  read  the  f o r the p r o p e r t y as a r e f e r e n c e  property  at the  so  to  time  "the it  fair  was  acquired". Sec. (5.2)  Certificate  a non-resident  person  i n r e s p e c t of d i s p o s i t i o n s . has,  a proposed d i s p o s i t i o n of a l i f e person, or  insurance  a property  (d) of  that  the  policy  of  (a)  Receiver  p a i d to the tax  under  person to  this  f o r the  the  such  by  of  the  of  proposed d i s p o s i t i o n  the  person  and  to the  as  taxpayer  or  such  the  of  i s acceptable  the d i s p o s i t i o n  or  or  acceptable  the d i s p o s i t i o n  to  or  property,  a certificate  amount a s  c ircumstances. Sec.  account  non-resident  property,  the d i s p o s i t i o n , other  taxable  or on  f o r t h w i t h i s s u e to the  i n r e s p e c t of  disposition  of  property  person,  f u r n i s h e d to the M i n i s t e r s e c u r i t y the M i n i s t e r i n r e s p e c t  year  59(2)(a), (c),  i t , be  amount as  t h e M i n i s t e r i n r e s p e c t of  the M i n i s t e r s h a l l  form  General,  or  non-resident  or d e p r e c i a b l e of  Part payable  proposed d i s p o s i t i o n (b)  person  non-resident  year,  the  in paragraph  disposed  Canadian p r o p e r t y  in a taxation  i n Canada of  described  i f he  Where  i n r e s p e c t of a d i s p o s i t i o n  to a taxpayer  non-resident  i s or w o u l d ,  116(5.2)  116(5.3)  non-resident in prescribed  proposed  proceeds  i s reasonable  in  of the  166 (5.3)  Liability  in a t a x a t i o n year non-resident  of purchaser  a taxpayer  person  property  in certain  has a c q u i r e d referred  cases.  Where  from a  to in subsection  (5.2) , (a)  the taxpayer,  unless after  had  t o b e l i e v e that the non-resident  no r e a s o n  person pay, of  was n o t r e s i d e n t i n Canada,  as tax under  this  the non-resident  any,  Part  person,  inquiry  is liable  f o r the year  he  to  on b e h a l f  50% o f t h e amount, i f  by w h i c h  (i)  t h e amount property  (ii)  payable  fixed  under  non-resident  i n the c e r t i f i c a t e ,  person  t o deduct  or t o o t h e r w i s e  non-resident  i f any,  (5.2) i n r e s p e c t o f  of the p r o p e r t y  amount p a i d o r c r e d i t e d person  f o r the  exceeds  subsection  the d i s p o s i t i o n  is entitled  by t h e t a x p a y e r  so a c q u i r e d  t h e amount issued  and  reasonable  to the  by t h e  taxpayer  or w i t h o l d  from any  by him t o t h e n o n - r e s i d e n t recover  from t h e  person  any amount p a i d by him a s  shall,  w i t h i n 30 d a y s a f t e r  such  t a x ; and (b)  the taxpayer t h e month to  i n w h i c h he a c q u i r e d t h e p r o p e r t y ,  the Receiver  liable  t h e end o f  General  t h e t a x f o r w h i c h he i s  under p a r a g r a p h ( a ) . Sec.  remit  116(5.4)  167 (5.4)  P r e s u m p t i o n . Where t h e r e has  disposition  by  i n Canada by  a non-resident  virtue  of  subsection  subparagraphs  148(9)(c)(i)  insurer  the  under  subsections who  policy  (5.2)  acquired  the  and  to  (5.3)  p r o c e e d s of d i s p o s i t i o n  p u r p o s e s of  this  non-resident  person  (a)  property  (b)  a share  or an  a unit  (d)  a bond, d e b e n t u r e ,  (e)  of a mutual  similar  any  other  excluded  245  see  sec.  246  see  Holmes  247  see  CTS  the  section  property"  in subparagraph  property  of a  148.  the  of  a  trust;  bill,  note,  that  I.T.A.  115(1)(b)(ix); public  therein;  fund  property.  116(5)(a)  stock  interest  obligation;  212-11  to  means  (c)  or  taxpayer  p r o p e r t y " . For  "excluded  the c a p i t a l  corporation,  under  of  116(6)  "excluded  described of  the  the  amount e q u a l  policy  of  (iv.1),  deemed t o be  as d e t e r m i n e d  section,  insurance  f o r the purposes  f o r an  Sec. of  be  a  148(2) o r any  ( i i i ) and  shall,  property  (6) D e f i n i t i o n  of a l i f e  been  mortgage,  hypothec  or i s prescribed  to  be  248  The  C a r t e r Commission  witholding specific  tax  of  items  30%,  the  recommended a  general  see V o l . IV p.488 No.  Commission  recommended  6.  For  ( V o l . IV  p.502/503): "Payments o f p r o p e r t y non-residents taxes  as  o f Canada a r e  25  per  or more by  in this  a stock  shares  exchange) —  10 p e r  cent;  15 p e r  exceptions,  after  15 per  t h e most  cent  for interest  listed  a l l other  certain being  payments on  1966,  provincial,  and  municipal  by  the  the  bonds  issued  federal,  g o v e r n m e n t s , and  payments t o o r g a n i z a t i o n s exempt  in their  country  certificates (3) R e n t a l s  of —  realty  rentals  tax at  the  filing  an  rental  income.  (conditional  exemption  15 p e r  cent,  being but  a non-resident  income t a x  to w i t h o l d i n g tax;  case  elect  to  tax  rates  net  Canadian  royalties film  from  provided).  may  r e t u r n of  for  on  i n the  a p p l i c a b l e Canadian  (4) R o y a l t i e s — c o p y r i g h t subject  with  important  15,  tax  are  cent.  April  interest  extent  (with a  i f the  Interest —  exemption  Canadians  rule  dividends — (2)  subject to w i t h o l d i n g  of a company owned t o t h e  cent  variation on  r e s i d e n t s to  follows:  (1) D i v i d e n d s of  income by  and  are tape  of pay  after  not  royalties  10 p e r c e n t ;  a l l other  royalties  15 p e r c e n t . A r e c i p i e n t  of timber  royalties  may  -  elect  t o be t a x e d  income by  filing  recipient  of r e a l  dividends — (6) A  estate  interest  income a n d  patronage  o f any o t h e r  tax  t h e w i t h o l d i n g t a x on d i v i d e n d s  and  paid)  corporation  i s imposed on t h e income o f a investment  substantially  i s substantially  249 e . g . Canada-Germany, Art.  rentals.  tax i n l i e u  non-resident-owned  income  of a  15 p e r c e n t .  15 p e r c e n t  (including  on h i s n e t C a n a d i a n  a r e t u r n as i n t h e case  (5) E s t a t e and t r u s t  —  corporation — a  owned a b r o a d  from  whose  investments."  see A r t . 10(2) f o r d i v i d e n d s ;  11(2) f o r i n t e r e s t .  250 e . g . Canada-Germany  A r t . 12(2) f o r r o y a l t i e s .  251  s e c . 2 1 2 ( l ) ( a ) I.T.A.;  252  sec. 212(1)(b)  I.T.A.  253  sec. 212(1)(C)  I.T.A.  254  sec. 212(1)(d)  I.T.A.  see a l s o  s e c . 212(4)  I.T.A.  1 70 255  sec.  2 1 2 ( 1 ) ( e ) I .T. A.  256  sec.  212(1)(f)  257  sec.  2 1 2 ( 1 ) ( g ) I .T. A.  258  sec.  2 1 2 ( 1 ) ( h ) I .T. A.  259  sec.  212(1 ) ( i ) I • T.A.  260  sec.  2 1 2 (1 ) (1j ). I .T.  261  sec.  2 1 2 ( 1 ) ( k ) I .T. A.  262  sec.  2 1 2 ( 1 ) ( 1 ) I .T. A.  263  sec.  2 1 2 ( 1 ) ( m ) I .T. A.  264  sec.  2 1 2 ( 1 ) ( n ) I .T. A.  265  sec.  2 1 2 ( 1 ) ( o ) I . T.A.  266  sec.  2 1 2 ( 1 ) ( p ) I .T. A.  267  s e c . 2 1 2 ( 1 ) ( q ) I • T.A.  268  sec.  I .T. A.  2 1 2 ( 1 ) ( r ) I .T. A.  171  269  sec.  212(1)(s)  270  sec.  212(2)  271  So  interest  corporation witholding capital  272  see  273  CCH,  p a i d by  virtue  I.T.A.; See  from  allowed  long-term  debt  obligations  the  by  virtue  M a c D o n a l d , V o l . 4,  of  No.  sec.  68444.  Prentice Hall,  Budget  the  Tax  non-resident  for interest  w i t h o l d i n g tax  payments on  the of  end this  of  1985.  exemption  1989.  The  at competitive non-resident  The  budget  f o r such  extension access  was  on  debt  these  proposed  are  an  debt o b l i g a t i o n s to ensure  long-term  was  that  debt  r a t e s . In a d d i t i o n , an  w i t h o l d i n g tax  is  certain  o b l i g a t i o n s of c o r p o r a t i o n s and  c o r p o r a t i o n s have c o n t i n u e d  from  exempt  non-resident-owned  of C a n a d i a n g o v e r n m e n t s , p r o v i d e d  before  financing  a  I.T.A.;  p.11:  currently  extension  212(1)(b)(i)  from  2 1 2 ( 1 ) ( b ) ( v i i ) I.T.A.  exemption  issued  sec.  Budget Message, p.13;  by  investment  i s g e n e r a l l y exempt  d i v i d e n d s p a i d by  Non-Resident Witholding  issued  of  c o r p o r a t i o n are  sec.  Message,  An  a non-resident-owned  to a non-resident  gains  212(2)(a)  I.T.A.  t a x by  investment  I.T.A.  being  exemption provided  1 72 for  interest  p a i d to the  Settlements. the on  The  coming y e a r  be  effectively domestic issue of  274  the  extent  To  to  ensure  foreign currency  of a p p r o p r i a t e s a f e g u a r d s  the  used  to  finance  lenders,  intended  t o be  s e c . 215(6) I.T.A. I t Sec.  (6) L i a b i l i t y deduct  this  reads:  215(6)  f o r t a x . Where a p e r s o n  or w i t h o l d any  s e c t i o n from an  amount as  person,  as  this  tax  under  non-resident should  paid  to deduct  or c r e d i t e d  by  person  or o t h e r w i s e  person  any  Part  on  that person on  him  to the  recover  thereof.  to a  of the  amount  f r o m any  that  is  amount  non-resident  from the  him  pay  the  w i t h e l d , and  or w i t h o l d  amount p a i d by  behalf  behalf  or  or  i s l i a b l e to  t h e w h o l e of  have been d e d u c t e d  entitled  by  amount p a i d o r c r e d i t e d  Part  person  failed  required  deemed t o have been p a i d o r c r e d i t e d non-resident  has  as  tax  non-resident under  the  part  review.  see  to  i s not  of o t h e r  was  exemption  financial  exemption  l e n d i n g , to the d e t r i m e n t  over  deposits held in  include other  t h a t the  applying to  t o examine  to which the c u r r e n t  foreign currency  broadened  institutions.  for International  government a l s o p r o p o s e d  w i t h o l d i n g t a x on  b a n k s can  Bank  this  1 73 275  sbgenannte S p e k u l a t i o n s f r i s t  276  Short  stock  277  See example  by D a r t / B r o w n ,  joint  i n t e r e s t payments  - and  XXIV Can. Tax J .  18, where t h e y a r e a c t u a l l y c a l c u l a t i n g  bank's g r o s s - u p i n r e s p e c t  reasons  279  given  151, F n .  t a x e s on  278  w h i c h means  company.  (1976), the  form of " A k t i e n g e s e l l s c h a f t " ,  t h e r e may  to Canadian  to a foreign  witholding  bank.  be d i f f e r e n t e c o n o m i c a l and  legal  for this -  It reads: Sec.  212(14)  (14) C e r t i f i c a t e of e x e m p t i o n . The M i n i s t e r upon a p p l i c a t i o n , non-resident of  who  the M i n i s t e r (a)  (b)  issue  a certificate  establishes  may,  t o any  t o the s a t i s f a c t i o n  that  an  income  t a x i s imposed  of  the c o u n t r y  he  i s exempt  under  o f w h i c h he  under  t h e laws  is a  resident;  t h e laws r e f e r r e d t o  i n p a r a g r a p h (a) f r o m t h e payment o f income country (c)  t a x t o t h e government o f w h i c h he  of the  i s a resident;  and  he i s (i)  a p e r s o n who  i s o r would be,  i f he  1 74 were r e s i d e n t under (ii) or  section a trust  from  149, corporation  established  incorporated  principally  in connection  or  the  principal  to a d m i n i s t e r  u n d e r , one pension, any  or  or more  or  plans  employee b e n e f i t s , (iii)  p u r p o s e of  provide  a trust,  organization  which  benefits  superannuation,  retirement  f u n d s or  f u n d s or  established  plans to  or  corporation  constituted  or  and  other operated  for c h a r i t a b l e purposes,  part  income o f  of or  the  which  benefit  of  member, s h a r e h o l d e r ,  any  no  i s payable  i s otherwise a v a i l a b l e  personal  or  provide  exclusively  to,  tax  or  with, is  i n Canada, exempt  for,  the  proprietor,  trustee,  or  settlor  thereof.  280  the  281  depending  282  This  currency risk  in  London  rate  of  i f there  does not  take  transactions, itself.  g r o s s up  between  i s a D o u b l e Tax  i n t o account which  Convention  the  i s t o be  banks  risk  seen as  of an  foreign economic  175 283  The  C a r t e r Report  non-residents 7.  to  file  "A w i t h o l d i n g t a x imposed on in  suggested  of  up  8.  benefit  of b u s i n e s s  from  them w o u l d be should  in  expenses.  reimbursement  In c e r t a i n  of  specific  to e l e c t  reporting  their  deducting  foreign  foreign  cases  t o be  world  following  we  taxed as  1.  as  on  be  and  These but  i n Canada.  t o amounts p a i d  should  r e s i d e n t s of  the p r e s e n t  be Canada,  a l l sources  and basis  foreign  available  a Canadian  i n the  and  r e s i d e n t f o r each  r e s i d e n c e ; or  received certain  including  gifts, and  k i n d s of  income  i n h e r i t a n c e s , the annuity  payments  and  income.  implementation  believe,  income  r e s i d e n t became n o n - r e s i d e n t  income p o r t i o n of p e n s i o n  The  apply  income from  should  the change of  Canada,  employment  obtained  non-residents  taxed  p a i d on  where a n o n - r e s i d e n t from  deducted  cases:  t o be  after  not  tax c r e d i t s  taxes  where a C a n a d i a n  year  be  o u t s i d e Canada  income from  sources. This e l e c t i o n  elected  should  or p r o p e r t y  rendered  T h i s w i t h o l d i n g tax  for  b)  10 p e r c e n t  already subject to a w i t h o l d i n g tax.  entitled  a)  to  payments f o r s e r v i c e s t h a t were  s e r v i c e s m i g h t w e l l be the  for  a return:  the computation  were n o t  the p o s s i b i l i t y  confer  Substitution  the  of  these  recommendations  f o l l o w i n g important  of a 30  percent  gross-up  would,  advantages: and  credit  for  1 76 the s e c t i o n a)  28(1)(d)  Removal o f t h e e x e m p t i o n for  foreign  corporation  section  f r o m a company  by a C a n a d i a n  i n which  major  l o o p h o l e i n the p r e s e n t tax system  which  some C a n a d i a n s  have  full  income w h i c h  of  eliminate a  in effect  Canadian  through  avoided the  t a x on C a n a d i a n  h a s been d i v e r t e d  through  i n tax havens.  The u s e o f an a r b i t r a r y would  would  i t held at  a 25 p e r c e n t  companies  interest  28(1)(d)  least  source  reduce,  flat-rate  to a great  tax c r e d i t  e x t e n t , the s i g n i f i c a n c e  t h e t a x mix o f t h e s o u r c e c o u n t r y . T h u s , t h e  b a l a n c e between  income t a x e s and w i t h o l d i n g  taxes  would  be u n i m p o r t a n t  other  taxes  (e.g., sales  t a x e s ) were u t i l i z e d i n  foreign  jurisdiction  would  the c)  under  dividends received  payment o f t h e i r  b)  exemption:  Once  i t was d e c i d e d t h a t  section  be l e s s  r a t e would  simplify  to ensure  that  discouraged Although  would  Canadian  t h e use of  Both of  be p a r t i c u l a r l y corporations  from e s t a b l i s h i n g  t h e p r o c e d u r e would  foreign  important  were n o t operations.  require the  measurement o f u n d e r l y i n g  foreign  from most c o u n t r i e s ,  would  this  like  the computations  remove much o f t h e u n c e r t a i n i t y .  these advantages  important.  a broad e x c l u s i o n  2 8 ( 1 ) ( d ) was n o t a p p r o p r i a t e ,  an a r b i t r a r y and  and the e x t e n t t o which  source  income  not g e n e r a l l y  1 77 apply  to  income d e r i v e d  the U n i t e d quarters  Kingdom  of  the  from t h e U n i t e d  (from which over  f o r e i g n source  perhaps l a t e r  countries after administering adjustments although  dividends  the  r e q u i r e d f o r the  be  i n the  might A  w o u l d not  flat-rate  source  run.  taxed  direct  and  .on  tax  to  would  Arbitrary  credit  tax  liability  credit  would  being  investment 30 p e r  they  in  a p p l i e d to  for  would have two  f o r e i g n source  result  income.  cent  Canada w o u l d d e r i v e some ( a l b e i t  direct  simple.  i n e q u i t a b l e as  rate schedule  gross-up  shareholders  the  in f u l l  Canadian  the a n n u a l  and  of a r a t e o f  from  in  be.  Adoption  revenue  case,  relatively  full  be as  gross-up  the p r o g r e s s i v e foreign  long  t o compute  otherwise  been g a i n e d  g a i n s w o u l d be  realization,  collected  other  other c o u n t r i e s ,  would be  C a n a d i a n s on  therefore  has  to  of  treatment  p r o v i s i o n s . In any  arbitrary,  procedures  e)  extended  experience  Because p r o p e r t y  d)  be  or  three  Canadians are d e r i v e d ) . This s p e c i a l could  States  the  advantages:  small)  net  d i v i d e n d s , and  most  i n Canadian companies w i t h f o r e i g n  investments  f o r e i g n source  would pay dividends  no than  more C a n a d i a n they  do  tax  at  present. f)  The  gross-up  r a t e c o u l d be  adjusted  from  time  to  1 78 time  t o meet p a r t i c u l a r  reduction time  adoption Carter  i n t h e r a t e might  the expected before-tax  corporate  See  circumstances.  Report  assets  be n e c e s s a r y rates  i n Canada d e c l i n e d  of the i n t e g r a t i o n  A i f over  o f r e t u r n on following the  proposal."  p p . 488-490.  284 s e e s e c . 216 a n d 217 I.T.A.  285 See B a r k i  v . M.N.R., [1975] CTC 2300; PPG I n d u s t r i e s  L t d . v . M.N.R., [ 1 9 7 8 ] CTC 2055; 78 DTC 1062 (T.R.B.)  286 As an example l e t ' s all  tenants  take  are witholding  usually  e n d up b e i n g  profit,  w h i c h means g r o s s  real  estate  investments: I f  25% o f t h e r e n t ,  more e x p e n s i v e  than  this  will  taxation  of  the  r e n t minus a l l e x p e n s e s .  287 s e e a b o v e  288 See IT-393R p a r a . all  different  losses,  kinds  at least  9. T h i s  of investment  the f e a s i b i l i t y of  w h i c h u s u a l l y have some  i n the beginning.  289 s e c . 1 2 5 ( 7 ) ( b ) I.T.A. Sec. Canadian-controlled controlled  limits  reads: 125(7)(b)  private corporation.  private corporation"  "Canadian-  means a p r i v a t e  179 corporation  that  i s a Canadian c o r p o r a t i o n  corporation  controlled, directly  other  or i n d i r e c t l y  manner w h a t e v e r , by one o r more n o n - r e s i d e n t one  o r more p u b l i c c o r p o r a t i o n s  venture c a p i t a l  corporation)  (other  than a  i n any  p e r s o n s , by  than a p r e s c r i b e d  o r any c o m b i n a t i o n  thereof.  290 s e e s e c . 1 1 2 ( 1 ) , ( 2 ) ITA  291  s e e s e c . 125 I.T.A.  292 The e x a c t province.  percentage d i f f e r s  In B.C.  293 L a w y e r s is  a pity  is  possible.  from p r o v i n c e  to  i t i s s e t a t 27%.  i n B.C. a r e n o t a l l o w e d  f o r them under  to incorporate,  tax a s p e c t s ,  which  but i n A l b e r t a i t  294 s e e : F a l c o n e  295 e x c l u d i n g provided  share c a p i t a l  by p e r s o n s o t h e r  shareholders  than  specified  surplus non-resident  of the c o r p o r a t i o n  296 i n c l u d i n g c o r p o r a t i o n s  297 f o r m u l a  or c o n t r i b u t e d  taken  Capitalization  and t r u s t s  from Ward,  i n : Forry  (Ed.),  Thin  180  298  see  above  299  see  above  300  i . e . , approximately  one-third  of  the  tax  payable  thereon  301 of  Subject, the  however, t o c e r t a i n a d j u s t m e n t s on  f o r e i g n tax  allowed  302  i . e . , at  303  i . e . , the  304  see  305  i . e . , 50%  of  306  i . e . , 50%  x 57.5%, p l u s  307  see  308  Direct  see  under  normal w i t h o l d i n g  maximum r a t e of  34%,  tax  plus  sec.  126  r a t e of  the  47%  I.T.A.  25%  surtax  above  chapter  restricted  309  the  credit  account  62.5%, p l u s  50%  50%  of  x  25%  15%  7  s u b s i d i e s as e a s i e r , but  d e f i n i t o n of  under APIP o r F P I P may this  would be  "capital  gains  a  separate  dividend  be issue.  account"  and  181  "Canadian p r o p e r t y "  310  Looking  at  1970-71, c.63,  the  in sec.  situation  formerly  seems worse t h a n  1 3 3 ( 8 ) ( b ) and  i t was  311  see  Cochrane  312  or,  under c e r t a i n  before  C-259), the under  limited  the  the  (c)  I.T.A.  treatment  old  I.T.A.  (S.C. of NRO's  I.T.A.  circumstances,  by  resident  corporations  313  after  amount  c o r p o r a t i o n taxes  for capital  CTS  and  see  315  MacDonald, Vol.4,  No.  316  unless  treaty  317  Non-Canadian c o r p o r a t i o n s  an  some  219-108B  reduced  Canada a t any on  r e t e n t i o n of  formation  314  Part  the  time  by  i n the  amount e q u a l  68325  year  to the  w h i c h were r e s i d e n t i n will  pay  a tax  aggregate  of  under  this  the  following: the  corporation's  taxable  dividends  I.T.A.,  plus  total  taxable  deducted  under  income, sec.  plus  112  or  115(1)  182  any  resource  I.T.A., the  allowance  preceding  claimed year  as  in  the  claimed  amount  below)  for  (c)  amounts the  the  sec.  20(1)(V.1)  to  income  foreign  otherwise  in  respect  Canada,  of  its  plus  sec.  219(1)(i)  year  (sec.  sec.  income taxes  (f)  tax  the  I.T.A.  (see  219(1)(a),  (a.1),  219(1)(a.4)  I.T.A.,  of  federal  and  in  in  plus  referred  2l9(l)(e)  in  preceding  aggregate  corporation  allowance  under  I.T.A.),  provincial  the  property  the  total  the  by an  investment  minus  under  plus  amount  (b),  deducted  tax  and  paid  for  non-deductible the  year  (sec.  I.T.A.),  credit  payable  taken  under  Part  against  the  I  219(1)(g)  (sec.  tax  I.T.A.), half of  the  its  gains  lower  net  of  foreign  (sec.  the  corporation  at  the  end  of  of  exceeding  the  the  the  excess  the  company  of  income  income  was  carrying  year,  (sec.  the  an  aggregate,  it  and  the  aggregate  taxable  on  capital  property  in  219(1)(h)  last for  business  allowance  aggregate  since  or  I.T.A.),  maximum p r e s c r i b e d  Regulations  the  source  investment  the  over  taxable  219(1)(g)  if  respect  the  of  the  Canada, by  sec.  Canada  year  in  not 808(1)  of  I.T.A.), the  became  each  for  in  dividends  resident  taxation  year  in  paid  by  Canada  ending  183 after the  i t last  lesser  foreign  of  became r e s i d e n t  i n Canada,  of h a l f  (1) i t s t a x a b l e  income  (2) i t s n e t  source  income  and  and  taxable c a p i t a l  of  gains (sec.  219(1)(i) I.T.A.), t h e amount by w h i c h any d i r e c t  or i n d i r e c t  royalties  added  t o income  deduction  under  s e c . 12(1)(o) or  under  s e c . 69(6) o r  o t h e r amounts p a i d  provincial  or d i s a l l o w e d as a I 8 ( l ) ( m ) I.T.A.  or  (7) I . T . A . , and any t a x e s o r o r p a y a b l e t o t h e Crown under  the  P e t r o l e u m and Gas  Revenue A c t w h i c h a r e d i s a l l o w e d  a deduction  s e c . 18(1)(1.1) I.T.A., exceeds the  amount,  i f any, d e d u c t i b l e  provincial by way  under  income  o f an  in respect  t a x under  thereof  sec. 2 l 9 ( l ) ( f )  as  as  I.T.A. or  i n v e s t m e n t a l l o w a n c e under s e c .  2 1 9 ( 1 ) ( h ) I.T.A.  (see above)  (sec. 219(1)(J)  I.T.A.),  and amounts r e f e r r e d The to  investment property  i n s e c . 2 1 9 ( 1 ) ( b ) and  provide in  some leeway  Canada  on  company w o u l d distributing  retain them a s  term r e f e r r e d  Canada  i n Canada  f o r the f o r m a t i o n  part  of the  concept, r e f e r r e d  of working a  of i t s p r o f i t s  to capital  subsidiary rather  than  dividends.  corporations,  i n the t e c h n i c a l  sense of  t o above, which a r e not r e s i d e n t  t h r o u g h o u t t h e y e a r must pay  aggregate  I.T.A..  (h) I . T . A . , i s d e s i g n e d  t h e same a s s u m p t i o n t h a t  Non-Canadian the  to i n sec. 219(1)(k)  following:  in  t h e b r a n c h t a x on t h e  184  t h e c o r p o r a t i o n ' s t a x a b l e income e a r n e d (sec.  2l9(l)(a)  I.T.A.),  t h e amount o f any sec.  20(1)(V.1)  the allowance respect  amounts  I.T.A.),  referred  minus t h e a g g r e g a t e the aggregate dispositions M5(l)(b) Canada  f o r the y e a r ,  of i n v e s t m e n t  219(1)(b)  deducted  f o r the p r e c e d i n g year i n p r o p e r t y i n Canada ( s e c .  plus  t o i n s e c . 2 l 9 ( 1 ) ( a . 4 ) I.T.A. of:  gains  not used  in carrying  federal  provincial extent  from  the d i s p o s i t i o n  referred  i n Canada)  on b u s i n e s s i n  of a l l t a x a b l e  ( s e c . 219(1)(d)  in carrying  on  I.T.A.),  income t a x a n d t h e n o n - d e d u c t i b l e income t a x e s  that  from  t o t h e amount o f t h e n e t t a x a b l e  Canadian p r o p e r t y , whether or not used  the  gains  of " t a x a b l e Canadian p r o p e r t y " (see s e c .  I.T.A.)  the b u s i n e s s  under  plus  of the net t a x a b l e c a p i t a l  (limited  capital  plus  resource allowance  claimed  i n Canada  f o r the year  such t a x e s a p p l y  to immediately  above  except  t o the  t o the net c a p i t a l ( s e c . 219(1 H e )  gains  and ( f )  I.T.A.), if  t h e c o r p o r a t i o n was  at  t h e end o f t h e y e a r , an a l l o w a n c e  respect  of i n v e s t m e n t  exceeding  carrying  on b u s i n e s s  i n Canada  f o r the year i n  p r o p e r t y i n Canada n o t  t h e maximum p r e s c r i b e d  I.T.A. o f t h e R e g u l a t i o n s t h e amount o f any d i r e c t  by s e c . 8 0 8 ( 1 )  ( s e c . 219(1)(h) or i n d i r e c t  Crown  I.T.A.), royalties  185  added sec. or  t o income o r d i s a l l o w e d  as a d e d u c t i o n under  1 2 (1 ) (o) o r I 8 d ) ( m ) I .T.A. o r under s e c . 6 9 ( 6 ) (  (7) I.T.A., and any t a x e s o r o t h e r  payable  amounts p a i d o r  t o t h e Crown u n d e r t h e P e t r o l e u m and Gas  Revenue Tax A c t w h i c h a r e d i s a l l o w e d  as a d e d u c t i o n  under  that  s e c . 18(1) ( 1 . 1 ) ,  to the extent  amounts a r e n o t d e d u c t i b l e under  sec. 219(1)(f)  investment  allowance  as p r o v i n c i a l  I.T.A. o r by way  such income t a x  of an  under s e c . 2 1 9 ( 1 ) ( J )  I.T.A.),  and amounts  referred  t o i n s e c . 2 1 9 ( 1 ) ( k ) I.T.A. [CTS  219-108C-E]. More d e t a i l e d  information  c a n be o b t a i n e d  through  IT-137R2 and I T - 2 2 7 .  318 see s e c .  2 l 9 ( 2 ) ( a ) I.T.A.  319 s e e s e c . 2 l 9 ( 2 ) ( b ) ( i )  I.T.A.  320 s e e s e c . 2 1 9 ( 2 ) ( b ) ( i i )  321  see s e c . 2 1 9 ( 2 ) ( b ) ( i i i )  I.T.A.  I.T.A.  322 s e e s e c . 2 1 9 ( 4 ) I.T.A.  323 s e e M a c D o n a l d No. Tax.  68325; Ward, i n F o r r y  (Ed.):  Branch  186  324 minus c e r t a i n business assets  amounts  i n v e s t e d i n the year i n  i n Canada  325 see B o n z a n i g o , p . 5 6 . So a company  is likely  branch  branch  i n Canada o n l y a s l o n g a s t h i s  losses.  T h o s e l o s s e s c o u l d be o f f s e t  t h e company's operation  home c o u n t r y . Whenever  s t a r t s making p r o f i t s ,  would be c h a n g e d i n t o Forry  (Ed.),  t o keep a  produces  against p r o f i t s in the Canadian  i t is likely  branch  that i t  a s u b s i d i a r y . See h e r e t o : Ward, i n  p.77/78  326 C a n a d i a n  Business  327 a c c o r d i n g  C o r p o r a t i o n Act  t o t h e B.C.  Company A c t , RSBC  1979,  chapter  59  328  see s e c . 133(1) BCCA  329 see s e c . 133(1) BCCA  330 A c c o r d i n g  t o Newman, p.277.  i n the mid-70s,  Urquhart,  then  susidiary  of I T T , had t o g e t a p p r o v a l  expenditure  331  p r e s i d e n t a n d CEO  o f more t h a n  i n chapter  9  $25,000.  of R a y o n i e r from  Howard  Canada, a  t h e US  f o r any  1 87  332 See R o b i n s o n , M o t i v a t i o n on Flow o f P r i v a t e F o r e i g n Investment.  333 see P o w r i e  334 We  a l s o have German e x p l o r a t i o n f i r m s l o o k i n g f o r  minerals and  — mainly  i n the northern  i n the t e r r i t o r i e s .  processing  335 l i k e  p a r t of the p r o v i n c e s  German c h e m i c a l  firms are involved e s p e c i a l l y  more c o m p e t i t i o n ,  l a n d and h i g h e r  higher  and o i l in Alberta.  expenses t o a c q u i r e  taxes  336 I n t e r e s t r a t e s o f up t o 25% a n d an a l m o s t inflation  r a t e made b u s i n e s s  almost  impossible  equal some  years  ago.  337 i n c l u d i n g education  338 T h i s  a l l kinds  of e d u c a t i o n ,  especially  on t h e j o b  i s another  reason,  not  being  339  However, r e s o u r c e  why a l o t o f p r o d u c t i o n i s  transferred to low-salary countries.  companies u s u a l l y don't  much o f a c h o i c e where t h e y have t o go w h e r e v e r  like  have t o o  t o do i n v e s t m e n t .  the resources a r e .  They  188  340  especially  i n mining,  fishing,  and t h e lumber  industry.  341  In t h i s  s e n s e Canada has some d i f f i c u l t y ,  geography c a u s e s  fairly  w h i c h means f o r t r a d e  342  A new t r a c k  high  within  i s just  costs  f o r east-west  343 up  line  going  t o be b u i l t  hand, t h e r e  some i n v e s t m e n t s  344  track  through the to a double  between B.C. a n d A l b e r t a .  On t h e o t h e r  I will  trade,  the country.  Rocky M o u n t a i n s , e n l a r g i n g a s i n g l e track  since the  come back  are p o s s i b i l i t i e s  of p u t t i n g  i n Canada, c l o s e t o t h e U.S.  border.  to t h i s .  T h i s means any k i n d o f p r o d u c t ,  not only  in physical  form.  345 an  Sometimes l o w e r area  346 that  production  f u r t h e r from  costs w i l l  t h e "market".  One o f t h e p r o b l e m s o f d o i n g there  unless country  i s only  a s m a l l market  investment  situation.  i n Canada i s  f o r consumer g o o d s . So  Canada opens up f o r more p e o p l e there  be p o s s i b l e i n  t o come i n t o t h e  i s b a r e l y a c h a n c e t o improve  By g o i n g  this  way Canada c o u l d  this  g e t away  from  189 selling and  resources  and change t o w a r d s more  manufacturing  processing.  347 I w i l l  point  this  o u t i n more d e t a i l  later.  348 see s e c . 125 I.T.A.  349 see P a r t  V I.T.A., Reg. 500  350 see s e c . 18(4) I.T.A.  351  see above  352 see s e c . 74 I.T.A., s e c . 75 I.T.A. a n d s e c . 7 5 ( 2 ) I.T.A.  353 see e . g . , t h e d i f f e r e n c e between B.C. and W a s h i n g t o n .  354 So i t m i g h t be b e t t e r than e x p o r t i n g  from  t o go d i r e c t l y  to the States  Canada.  355 I , t h e r e f o r e , w i l l  refer  t o some o f t h e c h a n g e s .  CORPORATE TAXES The c o r p o r a t e  t a x r a t e f o r t h e U.S. was r e d u c e d  46 % t o 34%. On t h e o t h e r is  gone.  ( T h i s was  hand t h e i n v e s t m e n t  10% o f t h e p u r c h a s e p r i z e .  from  tax c r e d i t I t was  used  1 90 especially industry  i n the  etc.)  corporate  sec.  it,  55  to  tax  50%  which  only  of  of  the  the 50%)  AMT  and  is a  work t o tax  to the  earnings  time  from  This  the  rules.  the  minimum  in for  is  tax  AMT,  my the  only  1989.  taxation  Then  (or  s y s t e m of  lawyers  corporate  and  So  to  the  t h a t amount  problems  1987  and  two  i n p r a c t i c e and  c a u s e a l o t of  give  On  down  determine  normal i t by  taxes.  taxes.  complicated  Afterwards  to a  taxation  profits.  30%  witholding  tax  U.S.-German D o u b l e Tax In  on  20%  AMT.  f o r e i g n companies h a v i n g  this  connected tax  is laid  an  TAX  For  15%.  the  t i m e s 20%  c h a n g e the  the  add  another  will  the  difference, split  the  there  This  AMT  f o r the  BRANCH  20%.  introduced,  t o compare t h e  implemented  taxable  of  system  a company has  a c c o u n t a n t s and  will  (AMT)  machines  normal  to  t o pay  the  f o r the  i s a l s o a new  r a t e a l l o c a b l e under  understanding  of  does a p p l y  heavy  Code. In o r d e r  is really  US  i n the  new  i t by  company has is  59  have t o t a k e  multiply  industry,  minimum t a x  basically  corporate we  This  r a t e . There  alternative in  steel  context  we  foreign stockholders, german c o r p o r a t i o n  Convention  is also a  which are  p a i d by  i f 50%  (over  i n the  portfolio  have t o l o o k  income. There  dividends  on  a branch  of  i n c o m e . Under  i t i s reduced at  the  secondary a german the  a three  U.S.  gross  year  to  effectively witholding corporation income  period)  is  of  191  derived  from  U.S. c r e a t e d  t h e U.S. T h i s  a "branch p r o f i t  re-patriation equity of  position  b r a n c h t a x . But t h e r e implemented.  i s taxed  (The d e t a i l s  distributions  t o the  ends up a t 30% D o u b l e Tax  15%, a n d i t p r o h i b i t s a  are different  INVESTORS AND  For  this  t h e U.S.-German  down f o r t h e p u r p o s e o f t h i s  1986 t h e  t a x " , t r i g g e r e d by t h e  of the branch p . a . , t h i s  Convent i o n a s u b s i d i a r y  FOREIGN  i s 25%. A f t e r  o f p r o f i t s . I f we compare  t h e d i f f e r e n c e . Under  U.S.  t a x now  exemptions which the  a r e not important  to l a y  thesis.)  PARTNERSHIPS from a U.S. p a r t n e r s h i p  partners  there  i s a witholding  included  i n t h e t a x p a y a b l e by t h e s p e c i f i c  to foreign  t a x o f 20%. T h i s  will  partner  be or  investor.  DEPRECIATION Under t h e 1981 A c t t h e US gave i n v e s t m e n t s by i m p l e m e n t i n g were c a t e g o r i e s it  was  19 y e a r s .  U.S. was v e r y invested  fast  inventives for  write  offs  o f 3,5 and 10 y e a r a s s e t s . Therefore  interesting  i n U.S. r e a l  real  estate  (ACRS). T h e r e In r e a l  investment  estate i n the  a n d a l o t o f German money  estate  was  and a l l k i n d s o f  d e v e l e o p m e n t s . In t h e 1986 U.S. Tax R e f o r m A c t i n r e a l estate and  we now  find  two d i f f e r e n t  non-residential  period  f o r the write  categories:  ( = commercial)  real  o f f on r e s i d e n t i a l  residential  e s t a t e . The real  estate  now  192 is  27 1/2 y e a r s ,  acquired  after  and f o r non r e s i d e n t i a l  1986 i t i s 31  t o use t h e s t r a i g h t l i n e For  other  than  real  1/2 y e a r s .  we  example, asset, line.  for depreciation.  estate  the c a t e g o r i e s  For  $40, i n t h e 2nd y e a r so t h e d e p r e c i a t i o n  we c o u l d  switch  assets  we have a h a l f y e a r estate  quarter assets  of the year,  depreciation mandatory  b)  would be $24, and so o n .  we have a 150% d e c l i n i n g other  than  real  f o r the f i r s t  in service after  year.  If  i n the l a s t For  1986, t h e r e i s  system e l e c t a b l e , which i s  d e p r e c i a t i o n . For r e a l is elective.  estate a  The s y s t e m i s  cases:  taxpayer  uses i t f i r s t  i f a U.S.  depreciation.  we have a 1/4 month c o n v e n t i o n .  f o r 40 y e a r s  i n three  i f a U.S.  for  would be a r e s t o f  40% o f h i s a s s e t s  which are placed  straight line  and  there  convention  an a l t e r n a t i v e d e p r e c i a t i o n  a)  we w o u l d h a v e : In t h e  we have a 1/2 month c o n v e n t i o n .  someone b u y s more t h a n  the  o f $20 p . a . s t r a i g h t  d e p r e c i a t i o n . For a l l assets  real  o f a $100  t o the s t r a i g h t l i n e  t h e 15 a n d 20 y e a r  estate For  a t a 5 year d e p r e c i a t i o n  With a d e c l i n i n g d e p r e c i a t i o n  balance  now a r e  F o r t h e 3,5,7 and 10 y e a r  we w o u l d have a d e p r e c i a t i o n  $60 l e f t ,  The i n v e s t o r has  a 200% d e c l i n i n g b a l a n c e d e p r e c i a t i o n . F o r  looking  1st y e a r  Later  find  estate  method  3,5,7,10,15 a n d 20 y e a r a s s e t s . assets  real  taxpayer  buys a s s e t s outside  o f t h e U.S.  o f t h e U.S.;  acquires  i t , which l e a s e s i t ;  outside  property  and i s s u e s  bonds  1 93 c)  when t h e a l t e r n a t i v e  Another  rule  e s t a t e and marketing  least  as w e l l as  t h e r e was  40%  356  similar  U.S.  Tax  i n t h e U.S.  going  better  still  " i n the h o l e " .  costs.  one  in million  fur  Wirtschaft, April  358  in relation  359  and  has  360  real  have t o  be  term  a percentage  c o m p l e t i o n . Now: t o use  Reform Act  was  the  of if  percentage  especially  h i t right  1985  on  their  i t appears  German Mark; c i t e d 1985,  in Million  from  Anlage  to the y e a r l y  n o t , as b e f o r e ,  real  head.  that i t ' s Canada i s  1.  investments  in investment  not  too  activity  German Mark. C i t e d  h o l d i n g companies  the  Bundesministerium  from:  per  bad.  year.  Deutsche  1976-1982, p.6/7,  Die Kapitalverflechtung'1978-1983,  without  for  costs,  long  t o use  Bundesbank, D i e K a p i t a l v e r f l e c h t u n g und:  For  i n e a s t e r n Canada, w h i l e western  357  again  rule  interests  to report a f t e r  S i n c e t h e b e g i n n i n g of  Units  is calculated.  method.  W i t h t h e new lobby  t a x e s and  are completed,  of c o m p l e t i o n  estate  capitalization  the a l t e r n a t i v e  method o r  (AMT)  personal property: Sales  costs including  completion at  i s the uniform  intangible  capitalized projects  minimum t a x  p.23.  1 94  361  i n the sense of  362  The  following  1976-1982; c i t e d  f i g u r e s were o n l y from: Deutsche  Kapitalverflechtung  363  in B i l l i o n  364  numbers  365  The  admitted foreign  366  Bundesbank, D i e  1976-1982, p . 6 / 7 .  thousands  R e p o r t , as w e l l  n e t economic  as  benefits  the C a r t e r f o r Canada  Report, resulting  from  investment.  Some o f t h e t r e a t i e s  Canada's  imposition  367  i n : IFA, Non  368  Futhermore,  of  available for  German Marks  in  Gray  investment  a particular  difficult provisions  later  specifically  of a b r a n c h  tax.  Discrimination,  where a t r e a t y  discriminate  against  objection  would  be d u r i n g  provision  i s enacted which  to d i s c r i m i n a t e . While  A r t . 24,  p.304/305.  i s negotiated  s e t of s t a t u t o r y for a national  provide for  provisions,  to complain him.  The  negotiations, appears  on t h e  i t would  that  any  be  such  time f o r o r when a  to a Contracting  f o r t h e most p a r t  basis  the  new State  195 non-discrimination dressing,  may  t o pause b e f o r e  discriminatory  370 s e e : I F A : S p e c i a l  Analysis  371 N o n - d i s c r i m i n a t i o n  clauses  tax convent i o n s ( 1 i k e  U.S.) d e p a r t  markedly  they are contained Article "citizens" States. the  over-eager clearly  XVII  i n some o f t h e C a n a d i a n  Finland,  one b r i e f  of t h e F i n l a n d than  "Citizens"  to "nationals"  refers only  i n that  paragraph.  Convention  i s not a d e f i n e d  Article  Germany, Sweden and  f r o m t h e O.E.C.D. M o d e l  i n only  rather  Finland  t o be window  provisions.  Analysis  the  cause  enacting  s e e : IFA: S p e c i a l  double  appear  t h e y do, on o c a s s i o n ,  legislators  369  articles  refers to  of the  Contracting  t e r m . In a d d i t i o n ,  to taxation  which i s  "more burdensome". Article referred the  the  to " c i t i z e n s "  rather  than  O.E.C.D. p a r a g r a p h . P a r a g r a p h  Article, is  XIX o f t h e o l d German C o n v e n t i o n  however, d e f i n e d  equivalent  to that  O.E.C.D. A r t i c l e  Germany  (Federal  Proclaimed  in force  to "nationals"  "citizens"  and t h e d e f i n i t i o n i n paragraph  24. I t r e a d s : of)  January  Convention  1, 1958.  Article  as i n  3 o f t h e German  of " n a t i o n a l s "  Republic  also  XIX  2 of  196  (3)  The  not,  citizens  while  therein  are  the  citizens  are  residents  372  the  of  other  24  374  sec.  18(4)  375  sec.  125  376  allowing  residents;  contracting  or  The  persons, organized  contracting  term  under  be  than which  "citizens"  the  and  laws  in  force  States.  i f we  look at  some of  the  above.  Canadian-German D o u b l e Tax  Convention  I.T.A.  I.T.A.  a  see  $500,000 c a p i t a l also  investment  g a i n s exemption  only  for  Laffer  IT-393R p a r a . 9 ; see  for  the  Boidman,  C r a w f o r d ; Hughes, G.A.;  allowing  shall  State,  State,  partnerships  consequences 1981;  F o u n d a t i o n , C o r p o r a t e Management Tax  378  States  more burdensome t a x e s  makes a b i g d i f f e r e n c e  Art.  estate  contracting  such o t h e r c o n t r a c t i n g  created  373  see  or  the  in i t s t e r r i t o r y .  C a n a d i a n ways, see  377  i n the  to other  respective  This  of  a l l juridicial  associations in  one  residents  subject  includes  of  transfer  Canadian  for  real  Tax  Conference  1983;  Smith  to  spouses without  realization  of  1 97 capital  gains;  s e e B a r b e a u ; Cohen;  Cooper/Crawford/Gratias;  379 and i n o r d e r current  Cullity;  to avoid  the strange  corporation directly  should  by t h e  repealed:  means t h a t p r o f i t s n o t be t a x e d  to t h i s ,  the c a p i t a l  corporation controlled  should  appropriate  worse t h a n  no  to create  restricting  those  received  s e c . 8 9 ( 1 . 1 ) I.T.A. s h o u l d  d i v i d e n d account longer  to stimulate  t h e r e d o e s n o t seem  lapse  be  of a p r i v a t e  upon c e a s i n g  investment  t o be  persons.  i t m i g h t be  some i n c e n t i v e s . In p a r t i c u l a r ,  t o be any c o m p e l l i n g  the refundable  private corporations only,  tax to  reason f o r  Canadian-controlled-  or at l e a s t  were o f f e r e d when t h e l i m i t a t i o n s  were  no  explanations  introduced  i n 1979  i n 1981. I do n o t want  of a p p r o p r i a t e  this  under t h e  r e c e i v e d through a  by one o r more n o n - r e s i d e n t  382 In o r d e r  and  situation  taxpayer.  381 As a c o r o l l a r y  lead  Sakari  law, d e s c r i b e d a b o v e .  380 Which b a s i c a l l y  and  Goodman;  to enter  i n t o any d e t a i l e d  and f e a s a b l e p r o p o s a l s ,  into a longer  essay  about  economic growth i n g e n e r a l . field  the l i n k  discussion  because t h i s  would  between t a x law  Some of t h e r e s e a r c h i n  has been done by A a r o n / B o s k i n ;  Aaron/Pechman;  198 Arrow;  Bliss;  Bracewell-Milnes;  Bracewell-Milnes/Huiskamp;  Groenewold;  Gupta/Gupta;  Hermann; K o s k e l a / K a n n i a n e n ; Kwon; P a u l ; R o b i n s o n .  383 Even  i f t h e l a n g u a g e o f t h e new a c t i s n o t much  different  f r o m FIRA, t h e i d e a s b e h i n d  384 A t a x f r e e p e r i o d granted  sometimes  for provincial  i s inconsitent  Income Tax A c t t o o .  i t are.  taxes,  which i s  with the p o l i c y  of the  BIBLIOGRAPHY A a r o n , Henry J . / B o s k i n , M i c h a e l , J . , ( E d s . ) : The E c o n o m i c s of T a x a t i o n , B r o o k i n g s Institution, 1980. 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M. 1962  APPENDIX A INTERPRETATION BULLETINS ON THE TAXATION OF NON-RESIDENTS, NON-CANADIAN-CONTROLLED COMPANIES RELATED ISSUES  AND  IT-59R3  I n t e r e s t on d e b t s owing t o s p e c i f i e d non-residents (Thin C a p i t a l i z a t i o n )  IT-68R  E x e m p t i o n f r o m income t a x i n Canada — P r o f e s s o r s a n d t e a c h e r s from o t h e r c o u n t r i e s  IT-76R2  Exempt p o r t i o n o f p e n s i o n been a n o n - r e s i d e n t  IT-81R  P a r t n e r s h i p s — Income partners  IT-122R  United States benefits  IT-137R2  A d d i t i o n a l t a x on c o r p o r a t i o n s , o t h e r t h a n C a n a d i a n c o r p o r a t i o n s , c a r r y i n g on b u s i n e s s i n Canada  IT-150R  T a x a b l e C a n a d i a n p r o p e r t y — A c q u i s i t i o n from n o n - r e s i d e n t by d e a t h o r m o r t g a g e f o r e c l o s u r e  IT-155R2  N o n - r e s i d e n t t a x — i n t e r e s t on bonds, debentures, n o t e s , hypothecs or s i m i l a r o b l i g a t i o n s o f , o r g u a r a n t e e d by, t h e Government o f Canada  IT-161R3  N o n - r e s i d e n t s — E x e m p t i o n from t a x d e d u c t i o n s a t s o u r c e on employment income  IT-163R  E l e c t i o n by n o n - r e s i d e n t i n d i v i d u a l s on c e r t a i n C a n a d i a n s o u r c e income  IT-171  Taxation of n o n - r e s i d e n t s — Determination t a x a b l e income e a r n e d i n Canada  social  228  when employee h a s  of non-resident  security  t a x and  of  229 C a p t i a l gains Canada-United Taxable  by n o n - r e s i d e n t s — S t a t e s Tax Convention  Canadian  property  Permanent e s t a b l i s h m e n t of a c o r p o r a t i o n i n a p r o v i n c e and of a f o r e i g n e n t e r p r i s e i n Canada Foreign  tax c r e d i t  Determination status  — Part-time residents  o f an  D e t e r m i n a t i o n of l e a v i n g Canada  individuals's  residence  L o s s e s of n o n - r e s i d e n t s residents  for  and  residence  individuals  part-time  A d d i t i o n a l t a x on c o r p o r a t i o n c a r r y i n g on b u s i n e s s i n Canada, o t h e r t h a n C a n a d i a n c o r p o r a t i o n s and n o n - r e s i d e n t i n s u r a n c e c o m p a n i e s — E f f e c t of income t a x a g r e e m e n t s and c o n v e n t i o n s  Non-resident-owned investment c o r p o r a t i o n — M e a n i n g of p r i n c i p a l b u s i n e s s Canada-U.S. Tax C o n v e n t i o n " p r e s e n t " i n Canada Know-how and s i m i l a r non-residents E x e m p t i o n from non-residents  t a x on  E l e c t i o n r e t a x on — Non-residents  - Number of  payments  to  interest  r e n t s and  days  payments  timber  to  royalties  230 N o n - r e s i d e n t s — Income Residence  of a t r u s t  or  earned  i n Canada  estate  Deemed d i s p o s i t i o n and a c q u i s i t i o n on t o be o r b e c o m i n g r e s i d e n t i n Canada Canadian-controlled Non-resident  private  corporation  b e n e f i c i a r i e s of t r u s t s  Management o r a d m i n i s t r a t i o n non-residents Hire  of s h i p s  ceasing  and a i r c r a f t  fees  from  paid to  non-residents  APPENDIX B  INFORMATION  CIRCULARS ON THE TAXATION OF  NON-CANADIAN-CONTROLLED COMPANIES  AND  NON-RESIDENTS,  RELATED ISSUES  72-17R2  P r o c e d u r e s C o n c e r n i n g D i s p o s i t i o n of T a x a b l e C a n a d i a n P r o p e r t y by N o n - R e s i d e n t s o f C a n a d a and P o t e n t i a l Tax L i a b i l i t i e s o f P u r c h a s e r s of Such P r o p e r t y  75-6  15% Tax W i t h o l d i n g from Amounts P a i d t o Non-Resident Persons Performing S e r v i c e s i n Canada  76-12R2  A p p l i c a b l e R a t e o f P a r t X I I I Tax on Amounts P a i d or C r e d i t e d t o Persons i n T r e a t y Countries  77-16R2  Non-Resident  Income Tax  231  232 INDEX OF CASES B a r k i v . M.N.R., [1975] CTC 2300, 178 Cooper v . C a d w a l a d e r , ( 1 9 0 4 ) , 5T.C. 101, 6 De B e e r s C o n s o l i d a t e d M i n e s L t d . v . Howe. [1906] A.C.455; 5T.C. 198; 95L.T.221, 10 E g y p t i a n D e l t a L a n d & I n v e s t m e n t Co. L t d . v . T o d d , 1929 AC 1 , 11 E r i c k s o n v . M.N.R., [1980] CTC 2117; 80 DTC 1118 (T.R.B.), 5 I.R.C. v . L y s a g h t , (1928) 13 T.C.511; [1928] A.C.234, 6 L e v e n e v . I.R.C. , [ 1 928] A.C.217, 7 M a l l o n , ( 1 9 6 4 ) , 35 T a x A.B.C. 420; 64 DTC 449, 6 Meldrum, ( 1 9 5 8 ) , 2 T a x A.B.C. 63; DTC 232, 6 PPG I n d u s t r i e s L t d . v . M.N.R., [1978] CTC 2055; 78 DTC 1062 ( T . R . B . ) , 178 R u s s e l l , [1949] C.T.C. 13; 4 DTC 536, 6 Shpak a n d Shpak v . M.N.R., [1981]CTC 2429; 81 DTC 366, 7 T h i b o d e a u v . The Queen[ 1"978 ] C.T.C. 539, 14 York v . M.N.R., [1980] CTC 2845; 80 DTC 1749, 6  

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