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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 accept t h i s t h e s i s as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA A p r i l 1987 © Michael F.M. Reuter, 1987 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department of The University of British Columbia 1956 Main Mall Vancouver, Canada V6T 1Y3 Date M ^ T t i ^ g y ABSTRACT Some Implications of the Canadian Tax Law on Foreign Investment in Canada — A German Perspective Canada i s one of the c o u n t r i e s depending on f o r e i g n investment to a f a i r l y high e x t e n t . A f t e r some time of concern about f o r e i g n investment 1 the For e i g n Investment Review Act (FIRA) was implemented. 2 With the f e d e r a l e l e c t i o n i n 1984 the Canadian government took the stand i n favour of f o r e i g n investment again and changed FIRA to a more p o s i t i v e "Investment Canada". Anyway, the c o n t r o l of f o r e i g n investment should be seen only as pa r t of a l a r g e r economic p o l i c y , which determines the economic c r i t e r i a f o r investment d e c i s i o n s . One of these c r i t e r i a i s the Canadian tax law. And as one example, p r i o r to 1980, a l l p r i v a t e c o r p o r a t i o n s were e n t i t l e d to the refundable tax i n resp e c t of t h e i r investment income. A f i r s t l i m i t a t i o n was int r o d u c e d i n October of 1973, whereby c o r p o r a t i o n s other than 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 c o r p o r a t i o n s were denied any refundable tax i n resp e c t of income from r e a l p r o p e r t y f o r t a x a t i o n years commenced a f t e r 1979. F i n a l l y , as a r e s u l t of the November 12, 1981 budget, f o r t a x a t i o n years commenced a f t e r that date, investment income no longer "earns" refundable tax unl e s s the c o r p o r a t i o n was 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 c o r p o r a t i o n throughout the r e l e v a n t t a x a t i o n year. i i The Canadian t a x a t i o n of r e s i d e n t s and n o n - r e s i d e n t s i n Canada, i n c l u d i n g the t a x a t i o n of Canadian and non-Canadian-controlled companies and branches of f o r e i g n companies, i s unequal and d i s c r i m i n a t i n g . T h i s t h e s i s w i l l g i v e some ideas about the Canadian t a x a t i o n of f o r e i g n investment i n Canada, r e f e r r i n g sometimes to the Canadian-German Double Tax Convention as w e l l as the O.E.C.D. Model Double Tax Convention. Since tax p l a n n i n g i s a part of general economic investment d e c i s i o n s , the t a x a t i o n of f o r e i g n investments w i l l be evaluated i n r e l a t i o n to other investment c r i t e r i a f o r investments i n Canada. As i t w i l l become obvious, there are reasons i n favour of the Canadian tax p o l i c y on one hand and reasons a g a i n s t i t on the other hand. As a c o n c l u s i o n , I am of the o p i n i o n that i t i s worthwhile to c o n s i d e r changes i n the t a x a t i o n of f o r e i g n investment. LIST OF TABLES TABLE OF CONTENTS v i i i 1 . I n t r o d u c t i o n 1 2. The Canadian Concept of I n t e r n a t i o n a l T a x a t i o n ...3 3. D e f i n i t i o n of Residence 5 3.1 Residence of I n d i v i d u a l s 5 3.2 Residence of C o r p o r a t i o n s and D e f i n i t i o n of Permanent Establishment 10 3.3 Residence of T r u s t s 13 4. Reasons f o r D i s t i n c t i o n of T a x a t i o n of R esidents and Non-Residents 17 4.1 ( T e c h n i c a l ) Aspects of C o l l e c t i n g Taxes ....17 4.2 Aspects J u s t i f y i n g D i s c r i m i n a t i o n i n I t s e l f 18 4.2.1 Economic and Other Reasons f o r D i f f e r e n t Treatment of Non-Residents' Investment i n Canada 19 4.2.2 Assumption: F o r e i g n I n v e s t o r s R e p r a t r i a t e T h e i r P r o f i t s I nstead of Re-Investing Them i n Canada 25 4.2.3 Assumption: F o r e i g n I n v e s t o r s are Buying Abroad, Canadians are Buying Canadian 28 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 Tax Law ...31 5.1 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 31 5.1.1 General Ideas on 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 33 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 I n t e r n a t i o n a l Law 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 Intent 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 5.2 C o n s t i t u t i o n a l and A d m i n i s t r a t i v e 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 47 i v 5.2.1 O b l i g a t i o n of the A d m i n i s t r a t i o n to Follow the P r i n c i p l e of E q u a l i t y 47 5.2.2 T i e s of the L e g i s l a t i o n to the P r i n c i p l e of Equal Treatment 49 5.2.3 The P r i n c i p l e of Equal Treatment i n C o n s t i t u t i o n a l and A d m i n i s t r a t i v e Law 49 5.2.4 Conclusion 53 5.3 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 ....54 5.3.1 N o n - D i s c r i m i n a t i o n A c c o r d i n g to A r t . 24 of the OECD Model D r a f t Convention 56 5.3.2 The A p p l i c a t i o n 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 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 the N a t i o n a l i t y / C i t i z e n s h i p 59 5.3.4 D i s c r i m i n a t i o n of Branches 62 5.3.5 D i s c r i m i n a t i o n A c c o r d i n g to the C o n t r o l of C a p i t a l 65 5.3.6 C o n c l u s i o n 66 6. Canadian T a x a t i o n of Non-Residents 1 67 6.1 Prepayment of Taxes 68 6.2 W i t h o l d i n g Tax 69 6.3 E v a l u a t i o n 71 6.4 E l e c t i o n of F i l i n g a Return 75 6.5 C o n c l u s i o n 77 7. Non-Canadian C o n t r o l l e d Companies 78 7.1 I n t e r c o r p o r a t e Dividends 78 7.2 Small Business 79 7.3 T h i n C a p i t a l i z a t i o n 81 7.4 Investment Through a C o r p o r a t i o n 84 7.5 O i l and Gas 87 v 7.6 E v a l u a t i o n of the Taxa t i o n of Non-Canadian C o n t r o l l e d Companies 87 8. Non-Resident-Owned Investment C o r p o r a t i o n 91 9. F o r e i g n Companies Operating i n Canada (Branch Tax) 94 9.1 E v a l u a t i o n of the Branch Tax 97 10. Economic C r i t e r i a f o r Investment D e c i s i o n s 99 10.1 Economical C r i t e r i a I n c l u d i n g Tax Consequences f o r Investment D e c i s i o n s i n Favour of Canada 99 10.1.1 Main areas of German Investment i n Canada 100 10.2 General Economic C r i t e r i a and Tax I m p l i c a t i o n s 100 10.2.1 S t a b i l i t y 100 10.2.2 Resources I n c l u d i n g Human Resources 101 10.2.3 T r a n s p o r t a t i o n 101 10.2.4 Marketing/Sales 102 10.2.5 Taxes 103 10.3 Comparison to Investment i n the U n i t e d S t a t e s 104 10.4 S t a t i s t i c s on Investment i n Canada and i n the U.S 1 05 11. P r o p o s a l s f o r an A l t e r n a t i v e Approach and Some Changes i n the Income Tax Act 110 11.1 Canada and A r t . 24 OECD Model Double Tax Convention 110 11.2 Some Proposals 114 1 2 . C o n c l u s i o n 117 FOOTNOTES 119 BIBLIOGRAPHY 1 99 v i 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 v i i LIST OF TABLES Development of German Investment i n the U.S. and i n Canada from 1975 to 1984 106 D i r e c t and I n d i r e c t German Investment i n the U.S. and i n Canada from 1976 to 1983 107 Number of German Companies Involved i n Investment i n the U.S. and in Canada from 1976 to 1982 107 Annual Gross of those Companies 108 Employees of those Companies 109 v i i i 1. INTRODUCTION The Canadian t a x a t i o n of f o r e i g n investment i s one of the s u b j e c t s where there are many books and a r t i c l e s w r i t t e n about. 3 Most of them are d e a l i n g with the t e c h n i c a l d e t a i l s of t a x a t i o n r a t h e r than l o o k i n g f o r the reasons behind i t and e v a l u a t i n g the c o n s i d e r a t i o n s the concept i s based on, e s p e c i a l l y not i n an i n t e r n a t i o n a l c o n t e x t . The Canadian t a x a t i o n of f o r e i g n investment i n t h i s context i s supposed to i n c l u d e the t a x a t i o n of non- r e s i d e n t s i n g e n e r a l , " the t a x a t i o n of companies c o n t r o l l e d by n o n - r e s i d e n t s 5 or by non-resident companies 3 and the t a x a t i o n of Canadian branches of f o r e i g n companies. 6 The purpose of t h i s t h e s i s i s to c o n t r i b u t e to an i n t e r n a t i o n a l d i s c u s s i o n between i n d u s t r i a l i z e d c o u n t r i e s i n g e n e r a l . 7 When a l l examples used i n t h i s t h e s i s c o n c e n t r a t e on Canada, one has to be aware that Canada i n t h i s sense i s not a s p e c i a l country and that s i m i l a r tax c o n s i d e r a t i o n s have l e a d other c o u n t r i e s as w e l l when implementing r u l e s d e a l i n g with the t a x a t i o n of n o n - r e s i d e n t s . 8 I w i l l t r y to concentrate on the g e n e r a l p r i n c i p l e s and the ge n e r a l s t r u c t u r e of the Canadian t a x a t i o n on f o r e i g n investment without g e t t i n g i n t o too many t e c h n i c a l d e t a i l s . Therefore I w i l l e x p l a i n the p r i n c i p l e s necessary to understand the Canadian t a x a t i o n as f a r as f o r e i g n investment i s concerned. But I won't 1 2 d e a l with the t a x a t i o n of every branch of the economy s e p a r a t e l y i n d e t a i l . Instead of t h i s I w i l l c o n c e n t r a t e on some r e f l e c t e d d i f f e r e n c e s i n t a x a t i o n of r e s i d e n t s and n o n - r e s i d e n t s , and I w i l l t r y to get i n t o the p o l i t i c a l , economical and p s y c h o l o g i c a l background necessary to understand the p r i n c i p l e s d e a l t with. The is s u e w i l l be the e v a l u a t i o n of the Canadian t a x a t i o n p o l i c y towards f o r e i g n investment i n Canada. The concept f o l l o w e d i n t h i s t h e s i s i s based on a gene r a l understanding, that f r e e trade and investment are most advantageous f o r a l l c o u n t r i e s i n v o l v e d , at l e a s t i n the long run. In my understanding t h i s concept of f r e e trade and investment p o l i c y does allow more f a i r c o m p e t i t i o n , a st r o n g e r and d e c e n t r a l i z e d economical development and lower p r i c e s f o r the consumer i n g e n e r a l . 9 The t a x a t i o n of f o r e i g n investment, e s p e c i a l l y a non d i s c r i m i n a t i n g , equal treatment of r e s i d e n t s and non- r e s i d e n t s i n tax law, i s a part of t h i s concept. I am aware that the concept t h i s t h e s i s i s based on, as w e l l as the c r i t e r i a consequently developed from t h i s b a s i s , 1 0 may be c r i t i c i z e d . But even i n t h i s case I would be s a t i s f i e d , as long as the t a x a t i o n of f o r e i g n investment i s going to be i n c l u d e d i n the gen e r a l d i s c u s s i o n of f r e e investment and trade p o l i c y i n Canada. 1 1 2. THE CANADIAN CONCEPT OF INTERNATIONAL TAXATION Most c o u n t r i e s are t a x i n g the world income of every person r e s i d e n t . 1 2 Some c o u n t r i e s are t a x i n g the world income of t h e i r c i t i z e n s , wherever r e s i d e n t . 1 3 In a d d i t i o n , most c o u n t r i e s are l e v y i n g an income tax on n o n - r e s i d e n t s and f o r e i g n companies d e r i v i n g income from a source i n t h i s c o u n t r y . As an example, Canada imposes income taxes on non- r e s i d e n t s who are employed i n Canada 1' or who c a r r y on business i n Canada. 1 5 Canada a l s o taxes n o n - r e s i d e n t s on the d i s p o s i t i o n of t a x a b l e Canadian p r o p e r t y 1 6 and on i n t e r e s t s , d i v i d e n d s , r e n t s , r o y a l t i e s , management fees and s i m i l a r types of income from Canadian s o u r c e s . 1 7 Whenever a person has income from o u t s i d e of " h i s " c o u n t r y , 1 8 t h e r e are (at l e a s t ) two tax a u t h o r i t i e s l e v y i n g t a x e s : h i s home country and the other c o u n t r y . Under i n t e r n a t i o n a l law there i s no r u l e a g a i n s t double t a x a t i o n . 1 9 Each country i s f r e e to determine, i f and to which extent to tax non-residents on t h e i r income d e r i v e d from and p r o p e r t y s i t u a t e d i n t h e i r t e r r i t o r y , as w e l l as on income and p r o p e r t y o u t s i d e t h e i r t e r r i t o r y . 2 0 T h e r e f o r e i t would be p o s s i b l e that a taxpayer c o u l d be taxed t w i c e . I f , f o r example, a Canadian r e s i d e n t 2 1 c a r r i e s on b u s i n e s s i n the U n i t e d S t a t e s , the p r o f i t out of h i s o p e r a t i o n i n the Sta t e s c o u l d be taxed t w i c e , 2 2 once there and once i n Canada. T h i s o b v i o u s l y would not be f a i r . But i t wouldn't be f a i r a l s o , i f none of these 3 4 c o u n t r i e s would impose t a x e s . 2 3 Canada taxes i t s r e s i d e n t s on the b a s i s of t h e i r worldwide income. 2 4 T h i s means that wherever the source of income 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 f o r a l l h i s worldwide income i n Canada. Non-residents are taxed o n l y on t h e i r Canadian income. As s p e c i f i e d i n sec. 2(3) I.T.A., non-residents are taxable i n Canada, i f they (a) are employed i n Canada, (b) c a r r y on a business i n Canada, 2 5 or (c) d i s p o s e of taxable Canadian p r o p e r t y at any time of the y e a r . 2 6 C o n t r a r y to sec. 2(3) I.T.A., under the Canadian-German Double Tax Convention self-employed p e o p l e 2 7 as w e l l as e n t e r p r i s e s 2 8 are not going to be taxed i n the other C o n t r a c t i n g State as long as they don't c a r r y on business through a permanent e s t a b l i s h m e n t . 2 9 T h i s r u l e p r e v a i l s over sec. 2(3) I.T.A.. 3 0 These c r i t e r i a seem reasonable i n terms of i n t e r n a t i o n a l t a x a t i o n . But l e t ' s have a c l o s e r look at some of the d e t a i l s of the Canadian t a x a t i o n of no n - r e s i d e n t s and non-Canadian c o n t r o l l e d companies. 3. DEFINITION OF RESIDENCE In the Canadian Income Tax Act (I.T.A.) there i s no d e f i n i t i o n of r e s i d e n c e to be f o u n d . 3 1 The only d e f i n i t i o n we f i n d i s the d e f i n i t i o n of a non-resident i n sec. 248 I.T.A. I t reads: "'Non-resident' means not r e s i d e n t i n Canada." T h i s answer doesn't h e l p . Sec. 250(3) I.T.A. i n c l u d e s i n the d e f i n i t i o n of r e s i d e n t a person, who i s " o r d i n a r i l y " a r e s i d e n t . 3 2 T h i s doesn't h e l p e i t h e r . Persons who normaly sojourn i n Canada f o r a p e r i o d of 183 days or more i n the year, are deemed to be r e s i d e n t s a c c o r d i n g to sec. 250(1)I.T.A.. Since we s t i l l don't have any d e f i n i t i o n of r e s i d e n c e , I w i l l t r y to look i n t o i t f i r s t f o r i n d i v i d u a l s , second fo r c o r p o r a t i o n s and then f o r t r u s t s and e s t a t e s . 3.1 RESIDENCE OF INDIVIDUALS Under common law p h y s i c a l presence i s not always a major f a c t o r i n e s t a b l i s h i n g r e s i d e n c e — a taxpayer can be found to be r e s i d e n t i n a country even though he may spend very l i t t l e time t h e r e . For example, i n E r i c k s o n v.  M.N.R.33 the taxpayer normally l i v e d i n Canada but was t r a n s f e r r e d to I r e l a n d f o r two years to work on a mining p r o j e c t . Although he r e t u r n e d to Canada f o r only one 10-day p e r i o d d u r i n g that time to v i s i t h i s wife and f a m i l y , he was h e l d to be r e s i d e n t here. A l s o i n Cooper v. Cadwalader, 3 4 an American c i t i z e n who had rented a 5 6 house i n S c o t l a n d f o r two months a year f o r v a c a t i o n was h e l d to be a r e s i d e n t of the U.K. f o r tax purposes. In I.R.C. v. L y s a g h t , 3 5 the taxpayer, who was born i n England of I r i s h parents and p a r t i a l l y r e t i r e d from h i s p o s i t i o n as managing d i r e c t o r of an E n g l i s h company, went to l i v e permanently with h i s f a m i l y i n I r e l a n d . The House of Lords upheld the Commissioners' f i n d i n g of f a c t that the taxpayer was r e s i d e n t i n the U.K. Although he had no home i n England, he returned once a month f o r d i r e c t o r s ' meetings, which the Commissioners found to be s u f f i c i e n t . Very o f t e n , having a home and f a m i l y w i t h i n a j u r i s d i c t i o n i s a major f a c t o r i n f i n d i n g a person to be r e s i d e n t t h e r e . In R u s s e l l , 3 6 the taxpayer had a matrimonial home i n Canada and was found to be r e s i d e n t here, although he himself was not p r e s e n t . A l s o , i n M a l i o n , 3 7 a U.S. c i t i z e n working as a seaman on U.S. shi p s but having a home i n Canada was h e l d to be r e s i d e n t i n Canada. However, the presence or absence of a home and fa m i l y i s not always d e t e r m i n a t i v e . In Meldrum, 3 8 a sea c a p t a i n r e s i d e n t i n New York bought a house i n Nova S c o t i a i n which h i s daughter l i v e d and at which he stayed f o r annual h o l i d a y s of about two weeks each summer. He a l s o made short v i s i t s when h i s Canadian port of c a l l was c l o s e by. The Tax Appeal Board h e l d he was not r e s i d e n t i n Canada w i t h i n the meaning of s u b s e c t i o n 9(1) of the Income War Tax Act. In York v. M.N.R.,3 9 the taxpayer had l i v e d i n Canada at one p o i n t , but i n 1973 he separated 7 from h i s wife and moved to the U.S. He v i s i t e d h i s c h i l d r e n three or four times a year and came to Canada twice i n 1977 on bus i n e s s , f o r which the M i n i s t e r a s s e s s e d him as a r e s i d e n t . The Tax Review Board h e l d he was not a r e s i d e n t d e s p i t e the f a c t s that he had a f a m i l y and owned a house i n Canada: h i s connection with Canada was tenuous and there was no i n d i c a t i o n that he intended to r e t u r n here to l i v e . Thus a home and fa m i l y per se are not c o n c l u s i v e f a c t o r s i n determining residence - the co u r t w i l l examine the nature of the taxpayer's r e l a t i o n s h i p with h i s home or f a m i l y before d e c i d i n g the quest i o n . I t should be noted that i t i s not a requirement that the taxpayer have a home at a l l to be a r e s i d e n t . In Levene v. I.R.C., q o a B r i t i s h s u b j e c t , who moved from h i s house i n London and t h e r e a f t e r had no f i x e d abode and re t u r n e d to the U.K. f o r approximately 20 weeks each year, was h e l d to be r e s i d e n t i n the U.K. A l s o , i n Shpak  and Shpak v. M.N.R.,"1 two taxpayers had l i v e d i n Vancouver, but to a v o i d high housing c o s t s they moved to Po i n t Roberts i n the State of Washington. They continued to work i n Vancouver but never intended to move back. The m i n i s t e r denied t h e i r c l a i m f o r a d i v i d e n d tax c r e d i t on the ground that they were no longer Canadian r e s i d e n t s , but t h i s was overturned by the Tax Review Board. The Board s t a t e d that the taxpayers had dual r e s i d e n c y , one of which was Canada — although P o i n t Roberts was t h e i r 8 d o m i c i l e , the c e n t r e of t h e i r i n t e r e s t s , s o c i a l l i f e and conveniences was Canada. 4 2 A d e t a i l e d d e s c r i p t i o n of the view of the Department of N a t i o n a l Revenue i s l a i d down i n I T - 2 2 1 . 4 3 I t determines that an i n d i v i d u a l i s a r e s i d e n t of Canada f o r tax purposes, i f the p l a c e where he " r e g u l a r l y , normally or c u s t o m a r i l y l i v e s i s i n Canada." A l l f a c t s have to be c o n s i d e r e d i n order to make t h i s d e t e r m i n a t i o n , e s p e c i a l l y f o r the d e t e r m i n a t i o n of the r e s i d e n t i a l t i e s w i t h i n Canada. As primary r e s i d e n t i a l t i e s are seen as the d e w e l l i n g p l a c e , spouse or dependents, and p e r s o n a l p r o p e r t y and s o c i a l t i e s of an i n d i v i d u a l . Other t i e s l i k e a p r o v i n c i a l h e a l t h i n s u r a n c e , a seasonal r e s i d e n c e , p r o f e s s i o n a l or other memberships i n Canada and f a m i l y allowance payments are a l s o seen to be s i g n i f i c a n t . If someone leaves Canada without e s t a b l i s h i n g a permanent residence elsewhere t h e r e i s a presumption that he remains a r e s i d e n t of Canada. Since dual residence i s p o s s i b l e , the f a c t that someone e s t a b l i s h e s a permanent res i d e n c e abroad does not mean he has become a non-resident of Canada. I f someone i s a r e s i d e n t of Canada as w e l l as i n another country, r e f e r e n c e should be made to the double tax convention between Canada and that other country. As an example I w i l l r e f e r to A r t . 4 of the Canadian-German Double Tax C o n v e n t i o n , 4 4 which excludes cases of dual r e s i d e n c e . 9 I t reads: " A r t i c l e 4 Resident (1) For the purposes of t h i s Agreement, the term " r e s i d e n t of a C o n t r a c t i n g S t a t e " means any person who, under the laws of that S t a t e , i s l i a b l e to tax t h e r e i n by reason of h i s d o m i c i l e , r e s i d e n c e , p l a c e of management or any other c r i t e r i o n of a s i m i l a r nature. But t h i s term does not i n c l u d e any person who i s l i a b l e to tax i n that State i n resp e c t only of income from sources i n that State or c a p i t a l s i t u a t e d t h e r e i n . (2) Where by reason of the p r o v i s i o n s of paragraph 1 an i n d i v i d u a l i s a r e s i d e n t of both C o n t r a c t i n g S t a t e s , h i s s t a t u s s h a l l be determined as f o l l o w s : (a) he s h a l l be deemed to be a r e s i d e n t of the State with which h i s p e r s o n a l and economic r e l a t i o n s are c l o s e r ( c e n t r e of v i t a l i n t e r e s t s ) ; (b) i f the State i n which he has h i s ce n t r e of v i t a l i n t e r e s t s cannot be determined, or i f he has not a permanent home a v a i l a b l e to him in e i t h e r S t a t e , he s h a l l be deemed to be a r e s i d e n t of the S t a t e i n which he has an h a b i t u a l abode; (c) i f he has an h a b i t u a l abode i n both St a t e s or 10 in e i t h e r of them, he s h a l l be deemed to be a r e s i d e n t of the S t a t e of which he i s a nat i o n a l ; (d) i f he i s a n a t i o n a l of both Sta t e s or of n e i t h e r of them, the competent a u t h o r i t i e s of the C o n t r a c t i n g S t a t e s s h a l l s e t t l e the q u e s t i o n by mutual agreement. (3) Where by reason of the p r o v i s i o n s of paragraph 1 a person other than an i n d i v i d u a l i s a r e s i d e n t of both C o n t r a c t i n g S t a t e s , the competent a u t h o r i t i e s of the C o n t r a c t i n g S t a t e s s h a l l endeavour to s e t t l e i t s s t a t u s by mutual agreement." Th i s d e f i n i t i o n p r e v a i l s over other d e f i n i t i o n s and a l s o over the d e f i n i t i o n of deemed residence i n sec. 250(1) I.T.A. T h e r e f o r e , f o r the purpose of t h i s t h e s i s , I t h i n k i t w i l l be s u f f i c i e n t to determine the r e s i d e n c e of an i n d i v i d u a l by the d e f i n i t i o n of the Convention. 3.2 RESIDENCE OF CORPORATIONS AND DEFINITION OF PERMANENT  ESTABLISHMENT Residence of a c o r p o r a t i o n f o r Anglo-Canadian income tax purposes has been h e l d to be where the c e n t r a l c o n t r o l and management of the c o r p o r a t i o n a c t u a l l y a b i d e s : " 5 De  Beers C o n s o l i d a t e d Mines L t d . v. Howe."6 The p l a c e of c e n t r a l management and c o n t r o l i s g e n e r a l l y where the d i r e c t o r s and the company h o l d t h e i r meetings and the 11 conduct of a f f a i r s i s d e c i d e d . T h i s fundamental c r i t e r i o n was confirmed i n E g y p t i a n D e l t a Land & Investment Co.  L t d . v. T o d d , 4 7 where i t was judged that the r e s i d e n c e of a company, whether B r i t i s h or not, i s e s t a b l i s h e d by i t s r e a l b usiness' l o c a t i o n . T h i s c r i t e r i o n was then f o l l o w e d i n a l l f u t u r e d e c i s i o n s r e g a r d i n g the r e s i d e n c e of companies. In the U n i t e d S t a t e s , a c o r p o r a t i o n i s t r e a t e d as r e s i d e n t where i t i s i n c o r p o r a t e d . As i s the case f o r i n d i v i d u a l s , the n o t i o n of residence i s extended by some s t a t u t o r y d e f i n i t i o n s . Any company i n c o r p o r a t e d i n Canada a f t e r A p r i l 26, 1965 s h a l l be deemed to be r e s i d e n t i n Canada. The simple and formal aspect of the i n c o r p o r a t i o n c r e a t e s r e s i d e n c e , 4 8 r e g a r d l e s s of where the r e a l business i s done or where the d i r e c t o r s a c t . The deemed residence of sec.250(4) I.T.A. a p p l i e s throughout an e n t i r e t a x a t i o n year and the company i s assessed on i t s world income a c c o r d i n g to s e c . 2 ( l ) and sec.3 I.T.A.. But the c e n t r a l management and c o n t r o l - t e s t p r e v a i l s over sec.250(4) I.T.A. For the purpose of i n t e r n a t i o n a l t a x a t i o n there does not appear to be any p a r t i c u l a r problem i n d e t e r m i n i n g i f a company i n c o r p o r a t e d i n Canada i s " r e a l l y " a r e s i d e n t Canadian company. 4 3 Another important i s s u e i s to determine a "permanent e s t a b l i s h m e n t . " 5 0 Under the I.T.A., c o r p o r a t i o n s not i n c o r p o r a t e d or r e s i d i n g i n Canada, but c a r r y i n g on business i n Canada, and d i s p o s i n g of c e r t a i n types of 1 2 Canadian p r o p e r t y are s u b j e c t to t a x a t i o n i n Canada. However, the Canadian-German Double Tax Convention p r o v i d e s that a German c o r p o r a t i o n c a r r y i n g on business i n Canada i s not s u b j e c t to Canadian income tax on i t s business p r o f i t s i n Canada, unless i t has a permanent establishment i n Canada and the p r o f i t s are a t t r i b u t a b l e to that e s t a b l i s h m e n t . A permanent establishment i n c l u d e s a branch, o f f i c e , f a c t o r y , workshop or mine but does not in c l u d e an independent broker or agent, p r o v i d e d he has no general a u t h o r i t y to c o n t r a c t on behalf of the German c o r p o r a t i o n and i s a c t i n g i n the o r d i n a r y course of h i s busine s s . We f i n d the d e f i n i t i o n of a permanent establishment i n the Canadian-German Tax Convention, at l e a s t f o r German a c t i v i t i e s i n Canada. A r t . 5 of the Convention determines a permanent establishment as a f i x e d p l a c e of bu s i n e s s through which the business of an e n t e r p r i s e i s wholly or p a r t l y c a r r i e d on. I t i n c l u d e s p l a c e s of management, branches, o f f i c e s , mines, and w e l l s , but not f a c i l i t i e s f o r the s o l e purpose of maintenance, s t o r a g e , or any other a c t i v i t y of a pr e p a r a t o r y or a u x i l i a r y c h a r a c t e r . B u i l d i n g and c o n s t r u c t i o n s i t e s c o n s t i t u t e a permanent establishment only i f they l a s t more than 12 months. For f u r t h e r d e t a i l s I have to r e f e r to A r t . 5 i t s e l f . 5 1 1 3 3.3 RESIDENCE OF TRUSTS Canada taxes t r u s t s r e s i d e n t i n Canada. Sec. 104 I.T.A. i s the only s e c t i o n which i s r e l e v a n t to the de t e r m i n a t i o n of the residence of a t r u s t . 5 2 I t i s g e n e r a l l y thought by the commentators that sec.104(1) I.T.A. i m p l i e s t h a t the residence of the t r u s t i s determined by the resid e n c e of i t s t r u s t e e s . Where there i s only one t r u s t e e , or where there are m u l t i p l e t r u s t e e s a l l r e s i d e n t i n the same j u r i s d i c t i o n , i t i s c l e a r that that j u r i s d i c t i o n i s , f o r the purpose of the Income Tax Act, the r e s i d e n c e of the t r u s t . However, great d i f f i c u l t i e s a r i s e when there are m u l t i p l e t r u s t e e s r e s i d e n t i n d i f f e r e n t j u r i s d i c t i o n s . Sec. 104(1) I.T.A. would seem to imply a t e s t f o r the d e t e r m i n a t i o n of the resid e n c e of a m u l t i p l e t r u s t e e t r u s t ; the r e s i d e n c e of the t r u s t would be the r e s i d e n c e of the t r u s t e e s "having ownership or c o n t r o l of the t r u s t p r o p e r t y . " However, there are two major d i f f i c u l t i e s with t h i s p o s s i b l e t e s t . F i r s t , l e g a l t i t l e to the t r u s t p r o p e r t y i s v e s t e d i n a l l of the t r u s t e e s . A l l of the t r u s t e e s own the t r u s t p r o p e r t y . Second, s u b j e c t to e x p l i c i t c o n t r a r y i n t e n t i o n de jure c o n t r o l i s a l s o vested e q u a l l y i n a l l the t r u s t e e s . Unless the t r u s t document p r o v i d e s otherwise, d e c i s i o n s of the t r u s t e e s must be unanamous. There can be no m a j o r i t y r u l e . Thus, i n the t y p i c a l t r u s t , no s i n g l e t r u s t e e or group of t r u s t e e s has e i t h e r complete ownership or complete de 1 4 j u r e c o n t r o l of the t r u s t p r o p e r t y . Furthermore, i f sec.104(1) I.T.A. was intended to d e a l with the q u e s t i o n of the r e s i d e n c e of a t r u s t i t c o u l d have been much c l e a r e r and e x p l i c i t . For the f o r e g o i n g reasons, i t was h e l d i n Thibodeau  v. The Queen 5 3 that the Income Tax Act c o n t a i n s no p r o v i s i o n s f o r the d e t e r m i n a t i o n of the r e s i d e n c e of a t r u s t . M.A. C o h e n 5 4 suggests that the Courts determine the r e s i d e n c e of a t r u s t by adopting the De Beers t e s t of " c e n t r a l c o n t r o l and management" used to determine the r e s i d e n c e of a c o r p o r a t i o n . 5 5 T h i s t e s t c o n s i d e r s the j u r i s d i c t i o n of the de f a c t o c o n t r o l and management of the c o r p o r a t i o n . 5 6 R.A. G r e e n 5 7 s t a t e s that the Act i s s i l e n t with regard to the d e t e r m i n a t i o n of the r e s i d e n c e of a t r u s t . He suggests three important f a c t o r s to be c o n s i d e r e d : 1) the r e s i d e n c e of the t r u s t e e s ; 2) the j u r i s d i c t i o n i n which the t r u s t i s c o n t r o l l e d ; 3) the j u r i s d i c t i o n i n which the t r u s t p r o p e r t y i s s i t u a t e d . As f a r as I know, Thibodeau Family T r u s t v. The  Queen, 5 8 i s the only d e c i s i o n i n respect of the present s t a t u t o r y p r o v i s i o n s and the i s s u e of the r e s i d e n c e of a t r u s t . 5 9 In seeking to r e s o l v e the i s s u e of r e s i d e n c e , J u s t i c e Gibson J . e x p r e s s l y r e j e c t e d the arguments of the Crown that he should employ a De Beers formula of c e n t r a l 1 5 management and c o n t r o l and that the t r u s t i n q u e s t i o n c o u l d have a dual r e s i d e n c e . 6 0 He c l e a r l y i m p l i e s that i t i s de j u r e c o n t r o l which i s r e l e v a n t f o r the d e t e r m i n a t i o n of the r e s i d e n c e of a t r u s t . T h i s i s because each t r u s t e e i s under a f i d u c i a r y duty to p e r s o n a l l y e x e r c i s e the t r u s t and d i s c r e t i o n reposed in him by the s e t t l o r . 6 1 Gibson J . g i v e s no c l e a r j u s t i f i c a t i o n f o r d e p a r t i n g from t h i s f a c t u a l approach i n the t r u s t c o n t e x t . For t h i s reason, the commentators have h e l d that the case cannot be c o n s i d e r e d an a u t h o r i t y c o n t r a r y to the view that r e s i d e n c e i s a q u e s t i o n of f a c t f o r t a x a t i o n purposes. They suggest that the d e c i s i o n should be r e s t r i c t e d to i t s p a r t i c u l a r f a c t s and that i t c r e a t e s no new l a w . 6 2 In 1980 the Department of N a t i o n a l Revenue is s u e d an 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. While such a B u l l e t i n i s not b i n d i n g and i s merely a p r a c t i s e g u i d e l i n e , i t i s c l e a r l y r e l e v a n t e s p e c i a l l y i n l i g h t of the s c a r c i t y of case law. I t c o n t a i n s a number of r e l e v a n t s p r o p o s i t i o n s : 1) the r e s i d e n t of a t r u s t i s a q u e s t i o n of f a c t ; 2) the r e s i d e n c e of a t r u s t i s g e n e r a l l y where the t r u s t e e or other l e g a l r e p r e s e n t a t i v e manages or c o n t r o l s the t r u s t a s s e t s r e s i d e s ; 3) i f there are m u l t i p l e t r u s t e e s , the t r u s t r e s i d e n c e i s where more than 50% of the management and c o n t r o l of the t r u s t r e s i d e s ; 4) the l o c a t i o n of the l e g a l r i g h t s and t r u s t a s s e t s i s a r e l e v a n t c o n s i d e r a t i o n ; 5) the r e s i d e n c e of 16 the b e n e f i c i a r i e s i s i r r e l e v a n t ; 6) the r e s i d e n c e of an "other person" with a s u b s t a n t i a l p o r t i o n of the management and c o n t r o l of the t r u s t i s a r e l e v a n t c o n s i d e r a t i o n which may be d e t e r m i n a t i v e . 6 3 T h i s I n t e r p r e t a t i o n B u l l e t i n seems to be adopting the de f a c t o c e n t r a l management and c o n t r o l concept used i n the d e t e r m i n a t i o n of re s i d e n c e of a c o r p o r a t i o n . 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 of the t a x a t i o n of no n - r e s i d e n t s ' investment i n Canada I would l i k e to look at the p o s s i b l e reasons why a tax system i n gen e r a l may d i s c r i m i n a t e between r e s i d e n t s and n o n - r e s i d e n t s . 4.1 (TECHNICAL) ASPECTS OF COLLECTING TAXES One of the t e c h n i c a l reasons f o r d i s t i n c t i o n between the t a x a t i o n of r e s i d e n t s and n o n - r e s i d e n t s i s t h a t every country l i k e s to make sure that i t a c t u a l l y r e c e i v e s taxes from the taxpayer. If the taxpayer i s a non - r e s i d e n t , chances are that he or she doesn't stay i n the country and t h e r e f o r e the tax department might be unable to c o l l e c t the taxes. C e r t a i n t e c h n i c a l instruments l i k e the w i t h o l d i n g t a x 6 4 and the requirements of prepayment of t a x e s 6 5 may h e l p to achieve t h i s g o a l . The w i t h o l d i n g tax i s a tax l e v i e d on payments from the payor to the payee and i s to be deducted from the amount to be p a i d by the payor. One t y p i c a l example f o r the w i t h o l d i n g tax i s the d i v i d e n d tax c r e d i t : The company paying d i v i d e n d s to t h e i r s h a r e h o l d e r s deducts taxes at source, pays out the d i f f e r e n c e and the shareholder may c l a i m the d i v i d e n d tax c r e d i t i n h i s or her own income tax r e t u r n . 17 18 In other i n s t a n c e s r e s i d e n t s have to w i t h o l d taxes from gross amounts to be p a i d to n o n - r e s i d e n t s . 6 6 The system of w i t h o l d i n g tax i n g e n e r a l safeguards Revenue Canada a g a i n s t d i f f e r e n t kinds of non-payment of taxes. Whereas the d i v i d e n d tax c r e d i t should allow tax n e u t r a l i t y i n respect to moneys r e c e i v e d through a c o r p o r a t i o n and d i r e c t l y f o r r e s i d e n t s , i t guarantees the payment of taxes i n i t s e l f f o r n o n - r e s i d e n t s . 6 7 Speaking i n g e n e r a l , the concept of w i t h o l d i n g tax i s a common system to provide f o r a s i m i l a r tax treatment of r e s i d e n t s and non-residents and a l l o w s an easy way of c o l l e c t i o n f o r the tax d e p a r t m e n t . 6 8 The same purpose f i t s the instrument of prepayment of taxes: The MNR has to ensure that n o n - r e s i d e n t s do not take t h e i r money and walk away without paying t h e i r t a x e s . 4.2 ASPECTS JUSTIFYING DISCRIMINATION IN ITSELF Apart from t h i s t e c h n i c a l reason, which — by the way — doesn't apply when the n o n - r e s i d e n t taxpayer i s l i v i n g or doing business i n t h i s c o u n t r y , 6 9 we f i n d an own understanding and p o l i c y towards n o n - r e s i d e n t s . Often a country doesn't l i k e to give non-residents a tax treatment as f a v o u r a b l e as i t s g i v e s to i t s r e s i d e n t s . In the Canadian I.T.A. there are v a r i o u s areas of d i f f e r e n t tax treatment of r e s i d e n t s , n o n - r e s i d e n t s , Canadian c o n t r o l l e d companies and non-Canadian c o n t r o l l e d companies, as we w i l l see l a t e r more d e t a i l e d . Since tax 19 p o l i c y i s a p a r t of the g e n e r a l economic p o l i c y , I would l i k e to look at the bacground of t h i s p o l i c y which may e x p l a i n the d i f f e r e n t tax treatment of non-residents i n Canada. 4.2.1 ECONOMIC AND OTHER REASONS FOR DIFFERENT TREATMENT  OF NON-RESIDENTS' INVESTMENT IN CANADA Canada i s the second l a r g e s t country i n the world with a r e l a t i v e l y small p o p u l a t i o n of about 25 m i l l i o n people. Most of them are l i v i n g i n a 200 km b e l t along the border with the U n i t e d S t a t e s , the r e s t of Canada i s populated s p a r e l y . The l i v i n g standard i n Canada i s one of the h i g h e s t i n the world. Canada has a l a r g e amount of r e s o u r c e s , but not the manpower and c a p i t a l to develop them. There are a few major r e s o u r c e s , e s p e c i a l l y wood, o i l and n a t u r a l gas and m i n e r a l resources l i k e c o a l , aluminum, n i c k e l , copper, and a b i t of s i l v e r and g o l d . The resource i n d u s t r y i s making i t s money by s e l l i n g the r e s o u r c e s , and they are s e l l i n g b i g q u a n t i t i e s . Compared to i n d u s t r i e s i n other western c o u n t r i e s , Canadian i n d u s t r i e s are s m a l l , one of the reasons being a l a c k of c a p i t a l and technology to b u i l d them up. New p r o d u c t i o n i n d u s t r i e s are t r y i n g to b u i l d up, but they cannot process as many resources as there a r e . P r o d u c t i v i t y i s low compared to c o u n t r i e s l i k e the U n i t e d S t a t e s , Japan or West Germany. E s p e c i a l l y the U.S. 20 companies are producing l a r g e r q u a n t i t i e s and they are a b l e to produce much cheaper. In Canada the p o p u l a t i o n and t h e r e f o r e the market for p r o d u c t i o n i s much s m a l l e r . T h e r e f o r e Canadian companies do not produce b i g q u a n t i t i e s . As the Grey Report p o i n t s out, i n the U.S. companies c o u l d s p e c i a l i z e on mass p r o d u c t i o n at high q u a l i t y and low p r i c e s , whereas Canadian companies have had to produce the f u l l product l i n e i n numbers too few to be e f f i c i e n t or c o s t e f f e c t i v e . The Grey Report g i v e s one example of r e f r i g e r a t o r p r o d u c t i o n i n Canada, which may be h e l p f u l f o r i l l u s t r a t i o n : At the time of the r e p o r t , there were nine manufacturers producing r e f r i g e r a t o r s i n Canada. The optimum number of r e f r i g e r a t o r s produced per p l a n t was found to be 200,000, while i n f a c t each p l a n t produced an average of 130,000. Looking at imports and e x p o r t s , Canada i s e x p o r t i n g mainly wheat, f i s h , c a t t l e , p u lp, paper, and v a r i o u s n a t u r a l resources and importing processed goods. The resources are s o l d cheaply, and the p r o c e s s i n g i s done o u t s i d e Canada. Le t ' s take one example: Canada i s e x p o r t i n g c o a l to Japan. They are producing c a r s , c r e a t e employment, s e l l the c a r s back to Canada and make the money out of p r o c e s s i n g . As one Canadian businessman s a i d " "We charge them, they charge us. But our p r i c e i s i n c l u d e d i n t h e i r c a l c u l a t i o n . They i n c o r p o r a t e the c o s t s of the resources 21 i n t o the c o s t s of the product, add other c o s t s l i k e labour, management, e t c . and add p r o f i t s . So Canada s e l l s the resources, gets them back processed, has to pay p r o f i t s and t h e r e f o r e Canada i s l o o s i n g money as a general f a c t o r , even i f the m i n e r a l resource i n d u s t r y i t s e l f makes money. T h i s i s the dilemma." In the o i l i n d u s t r y we f i n d the same phenomenon: Canada i s s e l l i n g o i l to other c o u n t r i e s , they use i t f o r the p r o d u c t i o n of p l a s t i c and i n f u e l , and Canada buys these products back. So Canada i s r e l y i n g on other c o u n t r i e s and the reason why the balance between exports and imports i s not n e g a t i v e are the huge q u a n t i t i e s of resources Canada has. T h e r e f o r e we f i n d the slogan: "Canada for Canadians" and "Buy Canadian" to h e l p the people of Canada b u i l d up t h e i r country. Many Canadians and Canadian businessmen f e e l that they should support Canadian products and not "give h e l p " to other c o u n t r i e s . By h e l p i n g Canadian companies the l e v e l of s e l f s u f f i c i e n c y should be i n c r e a s e d . The manufacturing and p r o c e s s i n g i n d u s t r y i n Canada was growing over the l a s t y e a r s . Exports of pulp, paper and c e l l u l o s e were making about 10% of Canadian exports in 1983 and exports of machines and p a r t s were making about 3 0 % . 7 0 One b i g p a r t of these exports c o n s i s t s of the exports of a u t o - p a r t s to the U n i t e d S t a t e s . Since the car i n d u s t r y was very weak i n r e l a t i o n to other western c o u n t r i e s Canada and the U.S. entered i n t o an "auto-pact" 22 some time ago, p r o v i d i n g f o r the set up of p l a n t s and p a r t s - p r o d u c t i o n i n Canada and a l l o w i n g f r e e trade of p a r t s over the border without t a r i f f s . The Canadian i n d u s t r i e s do not f e e l able to compete in the i n t e r n a t i o n a l market, and they want the government to p r o t e c t t h e i r market by t a r i f f s and whatever e l s e i t takes, u n t i l they become c o m p e t i t i v e . As an example, I would l i k e to r e f e r to the Canadian garment i n d u s t r y . Whereas the U.S. has a l a r g e share of the i n t e r n a t i o n a l market, Canada j u s t got onto her fe e t to get i n t o the market. So the Canadian i n d u s t r i a l lobby asked f o r t a r i f f s to p r o t e c t Canadian products a g a i n s t the U.S. garment i n d u s t r y , which can produce l a r g e r q u a n t i t i e s at good q u a l i t y f o r very c o m p e t i t i v e p r i c e s , whereas the Canadian products are much more e x p e n s i v e . 7 1 There are d i f f e r e n t programs to b u i l d up Canadian i n d u s t r i e s , and there are tendencies to keep the money i n Canada to be r e i n v e s t e d i n Canada and i n c r e a s e Canadian employment at the same time. As an example, s p e c i a l programs h e l p i n g Canadians are to be found i n the o i l i n d u s t r y . 7 2 F e d e r a l and p r o v i n c i a l programs t r y to get companies to d r i l l f o r more o i l . They want more Canadian involvement and to keep the money i n Canada. R e g u l a t i o n s make i t advantageous f o r Canadians to p a r t i c i p a t e i n each and any p r o j e c t s i n order to keep i t f e a s a b l e . So 100% U.S.-owned and other foreign-owned p r o j e c t s would have to pay more o i l 23 charges, whereas 50:50 U.S.-Canadian or 50:50 foreign-Canadian p r o j e c t s have to pay l e s s . Under the A l b e r t a Petroleum I n c e n t i v e s Pogram (APIP), which a p p l i e s only to Canadians, the government pays a i d of $0.35 f o r each $1.00 spent on d r i l l i n g expenses i n c l u d i n g expenses for g e o l o g i c a l p r e p a r a t i o n f o r an e x p l o r a t i o n w e l l . For a development w e l l i t pays $0.20 f o r each $1.00 spent. The program p r o v i d e s f o r some other i n c e n t i v e s as w e l l , f o r c i n g U.S. companies to make a j o i n t venture with a Canadian company. U.S. companies by themselves do not get any moneys at a l l . Under the F e d e r a l Petroleum I n c e n t i v e s Program (FPIP), which a p p l i e s o u t s i d e A l b e r t a , e s p e c i a l l y f o r o f f - s h o r e d r i l l i n g i n the Beaufort Sea, the government pays $0.80 on each $1.00 spent. These programs h e l p the Canadian o i l i n d u s t r y and Canadian companies. There are a l s o r e s t r i c t i o n s on s e l l i n g n a t u r a l gas to the U.S. and r e s t r i c t i o n s on the p r o d u c t i o n over and above c e r t a i n q u a n t i t i e s of o i l , to keep the p r i c e of o i l and n a t u r a l gas up. A d i f f e r e n t treatment of Canadian c o n t r o l l e d companies and non-Canadian c o n t r o l l e d companies i s to be seen a l s o i n terms of t a x a t i o n , and I w i l l r e f e r to i t i n more d e t a i l l a t e r on. S p e c i a l i n c e n t i v e s are given f o r the development of small b u s i n e s s e s . Programs support them with i n i t i a l c a p i t a l as w e l l as cheap f i n a n c i n g . Tax i n c e n t i v e s allow 24 a lower tax rate (small business abatement) i n order to help them b u i l d up. So i t can be seen that the general economic p o l i c y i n Canada t r i e s to give 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 by 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 are 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 kinds of tax i n c e n t i v e s spread throughtout the I.T.A. Looking at the Canadian tax law we w i l l see those tax i n c e n t i v e s for investment i n d i f f e r e n t a r e a s . 7 3 Some of them have been mentioned already. Speaking i n g e n e r a l , to encourage people to invest money i n , for example, r e a l e s t a t e , often a government increases the rate of d e p r e c i a t i o n or allows the i n v e s t o r 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 investments. 7" Other examples could be the S c i e n t i f i c Research Tax C r e d i t (SRTC) by which Canada t r i e d to s t i m u l a t e investment i n research companies 7 5 and tax i n c e n t i v e s given for the Canadian gas and o i l i n d u s t r y , 7 6 where the instruments of w r i t e - o f f s are u s e d . 7 7 As an i n c e n t i v e for investment i n s c i e n t i f i c research companies the government t r i e d to implement tax c r e d i t s for the i n v e s t o r ( 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 Another example might be the Canadian movie i n d u s t r y , where investment i n motion-picture f i l m s allows f o r w r i t e - o f f s . 7 9 25 In a l l these cases, where t a x a t i o n and tax law i s used as a p a r t of the government's p o l i c y to c r e a t e investment i n c e n t i v e s or d i s i n c e n t i v e s i t happens that these advantageous tax r u l e s are only f o r r e s i d e n t s and Canadian or Canadian c o n t r o l l e d companies. The bottom l i n e of t h i s p o l i c y i s that Canadian investment i n Canada i s supposed to b r i n g economic growth and economic b e n e f i t s to Canada, whereas n o n r e s i d e n t s ' investment i n s i d e Canada i s not seen to f i t t h i s g o a l . One of the assumptions along t h i s l i n e i s that f o r e i g n i n v e s t o r s r e p a t r i a t e p r o f i t s i n s t e a d of r e - i n v e s t i n g them in Canada. One other assumption i s that f o r e i g n i n v e s t o r s are buying t h e i r supply abroad, whereas Canadians t r y to buy Canadian goods. L e t ' s have a c l o s e r look at both arguments and see, i f or up to which extent they are a sound b a s i s f o r t a x a t i o n p o l i c y . 4.2.2 ASSUMPTION: FOREIGN INVESTORS REPRATRIATE THEIR  PROFITS INSTEAD OF RE-INVESTING THEM IN CANADA The assumption that f o r e i g n i n v e s t o r s r e p a t r i a t e t h e i r p r o f i t s i n s t e a d of r e - i n v e s t i n g them i n Canada was d i s c u s s e d i n the- r e p o r t s d e a l i n g with the implementation of F I R A . 8 0 F o r e i g n i n v e s t o r s were supposed to undertake investments i n Canada i n t e n d i n g to r e p a t r i a t e p r o f i t s . They a l s o r e q u i r e payments in the form of d i v i d e n d s or i n t e r e s t . Even i f importing c a p i t a l when the investment i s made, the r e s u l t was supposed to be a very complex 26 s e r i e s of i n f l o w and outflow r e l a t i o n s of c a p i t a l which defy coherent a n a l y s i s . However, i n 1970 the Gray Report suggested that f o r e i g n d i r e c t investment would have a d e f i c i t impact on Canada w i t h i n ten years of the investment i t s e l f . On the other hand, i t was noted that Canadian i n v e s t o r s themselves often prefer to e x p a t r i a t e p r o f i t s and invest outside of Canada, p r e f e r a b l y i n the United S t a t e s . Part of the explanation for the Canadian exodus of c a p i t a l may be that Canadians s u b s i d i a r i e s of American parents are often wholly owned by the parent company. The r e s u l t i s that Canadians cannot invest i n those Canadian s u b s i d i a r i e s , but must invest i n the parent company i n the United States i n order to gain an e q u i t y p o s i t i o n . Furthermore, the Canadian m e n t a l i t y was perceived to be one of extreme caution and lacked entrepreneurship i n c o n t r a s t to the United States lenders and e q u i t y players who g e n e r a l l y had the resources and the i n i t i a t i v e to take more s p e c u l a t i v e investments. The r e s u l t was that i n the Gray Report there was seen to be s u f f i c i e n t Canadian c a p i t a l which was j u s t not a p p l i e d p r o p e r l y to Canadian circumstances but t r a n s f e r r e d abroad. Furthermore, the economic development i n the United States was much f a s t e r and h e a l t h i e r over the l a s t 10 years than i n Canada. So many Canadian companies were expanding i n t o the United S t a t e s , s e t t i n g up new p l a n t s there and c o n c e n t r a t i n g on growth and p r o f i t s there instead of f u r t h e r development 27 i n Canada. L a s t , but not l e a s t , there were major tax i n c e n t i v e s to do investment in the U n i t e d S t a t e s : (a) In the areas of c o r p o r a t e t a x a t i o n i n the U.S. we f i n d a f a v o u r a b l e tax r a t e f o r n o n - d i s t r i b u t e d p r o f i t s i n order to give i n c e n t i v e s to r e - i n v e s t moneys i n the company. For u n d i s t r i b u t e d p r o f i t s the c o r p o r a t e tax r a t e i n the U.S. i s lower than i n Canada. 8 1 (b) Before Janurary 1, 1985 the t a x a t i o n of small b u s i n e s s e s was more favo u r a b l e i n the U.S. than in Canada, s i n c e a f a v o u r a b l e tax r a t e was a p p l i e d f o r the f i r s t US $100,000 in each year whereas there was an accumulative account f o r the s m a l l business abatement i n Canada. However, s i n c e January, 1985 Canada a l l o w s f o r h a l f of the normal tax rat e f o r the f i r s t Can $200,000 of net income from a Canadian c o n t r o l l e d p r i v a t e company as s p e c i f i e d i n sec. 125 I.T.A. 8 2 (c) A f t e r i n t r o d u c i n g the c a p i t a l gains tax on the d i s p o s i t i o n of r e a l e s t a t e i n Canada, i t was f a v o u r a b l e to do r e a l e s t a t e investment i n some s t a t e s of the U.S. p r o v i d i n g f o r exemption of c a p i t a l g ains when the proceeds are r e - i n v e s t e d i n r e a l e s t a t e . 8 3 D e p r e c i a t i o n was a l s o higher i n the U.S., where - apart from o l d e r MURB b u i l d i n g s - the d e p r e c i a t i o n 28 i s l i m i t e d to 5% p.a. of the v a l u e of the b u i l d i n g i n Canada. 8* T h e r e f o r e , comparing n o n - r e s i d e n t s ' investments i n Canada and Canadian investments, there seems to be a s i m i l a r tendency to take p r o f i t s out of Canada. However, payments of d i v i d e n d s and/or i n t e r e s t s are to be made f o r f o r e i g n s h a r e h o l d e r s and chances are that f o r e i g n i n v e s t o r s are l i k e l y to r e p a t r i a t e p r o f i t s up to a very h i g h degree. As the Gray Report concluded, f o r e i g n investment may have (at l e a s t ) 8 5 "a m i l d c o s t e f f e c t i n balance of payments." 4.2.3 ASSUMPTION: FOREIGN INVESTORS ARE BUYING ABROAD,  CANADIANS ARE BUYING CANADIAN With regard to imports, i n the Grey Report i t was found that s u b s i d i a r i e s import o n e - t h i r d of t h e i r purchases. S u b s i d i a r y firms were r e s p o n s i b l e f o r 40% of t o t a l Canadian imports i n 1969. I f automobiles were excluded, the f i g u r e drops to 24%. Only 36% of Canadian companies bought 95% or more of t h e i r s u p p l i e s and s e r v i c e s from Canadian sources. Only 11% of f o r e i g n owned busine s s e s bought 95% from Canadian sources. T h i s high l e v e l of importation by Canadian s u b s i d i a r i e s c o u l d be e x p l a i n e d by the s u b s i d i a r i e s ' d e s i r e f o r constant source of supply, advantages granted by the parent, c o n t r a c t s developed i n the U.S. market, parent companies' purchases i n bulk, d e s i r e to keep U.S. unions happy and simply 29 because they are f o l l o w i n g standard procedures. T h i s high degree of importation was seen to c o n t r i b u t e to slowing down the Canadian manufacturing s e c t o r , squeezing out e f f i c i e n t Canadian s u p p l i e r s of both m a t e r i a l s and s e r v i c e s and having d e c i s i o n s based from abroad on i n s u f f i c i e n t i n f o r m a t i o n . U s u a l l y import purchases are based on sound business p r i n c i p l e s but are s t i l l damaging to Canadian s u p p l i e r s of both raw m a t e r i a l s and s e r v i c e s . U n f o r t u n a t e l y , I do not have any s t a t i s t i c s on the degree of buying abroad and buying Canadian s i n c e that time. But we have to conclude that f o r e i g n i n v e s t o r s c o n t r i b u t e to high imports at a r e l a t i v e l y higher r a t i o than Canadians. So we f i n d t h a t those assumptions are r i g h t , at l e a s t to some extent. I t may be hard to analyze the economic c o s t s and b e n e f i t s of f o r e i g n investment i n Canada. The root problem may w e l l be that Canada i s too small to compete with the Un i t e d S t a t e s and t h e r e f o r e w i l l always be a net importer of technology, c a p i t a l , s k i l l s , and some form of m a t e r i a l s . The problem, i t must be emphasized, i s one of degree. But i f Canada depends on f o r e i g n investment, f o r e i g n investment i s part of the economic development of Canada and c r e a t e s growth and b e n e f i t s at l e a s t to some ex t e n t . Speaking i n terms of t a x a t i o n , one c o u l d imagine t h a t Canadian tax p o l i c y would implement tax i n c e n t i v e s f o r f o r e i g n investment i n areas where i t i s needed or 30 d e s i r e a b l e and tax disadvantages i n areas where i t i s not. As I d i s c u s s the d i f f e r e n t areas of t a x a t i o n , I w i l l t r y to put my f i n g e r on those economic b e n e f i t c o n s i d e r a t i o n s . 5. LEGITIMATE FORMS OF DISCRIMINATION I N TAX LAW As we d i d s e e , t h e r e a r e some t e c h n i c a l r e a s o n s f o r a d i s t i n c t i v e t a x a t i o n o f r e s i d e n t s a n d n o n - r e s i d e n t s . T h e r e seems t o be a l s o d i f f e r e n t e c o n o m i c i m p l i c a t i o n s o f d o m e s t i c a n d f o r e i g n i n v e s t m e n t s i n Canada w h i c h may e x p l a i n why t a x i n c e n t i v e s i n Canada a r e n o t g i v e n t o n o n - r e s i d e n t s a n d n o n - C a n a d i a n c o n t r o l l e d c o m p a n i e s . B u t a p a r t f r o m t h o s e c o n s i d e r a t i o n s I w o u l d l i k e t o e s t a b l i s h a l e g a l f r a m e w o r k t o d e t e r m i n e l e g i t i m a t e f o r m s a n d i l l e g i t i m a t e f o r m s o f d i s c r i m i n a t i o n i n t a x l a w . To g i v e a b a c k g r o u n d I w o u l d l i k e t o i n t r o d u c e some p r o b l e m s o f 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 l a w i n g e n e r a l b e f o r e I w i l l c o n c e n t r a t e on t h e s p e c i a l a s p e c t s o f d i s c r i m i n a t i o n i n t a x a t i o n . 5.1 DISCRIMINATION I N INTERNATIONAL LAW The t e r m n o n - d i s c r i m i n a t i o n i s t a k e n f r o m A n g l o - A m e r i c a n l a w i n t o i n t e r n a t i o n a l l a w a n d i n t e r n a t i o n a l b u s i n e s s l a w . 8 6 The word " t o d i s c r i m i n a t e " o r i g i n a l l y came f r o m " d i s c r i m i n a r e " i n t h e l a t i n l a n g u a g e , w h i c h h a d t h e m e a n i n g o f t o d i s t i n c t , t o s e e a d i f f e r e n c e . 8 7 Today t h e t e r m h a s d i f f e r e n t m e a n i n g s . I n F r e n c h 8 8 a n d i n G e r m a n 8 9 i t i s u s e d i n t h e s e n s e o f " t o s e e a d i f f e r e n c e " 9 0 a n d " t o d i s t i n c t . " More o f t e n " d i s c r i m i n a t i o n " i s u s e d i n t h e n e g a t i v e s e n s e o f " t r e a t i n g somebody w o r s e t h a n o t h e r s , " " n o t g i v i n g t h e same r i g h t s t o a l l " o r " t o d i s c r i m i n a t e a g a i n s t somebody." T h i s d u a l m e a n i n g seems t o be common 31 32 in French and E n g l i s h t o o . 9 1 Therefore F r a n c i s 9 2 d e f i n e s d i s c r i m i n a t i o n as a l l kinds of treatment or s o c i a l behaviour which r e s u l t i n any disadvantage f o r i n d i v i d u a l s , s o c i a l groups or c o u n t r i e s , n e g l e c t i n g the " p r i n c i p l e of equal t r e a t m e n t . " 9 3 While i n commerce the term i s used more i n a n e u t r a l sense of d i s t i n c t i o n , 9 4 i n p o l i t i c a l s c i e n c e i t i s used i n the sense of u n d e s i r e a b l e t r e a t m e n t 9 5 and i n law i t i s o f t e n used i n the sense of not j u s t i f i e d d i f f e r e n t t r e a t m e n t . 9 6 Hereby i t i s not e x p l a i n e d why a d i f f e r e n t treatment i s c o n s i d e r e d as u n j u s t i f i e d . A d i f f e r e n t treatment c o u l d be s i g n i f i e d as u n j u s t i f i e d because i t i s p e r c e i v e d as u n j u s t 9 7 or u n d e s i r e a b l e 9 8 because i t i s c o n s i d e r e d as u n l a w f u l 9 9 s i n c e i t i s c o n t r a r y to the i n t e n t i o n of the law. Only i f the standards and the purposes the term d i s c r i m i n a t i o n s h a l l serve f o r are i n c l u d e d i n a l e g a l c o ntext, we get a l e g a l term. I f , however, the standards and purposes of the term " d i s c r i m i n a t i o n " e x i s t only i n a p o l i t i c a l concept we get an economical or p o l i t i c a l term. In the p o l i t i c a l s e c t o r the term d i s c r i m i n a t i o n i s vague because i t c o n t a i n s v a r i a b l e f a c t o r s 1 0 0 and can t h e r e f o r e be misused. I t o f t e n serves as a hidden i n c i t a t i o n to change the s t a t u s quo. The term r e c e i v e s i t s economic p o l i c y tenor only with regard to the purposes i t serves f o r . 1 0 1 T h e r e f o r e the term d i s c r i m i n a t i o n can on l y have a r e l a t i v e l y constant tenor i n a l e g a l c o n t e x t . 1 0 2 33 Equal and d i f f e r e n t are a l t e r n a t i v e terms. They exclude each other and are supplements at the same time because one i s the c o r r e l a t e of the other. T h e r e f o r e 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 means "not to be allowed to t r e a t d i f f e r e n t " as w e l l as "to have to t r e a t e q u a l l y . " Consequently, 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 p r o h i b i t s a d i f f e r e n t treatment and r e q u i r e s equal treatment at the same time. T h e r e f o r e , 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 r e p r e s e n t s i t s e l f as a negative worded p r i n c i p l e of equal t r e a t m e n t . 1 0 3 5 . 1 . 1 GENERAL IDEAS ON DISCRIMINATION IN INTERNATIONAL  LAW As a p r i n c i p l e the i n t e r n a t i o n a l law i n c l u d e s a general but formal 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 . 1 0 4 I t i s d e r i v e d from the p r i n c i p l e of e q u a i l t y of the c o u n t r i e s . 1 0 5 Concerning the equal i n t e r n a t i o n a l s t a t u s of c o u n t r i e s as i n t e r n a t i o n a l b o d i e s 1 0 6 (we would c a l l them "human r i g h t s of c o u n t r i e s " ) 1 0 7 these are fundamental p r i n c i p l e s l i k e the p r i n c i p l e of s e l f - d e t e r m i n a t i o n , s e l f - e s t e e m , s u r v i v a l , the p r i n c i p l e of equal treatment, and the p r i n c i p l e of formal e q u a l i t y . 1 0 8 Apart from those rudimentary l e g a l e f f e c t s there i s no g e n e r a l p r o h i b i t i o n i n i n t e r n a t i o n a l law which r e q u i r e s equal r i g h t s and o b l i g a t i o n s f o r every c o u n t r y . 1 0 9 The e q u a l i t y of the c o u n t r i e s i n i n t e r n a t i o n a l law means that each c o u n t r y 34 can p l e a d i t s r i g h t s and has to f u l f i l i t s o b l i g a t i o n s . 1 1 0 With r e f e r e n c e to the treatment of f o r e i g n e r s - however, not of f o r e i g n l e g a l e n t i t i e s or c o m p a n i e s 1 1 1 - and t h e i r a s s e t s , c e r t a i n minimum r i g h t s are r e c o g n i z e d by customary i n t e r n a t i o n a l law. I t i s not allowed to s h o r t of the minimum l e g a l p o s i t i o n of f o r e i g n e r s which i s granted i n accordance with t h i s minimum standard by customary i n t e r n a t i o n a l l a w . 1 1 2 T h i s general 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 r e l a t i n g to i n t e r n a t i o n a l law f o r the p r o t e c t i o n of the human r i g h t s of f o r e i g n e r s i s widely accepted, f o r example: f o r t h e i r r e c o g n i t i o n as a l e g a l s u b j e c t , there i s the r e c o g n i t i o n of the e s s e n t i a l r i g h t s of l i b e r t y , the r i g h t to take l e g a l a c t i o n , p r o t e c t i o n a g a i n s t c r i m i n a l o f f e n c e . 1 1 3 In a d d i t i o n , the i n t e r n a t i o n a l law i n c l u d e s a " p r o h i b i t i o n of grave and i n t o l e r a b l e encroachments." A g e n e r a l p r i n c i p l e of the i n t e r n a t i o n a l law which a l l o t s a r e l a t i v e e q u a l i t y of s p e c i a l r i g h t s and o b l i g a t i o n s of the c o u n t r i e s and - i n d i r e c t l y - t h e i r people that means an equal treatment i n f i n a n c i a l matters of n o n - n a t i o n a l s i s not a c c e p t e d 1 1 4 apart from the above mentioned r e s t r i c t i o n . D i s c r i m i n a t i o n s are only c o n s i d e r e d to be an u n f r i e n d l y a ct which j u s t i f i e s r e t o r t i o n u n l e s s a s p e c i a l s t a t u t e of i n t e r n a t i o n a l law s i g n i f i e s the c o n t r a r y . 1 1 5 35 5.1.2 PROHIBITION OF DISCRIMINATION IN INTERNATIONAL LAW In i n t e r n a t i o n a l law there was a requirement to implement the r u l e of equal treatment i n t o agreements. Apart from a l i m i t e d number of cases, f i r s t of a l l i n the law r e l a t i n g to a l i e n s , the proof of a s p e c i a l t i t l e f o r the equal treatment i s always r e q u i r e d . The i n t e r n a t i o n a l law i n c l u d e s a number of standard c l a u s e s which appears o f t e n i n a m o d i f i e d f o r m . 1 1 6 The p a r t i e s to a c o n t r a c t are bound by the r e c i p r o c i t y c l a u s e which grants the equal treatment f o r each of t h e m . 1 1 7 T h e r e f o r e t h i s c l a u s e l i m i t s the o b l i g a t i o n s i n accordance with the r e c i p r o c a l equal r i g h t s and o b l i g a t i o n s of the c o n t r a c t i n g p a r t i e s . 1 1 8 Sometimes the " r e c i p r o c i t y c l a u s e " serves to l i m i t a most-favoured-nation c l a u s e . 1 1 9 In r e l a t i o n with t h i r d n a t i o n s , however, t h i s system of r e c i p r o c a l agreements leads to d i f f e r e n t treatment f o r each c o u n t r y . T h i s can be excluded by the agreement of a most-favoured-nation c l a u s e . 1 2 0 Within the scope of the most-favoured-nation c l a u s e 1 2 1 the c o n t r a c t i n g p a r t i e s o b l i g e themselves - mostly m u t u a l 1 2 2 - to grant f a v o u r a b l e treatment f o r the c o n t r a c t i n g c o u n t r i e s and t h e i r c i t i z e n s , companies, s h i p s , v e h i c l e s and goods as they d i d f o r the c i t i z e n s , companies, s h i p s , v e h i c l e s and goods of the most favoured c o u n t r i e s they ever n e g o t i a t e with. By t h i s the f a v o u r a b l e treatment i s extended always to the c o n t r a c t i n g p a r t i e s who granted the most favoured n a t i o n treatment r e c i p r o c a l l y . T h i s c l a u s e i s s p e c i a l l y 36 implemented i n t r e a t i e s on F r i e n d s h i p , Commerce and N a v i g a t i o n . Being used i n i n t e r n a t i o n a l agreements t h i s c l a u s e i s even more e f f e c t i v e . 1 2 3 The p r i n c i p l e of equal economic r i g h t s w i t h i n the scope of the open-door p o l i c y 1 2 4 as i t was r e a l i z e d f i r s t by the Congo-Act of February 26, 1885 today deserves only an h i s t o r i c l i n t e r e s t . 1 2 5 Tertium comparationis i s the treatment of each c o n t r a c t i n g country or t h i r d country and t h e i r c i t i z e n s i n a corresponding s i t u a t i o n . 1 2 6 While the most favoured n a t i o n c l a u s e r e f e r s to the treatment which i s granted to f o r e i g n e r s , the n a t i o n a l c l a u s e p r o v i d e s f o r an equal treatment compared with n a t i o n a l s 1 2 7 who are i n the same p o s i t i o n . Whether the f o r e i g n c i t i z e n s , companies, s h i p s , v e h i c l e s or goods are in the same p o s i t i o n with the n a t i o n a l s has to be decided a c c o r d i n g to the f a c t s which determine the n a t i o n a l s t a t u t e s . The l e g a l consequence, the procedure and the kind of a p p l i c a t i o n of the law form the "treatment" f o r the n a t i o n a l s , which has to be extended to the favoured f o r e i g n e r s without any e x c e p t i o n . The n a t i o n a l c l a u s e i s used very 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 T r e a t i e s , e i t h e r by i t s e l f or i n combination with a most-fav o u r e d - n a t i o n c l a u s e . 1 2 8 Since the U n i t e d S t a t e s became one of the super powers of the world, 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 i n t e r n a t i o n a l l a w . 1 2 9 In a negative sense the 37 n o n - d i s c r i m i n a t i o n c l a u s e determines the o b l i g a t i o n of equal t r e a t m e n t 1 3 0 by p r o h i b i t i n g d i f f e r e n t treatment f o r the c o n t r a c t i n g p a r t i e s . 1 3 1 The c l a u s e i s used i n areas of a d m i n i s t r a t i v e p l a n n i n g e s p e c i a l l y i n the area of q u a n t i t a t i v e r e s t r i c t i o n s . 1 3 2 A c c o r d i n g to i t s o r i g i n i t i s t i e d to the d i s t i n c t i o n of "unreasonable," " a r b i t r a r y d i s c r i m i n a t i o n " i n c o n t r a s t to the "reasonable c l a s s i f i c a t i o n " 1 3 3 which developed as a consequence of the i n t e r p r e t a t i o n of the "Equal P r o t e c t i o n Clause" i n the 14th Amendment to the U.S. C o n s t i t u t i o n . The n o n - d i s c r i m i n a t i o n c l a u s e i s found i n p o l i t i c a l agreements as w e l l as i n trade agreements because i t i s more a d a p t a b l e 1 3 4 than the standard of the most-favoured n a t i o n treatment and treatment of n a t i o n a l s . I t was used f o r the p r o t e c t i o n of human r i g h t s , e s p e c i a l l y f o r m i n o r i t i e s , 1 3 5 i n the area of i n t e r n a t i o n a l trade and European i n t e g r a t i o n . 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 in I n t e r n a t i o n a l Law Since the 15th century 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 treatment i n i n t e r n a t i o n a l l a w 1 3 6 e s p e c i a l l y i n the area of trade i n the form of most favoured n a t i o n c l a u s e s i n trade agreements and F r i e n d s h i p , Commerce and N a v i g a t i o n Treat i e s . In the B e r l i n Document of February 1885 equal r i g h t s f o r economic a c t i v i t i e s were l a i d down f o r the 38 Congo-Basin ( " e g a l i t e commercial") - a l s o c a l l e d : open-door p o l i c y . S i m i l a r agreements were f o l l o w i n g f o r r e g i o n s belonging to the i n t e r e s t sphere of d i f f e r e n t powers, a s s i g n i n g f o r a complete commercial e q u a l i t y of the c i t i z e n s of the c o n t r a c t i n g c o u n t r i e s i n those r e g i o n s . 1 3 7 In the p e a c e - t r e a t y of V e r s a i l l e s of June 28th, 1 9 1 9 1 3 8 c o n t r a c t u r a l c l a u s e s which c o n t a i n the word " d i s c r i m i n a t i o n " are used f o r the f i r s t time in the form of a 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 a g a i n s t the P o l i s h m i n o r i t y i n D a n z i g . 1 3 9 In a d d i t i o n , by the T r e a t y of V e r s a i l l e s the German Empire was bound not to d i s c r i m i n a t e a g a i n s t the trade of a former enemy compared to a t h i r d c o u n t r y 1 4 0 and not to undertake " d i s c r i m i n a t i o n or p r e f e r e n c e " ( " d i s t i n c t i o n ou p r e f e r e n c e " ) r e l a t i n g to the routes of t r a n s p o r t a t i o n or the n a t i o n a l i t y of the means of t r a n s p o r t a t i o n . 1 4 1 In p a r t i c u l a r , one group 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 should e l i m i n a t e the " a r b i t r a r y d i s c r i m i n a t i o n " ( " d i s c r i m i n a t i o n s m a l v e i l l a n t e s " ) . The p r o h i b i t i o n of malevolent d i s c r i m i n a t i o n s were s p e c i a l l y intended to prevent the misuse of r e g u l a t i o n s which allow import and export r e s t r i c t i o n s i n order to p r o t e c t the p u b l i c s e c u r i t y and order as w e l l as the e s s e n t i a l s e c u r i t y i n t e r e s t s (see Convention f o r the A b o l i t i o n of the R e s t r i c t i o n of Import and Export dated November 8, 1 9 2 7 ) . 1 4 2 39 There are f u r t h e r p r o h i b i t i o n s of malevolent d i s c r i m i n a t i o n s of c i t i z e n s , s h i p s , r a i l r o a d c a r s or a l i e n goods i n the "Geneva Convention on I n t e r n a t i o n a l R a i l r o a d and Ocean T r a f f i c . " 1 4 3 D i s t i n c t i o n s r egarding only the s h i p ' s f l a g were quoted as an example f o r a malevolent d i s c r i m i n a t i o n . 1 4 4 A f t e r World War II there were b i l a t e r a l and m u l t i l a t e r a l agreements i n c l u d i n g numerous n o n - d i s c r i m i n a t i o n c l a u s e s . As an example for 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 l a i d down i n a b i l a t e r a l t r e a t y we can r e f e r to A r t . V sec. (3), XII sec. ( 3 ), XIV sec. (3), XVII sec. (3) and XIII sec. (3) of the F r i e n d s h i p , Commerce and N a v i g a t i o n t r e a t y between the United S t a t e s and the F e d e r a l Republic of Germany of October 29, 1 9 5 4 . 1 4 5 S e v e r a l i n t e r n a t i o n a l o r g a n i z a t i o n s d e c l a r e t h e i r s p e c i a l i n t e n t i o n to get r i d of and to a v o i d d i s c r i m i n a t i o n . 1 4 6 A r t i c l e VIII sec. (3) of the Agreement on the I n t e r n a t i o n a l Monetary Fund of December 27, 1945 1" 7 p r o h i b i t s 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 i n t e r n a t i o n a l c u r r e n c i e s . The General Agreement on T a r i f f s and Trade of 1947 (GATT) i n c l u d e s not only a ge n e r a l most-favoured-nation c l a u s e f o r the area of customs d u t i e s and d e c l a r a t i o n s and the f o r m a l i t i e s connected with t h e m 1 4 8 but i t i n c l u d e s a l s o 40 r e g u l a t i o n s f o r the n o n - d i s c r i m i n a t o r y a p p l i c a t i o n of q u a n t i t a t i v e r e s t r i c t i o n s 1 " 9 and a 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 i n t e r n a t i o n a l trade of s o c i a l i s t e n t e r p r i s e s and monopolies owned by c o u n t r i e s . 1 5 0 In a d d i t i o n , i n the GATT-Conferences the GATT c r e a t e s a p l a t f o r m to remove d i s c r i m i n a t i o n s . L i k e the GATT the OEEC codex of l i b e r a l i z a t i o n p r o v i d e s the abolishment of every d i s c r i m i n a t i o n between the member c o u n t r i e s as w e l l as a g a i n s t one of them. The p r o v i s i o n r e f e r s to every d i s c r i m i n a t i o n i n any p a r t of i n t e r n a t i o n a l business unless there i s an e x p l i c i t e x c e p t i o n . 1 5 1 The EEC-Treaty as w e l l as the T r eaty of the Foundation of the European Community of Coal and S t e e l ( M U V ) 1 5 2 i n c l u d e s many 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 s . As a g e n e r a l c l a u s e A r t i c l e 4(b) MUV p r o h i b i t s a l l "measures and p r a c t i c e s " which cause a d i s c r i m i n a t i o n between producers, buyers or consumers f o r the c o a l and s t e e l i n d u s t r y . Contrary to the i n t e r n a t i o n a l 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 which i s s u i t e d f o r the c o u n t r i e s , hereby a general and d i r e c t o b l i g a t i o n of equal treatment of the p a r t i c i p a n t s of the market (producers, merchants, consumers) i s c r e a t e d 1 5 3 and the a d m i n i s t r a t i o n as d e f i n e d i n A r t . 7 and A r t . 8 MUV has to ensure i t s observance. T h i s 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 d i r e c t l y e f f e c t s e n t e r p r i s e s . 1 5 " The a d m i n i s t r a t i o n of the community 41 ( A r t . 8 MUV) and a l l member c o u n t r i e s 1 5 5 have to obey i t . The gen e r a l 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 s s p e c i f i e d by a number of i n s t r u c t i o n s . The a d m i n i s t r a t i o n i s not allowed to determine d i s c r i m i n a t i n g r e s t r i c t i o n s f o r pro d u c t i o n s and consumptions ( A r t . 58 (2) MUV). I t has to s p e c i a l l y observe 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 ( A r t . 4(b) MUV) f o r mergers and a c q u i s i t i o n s ( A r t . 66 (2) MUV). The t r e a t y i n c l u d e s 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 r e l a t i n g to p r i c e s ( A r t . 60 (1) MUV), f r e i g h t and t r a n s p o r t r e g u l a t i o n s ( A r t . 70 MUV) and r e l a t i n g to n a t i o n a l and a l i e n employees, e s p e c i a l l y f o r t h e i r s a l a r y and t h e i r working c o n d i t i o n s ( A r t . 69 (4) MUV) . A l s o the (EURATOM-Treaty) 1 5 6 Treaty of the Foundation of the European Atomic Community i n c l u d e s 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 A r t i c l e 52, 68, 93 and 97. These a r t i c l e s guarantee the a v a i l a b i l i t y of atomic m a t e r i a l f o r a l l member c o u n t r i e s , t h e i r c i t i z e n s , and e n t e r p r i s e s . T h i s i n c l u d e s a supply and customs p o l i c y equal f o r a l l of them. Furthermore, the p r o h i b i t i o n s i n t e n d to a b o l i s h the l i m i t a t i o n of the access to q u a l i f i e d employment i n the nucl e a r f i e l d ( A r t . 96 EAG-V) as w e l l as the p a r t i c i p a n t s i n the c o n s t r u c t i o n of s c i e n t i f i c or i n d u s t r i a l atomic p l a n t s , based on n a t i o n a l i t y . 1 5 7 42 5.1.2.2 The I n t e n t . o f 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 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 i n c l u d e s always a command of equal t r e a t m e n t . 1 5 8 The most favoured n a t i o n c l a u s e and the n a t i o n a l c l a u s e as w e l l as the n o n - d i s c r i m i n a t i o n c l a u s e form the p r i n c i p l e of equal treatment i n i n t e r n a t i o n a l l a w . 1 5 9 The p r i n c i p l e of equal treatment i s b i n d i n g to the extent of the r e s p e c t i v e c o n t r a c t u a l i n t e r n a t i o n a l agreement as i t i s worded i n d i f f e r e n t s i t u a t i o n s . To determine i t s s p e c i a l content t h e r e f o r e i t i s necessary to determine the ideas and terms of equal treatment as i t i s used i n each c a s e . 1 6 0 The q u e s t i o n i s which main aspect and i n which r e l a t i o n the p a r t i e s to a c o n t r a c t wanted to ensure an equal treatment. A c c o r d i n g to the p o i n t of view which determines the c o n t e n t s of the idea of e q u a l i t y we have to decide which c r i t e r i o n s , r e l a t i n g to the s i t u a t i o n , should be taken i n a c a s e . 1 6 1 The 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 are based on the p r i n c i p l e of equal treatment. T h e r e f o r e they have to be determined a c c o r d i n g to the norms of i n t e r n a t i o n a l l a w 1 6 2 unless 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 r e f e r s to the r e s p e c t i v e n a t i o n a l law. In accordance with the r e s p e c t i v e p o i n t of view we must decide whether two or more s i t u a t i o n s g i v e reasons f o r a d i f f e r e n t treatment. The contents and means of a s i t u a t i o n as intended by the p a r t i e s 43 determine i t s d i f f e r e n t understanding. Most n o n - d i s c r i m i n a t i o n c l a u s e s p r o h i b i t a d i f f e r e n t treatment only i n a s p e c i a l l i m i t e d s c o p e . 1 6 3 U s u a l l y they i n c l u d e s p e c i a l s i t u a t i o n s which e f f e c t the economic r e l a t i o n s with other c o u n t r i e s . T h e r e f o r e , the o b l i g a t i o n i s l i m i t e d . 1 6 4 In g e n e r a l , the n a t i o n a l c l a u s e i s onl y accepted f o r the l e g a l s t a t u s of f o r e i g n e r s i n the p r i v a t e order of the country of residen c e and does not grant the access to p u b l i c and a d m i n i s t r a t i v e p o s i t i o n s . The n a t i o n a l c l a u s e a l s o does not grant any p o l i t i c a l p o w e r . 1 6 5 On the other hand, the 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 are subj e c t to l i m i t a t i o n s w i t h i n the scope of A r t . XII, XXIV, XXV, GATT, and A r t . 8 OEEC Codex of L i b e r a l i z a t i o n . 1 6 6 The p e r s o n a l , r e g i o n a l and f a c t u r a l scope of the p r i n c i p l e of equal treatment or 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 can only be determined i n the context with other p r o v i s i o n s and i n c o n s i d e r a t i o n of the f a c t s of the r e s p e c t i v e scope of a p p l i c a t i o n . 1 6 7 The most-favoured-nation c l a u s e and the n a t i o n a l treatment c l a u s e are worded as p o s i t i v e 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 and take r e f e r e n c e to a f i x e d standard of comparison. The r e s p e c t i v e l e v e l of comparison i s v a l i d f o r the negative worded 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 and has to be determined f o r the r e s p e c t i v e p r o v i s i o n . 1 6 8 I t can 44 r e f e r to the treatment of n a t i o n a l s but i t can a l s o r e f e r to the treatment of f o r e i g n e r s which d i f f e r s from the treatment of n a t i o n a l s . The r e s p e c t i v 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 can be d e f i n e d by i n d i c a t i n g the p o i n t s of view which decide on the s i t u a t i o n . Sometimes the p o i n t s of view have to be taken from the systematic context of the other p r o v i s i o n of the same t r e a t y . For example: I t i s accepted that the p r o h i b i t i o n of d i s r i m i n a t i o n of A r t i c l e 14 of the European Convention of Human Ri g h t s i n c l u d e s r i g h t s and l i b e r t i e s and an independent v i o l i t i o n of A r t i c l e 14 cannot be a s s e r t e d . 1 6 9 The wording of the 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 can a l s o be l e t open f o r every s i n g l e c ountry. The most-favoured-nation c l a u s e g i v e s complete freedom i n the c r e a t i o n of the "favoured" t r e a t m e n t 1 7 0 u n l e s s i t i s combined with the o b l i g a t i o n to keep the s t a t u s q u o . 1 7 1 The n a t i o n a l c l a u s e does not i n s t r u c t how to t r e a t the n a t i o n a l s . 1 7 2 T h e r e f o r e , the o b l i g e d country i s a u t h o r i z e d to d e c i d e the p o i n t s of view which determine the p o s i t i o n of f o r e i g n e r s compared to that of n a t i o n a l s or the p o s i t i o n of f o r e i g n e r s of the most-favoured-nation. T h e r e f o r e , the n a t i o n a l a u t h o r i t y r e f e r s to the p o i n t s of view of the r e s p e c t i v e n a t i o n a l l e g i s l a t i o n and the standard of the l e g a l a p p l i c a t i o n f o r n a t i o n a l s or the f o r e i g n e r s 45 from most favoured n a t i o n s . The equal treatment r e q u i r e d by 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 can be a b s o l u t e or r e l a t i v e . If an a p p r o p r i a t e e q u a l i t y i n c u r s as 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 of power, the equal treatment c l a u s e s o n l y c r e a t e a b s o l u t e equal o p p o r t u n i t i e s , e.g., i n the form of the most-favoured-nation treatment or the treatment of n a t i o n a l s . 1 7 3 I f , however, the f r e e a c t i n g of the market i s d i s a r r a n g e d by a planned economic a c t i o n with a c o n t r a r y t r e n d the e x i s t i n g e q u a l i t y must be r e p l a c e d by an a r t i f i c i a l one which corresponds to the d i f f e r e n t e f f i c i e n c y of each c o u n t r y . 1 7 * The r e l a t i v e e q u a l i t y has to be r e a l i z e d a c c o r d i n g to A r t i c l e XIII GATT. The r e l a t i v e e q u a l i t y takes i n t o regard the q u a l i t a t i v e and the q u a n t i t a t i v e d i s c r i m i n a t i o n of the economic e f f i c i e n c y of the c o u n t r i e s i n terms of t h e i r import q u o t a . 1 7 5 The p r i n c i p l e of equal treatment can be regarded more formal or e s s e n t i a l . I t i s c a l l e d formal i f i t o f f e r s an equal treatment i n an e x t e r n a l treatment i n an e x t e r n a l - f o r m a l sense. An only formal o b l i g a t i o n of n o n - d i s c r i m i n a t i o n permits that the treatment can depend on c o n d i t i o n s which on the one hand are " g e n e r a l " i n a formal sense and do not have to have any o b j e c t i v e c o n n e c t i o n with the d i s c r i m i n a t i o n and t h e r e f o r e a c t u a l l y d i s c r i m i n a t e c e r t a i n groups of 46 people which should be t r e a t e d e q u a l l y . 1 7 6 In order to a v o i d a circumvention of the r e s p e c t i v 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 the p r o h i b t i o n of d i s c r i m i n a t i o n r e l a t i n g to i n t e r n a t i o n a l law should be i n t e r p r e t e d . 1 7 7 A s p e c i a l kind of the e s s e n t i a l equal treatment i s the r e a l equal treatment. As a r e s u l t t h i s r e a l l y means equal treatment. Every 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 has a p o s i t i v e and a negative aspect, because of the a l t e r n a t i v e nature of the term of e q u a l i t y . 1 7 8 A d i s c r i m i n a t i o n can mean to t r e a t the non-comparable e q u a l l y and to t r e a t the comparable d i f f e r e n t . 1 7 9 T r y i n g to reach an equal s t a t u s under d i f f e r e n t circumstances 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 can gi v e away the e q u a l i t y of the m e a n s 1 8 0 and can r e q u i r e a d i f f e r e n t treatment because i t has to take i n t o c o n s i d e r a t i o n the a c t u a l d i f f e r e n c e of the o b j e c t s of comparison. In t h i s case the equal treatment of the non-comparable would be a d i s c r i m i n a t i o n . 1 8 1 The r e l a t i v e equal treatment d i f f e r s from the a c t u a l equal treatment i n the manner that the r e l a t i v e one only stands f o r a q u a n t i t a t i v e d i s c r i m i n a t i o n of the r e s p e c t i v e o b j e c t s of comparison while the a c t u a l e q u a l i t y can a l s o r e q u i r e a q u a l i t a t i v e d i s c r i m i n a t i o n of the o b j e c t s of c o m p a r i s o n . 1 8 2 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 of the c i t i z e n s before law i s implemented i n every c o n s t i t u t i o n of the member c o u n t r i e s of the European Community with the exception of the N e t h e r l a n d s . 1 8 3 The p r i n c i p l e of e q u a l i t y i s a l s o embodied i n the c o n s t i t u t i o n of S w i t z e r l a n d 1 8 " and the United S t a t e s of A m e r i c a . 1 8 5 5.2.1 OBLIGATION OF THE ADMINISTRATION TO FOLLOW THE  PRINCIPLE OF EQUALITY In the Netherlands the gen e r a l p r i n c i p l e of e q u a l i t y i s a ge n e r a l p r i n c i p l e of law. I t i s one of the general p r i n c i p l e s of an o r d i n a r y a d m i n i s t r a t i o n . 1 8 6 The Dutch C o n s t i t u t i o n i n c l u d e s only s e v e r a l s p e c i a l 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 which should grant the pe r m i s s i o n to take up p u b l i c o f f i c e s , 1 8 7 the same p r o t e c t i o n f o r persons and p r o p e r t y 1 8 8 and p r o t e c t i o n f o r the r e l i g i o u s a f f a i r s of Dutch c i t i z e n s . 1 8 9 In the Netherlands casebooks on a d m i n i s t r a t i v e law d e r i v e the p r i n c i p l e of e q u a l i t y i n taxes from the gen e r a l p r i n c i p l e of e q u a l i t y . 1 9 0 I t i s a l s o accepted i f i t i s used i n p u b l i c a f f a i r s . 1 9 1 The a d m i n s t r a t i v e law i n France d i d not develop the p r i n c i p l e of o b l i g a t i o n of the a d m i n i s t r a t i o n to f o l l o w the p r i n c i p l e of e q u a l i t y r e l a t i n g to the precedents of the French C o u n c i l of State ( C o u n s e i l d'Etat) i n 48 accordance with the C o n s t i t u t i o n but as a g e n e r a l p r i n c i p l e of a d m i n i s t r a t i v e l a w . 1 9 2 P a r t i c u l a r l y i n the area of the economic a d m i n i s t r a t i o n the C o n s e i l d'Etat regards 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 as the counterbalance to f u r t h e r a u t h o r i t i e s and the s t r o n g dependence on the economy. 1 9 3 The area of a p p l i c a t i o n of the French p r i n c i p l e of e q u a l i t y covers t h r e e main groups of cases: I t concerns the e q u a l i t y under the law, the e q u a l i t y under p u b l i c charges and the e q u a l i t y i n p u b l i c s e r v i c e s ( s e r v i c e s p u b l i q u e s ) . 1 9 4 I t u n i t e s the a d m i n i s t r a t i o n i n the area of the " E i n g r i f f s v e r w a l t u n g " ( r e g u l a t i v e a d m i n i s t r a t i o n ) as w e l l as the "Daseinsvorsorge" ( d i s t r i b u t i v e a d m i n i s t r a t i o n ) and i n the scope of the a d m i n i s t r a t i o n of the economy. 1 9 5 The C o n s e i l d'Etat c o n s i d e r s that the a d m i n i s t r a t i o n of the economy i s i n f r i n g e d with the p r i n c i p l e of equal treatment and has to be repealed as "detournement de pouv o i r " i f the p l a i n t i f f i n an " a c t i o n en c o n t e s t a t i o n de v a l i d i t e " (an a c t i o n to set a s i d e a d m i n i s t r a t i v e a c t s ) can prove that the co n t e s t e d p r o v i s i o n i s l e d from motives which d i f f e r from those of the p u b l i c i n t e r e s t . 1 9 6 The I t a l i a n a d m i n i s t r a t i o n j u r i s d i c t i o n of the C o u n c i l of St a t e does not d e r i v e the t i e s of the a d m i n i s t r a t i o n to the p r i n c i p l e of equal treatment from A r t . 3 of the I t a l i a n C o n s t i t u t i o n 1 9 7 but from the p r i n c i p l e t h at the a d m i n i s t r a t i o n has to be independent 49 from the p o l i t i c a l p a r t i e s . 1 9 8 The t i e s of the l e g i s l a t o r c o n c e r n i n g the p r i n c i p l e of equal s t a t u s i s d e r i v e d from the I t a l i a n C o n s t i t u t i o n . 1 9 9 The v i o l a t i o n of the p r i n c i p l e of e q u a l i t y by the a d m i n i s t r a t i o n i s c o n s i d e r e d as an abuse of d i s c r e t i o n , as w e l l as i n the l e g a l sense as i n the precedents. T h i s i s the same i n France (eccesso d i p o t e r e ) . 2 0 0 C o n t r a r y to the above mentioned member c o u n t r i e s , i n B e l g i u m , 2 0 1 the F e d e r a l Republic of Germany 2 0 2 and Luxembourg 2 0 3 the p r i n c i p l e of equal treatment i s taken from the c o n s t i t u t i o n and governs a l l of the p u b l i c a d m i n i s t r a t i o n 2 0 4 but, even without any c o n s t i t u t i o n a l guarantee, i t would be one of the important p r i n c i p l e s of l a w . 2 0 5 5.2.2 TIES OF THE LEGISLATION TO THE PRINCIPLE OF EQUAL  TREATMENT I t i s e s s e n t i a l that i n s e v e r a l member c o u n t r i e s as I t a l y 2 0 6 and i n the F e d e r a l Republic of Germany 2 0 7 the l e g i s l a t o r i s t i e d to the p r i n c i p l e of equal treatment. T h i s i s v a l i d i n S w i t z e r l a n d t o o 2 0 8 and the U n i t e d S t a t e s . 2 0 9 5.2.3 THE PRINCIPLE OF EQUAL TREATMENT IN CONSTITUTIONAL  AND ADMINISTRATIVE LAW The p r i n c i p l e of equal treatment r e q u i r e s an equal a p p l i c a t i o n of the law. F o l l o w i n g A r i s t o t e l e s ' command of 50 a r e l a t i v e l y equal treatment the law has to a l l o t "suum quique." By t h i s the d i f f e r e n c e i n s o c i e t y and i n the s o c i a l r e a l i t y should be taken i n t o c o n s i d e r a t i o n . 2 1 0 Having r e a l d i f f e r e n c e s i n r e a l i t y the e q u a l i t y s h a l l be l i m i t e d . 2 1 1 But the 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 are r e l e v a n t and j u s t i f y a d i s c r i m i n a t i o n i n an i n d i v i d u a l case? I f a f f a i r s are q u a l i t a t i v e l y e q u a l , which q u a n t i t a t i v e d i f f e r e n c e s are r e l e v a n t and r e q u i r e , t h e r e f o r e , a r e l a t i v e l y equal t r e a t m e n t ? 2 1 2 The c h a r a c t e r i s t i c s being r e l e v a n t f o r a comparison depend on the p o i n t s of view f o r comparison. The r e s p e c t i v e v a l i d p o i n t of view f o r comparison, the i n t e n t i o n of the e q u a l i z a t i o n determines the c h o i c e of the d e c i s i v e c h a r a c t e r i s t i c s f o r c o m p a r i s o n . 2 1 3 The o b j e c t of comparison and the c h a r a c t e r i s t i c s of these o b j e c t s have to be c o n s i d e r e d by turns with the p o i n t s of view f o r comparison. The German "Grundgesetz" ( c o n s t i t u t i o n ) s p e c i f i e s the p o i n t f o r comparison p a r t l y negative by enumeration of the i r r e l e v a n t d i f f e r e n t c h a r a c t e r i s t i c s . 2 1 4 However, t h i s enumeration i s not complete. In an i n d i v i d u a l case where the negative c h a r a c t e r i s t i c s do not count the r e s p e c t i v e v a l i d p o s i t i v e p o i n t of view f o r comparison has to be determined. According to Ipsen, p r i n c i p l e s of c o n s t i t u t i o n a l order determine the comparison, l i k e : the democratic p r i n c i p l e , the p r i n c i p l e of law and order, the 51 s e p a r a t i o n 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 j u d i c i a l power, the s o c i a l element and the c h a r a c t e r of a f e d e r a l a u t h o r i t y . 2 1 5 In the area of a d m i n s t r a t i v e d i s c r e t i o n p o i n t s of view f o r comparison have to be s p e c i f i e d r e l a t i n g to the i n t e n t i o n and the l i m i t s of the d i sc r e t i o n . An important c r i t e r i o n i s the scope f o r the c o m p a r i s o n . 2 1 6 R e l a t i n g to the p o l i t i c a l r i g h t s the p r i n c i p l e of equal treatment has to be i n t e r p r e t e d d i f f e r e n t than r e l a t i n g to tax law, tr a d e , i n t e r n a t i o n a l t r a d e law or the r i g h t to e x p r o p r i a t e . If an economy i s d r i v e n by i n t e r v e n t i o n i s t s , 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 i n economic law has a more s p e c i f i e d scope of a p p l i c a t i o n than i n a l i b e r a l economy. 2 1 7 T h e r e f o r e an i n t e r v e n t i o n i s t measure v i o l a t e s only 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 i f two cases which are equal r e l a t i n g to the aims of the i n t e r v e n t i o n 2 1 8 are t r e a t e d d i f f e r e n t ( i n a d i s c r i m i n a t o r y manner). On the other hand, the addressee and h i s competences and the margin of d i s c r e t i o n which i s granted to the r e s p e c t i v e addressee are important. While the p r i n c i p l e of equal treatment i n the scope of a d m i n i s t r a t i o n i s understood as an abuse of d i s c r e t i o n , i t l i m i t s the d i s c r e t i o n of the l e g i s l a t o r only as p r o h i b i t i o n of a r b i t r a r y a c t i o n s . 2 1 9 T h e r e f o r e , an abuse of d i s c r e t i o n and i n c o n s i s t e n c y with the p r i n c i p l e of equal treatment are o n l y given, " i f there i s no reasonable argument which 52 d e r i v e s from the nature of the matter or any other l o g i c a l reason f o r the l e g a l d i s c r i m i n a t i o n or equal t r e a t m e n t . " 2 2 0 The margin of d i s c r e t i o n i s extended by the i n t e r p r e t a t i o n of the p r i n c i p l e of equal treatment. The l e g i s l a t o r does not need to chose the "most expedient," "the most reasonable" or the " f a i r e s t " s o l u t i o n r e l a t i n g to a determined aim or m o d e l . 2 2 1 T h e r e f o r e the p r i n c i p l e of equal treatment i s b i n d i n g f o r the l e g i s l a t o r . I t i s not necessary that a l l r e a l d i f f e r e n c e s are taken i n t o c o n s i d e r a t i o n but the l e g i s l a t o r has not to t r e a t r e l e v a n t equal s i t u a t i o n s as d i f f e r e n t and r e l e v a n t s i t u a t i o n s not e q u a l l y . 2 2 2 A r b i t r a r y a c t i o n s are only given " i f an a p p r o p r i a t e reason f o r a l e g a l d e t e r m i n a t i o n cannot be i n v e s t i g a t e d . " 2 2 3 For example, i f the l e g a l i t y which i s a part of the m a t t e r 2 2 " i s d i s r e g a r d e d r e l a t i n g to the idea of e q u a l i t y . T h i s i n t e r p r e t a t i o n corresponds to the i n t e r p r e t a t i o n i n the U n i t e d S t a t e s of America and i n S w i t z e r l a n d . 2 2 5 As the n a t u r a l 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 s c o n s i d e r e d as an a r b i t r a r y a c t i o n ( p r o h i b i t i o n of abuse of law) a margin of d i s c r e t i o n f o r the d e f i n i t i o n of g e n e r a l v a l u a t i o n i s p l a c e d . By t h i s the d i f f i c u l t i e s are c o n s i d e r e d which are o p p o s i t e to a d e f i n i t e i n t e r p r e t a t i o n of the term e q u a l i t y i n a s p e c i a l i n d i v i d u a l case with regard to an a b s t r a c t noun. The terms reserve to i n f r i n g e 2 2 6 the tasks and 53 r e s p o n s i b i l i t i e s which are a s s i g n e d to the a d m i n i s t r a t i o n or the l e g i s l a t i o n by d e c l i n i n g of the c o n t r o l of expediency and the r e s t r i c t i o n of the c o n t r o l of d i s c r e t i o n . Whether a d i s c r i m i n a t i o n e x i s t s has to be seen r e l a t i n g to the p r a c t i c a l e f f e c t of a r u l e f o r the i n d i v i d u a l a ct and not i n accordance with a formal reason. Therefore the p r i n c i p l e of equal treatment has the aim to r e a l i z e an e s s e n t i a l e q u a l i t y and not to be a formal o n e . 2 2 7 From the mentioned examples of 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 i n t e r n a t i o n a l law and i n c o n s t i t u t i o n a l and a d m i n i s t r a t i v e law of the member c o u n t r i e s of the EEC we can l e a r n that 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 depends on the area of power of the addressee of the p r o h i b i t i o n and on the p o s s i b i l i t y to make d i f f e r e n c e s based on r e a l r e l a t i o n s or i n the scope of the l e g a l order, sphere they have e f f e c t s on, and the system of norms who the idea of e q u a l i t y should be r e a l i z e d as a gen e r a l c l a u s e with regard to the v a l i d value f o r the d e f i n e d f a c t u a l scope. 5.2.4 CONCLUSION As a c o n c l u s i o n we can see: (a) that n o n - d i s c r i m i n a t i o n i s a negative wording of the p r i n c i p l e of equal treatment, (b) that n o n - d i s c r i m i n a t i o n and equal treatment are 54 p r i n c i p l e s of i n t e r n a t i o n a l law, (c) that the r e a l i z a t i o n of those p r i n c i p l e s a c t u a l l y depends on the c o u n t r i e s i n v o l v e d and that the main instruments to implement and guarantee equal treatment are i n t e r n a t i o n a l t r e a t i e s , (d) that even without those t r e a t i e s there i s a minimum standard i n i n t e r n a t i o n a l law. 5.3 DISCRIMINATION IN INTERNATIONAL TAX LAW Debatin, a w e l l known German w r i t e r on i n t e r n a t i o n a l t a x a t i o n , s a i d i n h i s a r t i c l e about d i s c r i m i n a t i o n i n tax law: In i n t e r n a t i o n a l law we f i n d 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 . 2 2 8 However, i t s content i s too vague and not enough f o r an exact d e t e r m i n a t i o n of c r i t e r i a i n t a x a t i o n . On the other hand, " i t belongs to the b a s i c elements of modern l e g a l systems that a l l r e g u l a t i o n s and a c t i o n s of any country are determined by the p r i n c i p l e of equal t r e a t m e n t . " 2 2 9 A r t . 3 G r u n d g e s e t z 2 3 0 implements a p r o v i s i o n guaranteeing a ge n e r a l equal treatment. Those g u i d e l i n e s have to be determined e x a c t l y i n each case a c c o r d i n g to the ci r c u m s t a n c e s , because the p r i n c i p l e of equal treatment does not mean a l e g a l e q u a l i t y i n an abs o l u t e sense, but i t i s a consequence of the p r i n c i p l e of f a i r n e s s , that equal has to be t r e a t e d e q u a l l y and d i f f e r e n t has to be t r e a t e d d i f f e r e n t l y . F o l l o w i n g t h i s l i n e the l e g i s l a t i o n of the German court of c o n s t i t u t i o n i s i n t e r p r e t i n g 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 unequal or d i s c r i m i n a t i n g treatment, where a sound reason, being taken from the nature of the f a c t s and the circumstances, or a proper reason i s m i s s i n g , 2 3 1 t h e r e f o r e d i s a l l o w i n g an a r b i t r a r y d i s t i n c t i o n . T h i s has to be a p p l i e d i n t a x a t i o n too, and hence i t i s where one of the c e n t r a l areas of a p p l i c a t i o n i s . D i f f e r e n c e s i n t a x a t i o n are l e g i t i m a t e , i f there i s a sound reason f o r them. If not, they are i l l e g i t i m a t e . T herefore i t has to be determined i f s i t u a t i o n s being seen as d i f f e r e n t i n a l e g a l sense a c t u a l l y are d i f f e r e n t in f a c t , j u s t i f y i n g a d i f f e r e n t l e g a l treatment. It i s extremely d i f f i c u l t to apply those c r i t e r i a , while guaranteeing a s u b t l e d i f f e r e n t a t i o n as can be seen in the l e g i s l a t i o n of the German court of c o n s t i t u t i o n . In the German tax law a l o t of changes were necessary i n order to comply with the p r i n c i p l e of equal t r e a t m e n t . 2 3 2 Those were not i n the areas of i n t e r n a t i o n a l t a x a t i o n , even i f we f i n d the b i g g e s t d i f f e r e n c e s i n f a c t i n t h i s a r e a. Making a d i s t i n c t i o n between r e s i d e n t s and non-residents i n t a x a t i o n i s not to c r i t i c i z e i n i t s e l f , s i n c e there have to be d i f f e r e n c e s at l e a s t i n a t e c h n i c a l way. But a l s o the t a x a t i o n of world wide income and the t a x a t i o n of income d e r i v e d only from sources of a country make a d i f f e r e n c e . C r i t i c a l i s the d e t e r m i n a t i o n , which c r i t e r i a f o r the d i f f e r e n t treatment of r e s i d e n t s and n o n - r e s i d e n t s are to be chosen i n d e t a i l , a c c o r d i n g to the p r i n c i p l e s of i n t e r n a t i o n a l and c o n s t i t u t i o n a l 56 law. From the a b s t r a c t r u l e s developed above we can only take a b s t r a c t g u i d e l i n e s , that an a r b i t r a r y d i s c r i m i n a t i o n i s not j u s t i f i e d i n i n t e r n a t i o n a l taxat i o n . 2 3 3 5.3.1 NON-DISCRIMINATION ACCORDING TO ART. 24 OF THE OECD  MODEL DRAFT CONVENTION 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 got i t s "break-through," i t s wide i n t e r n a t i o n a l acknowledgement and r e c o g n i t i o n 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 implemented i n A r t . 24 of the OECD Model D r a f t Double  Taxa t i o n Convention on Income and C a p i t a l . 2 3 " More c o r r e c t l y , 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 was alr e a d y a s u b j e c t of the f i r s t recommendation which the OEEC as predecessor of the OECD gave out as a d r a f t model for 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 . 2 3 5 The f a c t that 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 was made pa r t of the OECD model convention d i d not make i t b i n d i n g i n terms of i n t e r n a t i o n a l law. The model convention i t s e l f i s only a recommendation given by OECD to implement the model c l a u s e s i n double tax conventions to 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 the recommendation to implement 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 i s only a recommendation too. But the OECD model convention a c t u a l l y had a t h r i v i n g impact on the n e g o t i a t i o n of i n t e r n a t i o n a l double tax conv e n t i o n s , and n o n - d i s c r i m i n a t i o n i s a w e l l 57 e s t a b l i s h e d c r i t e r i o n i n the concept of modern conventions. 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 has got d i f f e r e n t i n t e n t i o n s and reasons. I t s r o o t s are l a i d down in d i f f e r e n t a r e a s : Those are c i t i z e n s h i p , the f a c t of doing business and the dependence on the source of the c a p i t a l . a) In r e l a t i o n to the c r i t e r i o n of c i t i z e n s h i p , c o u n t r i e s are not allowed to tax c i t i z e n s of a f o r e i g n country which i s a member of the OECD Model  Double Tax Convention more burdensome than t h e i r own c i t i z e n s . T r e a t i e s f o l l o w i n g the OECD Model D r a f t  Convent ion n a t u r a l l y do i n c l u d e s t a t e l e s s i n t o t h i s p r i n c i p l e of equal treatment. In t h i s case there i s only one e x c e p t i o n l e f t f o r people being c i t i z e n s of a t h i r d country, where there i s no double tax c o n v e n t i o n . Here the reason i s the p r i n c i p l e of r e c i p r o c i t y . But i t i s not necessary to f o r g e t about the p r i n c i p l e of n o n - d i c r i m i n a t i o n . I t would be s u f f i c i e n t to r e f u s e the equal treatment i n the area where the other country i s t a x i n g d i s c r i m i n a t o r y i t s e l f . b) In r e l a t i o n to the same branch of business 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 does not a l l o w a more burdensome t a x a t i o n of f o r e i g n branches of another country than i t i s granted to domestic companies in the same b u s i n e s s . Here we have the most important 58 e f f e c t 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 . I t grants the same treatment i n t a x a t i o n f o r a f o r e i g n branch as i t i s given f o r domestic companies. T h e r e f o r e , i n t h i s area 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 does not i n t e n d n e u t r a l i t y of c o m p e t i t i o n as f a r as taxes are concerned, c) In r e l a t i o n to the d i f f e r e n t sources of c a p i t a l the p r i n c i p l e of equal treatment does not a l l o w a more burdensome t a x a t i o n f o r companies where the c a p i t a l i s t o t a l l y or p a r t l y , d i r e c t l y or i n d i r e c t l y i n the p o s s e s s i o n of persons l i v i n g i n a d i f f e r e n t country or being under c o n t r o l of those people. The f a c t o r of c o n t r o l of the c a p i t a l does not allow a d i f f e r e n t treatment. But i t i s important to keep i n mind, that the p r i n c i p l e only i n c l u d e s the t a x a t i o n of the company i t s e l f and not the t a x a t i o n of persons who c o n t r o l or own the c a p i t a l of the company. 5.3.2 THE APPLICATION OF THE PRINCIPLE OF  NON-DISCRIMINATION 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 being a p a r t of double tax conventions does i n c l u d e a l l taxes under the co n v e n t i o n . U s u a l l y those are income taxes and the t a x a t i o n of c a p i t a l . Other taxes, e s p e c i a l l y i n d i r e c t taxes, are not i n c l u d e d i n the p r o t e c t i o n 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 . The r e s u l t does not meet the i n t e n t i o n 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 . 59 There i s a need of t h i s p r i n c i p l e f o r a l l areas of t a x a t i o n which i s i n c l u d e d i n double tax c o n v e n t i o n s . I f 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 would not i n c l u d e s p e c i f i c taxes they would r e a l i z e ideas o p p o s i t e to the ba s i c idea of i n t e r n a t i o n a l double tax c o n v e n t i o n s . T h e r e f o r e the modern concept of double tax conventions do extend 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 on a l l taxes. T h e r e f o r e 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 does mean any d i s c r i m i n a t i o n of a l l kind and independent of i t s name, as i t i s i n c l u d e d i n the OECD Model D r a f t  Convent i o n . The idea and i n t e n t i o n 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 r e q u i r e to r e a l i z e i t as f a r as p o s s i b l e . Double d r a f t tax conventions a c t u a l l y do i n c l u d e a l l kinds of taxes i n 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 . 5.3.3 DISCRIMINATION RELATING TO THE  NATIONALITY/CITIZENSHIP Looking at 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 which i s l a i d down i n the OECD double tax convention, c o u n t r i e s are not allowed to tax f o r e i g n c i t i z e n s more burdensome than t h e i r own c i t i z e n s . T h e r e f o r e we f i n d a d i s c r i m i n a t i o n wherever f o r e i g n c i t i z e n s are taxed more burdensome than n a t i o n a l s under the same ci r c u m s t a n c e s . T h i s means that a more burdensome t a x a t i o n r e l a t i n g only to the n a t i o n a l i t y i s not allowed because 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 . Because of the 60 n a t i o n a l i t y , somebody must not be taxed worse than o t h e r s . The reason does not matter. T h e r e f o r e , i t i s not necessary that the purpose of a p r o v i s i o n i s the d i s c r i m i n a t i o n of f o r e i g n e r s . I f 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 i s l a i d down i n the double tax c o n v e n t i o n , we have to look i f i t i s a p r i n c i p l e f o r a c e r t a i n group of people or i f i t i s r e l a t e d to the o r i g i n of people who have to be r e s i d e n t i n one of the c o u n t r i e s of a c o n v e n t i o n . In the l a t t e r case, 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 would not h e l p f o r c i t i z e n s of one of the c o u n t r i e s of a convention i f they are r e s i d e n t i n a t h i r d c o u n t r y . A d i s c r i m i n a t i o n only e x i s t s i f a f o r e i g n c i t i z e n i s taxed more burdensome than a n a t i o n a l under the same cir c u m s t a n c e s . D i f f e r e n c e s i n t a x a t i o n based on d i s t i n c t i o n s of the l e g a l and r e a l c i rcumstances, without any regard of the n a t i o n a l i t y , are not understood as a d i s c r i m i n a t i o n . T h i s i s important f o r the d i s t i n c t i o n of the so c a l l e d "beschrankte" and "unbeschrakte" t a x a t i o n , as i t i s l a i d down i n sec. 1 para. (1), (2) and (3) of the German Income Tax A c t . 2 3 6 T h i s i s not t i e d to the person who a c t u a l l y has to pay taxes i n s i d e or o u t s i d e the c o u n t r y . A d i f f e r e n t treatment of r e s i d e n c e and non-residence i n i t s e l f does not o r i g i n a t e from the same c i r c u m s t a n c e s . T h e r e f o r e i t i s not a d i s c r i m i n a t i o n i n i t s e l f . The OECD 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 d e f i n e s c i t i z e n s not only as i n d i v i d u a l s , but a l s o as a l l l e g a l e n t i t i e s 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 the law of the r e s p e c t i v e country. T h e r e f o r e , a c r i t e r i o n f o r the " c i t i z e n s h i p " there i s the law of i n c o r p o r a t i o n . We t h e r e f o r e have a d i s c r i m i n a t i o n whenever a l e g a l e n t i t y or p a r t n e r s h i p being i n c o r p o r a t e d o u t s i d e of the country of t a x a t i o n i s taxed more burdensome than l e g a l e n t i t i e s or p a r t n e r s h i p s i n c o r p o r a t e d i n s i d e that country. But, of course here we have a l s o to compare i t s s i t u a t i o n under the same cir c u m s t a n c e s . T h i s i s l a c k i n g i f i n one case the l e g a l e n t i t y i s r e s i d e n t i n the t a x i n g country and i n the other case he i s r e s i d e n t o u t s i d e of that c o u n t r y . In the German law the d i f f e r e n c e between "beschrankter" and "unbeschrankter" t a x a t i o n i s based on t h i s d i f f e r e n c e . A c c o r d i n g to s e c t i o n one of the German Corporate Tax Act, a company i s r e s i d e n t i n Germany i f the ce n t e r f o r management or c o n t r o l i s i n s i d e Germany. Consequently the d i f f e r e n c e of "bechrankte" and "unbeschrankte" t a x a t i o n i s not a d i s c r i m i n a t i o n i n i t s e l f . In accordance with 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 , a d i s c r i m i n a t i o n i s only g i v e n i f a company which maintains a p l a c e of management w i t h i n the country and being t r e a t e d as a r e s i d e n t of that country i s t r e a t e d worse than a company which i s i n c o r p o r a t e d a c c o r d i n g to f o r e i g n law. I f cases l i k e t h i s do not happen very o f t e n , t h i s i s not an argument f o r the weakness 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 to be seen as a proof that those cases do not happen very o f t e n . 62 5.3.4 DISCRIMINATION OF BRANCHES 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 e n t e r p r i s e s has the aim to grant at l e a s t the same c o n d i t i o n s of c o m p e t i t i o n as they e x i s t f o r the r e s p e c t i v e a c t i v i t y of domestic e n t e r p r i s e s . Based on the t y p i c a l c o n d i t i o n s of double tax conventions the OECD c l a u s e says: I t i s not all o w e d t o set up more burdensome taxes f o r a branch being maintained by a company of the other country of the conve n t i o n than f o r a company being r e s i d e n t i n the t a x i n g country, i f they are doing the same kind of b u s i n e s s . T h e r e f o r e 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 i s r e l a t e d to the e n t e r p r i s e . More e x a c t l y t h i s means that i t i s r e l a t e d to the entrepreneur. He has to be a r e s i d e n t i n the country which does grant 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 under the t r e a t y . T h i s means that he must be s u b j e c t to the " u n b e s c h r a n k t e " 2 3 7 t a x a t i o n . The c i t i z e n s h i p does not matter. 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 i s d i r e c t e d towards branches. By t h i s 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 i s implemented i n the concept of double tax conventions which only a l l o w t a x i n g a f o r e i g n company i f i t does not maintain a branch i n s i d e the t a x i n g c o u n t r y . The business c a r r i e d on by the branch i s not to be taxed worse than as i f i t would be c a r r i e d on by a domestic company. T h i s p r o t e c t i o n i s d i r e c t e d a g a i n s t a more burdensome t a x a t i o n of "beschrankte" 63 a g a i n s t "unbeschrankte" t a x a t i o n . T h i s i s the b a s i c d i f f e r e n c e from a d i s c r i m i n a t i o n based on n a t i o n a l i t y or c i t i z e n s h i p which does not take the d i f f e r e n c e of "beschrankter" and "unbeschrankter" t a x a t i o n i n t o c o n s i d e r a t i o n . 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 of branches does aim at a t a x a t i o n of branches which i s e x a c t l y the same f o r the "beschrankte" t a x a t i o n as i t i s f o r the "unbeschrankte." Here we have a s i g n t h a t 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 of branches does not give favours to f o r e i g n e n t e r p r i s e s . 2 3 8 The reason i s that t h i s would mean to b u i l d up the t a x a t i o n o f . f o r e i g n e n t e r p r i s e s on the f a v o u r a b l e tax treatment of the "unbeschrankte" t a x a t i o n . The d i f f e r e n c e between "beschrankte" and "unbeschrankte" i s part of a l l modern tax systems and t h i s would not be v a l i d any l o n g e r . I t i s c l e a r that t h i s cannot be i n c l u d e d i n 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 . 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 i s r e s t r i c t e d on the p r o h i b i t i o n to tax branches more burdensome than domestic e n t e r p r i s e s doing the same b u s i n e s s . In order to d e f i n e 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 we have to d i s t i n g u i s h between the e f f e c t s of t a x a t i o n r e f e r r i n g to the branch and the business of the p l a n t on one hand and to the scope of t a x a t i o n of the e n t i t y on the other hand. T h i s i s not to be seen as a c o n t r a s t or i n a sense of a s e p a r a t i o n between the t a x a t i o n of 64 companies and i n d i v i d u a l s . 2 3 9 The t a x a t i o n of branches depends on the c h a r a c t e r i s t i c s of the company in order to determine income and c o r p o r a t e taxes. In s p i t e of t h i s , there are elements in t a x a t i o n of branches which can be compared with the elements of t a x a t i o n of income of the i n d i v i d u a l . T h i s i s expressed i n the t r a d i t i o n a l c l a u s e of the t a x a t i o n of branches a c c o r d i n g to the OECD-formula, which does compare the business c a r r i e d on by the branch to the domestic e n t e r p r i s e . But on the other hand, c o u n t r i e s are not o b l i g e d to grant the same amount as tax f r e e f o r branches and f o r f o r e i g n e n t e r p r i s e s as they do f o r the domestic companies. Th e r e f o r e , the r u l e of t a x a t i o n which has to be a p p l i e d i n a c e r t a i n case depends on the f a c t i f the branch i s s i t u a t e d i n s i d e or o u t s i d e of the area which i s covered by 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 . Not 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 are the elements of t a x a t i o n r e l a t i n g to the t a x a t i o n of the i n d i v i d u a l . Taxing somebody w i t h i n a low tax bracket a c c o r d i n g to h i s p e r s o n a l income i s n e u t r a l f o r 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 . Outside 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 there are a l l kinds of t a x a t i o n which are based on the s p e c i f i c elements of the i n d i v i d u a l as o p p o s i t e to the kind of business of the branch, even i f they do not belong to the amount of income of the taxpayer. Anyway, in order to compare t a x a t i o n we have to look at the r e s u l t of the tax p r o v i s i o n s . The t a x a t i o n of 65 a branch must not be hig h e r than the t a x a t i o n of domestic companies. D i f f e r e n t kinds of t a x a t i o n do not matter. Therefore i t i s not a d i s c r i m i n a t i o n i f the kind of t a x a t i o n of a branch d i f f e r s from the t a x a t i o n of a domestic company u n l e s s the t a x a t i o n i s more burdensome. We have to compare the t a x a t i o n of the branch and the t a x a t i o n of a domestic company, doing the same bus i n e s s . However, t h i s comparison between a branch and a domestic company i s not always p o s s i b l e because the branch i s not a l e g a l e n t i t y . As an idea we have to add the element of a separate l e g a l e n t i t y as a f i c t i o n a c c o r d i n g to the s i t u a t i o n of a f o r e i g n c o r p o r a t i o n . Therefore we have to compare a f o r e i g n company to a domestic one of the same k i n d . T h i s i s e s p e c i a l l y important f o r the c o r p o r a t e taxes. The c o r p o r a t e taxes of a domestic branch of a f o r e i g n company cannot be examined as i t can be done f o r a domestic s o l e p r o p r i e t o r s h i p having the same elements as a branch. But the t a x a t i o n of a domestic branch has to be compared with the t a x a t i o n of a domestic c o r p o r a t i o n . 5.3.5 DISCRIMINATION ACCORDING TO THE CONTROL OF CAPITAL 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 does not allow t a x i n g the domestic company more burdensome because i t s c a p i t a l does not belong t o t a l l y or p a r t l y , d i r e c t l y or i n d i r e c t l y , to persons who are r e s i d e n t s abroad. The same p r i n c i p l e does not a l l o w t a x i n g domestic companies more 66 burdensome i f they are c o n t r o l l e d by persons who are r e s i d e n t abroad. The t o p i c i s not to tax the persons h o l d i n g the shares i n the company but to tax the company i t s e l f . The f a c t t h at c a p i t a l i s coming from abroad should not be a reason f o r a more burdensome t a x a t i o n . The sense of the p r o h i b i t i o n of that kind of d i s c r i m i n a t i o n i s obvious but i t i s not very e f f e c t i v e for the tax system because that kind of d i s c r i m i n a t i o n became r a r e . 5.3.6 CONCLUSION We t h e r e f o r e can conclude: 1. 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 does commit c o u n t r i e s to an equal treatment in t a x a t i o n . 2 . The p r i n c i p l e of equal treatment has to be c o n s i d e r e d f o r companies as w e l l as f o r i n d i v i d u a l s . 3. I t a l s o commits to a comparable t a x a t i o n of r e s i d e n c y and non-residency as w e l l of Canadian c o n t r o l l e d companies and non-Canadian c o n t r o l l e d companies. 4. We s t i l l have to t r e a t branches of f o r e i g n companies o p e r a t i n g i n s i d e a country d i f f e r e n t from companies being i n c o r p o r a t e d t h e r e , but only to the extent as a d i f f e r e n t treatment of the branch i s a l o g i c a l consequence of the d i f f e r e n t l e g a l s t a t u s . Compared to a domestic company, a branch should not be taxed more burdensome. 6. CANADIAN TAXATION OF NON-RESIDENTS 2 4 0 Non-resident persons who are employed or c a r r y on business i n Canada or dispose of taxable Canadian p r o p e r t y are taxed p r i m a r i l y under Part I (sec. 2, 115 and 116 I.T.A.), whereas non-residents r e c e i v i n g income from Canada are taxed under Part XIII I.T.A. I w i l l j u s t g i v e a rough idea on Part I tax, without going i n t o too many d e t a i l s . As I a l r e a d y p o i n t e d out German n o n - r e s i d e n t s are not always s u b j e c t to Canadian t a x a t i o n , when they c a r r y out business i n Canada. Contrary to the p r o v i s i o n of sec. 2(3) I.T.A. there has to be a permanent e s t a b l i s h m e n t . Self-employed p r o f e s s i o n a l s are deemed to render t h e i r s e r v i c e s from t h e i r home country, u n l e s s there i s such permanent establishment i n the other c o u n t r y . 2 4 1 I f there i s a permanent es t a b l i s h m e n t i n Canada, business income i s sub j e c t to Canadian t a x a t i o n . Employment income i s tax a b l e a c c o r d i n g to sec. 2 ( 3 ) ( a ) , 115 I.T.A.. Non-residents are a l s o s u b j e c t to c a p i t a l gains tax on the d i s p o s i t i o n of t a x a b l e Canadian p r o p e r t y . 2 4 2 Furtheron I would l i k e to d e s c r i b e the prepayment of taxes by n o n - r e s i d e n t s , the w i t h o l d i n g tax, and the e l e c t i o n of f i l i n g a r e t u r n . 67 68 6.1 PREPAYMENT OF TAXES The most common and important case f o r the prepayment of taxes i s the d i s p o s i t i o n of r e a l e s t a t e . 2 4 3 When a non-resident d i s p o s e s of r e a l e a t a t e , he has to prepay taxes a c c o r d i n g to sec. 116 I.T.A. 2 4 4 T h i s p r o v i s i o n imposes a l i a b i l i t y f o r taxes on the purchaser, "unless a f t e r a reasonable i n q u i r y he had no reason to b e l i e v e , t h at the non-resident person was not r e s i d e n t i n Canada." 2 4 5 The other very common case f o r the prepayment of taxes i s the so c a l l e d d i v i d e n d tax c r e d i t . Assuming d i v i d e n t s to be p a i d by a Canadian company, the company has to pay taxes on d i v i d e n d s before they are p a i d to the sharehol d e r . The r e s i d e n t shareholder as w e l l as the non r e s i d e n t one w i l l r e c e i v e the d i v i d e n d from the company as w e l l as a tax c r e d i t , which may reduce the o v e r a l l Canadian tax burden up to the t o t a l of the d i v i d e n d tax c r e d i t . For non r e s i d e n t s having any Canadian income other than those d i v i d e n d s the c r e d i t i s not worth anything and he a c t u a l l y l o o ses i t . T h i s consequence of the d i v i d e n d tax c r e d i t i s not a p o l i c y a g a i n s t non r e s i d e n t s h a r e h o l d e r s , but i t r e s u l t s out of the t e c h n i c a l l i t y of the system i t s e l f . T h i s becomes obvious where non r e s i d e n t s are e l i g i b l e to use the d i v i d e n d tax c r e d i t . By the way, we f i n d the same d i f f i c u l t y i n West Germany. 69 6.2 WITHOLDING TAX In a d d i t i o n to any tax which might be l e v i e d upon a non-resident under Part I there i s a tax l e v i e d under Part XIII I.T.A. which, g e n e r a l l y speaking, i s a tax on gross amounts p a i d or c r e d i t e d by Canadians to no n - r e s i d e n t s , a r i s i n g from investments and from sources other than p e r s o n a l employment or the c a r r y i n g on of b u s i n e s s . 2 4 6 The tax i s r e q u i r e d to be w i t h e l d at source by the Canadian payor from the gross amounts p a i d or c r e d i t e d , without.deductions of expenses, i f any, and i s to be r e m i t t e d to the Receiver General of Canada as pro v i d e d i n sec. 215 I.T.A.. 2 4 7 The g e n e r a l r a t e of w i t h o l d i n g tax i n Canada i s 2 5 % . 2 4 8 In most double tax conventions i t i s reduced to 1 5 % 2 4 9 or even 1 0 % . 2 5 0 Subject to w i t h o l d i n g tax a r e : management f e e s , 2 5 1 i n t e r e s t s , 2 5 2 e s t a t e or t r u s t i n c o m e , 2 5 3 r e n t s , r o y a l t i e s , 2 5 4 timber r o y a l t i e s , 2 5 5 a l i m o n y , 2 5 6 patronage d i v i d e n d s , 2 5 7 pension b e n e f i t s , 2 5 8 Canada Pension Plan b e n e f i t s , 2 5 9 r e t i r i n g a l l o w a n c e s , 2 6 0 Supplementary Unemployment B e n e f i t Plan payments, 2 6 1 RRSP, 2 6 2 D e f e r r e d P r o f i t S h a r i n g Plan p a y m e n t s , 2 6 3 Income Averaging Annuity C o n t r a c t p a y m e n t s , 2 6 4 other annuity p a y m e n t s , 2 6 5 R e g i s t e r e d Home Ownership Savings Plan p a y m e n t s , 2 6 6 D e f e r r e d Retirement Income Fund p a y m e n t s , 2 6 7 R e g i s t e r e d Education Savings Plan p a y m e n t s , 2 6 8 Home I n s u l a t i o n or Energy Conversion G r a n t s , 2 6 9 D i v i d e n d s , 2 7 0 and other 70 forms of income as l a i d down i n sec. 212 I.T.A. The Income Tax Act allows the payment of i n t e r e s t to n o n - r e s i d e n t s f r e e of w i t h o l d i n g tax i n many c i r c u m s t a n c e s . 2 7 1 With r e s p e c t to c o r p o r a t i o n s r e s i d e n t i n Canada, there i s g e n e r a l l y no w i t h o l d i n g tax where the payor c o r p o r a t i o n i s not o b l i g e d to repay more than 25% of the p r i n c i p a l amount of the o b l i g a t i o n w i t h i n f i v e years from the date of i s s u e of the o b l i g a t i o n . 2 7 2 T h i s exemption was to e x p i r e at the end of 1985, but the 1986 budget proposed an e x t e n s i o n of t h i s exemption f o r such debt o b l i g a t i o n s i s s u e d before 1989. In a d d i t i o n , an exemption from the non-resident w i t h o l d i n g tax i s being p r o v i d e d f o r i n t e r e s t p a i d to the Bank f o r I n t e r n a t i o n a l S e t t l e m e n t s . 2 7 3 The o b l i g a t i o n to w i t h o l d the taxes i s imposed on a l l those who are going to make payments which are s u b j e c t to w i t h o l d i n g tax a c c o r d i n g to Part XIII I.T.A. I w i l l g i v e j u s t some examples: tenants have to w i t h o l d tax from rent payable to a non-resident l a n d l o r d ; banks have to w i t h o l d tax from i n t e r e s t payable to n o n - r e s i d e n t customers; customers have to w i t h o l d tax from i n t e r e s t s payable to a non-resident bank; c o r p o r a t i o n s have to w i t h o l d tax from d i v i d e n d s payable to n o n - r e s i d e n t s h a r e h o l d e r s , e t c . Where a person has f a i l e d to w i t h o l d taxes, t h a t person i s l i a b l e to pay the tax on behalf of the n o n - r e s i d e n t . 2 7 " 71 6.3 EVALUATION Both the instrument of prepayment of taxes and w i t h o l d i n g tax are t e c h n i c a l instruments to safeguard Revenue Canada a g a i n s t non-payment of taxes or, at l e a s t , a g a i n s t p o s s i b l e d i f f i c u l t i e s a r i s i n g when taxes are to be c o l l e c t e d . In i t s e l f both instruments are necessary to prov i d e an equal treatment of r e s i d e n t s and non r e s i d e n t s . While a r e s i d e n t has to pay taxes on r e a l e s t a t e t r a n s a c t i o n s ( c a p i t a l g a i n s ) , i t i s f a i r to say that non r e s i d e n t s should not have an advantage by walking away. As f a r as no c a p i t a l g a i n s tax i s to be p a i d , e.g. under the p r i n c i p a l r e s i d e n c e e x c e p t i o n , both are t r e a t e d the same way too, s i n c e the Department of N a t i o n a l Revenue i s to is s u e the s a i d c e r t i f i c a t e without any payment f o r non r e s i d e n t s as w e l l . The d i f f e r e n c e between r e s i d e n t s and non r e s i d e n t s i n re s p e c t of the tax ra t e i s based on the assumption that the non r e s i d e n t has to pay at l e a s t a minimum tax i n Canada. On the other hand i t i s to be assumed that the non r e s i d e n t i s taxed on the b a s i s of h i s world wide income i n h i s home countr y . I f those general assumptions w i l l f i t depends on the c o u n t r i e s i n v o l v e d as w e l l as on the p e r s o n a l tax s i t u a t i o n of the non r e s i d e n t taxpayer. Looking at w i t h o l d i n g taxes to be p a i d on r e n t s , a Canadian would pay taxes on those rents only i f he makes a p r o f i t . I f he runs a l o s s with h i s pr o p e r t y , he would not pay any tax on h i s income at a l l . For the non-resident the w i t h o l d i n g 72 tax i s to be c a l c u l a t e d on the gross annual income. Th e r e f o r e even 10% of the gross may e f f e c t the c a l c u l a t i o n of that p a r t i c u l a r p r o p e r t y a l o t , i f the r e n t s do not cover the expenses. Looking at West Germany, there i s no c a p i t a l gains tax to be p a i d on the d i s p o s i t i o n of r e a l e s t a t e , i f i t i s kept more than two y e a r s . 2 7 5 A prepayment of 25% c a p i t a l gains taxes t h e r e f o r e would be s i m i l a r a tax burden a Canadian would f a c e . We a l s o f i n d some strange consequences in t h i s c o n t e x t . L e t ' s take an example: An i n v e s t o r l i k e s to take up a loan i n Germany to f i n a n c e an investment i n Canada. His i n t e r e s t payment to the bank i s s u b j e c t to w i t h o l d i n g tax of 25% a c c o r d i n g to sec. 212(1)(b) I.T.A. or 15% a c c o r d i n g to A r t . 11(2) of the Canadian-German Double Tax a t i o n Convention, r e s p e c t i v e l y . T h i s a p p l i e s to loans given by any bank being a l e g a l e n t i t y o u t s i d e of Canada. If we take the Royal Bank A G 2 7 6 i n F r a n k f u r t / M a i n , West Germany, f i n a n c i n g an investment i n Canada, i n t e r e s t payments from Canada to the bank would be s u b j e c t to 15% w i t h o l d i n g tax. I n t e r e s t payments fo r a loan given f o r the same amount by the Canadian I m p e r i a l Bank of Commerce, F r a n k f u r t / M a i n , which i s only a branch of the Canadian banking c o r p o r a t i o n and not a s u b s i d i a r y , would not be s u b j e c t to any w i t h o l d i n g tax. Since the f i n a n c i n g bank has to i n c l u d e the w i t h o l d i n g tax on i n t e r e s t s i n i t s c a l c u l a t i o n , loans given by 7 3 s u b s i d i a r i e s of Canadian banks abroad f o r investments i n Canada have to be more expensive than loans given by branches of Canadian banks a b r o a d . 2 7 7 Consequently, whenever a branch of a Canadian bank abroad would change i n t o a s u b s i d i a r y , 2 7 8 the loans f o r investments i n Canada would.be more expensive than b e f o r e . However, under c e r t a i n circumstances i t i s p o s s i b l e to o b t a i n a c e r t i f i c a t e of exemption from the M i n i s t e r of N a t i o n a l Revenue a c c o r d i n g to sec. 212(14) I.T.A.. 2 7 9 I don't know the reasons f o r t h i s . One reason seems to be that f o r e i g n c r e d i t o r s should pay taxes on i n t e r e s t s d e r i v e d from Canada as domestic one have to do too. As a p r i n c i p l e t h i s i s not a bad idea, s i n c e a f o r e i g n bank doing f i n a n c i n g i n Canada by g i v i n g loans from o u t s i d e Canada would not be s u b j e c t to Canadian tax at a l l . On the other hand, any w i t h o l d i n g tax on i n t e r e s t s to be p a i d by Canadians f o r loans taken abroad i s t e c h n i c a l l y imposed on Canadians and not on the f o r e i g n c r e d i t o r . T h e r e f o r e one would ask f o r the o v e r a l l b e n e f i t f o r Canada r e s u l t i n g out of t h i s p r o v i s i o n . I t c o u l d be to promote business f o r Canadian banks and, by imposing w i t h o l d i n g tax on i n t e r e s t s to be p a i d abroad, g i v i n g i n c e n t i v e s to get f i n a n c i n g through one of the Canadian banks. In t h i s case the p r o v i s i o n would be " l e g i t i m a t e " i n terms of p r o t e c t i o n of the Canadian banks. Assuming,that s u b s i d i a r i e s of Canadian companies are supposed t o r e p a t r i a t e t h e i r p r o f i t s (as one of the 74 reasons f o r a d i f f e r e n t tax treatment f o r f o r e i g n i n v e s t o r s i n Canada was ought to be), i t i s s t i l l s u r p r i s i n g to e x p l a i n the d i f f e r e n t tax treatment of i n t e r e s t s f o r loans given by Canadian banks abroad, depending upon t h e i r l e g a l • s e t - u p . Taking the p o l i t i c a l reason of promotion and p r o t e c t i o n af Canadian banks as g i v e n , the p r o v i s i o n should exempt loans from any branch and any s u b s i d i a r y of a Canadian bank abroad from being s u b j e c t to w i t h o l d i n g tax. On the other hand, i f t h i s reason does not j u s t i f y the p r o v i s i o n , and the main reason i s to be seen as s a f e g u a r d i n g an equal t a x a t i o n of domestic loans and of i n t e r n a t i o n a l ones, a w i t h o l d i n g r a t e of 10% to 25% on i n t e r e s t s seems to high. Let us look at the t a x a t i o n of i n t e r e s t s f o r domestic l o a n s : I f one of the "Big F i v e " charges i n t e r e s t s , they are l i k e l y to r e f i n a n c e i t . In t h e i r o v e r a l l tax burden they w i l l have to pay taxes on the p r o f i t d e r i v e d from that l o a n . The same idea should be implemented f o r i n t e r n a t i o n a l loans given by banks abroad and, s i n c e the gross up between r e f i n a n c i n g and the r a t e f o r the loan i s u n l i k e l y to be 10% to 25%, but something between 1/4 and 1 l i b o r , 2 8 0 the w i t h o l d i n g tax f o r those loans should be a d j u s t e d a c c o r d i n g l y . On the other hand, comparing the tax treatment of r e s i d e n t s ' i n t e r e s t income with that of non r e s i d e n t s , the r e s i d e n t s would have to pay a tax r a t e a c c o r d i n g to the p r o g e s s i v e r a t e s t r u c t u r e , while the non r e s i d e n t s 75 are paying between 10% and 2 5 % . 2 8 1 For Germans having bank accounts i n Canada the r a t e would be 15% a c c o r d i n g to A r t . 11(2) of the Canadian-German Double Tax  Convent i o n . In t h i s case, even i f the f o r e i g n i n t e r e s t s are i n c l u d e d i n the domestic tax c a l c u l a t i o n , the German taxpayer would have to pay o n l y a r e l a t i v e l y small "gross up" on top of h i s other german taxes because of the german system of the " P r o g r e s s i o n s v o r b e h a l t . " Given the h i g h e s t tax bracket i n Germany, as a r e s u l t he would be b e t t e r o f f d e r i v i n g i n t e r s t s from Canada and paying w i t h o l d i n g tax there as w e l l as i n c l u d i n g those i n t e r e s t s and the w i t h o l d i n g tax i n h i s german income tax r e t u r n than d e r i v i n g the same amount from German sources. 2 8 2 6.4 ELECTION OF FILING A RETURN In c e r t a i n circumstances, the most important case being income from r e a l e s t a t e ( r e n t a l income), a non-resident may e l e c t to f i l e an income tax r e t u r n 2 8 3 and pay tax under Part I I.T.A. i n s t e a d of under Part XIII I.T.A. The tax i s c a l c u l a t e d as i f the taxpayer were a r e s i d e n t but without e f f e c t i n g h i s l i a b i l i t y f o r tax otherwise payable under Part I I.T.A. 2 8 4 In t h i s case a non-resident may be b e t t e r o f f i n terms of t a x e s : As a g e n e r a l r u l e i t i s cheaper f o r a non-resident to pay Part I tax than Part XIII tax, because the 25% w i t h o l d i n g tax i s c a l c u l a t e d on the gross payments or c r e d i t s without deductions f o r e x p e n s e s , 2 8 5 whereas Part 76 I tax i s c a l c u l a t e d on p r o f i t s or net e a r n i n g s . 2 8 6 I f a non-resident e l e c t s to pay taxes under Part I by f i l i n g a r e t u r n 2 8 7 the taxes w i l l be c a l c u l a t e d by the department. W i t h o l d i n g taxes a l r e a d y p a i d are to be con s i d e r e d . The taxpayer w i l l r e c e i v e a refund i f too much tax has been w i t h e l d or prepayed. So, depending on the tax s i t u a t i o n a non r e s i d e n t may be b e t t e r o f f by f i l i n g a Canadian income tax r e t u r n or by l e a v i n g i t . In most cases, where non r e s i d e n t taxpayers are d e r i v i n g rents from Canada, they are b e t t e r o f f by f i l i n g a r e t u r n . But c o n t r a r y to the t a x a t i o n of r e s i d e n t s , non-residents are not allowed to c a r r y l o s s e s forward or b a c k w a r d . 2 8 8 About the reasons being I can j u s t guess that as a kind of tax p o l i c y Revenue Canada does not l i k e to financ e low e q u i t y r e a l e s t a t e h o l d i n g s as w e l l as other investments of the same k i n d . The aspect one might be concerned about would be that non r e s i d e n t s t r y to b u i l d up an investment by saving Canadian taxes. But l o o k i n g at the s i t u a t i o n of r e s i d e n t s , one would not have any d i f f i c u l t y to al l o w to c a r r y l o s s e s forward and backward. So the only reason f o r t h i s d i s t i n c t i o n I can guess might be the e x p e c t a t i o n that non r e s i d e n t s are to be producing l o s s e s i n t h e i r books, e s c p e c i a l l y by d e p r e c i a t i o n , while there i s s t i l l some economic advantage f o r them, whereas r e s i d e n t s 77 "deserve" t h i s kind of tax r e l i e f . T herefore t h i s d i s t i n c t i o n i s " i l l i g i t i m a t e " i n the terms d e s c r i b e d be f o r e . 6.5 CONCLUSION In the o v e r a l l scheme the instruments of prepayment of taxes as w e l l as the instrument of w i t h o l d i n g tax as they are set up i n the I.T.A. f i t a need r e s u l t i n g out of t e c h n i c a l d i f f i c u l t i e s whenever non r e s i d e n t s are s u b j e c t to Canadian t a x a t i o n . Since non r e s i d e n t s are e l i g i b l e f i l i n g a r e t u r n , i n g e n e r a l they are not i n a worse p o s i t i o n than r e s i d e n t s . They are even b e t t e r o f f sometimes, because they can use the low r a t e of w i t h o l d i n g tax (compared with the Canadian 50% bracket and the German 56% bracket) to reduce t h e i r o v e r a l l tax burden. However, there are circumstances where i t i s hard to understand a d i f f e r e n t treatment as p o i n t e d out i n connection with i n t e r n a t i o n a l loans and, as I showed, there are no reasons j u s t i f y i n g i t . There i s a l s o the p r o v i s i o n not a l l o w i n g to c a r r y l o s s e s forward or backward f o r non r e s i d e n t s . T h i s p r o v i s i o n i s not j u s t i f i e d e i t h e r . 7. NON-CANADIAN CONTROLLED COMPANIES There i s a d i f f e r e n c e between Canadian and non-Canadian c o n t r o l l e d companies i n the Canadian Income  Tax A c t . A non-Canadian c o n t r o l l e d c o r p o r a t i o n i s d e f i n e d i n sec. 125(7)(b) I.T.A. 2 8 9 as a c o r p o r a t i o n where the m a j o r i t y of shares i s owned by n o n - r e s i d e n t s . T h e r e f o r e a 50:50 ownership between r e s i d e n t s and n o n - r e s i d e n t s means that there i s s t i l l a Canadian c o n t r o l l e d p r i v a t e company (CCPC), wheras a 49:51 ownership i n favour of non- r e s i d e n t s makes the company a non-Canadian c o n t r o l l e d p r i v a t e company (NCCPC). Canadian and non-Canadian-c o n t r o l l e d companies are t r e a t e d d i f f e r e n t l y i n the f o l l o w i n g areas of t a x a t i o n . 7. 1 INTERCORPORATE DIVIDENDS I n t e r c o r p o r a t e d i v i d e n d s between Canadian c o r p o r a t i o n s are t a x f r e e . 2 9 0 So i t i s common to see a flowthrough of d i v i d e n d payments between companies and no negative tax consequences are t r i g g e r e d . In the r e s u l t t h i s a l l o w s a tax d e f e r r a l up to the time when the d i v i d e n d s are e x t r a c t e d from the company. For companies, which are c o n t r o l l e d by n o n - r e s i d e n t s , no i n t e r c o r p o r a t e d i v i d e n d s can be p a i d t a x f r e e and there i s no way of tax d e f e r r a l by paying d i v i d e n d s out to the non-Canadian c o n t r o l l e d company. The same s i t u a t i o n i s given f o r i n t e r c o r p o r a t e d i v i d e n d s to be p a i d by a Canadian company to a f o r e i g n company. The reason f o r the d i s t i n c t i o n between the 78 79 t a x a t i o n of i n t e r c o r p o r a t e d i v i d e n d s between Canadian and f o r e i g n companies i s obvious, s i n c e d i v i d e n d payments to a f o r e i g n c o r p o r a t i o n do not have any p o s i t i v e impact on investment i n Canada and the f i n a n c i a l s i t u a t i o n of no Canadian c o r p o r a t i o n i s improved. T h e r e f o r e t h e r e i s no reason to give a tax d e f e r r a l on those d i v i d e n d s . A reason f o r the d i s t i n c t i o n between Canadian c o n t r o l l e d and non-Canadian c o n t r o l l e d c o r p o r a t i o n s i s not that easy to see, s i n c e both c o r p o r a t i o n s are i n c o r p o r a t e d i n Canada, have the c e n t r e of t h e i r management and c o n t r o l i n Canada and the tax d e f e r r a l by a l l o w i n g t a x f r e e i n t e r c o r p o r a t e d i v i d e n d s does a c t u a l l y improve the f i n a n c i a l s i t u a t i o n of those companies i n Canada. 7.2 SMALL BUSINESS Only the Canadian c o n t r o l l e d companies are e l i g i b l e f o r a f a v o u r a b l e tax treatment such as the small b u s i n e s s a b a t e m e n t . 2 9 1 In g e n e r a l terms the small business abatement e f f e c t s the f i r s t $200,000 of net income from a Canadian 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 a c t i v e business as s p e c i f i e d i n sec. 125 I.T.A., reducing the tax on t h i s amount to about 2 5 % . 2 9 2 T h i s f a v o u r a b l e tax treatment was r e s t r i c t e d to " a c t i v e " b u s i n e s s e s only before January 1, 1985. There was a l s o an o v e r a l l l i m i t of Can $1,000,000 accumulated p r o f i t s i n order to l i m i t tax b e n e f i t s to s m a l l companies. The p o l i c y was to h e l p them b u i l d up t h e i r 80 b u s i n e s s , and the accumulative c a p i t a l account was to implement a f i x e d l i m i t f o r those hidden s u b s i d i e s . Over the years a l l kinds of p r o f e s s i o n a l s , e s p e c i a l l y lawyers, CA's, p h y s i c i a n s and other s e l f employed persons not c a r r y i n g out an a c t i v e business, s t a r t e d to set up management companies p r o v i d i n g them with some kind of s e c r e t a r i a l s e r v i c e s e t c . i n order to q u a l i f y f o r the tax b e n e f i t s under the small business abatement. Even people d e a l i n g i n r e a l e s t a t e c o u l d s p l i t t h e i r income i n t o t h e i r "normal" income which was taxed at the normal r a t e and up to Can $200,000 r e s u l t i n g out of an a c t i v e b u s i n e s s , set up i n the manner that I j u s t e x p l a i n e d , were taxed o n l y with h a l f the r a t e . On an income range of t o t a l Can $300,000 p.a. t h e r e f o r e the f i r s t Can $200,000 were taxed i n B.C. only with now 27%, and only f o r the remaining Can $ 100,000 the top marginal r a t e of now 50% were a p p l i e d . Only the accumulative c a p i t a l account was l i m i t i n g t h i s scheme, but the c a l c u l a t i o n was r a t h e r time consuming, not c l e a r i n p r a c t i c e and f o r r e a l small businesses which never made much p r o f i t i t was questioned i f i t was a p p r o p r i a t e at a l l . To make a long s t o r y s h o r t , in the 1985 budget the Canadian government gave up on the formal r e s t r i c t i o n of the abatement, which never worked, and s i n c e January 1, 1985 almost everybody i s e l i g i b l e f o r the s m a l l b u s i n e s s abatement i f he r e c e i v e s income from a Canadian c o n t r o l l e d p r i v a t e company. The accumulative c a p i t a l account was dropped, and thousands 81 of medical 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 , surgeons, d e n t i s t s took p l a c e i n 1985 i n order to q u a l i f y f o r the abatement. Now we f i n d , that people who are u s u a l l y t a x a b l e at the top marginal r a t e , are r e c e i v i n g tax b e n e f i t s and are only taxed at h a l f the r a t e f o r the f i r s t Can $200,000 each year. So the o b j e c t i v e of the small business abatement to all o w growth f o r s m a l l Canadian businesses changed to a gene r a l tax b e n e f i t f o r the f i r s t Can $200,000 p.a., i f there i s any chance to i n c o r p o r a t e . 2 9 3 And i f there are chances to get some f a m i l i y members i n v o l v e d i n the company, t h i s f a v o u r a b l e tax r a t e might be a p p l i e d f o r Can $400,000 , Can $600,000 or even higher amounts every year f o r a f a m i l y u n i t . In order to keep up the idea that there should be at l e a s t some l i n k between the economic b e n e f i t out of the op e r a t i o n and the tax b e n e f i t , some minor r e s t r i c t i o n s e x i s t . As an example f o r an investment c o r p o r a t i o n there i s only an abatement, i f there are f i v e employees. For f u r t h e r d e t a i l s I w i l l r e f e r to sec. 125 and the f o l l o w i n g s e c t i o n s I.T.A. 7.3 THIN CAPITALIZATION Under the t h i n c a p i t a l i z a t i o n r u l e s i n t e r e s t payable on debts to non-resident shareholders i s d i s a l l o w e d as a deduction f o r Canadian tax purposes to the extent that i t r e l a t e s to the debt which exceeds three times the sha r e h o l d e r s ' e q u i t y of the Canadian company. 2 9" Sec. 82 18(4) I.T.A. r e s t r i c t s the i n t e r e s t expense deduction which would otherwise be allowed where the g r e a t e s t amount of the debts owing by a c o r p o r a t i o n i n the year to ' s p e c i f i e d n o n - r e s i d e n t s ' exceeds three times the s h a r e h o l d e r s ' e q u i t y . 2 9 5 Such s p e c i f i e d n o n - r e s i d e n t s are d e f i n e d to be those p e r s o n s 2 9 6 who are shareholders i n the c o r p o r a t i o n and who, e i t h e r alone or with persons with whom they do not d e a l at arm's l e n g t h , own at l e a s t 25% of any c l a s s of the i s s u e d c a p i t a l of the c o r p o r a t i o n and other n o n - r e s i d e n t s who do not d e a l at arm's l e n g t h with such s h a r e h o l d e r s . T h i s ' t h i n c a p i t a l i z a t i o n ' i s l i m i t e d to a p r o h i b i t i o n of deductions of i n t e r e s t and does not go f u r t h e r to a s s i m i l a t e p r i n c i p a l repayments to d i v i d e n d s . The c a l c u l a t i o n of the i n t e r e s t d i s a l l o w a n c e may be expressed by the f o l l o w i n g formula: (a/b)c=d where: a=greatest amount ou t s t a n d i n g to s p e c i f i e d n on-residents minus t h r e e times e q u i t y b=greatest amount outst a n d i n g to 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 or payable on debts owing to n o n - r e s i d e n t s d = i n t e r e s t d i s a l l o w a n c e Only i n t e r e s t bearing debt i s taken i n t o account i n the c a l c u l a t i o n of the amount of the i n t e r e s t d i s a l l o w a n c e . 2 9 7 83 Speaking f r a n k l y , I do not know the reasons f o r the t h i n c a p i t a l i z a t i o n r u l e s . I c o u l d imagine that the r e s t r i c t i o n of i n t e r e s t expense d e d u c t i o n was introduced i n order to prevent low e q u i t y f i n a n c i n g where " s p e c i f i e d n o n - r e s i d e n t s " are shareholders of companies and to dis c o u r a g e non-resident s h a r e h o l d e r s from e x t r a c t i n g p r o f i t s out of a c o r p o r a t i o n i n terms of i n t e r e s t s i n s t e a d i n terms of d i v i d e n d s . Apart from the c o n s i d e r a t i o n that c o r p o r a t e f i n a n c i n g by sha r e h o l d e r s ' loans does not give as much s e c u r i t y f o r c r e d i t o r s than e q u i t y f i n a n c i n g and that i n g e n e r a l there i s a higher r i s k of i n s o l v e n c y , o b v i o u s l y income i n form of i n t e r e s t s i s a guaranteed r e t u r n f o r the shareholder and t h e r e f o r e a chance to e x t r a c t moneys out of the company even i f no or low p r o f i t s are made. The shareholder w i l l be taxed on h i s i n t e r e s t - i n c o m e i n terms of w i t h o l d i n g tax, 2 9 8 whereas d i v i d e n d s would be taxed at the company's l e v e l as a l l other d i v i d e n d s . To d i s a l l o w the deduction of i n t e r e s t s h i t s the company, the w i t h o l d i n g tax e f f e c t s the s h a r e h o l d e r . The reason I might guess f o r implementing the t h i n c a p i t a l i z a t i o n r u l e s on top of the Part XIII tax i s to b u i l d up d i s i n c e n t i v e s f o r non-resident shareholders' l o a n s . Compared to r e s i d e n t s h a r e h o l d e r s ' loans the s i t u a t i o n of low e q u i t y f i n a n c i n g seems to be the same, as w e l l as the guaranteed r e t u r n . A reason f o r the d i s t i n c t i o n might be the assumption that n o n - r e s i d e n t i n v e s t o r s always l i k e to e x t r a c t and 84 r e - p a t r i a t e as much money from Canadian companies as they c a n . 2 9 9 But even i f they would do so, the w i t h o l d i n g tax and the t a x a t i o n of d i v i d e n d s would seem to be a p p r o p r i a t e . For an assumption t h a t non-residents are l i k e l y to e x t r a c t moneys i n terms of guaranteed i n t e r e s t s v o l u n t a r y by pushing (simulated) loans and i n t e r e s t payment over an economic sound l i m i t , there i s no i n d i c a t i o n . And as I f e e l , n o n-resident i n v e s t o r s as w e l l as r e s i d e n t ones are i n t e r e s t e d i n a h e a l t h y p r o f i t of the company. As I do not see any other negative i n d i c a t i o n s of non-resident s h a r e h o l d e r s ' loans c o n t r a s t i n g r e s i d e n t s h a r e h o l d e r s ' loans I do not see much of a d i f f e r e n c e f o r the Canadian economy i f they are e x t r a c t i n g p r o f i t s by d i v i d e n d s or by i n t e r e s t s . 7.4 INVESTMENT THROUGH A CORPORATION Another issue i s the t a x a t i o n of investment of non-Canadian c o n t r o l l e d companies. P r i v a t e c o r p o r a t i o n s are s u b j e c t to tax at maximum r a t e on t h e i r worldwide "investment income," comprising non-dividend p r o p e r t y income and taxable c a p i t a l g a i n s . But then, under sec. 129 I.T.A. one s i x t h of the c o r p o r a t i o n ' s Canadian investment i n c o m e 3 0 0 i s refunded to the c o r p o r a t i o n when i t pays taxable d i v i d e n d s . The same goes f o r f o r e i g n investment i n c o m e . 3 0 1 P r i o r to 1980, a l l p r i v a t e c o r p o r a t i o n s were e n t i t l e d to the refundable tax i n resp e c t of t h e i r 85 investment income. A f i r s t l i m i t a t i o n was introduced i n October of 1973, whereby c o r p o r a t i o n s other than 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 c o r p o r a t i o n s were denied any refundable tax i n r e s p e c t of income from r e a l p r o p e r t y f o r t a x a t i o n years commenced a f t e r 1979. F i n a l l y as a r e s u l t of the November 12, 1981 budget, for t a x a t i o n years commenced a f t e r that date, investment income no longer "earns" refundable tax u n l e s s the c o r p o r a t i o n was 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 c o r p o r a t i o n throughout the r e l e v a n t t a x a t i o n year. Assuming a c o r p o r a t e tax r a t e of 50%, t h i s l i m i t a t i o n had the e f f e c t of i n c r e a s i n g the Canadian e f f e c t i v e c o r p o r a t e tax r a t e from 33-1/3% to 50%. In a d d i t i o n , the Canadian w i t h o l d i n g tax a p p l i e s upon the d i s t r i b u t i o n of the c o r p o r a t i o n ' s a f t e r - t a x income to i t s non-resident s h a r e h o l d e r s i n the form of taxable d i v i d e n d s . Thus, the amendment has e f f e c t i v e l y i n c r e a s e d the o v e r a l l Canadian r a t e of tax on investment income from 50% to 62.5% i n the absence of any tax t r e a t y , 3 0 2 and from 43-1/3% to 57.5% i n s i t u a t i o n s where a t r e a t y reduces the w i t h o l d i n g tax to 15%. For example, these r a t e s apply with respect to the net r e n t a l income from Canadian r e a l e s t a t e which a non-resident holds through a Canadian c o r p o r a t i o n . By c o n t r a s t , i f the non-resident h o l d s the property d i r e c t l y and e l e c t s to pay tax i n Canada on h i s net r e n t a l income pursuant to sec. 216 I.T.A., the Canadian tax i s o n l y 46% 86 i n the case of a c o r p o r a t i o n , and a maximum of 50% i n the case of an i n d i v i d u a l . 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 d i v i d e n d account" to which i s c r e d i t e d the other (non-taxable) one-half of c a p i t a l gains r e a l i z e d by i t . The p r i v a t e c o r p o r a t i o n may then, upon making the appropriate e l e c t i o n , declare and pay a " c a p i t a l d i v i d e n d " from such account. C a p i t a l dividends are not included i n the income of a resident Canadian shareholder and are t h e r e f o r e not subject to tax. However, non-resident 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 for w i t h o l d i n g tax thereon, j u s t as for taxable dividends. I f i n s t e a d , the non-resident were to use a Canadian p r i v a t e c o r p o r a t i o n to hold the property, taxable c a p i t a l gains r e a l i z e d by that c o r p o r a t i o n would be t r e a t e d as investment income. Not only would he s u f f e r Canadian tax at higher rates on such taxable c a p i t a l g a i n s , 3 0 " but he would a l s o become l i a b l e to the Canadian w i t h o l d i n g tax of 25% or 15%, 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 the non-taxable one-half of the c a p i t a l gains by way of d i v i d e n d s . In the absence of any t r e a t y , the o v e r a l l Canadian tax burden now i s 43.75% of the t o t a l c a p i t a l g a i n . 3 0 5 Where there i s a t r e a t y rate of 15% 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 g a i n . 3 0 6 87 7.5 OIL AND GAS As I pointed out before, e s p e c i a l l y i n the area of t a x a t i o n for o i l and gas companies the Canadian government t r i e d to give i n c e n t i v e s for Canadians. Therefore numereous tax 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 , are granted 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 undertakings. I t would be to f a r for the purpose of t h i s t h e s i s to go i n t o the t e c h n i c a l d e t a i l s , 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 to see the concept of t a x a t i o n p o l i c y for o i l and gas, and to r e a l i z e the economical and p o l i t i c a l background as I explained i t for t h i s area of the Canadian economy. 3 0 7 7.6 EVALUATION OF THE TAXATION OF NON-CANADIAN CONTROLLED  COMPANIES In order to evaluate the t a x a t i o n of non-Canadian c o n t r o l l e d companies I would l i k e to r e f e r to the d i f f e r e n t areas of t a x a t i o n mentioned above and to compare the circumstances for Canadian and non-Canadian c o n t r o l l e d companies. As we could see there i s a t o t a l l y d i f f e r e n t s i t u a t i o n f o r i n t e r c o r p o r a t e dividends flowing between Canadian companies compared to the payment of dividends from a Canadian to 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 co r p o r a t i o n i s given some tax d e f e r r a l i n order to 88 improve the f i n a n c i a l s i t u a t i o n . I n the second case the moneys are p a i d abroad and do not have any p o s i t i v e stimulus on investment i n Canada. Therefore i t i s l e g i t i m a t e to t r e a t both cases d i f f e r e n t i n t a x a t i o n . Comparing i n t e r c o r p o r a t e d i v i d e n d payments between Canadian and non Canadian c o n t r o l l e d companies there i s no d i f f e r e n c e , s i n c e i n both of those cases the tax d e f e r r a l i s advantageous f o r a Canadian company and a p o s i t i v e impact w i l l be achieved on the f i n a n c i a l s i t u a t i o n , a l l o w i n g to s t i m u l a t e business a c t i v i t y . For the purpose of i n t e r c o r p o r a t e d i v i d e n d t a x a t i o n , to a l l o w a tax d e f e r r a l f o r Canadian companies and to improve t h e i r f i n a n c i a l s i t u a t i o n , i t does not make a d i f f e r e n c e i f the Canadian company i s a c t u a l l y c o n t r o l l e d by Canadians or not. T h e r e f o r e the d i s t i n c t i o n i n t a x a t i o n of i n t e r c o r p o r a t e d i v i d e n d s f o r Canadian and non-Canadian c o n t r o l l e d companies i s not j u s t i f i e d and the d i s c r i m i n a t i o n of non-Canadian c o n t r o l l e d companies i s i l l i g i t i m a t e . For a d i f f e r e n t treatment of Canadian and non-Canadian companies i n the area of small b u s i n e s s e s there were sound reasons when the p r o v i s i o n s were implemented. Over the years the t a x a t i o n p o l i c y f o r s m a l l businesses i n c l u d e d not only low bracket and low income businesses, but the s m a l l business abatement was changed towards a tax s h e l t e r f o r the f i r s t Can $200,000 p.a. f o r almost everybody. Even i f the s i t u a t i o n f o r Canadian 89 c o n t r o l l e d c o m p a n i e s was somehow d i f f e r e n t some y e a r s a g o , now i t i s n o t d i f f e r e n t t o t h e s i t u a t i o n o f n o n - C a n a d i a n c o n t r o l l e d c o m p a n i e s . T h e r e f o r e i t i s n o t l o n g e r j u s t i f i e d t o r e s t r i c t 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 o n l y t o 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 c o m p a n i e s . R e f e r r i n g t o t h e t h i n c a p i t a l i z a t i o n r u l e s t h e f a c t u a l c i r c u m s t a n c e s o f l o w e q u i t y f i n a n c i n g a n d t h e d e d u c t i o n o f s h a r e h o l d e r s ' l o a n i n t e r e s t s a r e t h e same f o r C a n a d i a n a nd n o n - C a n a d i a n c o n t r o l l e d c o m p a n i e s . S i n c e t h e payment o f i n t e r e s t s t o n o n - r e s i d e n t s h a r e h o l d e r s i s s u b j e c t t o w i t h o l d i n g t a x a n d t h e payment o f t h o s e t a x e s i s g u a r a t e e d , t h e r e i s no r e a s o n t o l i m i t n o n - r e s i d e n t s h a r e h o l d e r s ' l o a n i n t e r e s t d e d u c t i o n on t o p o f i t . T h e r e f o r e t h e t h i n c a p i t a l i z a t i o n r u l e s a r e d i s c r i m i n a t i n g n o n - r e s i d e n t s h a r e h o l d e r s ' l o a n s a n d e f f e c t n o n - C a n a d i a n c o n t r o l l e d c o m p a n i e s w i t h o u t a l e g i t i m a t e r e a s o n . I f i n v e s t m e n t s a r e u n d e r t a k e n by n o n - r e s i d e n t s t h r o u g h a C a n a d i a n c o r p o r a t i o n , d i s a d v a n t a g e s a c c u m u l a t e t o a mounts w h i c h work 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 1/3, w h e r a s 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 r e s i d e n t s . T h i s n e g a t i v e i m p a c t c a n be e x p l a i n e d by t h e s y s t e m o f t h e d i v i d e n d t a x c r e d i t i n r e s p e c t t o n o n - r e s i d e n t s up t o a c e r t a i n d e g r e e , by t h e t r i g g e r f o r w i t h o l d i n g t a x up t o a n o t h e r d e g r e e , b u t t o some d e g r e e by r e s e n t m e n t a g a i n s t f o r e i g n i n v e s t m e n t . I t i s a p p r o p r i a t e t o a d j u s t t h o s e r u l e s , l e a v i n g no d i f f e r e n t 90 treatment other than the ones which are necessary because of t e c h n i c a l reasons as d e s c r i b e d i n chapter 4 and 5. In the area of o i l and gas the Canadian government implemented government a i d i n t o the tax law, g i v i n g s u b s i d i e s to Canadian o i l and gas companies and to promote e x p l o r a t i o n and e x p l o i t a t i o n of n a t u r a l r e s o u r c e s . To r e s t r i c t s u b s i d i e s to domestic companies i s one of the common p r i n c i p l e s of economic p o l i c y i n every country. Here the tax b e n e f i t s are not r e s t r i c t e d o n l y to Canadian c o r p o r a t i o n s , but to Canadian c o n t r o l l e d c o r p o r a t i o n s . Looking at t h i s d i s t i n c t i o n , i t might be d o u b t f u l what the reasons f o r the d i s t i n c t i o n are and i f they j u s t i f y a d i f f e r e n t set of r u l e s i n tax law..As we saw b e f o r e , 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 i n tax law does not allow a d i f f e r e n t treatment of companies only because of the reasons that the s h a r e h o l d e r s are n o n - r e s i d e n t s . A l i m i t a t i o n of tax b e n e f i t s to Canadian c o n t r o l l e d companies i n the area of o i l and gas which i s i n the same f a c t u a l s i t u a t i o n as a non-Canadian c o n t r o l l e d o i l and gas company i s not based on a reason other than d i s c r i m i n a t i o n . T h e r e f o r e i t i s i l l i g i t i m a t e . 3 0 8 I t i s t h e r e f o r e concluded that the d i s c r i m i n a t i n g t a x a t i o n of non-Canadian c o n t r o l l e d companies i s i l l i g i t i m a t e , i f there are not d i f f e r e n t c i r c u m s t a n c e s a l l o w i n g f o r d i f f e r e n t tax treatment i n a p a r t i c u l a r case. 8. NON-RESIDENT-OWNED INVESTMENT CORPORATION A non-resident-owned investment c o r p o r a t i o n (NRO) i s d e f i n e d i n sec. 248(1), I33(8)(d) I.T.A. as a c o r p o r a t i o n which f u l f i l l s the f o l l o w i n g requirements: I t has to be i n c o r p o r a t e d i n Canada, must have been an NRO c o n t i n u o u s l y from June 18, 1971 or, i f i n c o r p o r a t e d l a t e r , from i t s i n c o r p o r a t i o n u n t i l the end of the r e l e v a n t t a x a t i o n year and must have made an e l e c t i o n as a NRO. A l l i s s u e d shares, a l l debentures, and other funded indebtedness must be b e n e f i c i a l l y owned by n o n - r e s i d e n t s , by t r u s t e e s f o r the b e n e f i t of n o n - r e s i d e n t persons or t h e i r unborn i s s u e s , or owned by a NRO. The income of a NRO may only d e r i v e from the ownership of or t r a d i n g or d e a l i n g i n bonds, shares, debentures, mortgages, b i l l , or notes; l e n d i n g money, r e n t s , h i r e of c h a t t e l s , c h a r t e r p a r t y fees or renumerations, a n n u i t i e s , r o y a l t i e s , but only up to the maximum of 10% of the t o t a l gross revenue; i n t e r e s t s or d i v i d e n d s ; e s t a t e s or t r u s t s , or d i s p o s i t i o n of c a p i t a l p r o p e r t y . A c c o r d i n g to sec. 134 I.T.A. a NRO i s deemed not to be a Canadian or p r i v a t e c o r p o r a t i o n . G e n e r a l l y , an NRO pays a 25% r a t e of tax. T h i s tax i s refunded to the NRO when i t pays d i v i d e n d s and the d i v i d e n d s i n t u r n are s u b j e c t to w i t h o l d i n g tax under 91 92 Part XIII I.T.A. If the r e c i p i e n t of the d i v i d e n d s i s r e s i d e n t i n a t r e a t y country, the w i t h o l d i n g tax on the d i v i d e n d s w i l l be reduced to the t r e a t y r a t e , g e n e r a l l y 15%. In these circumstances, u n l e s s an NRO's income i s d i s t r i b u t e d i n the year i t i s earned by way of d i v i d e n d s , the r e s u l t i s an immediate 25% tax r a t e on types of income ( i . e . , i n t e r e s t , r e n t a l s , r o y a l t i e s , d i v i d e n d s ) which, i f p a i d d i r e c t l y to the non-resident shareholder of the NRO, would be s u b j e c t to a lower r a t e of Canadian tax. One of the purposes of non-resident-owned investment c o r p o r a t i o n s should be to o f f e r an a c c e p t a b l e degree of tax n e u t r a l i t y t o a non-resident wishing to h o l d investments through a Canadian c o r p o r a t i o n as compared to h o l d i n g those investments d i r e c t l y . Under sec. 212(1)(b) I.T.A., a non-resident may r e c e i v e c e r t a i n i n t e r e s t payments f r e e of Canadian w i t h o l d i n g tax. I f such i n t e r e s t payments are r e c e i v e d by an NRO, they are s u b j e c t to a 25% tax. A n o n - r e s i d e n t i s not s u b j e c t to tax, i n t e r a l i a , on c a p i t a l g a i n s r e a l i z e d with respect to c a p i t a l p r o p e r t y not s i t u a t e d i n Canada. S i m i l a r l y , an NRO i s not s u b j e c t to tax on such c a p i t a l g a i n s . However, d i s t r i b u t i o n of such c a p i t a l gains by an NRO by way of d i v i d e n d s r e s u l t s i n Canadian w i t h o l d i n g t a x . 3 0 9 T h e r e f o r e non-resident-owned investment c o r p o r a t i o n s are not a u s e f u l v e h i c l e f o r investment and are not o f t e n 93 used. S i n c e the concept of t a x a t i o n of non-resident owned investment c o r p o r a t i o n s was planned to o f f e r an a c c e p t a b l e degree of tax n e u t r a l i t y and as a tax n e u t r a l i t y as f o r C a n a d i a n - c o n t r o l l e d companies i s not a c h i e v e d , 3 1 0 those p r o v i s i o n s j u s t do not f i t the idea behind them, we can ne g l e c t them f o r the e v a l u a t i o n of l e g i t i m a t e or i l l i g i t i m a t e d i s c r i m i n a t i o n . Saying i t more i n d e t a i l , the concept was proper and l e g i t i m a t e because i t was intended to implement an equal treatment f o r equal c i r c u m s t a n c e s . But as i t i s now, the a c t u a l t a x a t i o n of non-resident owned investment c o r p o r a t i o n s i s i l l e g i t i m a t e . Implementing the goals of those p r o v i s i o n s i n t o a t e c h n i c a l proper l e g i s l a t i o n would f i t the i n t e n t i o n of the l e g i s l a t o r and e l i m i n a t e the d i s c r i m i n a t i o n . 9. FOREIGN COMPANIES OPERATING IN CANADA (BRANCH TAX) Part XIV I.T.A. p r o v i d e s f o r an a d d i t i o n a l tax on c o r p o r a t i o n s , other than Canadian 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 C a n a d a . 3 1 1 The purpose of sec. 219 I.T.A. i s to impose a s p e c i a l tax on the p r o f i t s d e r i v e d by non-resident c o r p o r a t i o n s 3 1 2 from the c a r r y i n g on of business through a branch i n s t e a d of a s u b s i d i a r y c o r p o r a t i o n . The tax so imposed i s roughly e q u i v a l e n t to the tax that would be payable under Part XIII I.T.A. i f the o p e r a t i o n s i n Canada had been conducted through a Canadian s u b s i d i a r y and i f the s u b s i d i a r y had returned a l l i t s net p r o f i t s 3 1 3 to i t s parent company abroad in the form of d i v i d e n d s . 3 1 " The branch tax i s normally thought of i n the context of n o n - r e s i d e n t c o r p o r a t i o n . However, Part XIV I.T.A. i s a p p l i c a b l e to a l l c o r p o r a t i o n s other than Canadian c o r p o r a t i o n s , and i t may t h e r e f o r e apply to some r e s i d e n t c o r p o r a t i o n s . S p e c i f i c a l l y , a c o r p o r a t i o n i n c o r p o r a t e d i n a f o r e i g n j u r i s d i c t i o n but r e s i d e n t i n Canada c o u l d be l i a b l e f o r branch tax i f i t has not been c o n t i n u o u s l y r e s i d e n t i n Canada s i n c e June 18, 1 9 7 1 . 3 1 5 The r a t e of tax payable i s 2 5 % . 3 1 6 The amount on which the branch tax i s computed depends on whether the non-Canadian c o r p o r a t i o n was or was not r e s i d e n t i n Canada d u r i n g the y e a r . 3 1 7 No branch tax under Part XIV I.T.A. i s payable by a branch of a c o r p o r a t i o n 3 1 8 which i s i n the t r a n s p o r t a t i o n 94 95 b u s i n e s s , 3 1 9 i n c o m m u n i c a t i o n s , 3 2 0 i n the mining of o r e , 3 2 1 or i s a non-resident insurance company. 3 2 2 The i n t e n t i o n of the branch tax i s to ensure that approximately the same o v e r a l l Canadian tax i s e l i g i b l e whether a non-resident c a r r i e s on business i n Canada through a Canadian c o r p o r a t i o n or through a Canadian b r a n c h . 3 2 3 Since d i v i d e n d s p a i d to shareholders by a n o n - r e s i d e n t c o r p o r a t i o n c a r r y i n g on business i n Canada are not s u b j e c t to the w i t h o l d i n g tax p r o v i s i o n s of the A c t , even though the income from which the d i v i d e n d i s p a i d i s earned i n Canada, there would, without f u r t h e r tax l i a b i l i t y , be a decided advantage i n c a r r y i n g on b u s i n e s s i n Canada by means of a branch r a t h e r than a s u b s i d i a r y . T h e r e f o r e , the Act p r o v i d e s that where a non-Canadian c o r p o r a t i o n c a r r i e s on business i n Canada, i t i s r e q u i r e d to pay a tax of 25% on what may g e n e r a l l y be d e s c r i b e d as i t s a f t e r tax t a x a b l e income earned i n Canada f o r that t a x a t i o n y e a r . 3 2 " T h i s tax i s i n a d d i t i o n to the normal Canadian c o r p o r a t e tax that would be payable. The r a t e of branch tax i s normally reduced to the same r a t e a p p l i c a b l e to the payment of d i v i d e n d s with r e s p e c t to c o r p o r a t i o n s which are r e s i d e n t s of c o u n t r i e s with which Canada has entered i n t o a comprehensive tax t r e a t y . The e f f e c t of the i m p o s i t i o n of t h i s branch tax, t h e r e f o r e , i s to render the t o t a l tax on income earned in Canada by a non-Canadian c o r p o r a t i o n approximately the same as the tax that would be payable i f that income had 96 been earned by a Canadian c o r p o r a t i o n , tax pa i d thereon and then d i s t r i b u t e d by way of d i v i d e n d to the f o r e i g n s h a r e h o l d e r . However, by imposing a branch tax on c u r r e n t income, whether or not d i s t r i b u t e d back to the head o f f i c e , the u t i l i z a t i o n of a Canadian s u b s i d i a r y may be more a t t r a c t i v e s i n c e the w i t h o l d i n g tax on the d i v i d e n d d i s t r i b u t i o n s can be postponed u n t i l such time as d i v i d e n d s are a c t u a l l y p a i d . Since the Canadian branch tax i s based on the u n r e a l i s t i c assumption that a l l p r o f i t s are going to be cashed out each year, i t i s more expensive than the Canadian taxes imposed on Canadian s u s i d i a r i e s . 3 2 5 Another reason, why Canada imposes d i s i n c e n t i v e s f o r branches of f o r e i g n companies i s the assumption that s u b s i d i a r i e s , i n c o r p o r a t e d i n Canada and t h e r e f o r e being a Canadian l e g a l e n t i t y , would be e a s i e r to c o n t r o l . Each Canadian company under the CBCA 3 2 6 has to have a m a j o r i t y of Canadian c i t i z e n s as d i r e c t o r s . For a B.C. company 3 2 7 at l e a s t one d i r e c t o r has to be a r e s i d e n t of B . C . 3 2 8 and the m a j o r i t y of the d i r e c t o r s s h a l l be persons o r d i n a r i l y r e s i d e n t i n C a n a d a . 3 2 9 Even i f i t seems obvious that the Canadian i n f l u e n c e i n Canadian s u b s i d i a r i e s would be stronger than i n branches of f o r e i g n companies, i n my understanding, "Canadian i n f l u e n c e " depends more on the f a c t u a l set up than on the l e g a l s t r u c t u r e . The way most i n t e r n a t i o n a l companies operate today i s more l i k e l y to determine the d e c i s i o n s f o r the whole company by 97 d e c i s i o n s of the c e n t r a l board of the mother company or the d i v i s i o n a l h e a d q u a r t e r s . 3 3 0 Disencouragement of having Canadian branch o p e r a t i o n s seems to have worked p r e t t y w e l l as an i n c e n t i v e to e s t a b l i s h a Canadian s u b s i d i a r y . S t i l l , where the Canadian o p e r a t i o n i s a s a l e s department of a f o r e i g n company, we would have to compare the disadvantage of the w i t h o l d i n g tax a g a i n s t the advantage of the s u b s i d i a r y tax-treatment over the branch tax-treatment. 9.1 EVALUATION OF THE BRANCH TAX The o p e r a t i o n of branches of f o r e i g n companies i n Canada and i t s l e g a l set up i s based on a set of f a c t s which are d i f f e r e n t from any o p e r a t i o n that a Canadian c o r p o r a t i o n i s determined by. The Canadian government has to ensure that p r o f i t s r e s u l t i n g from a branch o p e r a t i o n i n Canada are not t r a n s f e r r e d abroad t a x f r e e , and s i n c e payments w i t h i n the same l e g a l e n t i t y are not su b j e c t to w i t h o l d i n g tax there have to be some s p e c i a l tax p r o v i s i o n s . The i n t e n t i o n of the branch tax, as s t a t e d , was to achieve a comparable t a x a t i o n of f o r e i g n s u b s i d i a r i e s and f o r e i g n branch o p e r a t i o n s . In order to determine i f the branch tax p r o v i s i o n s are l e g i t i m a t e , we would have to compare the t a x a t i o n of domestic e n t e r p r i s e s and f o r e i g n branches i n Canada as i t turned out i n f a c t . The main d i f f e r e n c e s are, as p o i n t e d o u t , 3 3 1 98 that the branch o p e r a t i o n s are taxed on the assumption that a l l p r o f i t s are cashed out. Since t h i s does not apply i n most c i r c u m s t a n c e s , the assumption i s not r e a l i s t i c . In order to t r e a t equal as equal i t would be a p p r o p r i a t e to a d j u s t the branch tax a c c o r d i n g to the amounts p a i d from the Canadian branch to the f o r e i g n c o r p o r a t i o n or to i t s s h a r e h o l d e r s . On the other hand, t h i s would ask f o r the implementation of a kind of p a i d up c a p i t a l account f o r branches i n respect to t h e i r "income", and i t may be q u e s t i o n e d i f t h i s system i s p r a c t i c a l . As a c o n c l u s i o n , the branch tax i s j u s t i f i e d and l e g i t i m a t e because i t f o l l o w s a d i f f e r e n t l e g a l and f a c t u a l s i t u a t i o n . However, i t c o u l d be worked out i n even g r e a t e r d e t a i l i n order to get r i d of s m a l l e r anomalies. 1 0 . ECONOMIC CRITERIA FOR INVESTMENT DECISIONS When we look at the c o n s i d e r a t i o n s and the economical assumptions l e a d i n g toward the t a x a t i o n p o l i c y f o r n o n - r e s i d e n t s , NCCPC's and Canadian branches of f o r e i g n c o r p o r a t i o n s , we should have a look at the p r a c t i c a l consequences f o r investment i n Canada. Each investment d e c i s i o n has d i f f e r e n t elements: commercial, l e g a l , p o l i t i c a l , and p s y c h o l o g i c a l . I'd l i k e to t a l k about these d i f f e r e n t c r i t e r i a i n order to determine the importance of t a x a t i o n . 3 3 2 Since the tax p o l i c y i s p a r t of the g e n e r a l economic p o l i c y , t a x a t i o n of non r e s i d e n t s ' investment has to be seen i n the context of the general C a n a d i a n s i t u a t i o n . O bviously the C a n a d i a n government i n t e n d e d to i n f l u e n c e the economic behaviour by g i v i n g i n c e n t i v e s and d i s i n c e n t i v e s f o r f o r e i g n investment. For investment d e c i s i o n s t a x a t i o n i s not the most important f a c t o r . But i t i s one of the major f a c t o r s and has to be c o n s i d e r e d together with other ones. I j u s t l i k e to co n c e n t r a t e on the aspects of German investment. 1 0 . 1 ECONOMICAL CRITERIA INCLUDING TAX CONSEQUENCES FOR INVESTMENT DECISIONS IN FAVOUR OF CANADA E s p e c i a l l y f o r German investments i n Canada i t tu r n s out that under an economical p o i n t of view there are not many areas worthwhile to do business or investment i n Canada. 99 100 1 0 . 1 . 1 MAIN AREAS OF GERMAN INVESTMENT IN CANADA The German investment i n Canada i s i n g e n e r a l d i v i d e d i n t o t hree almost equal amounts: r e a l e s t a t e , manufacturing i n d u s t r y and p o r t f o l i o . 3 3 3 The p o r t f o l i o investment i s investment i n bonds and shares e t c . , but give s no a c t i v e c o n t r o l of b u s i n e s s . Investment i n the manufacturing i n d u s t r y we f i n d mainly i n the East of Canada, e s p e c i a l l y i n O n t a r i o . Real e s t a t e investment i s spread out a l l over Canada with an emphasis i n O n t a r i o and B.C. In B.C. there i s almost no manufacturing i n d u s t r y . So German investment i n B.C. i s c o n c e n t r a t e d i n r e a l e s t a t e . 3 3 4 1 0 . 2 GENERAL ECONOMIC CRITERIA AND TAX IMPLICATIONS 1 0 . 2 . 1 STABILITY Most companies p r e f e r p o l i t i c a l and economical s t a b i l i t y of the host country as f a c t o r number one f o r a d e c i s i o n of where to go ahead with d i r e c t f o r e i g n investment. T h i s i s the reason why d e s p i t e high wages and s a l a r i e s , t r a de unions and some other d i s a d v a n t a g e s 3 3 5 and together with some of the f o l l o w i n g c r i t e r i a many companies s t i l l p r e f e r investment i n North America and Europe over investment i n LDC's. Canada i s one of the p o l i t i c a l most s t a b l e c o u n t r i e s of the world. T h e r e f o r e i t q u a l i f i e s f o r investment. However, the economy i s not that s t a b l e s o m e t i m e s . 3 3 6 101 10.2.2 RESOURCES INCLUDING HUMAN RESOURCES Companies d e a l i n g with n a t u r a l resources always have to f i n d , e v a l u a t e and e x p l o i t these wherever they a r e , or more s p e c i f i c , wherever i t i s p r o f i t a b l e . Depending on the kind of re s o u r c e s i t i s l i k e l y to have at l e a s t some s o r t of p r o c e s s i n g at the l o c a t i o n of the m a t e r i a l s or nearby. So, i n my e v a l u a t i o n , these companies don't r e a l l y have a f r e e c h o i c e where they are going to do t h e i r investments. Other companies, e s p e c i a l l y those i n v o l v e d i n manufacturing and p r o c e s s i n g , have more of a ch o i c e of the l o c a t i o n of t h e i r p r o d u c t i o n . Besides the n a t u r a l r e s o u r c e s , the human resources, manpower, seem to be the most dete r m i n i n g f a c t o r . The higher the s k i l l s and the e d u c a t i o n 3 3 7 of the people are, the e a s i e r and the more r e l i a b l e the p r o d u c t i o n can take p l a c e . 3 3 8 Canada has a l o t of n a t u r a l r e s o u r c e s . 3 3 9 The human resource s i t u a t i o n i s good. People have a good e d u c a t i o n , i n g e n e r a l . P r o f e s s i o n a l s k i l l s are at a f a i r l y h i g h standard, and the work m e n t a l i t y i s not bad e i t h e r . On the other hand, wages and s a l a r i e s are f a i r l y h i g h and, e s p e c i a l l y i n some areas of the economy, the trade unions have a very s t r o n g p o s i t i o n . 3 4 0 10.2.3 TRANSPORTATION Another b i g item i s the ease and c o s t s of t r a n s p o r t a t i o n . E s p e c i a l l y the i n f r a - s t r u c t u r e , e x i s t i n g t r a n s p o r t a t i o n companies, access to sea-harbours, access 102 to i n t e r n a t i o n a l s h i p p i n g l i n e s , e t c . are i m p o r t a n t . 3 4 1 The i n f r a s t r u c t u r e and the t r a n s p o r t a t i o n system in general i s good. There are a l o t of good highways and roads and th e r e i s access to the A t l a n t i c and P a c i f i c oceans with harbours on both c o a s t s . The t r a i n system i s developed i n the East, while i n the West i t i s not developed t h a t much. 3 4 2 Because of the l a r g e d i s t a n c e s t r a n s p o r t a t i o n i s a major concern, even i f c o s t s are reasonable. J u s t by l o o k i n g at the geography one would assume a l o t of trade North-South i n s t e a d of East-West. But s i n c e the p o l i t i c a l borders are c u t t i n g the Un i t e d S t a t e s and Canada i n t o p a r t s i n an East-West d i r e c t i o n , there are g e o g r a p h i c a l disadvantages with r e s p e c t to t r a n s p o r t a t i o n . 3 4 3 10.2.4 MARKETING/SALES Marketing and s a l e s f o r e c a s t are other f a c t o r s which have a s t r o n g impact. Depending on the " p r o d u c t " 3 4 4 the d e f i n i t i o n of the r e l e v a n t market w i l l be d i f f e r e n t ; but whichever market w i l l be d e f i n e d , the i n v e s t o r would want to have an access to i t as easy as p o s s i b l e under the c i r c u m s t a n c e s . 3 4 5 The r e l a t i v e l y small p o p u l a t i o n , at l e a s t i n r e l a t i o n to the l a r g e area, makes marketing and s a l e s somehow d i f f i c u l t . 3 4 6 But s i n c e the East i s more densely populated and people are l i v i n g almost e x c l u s i v e l y w i t h i n a 200-mile l i m i t of the U.S. border, the s i t u a t i o n i s 1 03 a c t u a l l y not too bad. Even, mass p r o d u c t i o n c o u l d be worthwhile i n r e s p e c t to the S t a t e s . 10.2.5 TAXES Tax a t i o n i s the c r i t e r i o n I am i n t e r e s t e d i n most i n t h i s t h e s i s . But even i f i t i s the t o p i c of t h i s t h e s i s , under an economic e v a l u a t i o n of an investment d e c i s i o n i t i s only one of s e v e r a l c r i t e r i a . Since Canada has l a r g e land-masses, a high l i v i n g standard and a r e l a t i v e l y small p o p u l a t i o n , there are a l r e a d y some disadvantages f o r i n v e s t m e n t . 3 4 7 Therefore i t seems to me that t a x a t i o n i s , e s p e c i a l l y f o r a d e c i s i o n to i n v e s t i n Canada, one of the important f a c t o r s . The t a x a t i o n i s f a i r l y h i g h compared to tax heaven c o u n t r i e s . Compared to other western c o u n t r i e s i t i s f a i r l y reasonable, i n g e n e r a l . However, there are a l o t 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. Non-residents and non-Canadian c o n t r o l l e d companies are taxed more than r e s i d e n t s and Canadian c o n t r o l l e d companies. So non-Canadian c o n t r o l l e d companies are not e l i g i b l e for the so c a l l e d small business a b a t e m e n t . 3 4 8 Tax d i s i n c e n t i v e s e x i s t a l s o f o r non-resident owned investment c o m p a n i e s . 3 4 9 The t h i n c a p i t a l i z a t i o n r u l e 3 5 0 r e s t r i c t s the i n t e r e s t expense deduction f o r debts owing by a c o r p o r a t i o n to ' s p e c i f i e d n o n - r e s i d e n t s ' . 3 5 1 There i s no i n t e r v i v o s t r a n s f e r f o r n o n - r e s i d e n t s 3 5 2 at c o s t base. 1 04 As a c o n c l u s i o n I see an investment i n Canada under economic c r i t e r i a as not very a t t r a c t i v e . The tax i m p l i c a t i o n s , d i s c r i m i n a t i n g n o n - r e s i d e n t s and t h e i r companies, make i t even worse. However, Canada i s one of the p o l i t i c a l l y most s t a b l e c o u n t r i e s i n the western world and i t i s c l o s e to the U n i t e d S t a t e s . So I would l i k e to have a look at a comparable investment i n the S t a t e s . 10.3 COMPARISON TO INVESTMENT IN THE UNITED STATES If we have a look at "comparable" investments i n the U n i t e d S t a t e s with r a t h e r advantageous taxes, i t becomes obvious why there i s almost no German investment i n Canada d u r i n g the l a s t years and why there i s a l o t of new b u s i n e s s from Germany going to the S t a t e s . Speaking i n g e n e r a l , under general economic c r i t e r i a l i k e s t a b i l i t y , r e s o u r c e s , human res o u r c e s , t r a n s p o r t a t i o n and m a r k e t i n g / s a l e s , the U.S. i s b e t t e r o f f than Canada and t h e r e f o r e more i n t e r e s t i n g f o r f o r e i g n investment. The minimum wages are lower than i n C a n a d a . 3 5 3 A p r o d u c t i o n i n the U.S. would give a d i r e c t access to the market without p a s s i n g the b o r d e r . 3 5 4 In t a x a t i o n there i s no disadvantage f o r small companies, s i n c e under the IRC even non-American c o n t r o l l e d companies get a favourable tax treatment f o r the f i r s t $100,000 each year. A l s o , the t a x a t i o n of company p r o f i t s , i n g e n e r a l , i s more generous i n the U.S., i f the money remains i n the company. Some 105 s t a t e s exempt f o r e i g n i n v e s t o r s t o t a l l y from c a p i t a l g a ins taxes, i f they are w i l l i n g to r e - i n v e s t the money. A f t e r January 1, 1987 the U.S. t a x a t i o n system changed a l o t . 3 5 5 The b i g tax i n c e n t i v e s f o r r e a l e s t a t e investments are gone by now, and we a l r e a d y see a d i f f e r e n t a t t i t u d e towards r e a l e s t a t e investment i n the U.S. So compared with Canada one can say that the tax i m p l i c a t i o n s of investment u n t i l the end of 1986 were more favo u r a b l e than i n Canada, whereas the s i t u a t i o n changed - e s p e c i a l l y i n r e a l e s t a t e - a f t e r January 1, 1 987. 10.4 STATISTICS ON INVESTMENT IN CANADA AND IN THE U.S. L e t ' s look at some s t a t i s t i c s on German investment i n North America over the l a s t y e a r s . While German investments i n North America were r e l a t i v e l y weak a couple of years ago, there i s a t r e n d towards North America again i n the l a s t few y e a r s . Because of the p o l i t i c a l c l i m a t e and because of investment i n c e n t i v e s i n the U n i t e d S t a t e s many German i n v e s t o r s were and s t i l l are w i l l i n g to turn more to North America. While investment i n c e n t i v e s are very s t r o n g i n the United S t a t e s , t h i n g s are going slow i n C a n a d a . 3 5 6 But l e t ' s see some numbers: The f o l l o w i n g t a b l e shows the development of German investment i n the U.S. and i n Canada from 1975 to 1 9 8 4 . 3 5 7 106 Development of German Investment i n the U.S. and i n Canada from 1975 to 1984 US Canada 1 975 1 976 1 977 1 978 1979 1980 1981 1 982 1 983 1 984 1 , 138.4 1 ,338.8 1,885.8 3,692.6 3,380. 1 3,402.8 3,274.5 2,748.8 3,257.5 748.3 254.9 316.9 371 .0 407.7 407.5 421 .5 479.0 382.3 -14.2 208.0 T o t a l from 1975 - 1984 24,867.6 3,234.6 For Canada these f i g u r e s show a slow down of German investment from 1981 to 1982, a t o t a l breakdown from 1982 to 1983 and a tendency to recover i n 1984. In the U.S. the development of German investments i s more continuous with minor changes. The slow down from 1982 to 1983 made (only) 500 m i l l i o n German M a r k s , 3 5 8 while i n Canada i t dropped from 382 to minus 14 m i l l i o n . The next schedule r e f e r s to German investments i n Canada and the U.S. by the end of 1983 i n terms of t o t a l a s s e t s . 3 5 9 107 Direct and Indirect German Investment in the U.S. and in Canada from 1976 to 1983 End of US Canada 1 976 6630 1830 1977 8247 1580 1978 1 0842 1 479 1979 1 4840 1764 1980 18260 231 6 1981 25721 2752 1982 28078 3460 1 983 34518 3967 While t o t a l German investment a s s e t s i n the U.S. in c r e a s e d about f i v e times over the years, those i n Canada i n c r e a s e d by l e s s than two and a h a l f times. S i m i l a r r e l a t i o n s w i l l become obvious when we look at the number of German c o m p a n i e s 3 6 0 doing b u s i n e s s 3 6 1 i n Canada and the S t a t e s , the annual gross of those companies and the number of t h e i r e m p l o y e e s . 3 6 2 Number of German Companies Involved in Investment in the U.S. and in Canada from 1976 to 1982 US Canada 1976 629 360 1 977 713 40 1 1 978 854 419 1979 1113 461 1980 1 406 489 1981 1 639 526 1982 1 752 513 108 While the number of companies doing investment i n the U.S. almost t r i p l e d , those i n Canada d i d n ' t even double. Annual Gross of those C o m p a n i e s 3 6 3 US Canada 1 976 2 7 . 8 3 . 3 1 977 3 3 . 0 3 .0 1978 4 6 . 7 3 . 3 1979 71 .8 4 . 8 1980 8 5 . 4 5 . 4 1981 118.1 7.1 1 982 1 2 1 . 9 7 . 5 The d i f f e r e n c e s here are s i m i l a r to the d i f f e r e n c e s i n the i n c r e a s e of a s s e t s : The annual gross went up about f i v e times i n the U.S., while i t d i d n ' t reach two and one h a l f times i n Canada. 109 Employees of those Companies 3 6 4 US Canada 1 976 1 977 1 978 1 979 1980 1981 1982 78 100 216 349 376 391 355 1 1 1 2 1 3 1 5 1 7 1 6 18 Given the f a c t that most employees of those companies are U.S. or Canadian r e s i d e n t s , r e s p e c t i v e l y , the economic b e n e f i t from f o r e i g n investment should not be o v e r l o o k e d . 3 6 5 The c o n c l u s i o n of the comparison to the investment i n the U.S. i s that Canada does not pr o v i d e a f a v o u r a b l e investment c l i m a t e . While i n former times investments i n favour of Canada had reasonable chances of g i v i n g a good r e t u r n , there are only some hig h r i s k areas l e f t nowadays. The Canadian t a x a t i o n of f o r e i g n investment and of f o r e i g n i n v e s t o r s causes d i s i n c e n t i v e s on top of the economic s i t u a t i o n . T h e r e f o r e I am proposing to c o n s i d e r changes i n the Income Tax Act i n a way that prevents Canadian t a x a t i o n from d i s c r i m i n a t i n g a g a i n s t f o r e i g n investment, but i n s t e a d c r e a t e s some i n c e n t i v e s . 11. PROPOSALS FOR AN ALTERNATIVE APPROACH AND SOME  CHANGES IN THE INCOME TAX ACT Background f o r the pr o p o s a l s f o l l o w i n g i s the b e l i e f that a s u p p l y - s i d e o r i e n t e d p o l i c y and a concept of open market p o l i c y are going to l e a d to net b e n e f i t s f o r Canada. As we c o u l d see there are only few areas where no d i s c r i m i n a t i o n i s p r a c t i s e d . Looking at the n o n - d i s c r i m i n a t i o n c l a u s e and i t s main i m p l i c a t i o n s , an important tax i n c e n t i v e f o r f o r e i g n investment i n Canadian tax law would be to get r i d of some of i t s d i s i n c e n t i v e s . Speaking i n g e n e r a l , Canada should wave i t s r e s e r v a t i o n r e g a r d i n g A r t . 24 O.E.C.D. Model Convention and i n t r o d u c e a n o n - d i s c r i m i n a t i n g and equal treatment f o r no n - r e s i d e n t s and non-resident c o n t r o l l e d companies. 11.1 CANADA AND ART. 24 OECD MODEL DOUBLE TAX CONVENTION It i s apparent why Canada has res e r v e d : f o r example, paragraph 6 of A r t i c l e 24 of the O.E.C.D. s t a t e s i n e f f e c t that E n t e r p r i s e s of one C o n t r a c t i n g S t a t e , the c a p i t a l of which i s wholly or p a r t l y owned or c o n t r o l l e d by r e s i d e n t s of the other C o n t r a c t i n g S t a t e , s h a l l not be subj e c t e d to more burdensome tax than one would by r e s i d e n t s of the o t h e r . Canada's branch tax, t h i n c a p i t a l i z a t i o n r u l e s and d e n i a l of deduction f o r a d v e r t i s i n g i n c e r t a i n non-resident-owned media, are examples of p r o v i s i o n s which would appear to v i o l a t e such 1 1 0 111 p r o v i s i o n s . 3 6 6 I t i s understood that the o b j e c t i o n s Canada gets most f r e q u e n t l y i n the d i s c r i m i n a t i o n area p e r t a i n to areas 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 t h i n c a p i t a l i z a t i o n r u l e s , small business deduction and p a r t i c u l a r l y Canada's r e f u s a l to give n o n - r e s i d e n t s c r e d i t a g a i n s t tax on d i v i d e n d s f o r co r p o r a t e tax p a i d as i t does f o r r e s i d e n t s through the d i v i d e n d tax c r e d i t . I t i s p l a i n to see, as with r e s t r i c t i o n of the small business deduction to 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 c o r p o r a t i o n s , that one man's i n c e n t i v e i s another's d i s c r i m i n a t i o n . As I understand i t t h i s i s e s s e n t i a l l y Canada's view, that g i v i n g an i n c e n t i v e to r e s i d e n t s should not be co n s t r u e d as d i s c r i m i n a t i n g a g a i n s t n o n - r e s i d e n t s . I t i s probably f a i r to say that Canada d i s c r i m i n a t e s a g a i n s t a l l non-residents r e g a r d l e s s of race, creed, c o l o u r or n a t i o n a l i t y . Canada, t h e r e f o r e , can take the p o s i t i o n that i t does not d i s c r i m i n a t e a g a i n s t n a t i o n a l s of "the other" C o n t r a c t i n g S t a t e . As p o i n t e d out by Robertson and B i s s e t t , 3 6 7 Canada's tax p o l i c y makers and draftmen have been very s k i l f u l i n some areas — to a p o i n t where i t i s d i f f i c u l t to conclude whether there i s d i s c r i m i n a t i o n . For example, Canada deems c e r t a i n n o n - r e s i d e n t s to be r e s i d e n t s , as i n sec. 214(9) and 212(13.2) I.T.A. I t would be d i f f i c u l t f o r a non-resident to complain that he i s being d i s c r i m i n a t e d a g a i n s t when he i s r e q u i r e d to perform the same 1 1 2 w i t h o l d i n g o b l i g a t i o n s as r e s i d e n t s i n c e r t a i n c a s e s . 3 6 8 Canada has i n the past changed i t s course to a v o i d the appearance of d i s c r i m i n a t i o n . In 1963 the Budget c a l l e d f o r an e x t r a 5% w i t h o l d i n g on d i v i d e n d s from r e s i d e n t c o r p o r a t i o n s where share ownership was l e s s than 25% Canadian. To a v o i d the appearance of d i s c r i m i n a t i o n , the p r o v i s i o n as f i n a l l y enacted p r o v i d e d f o r a 5% re d u c t i o n i n w i t h o l d i n g tax f o r c o r p o r a t i o n s a c h i e v i n g the 25% Canadian ownership. I t i s a l s o understood the n o n - d i s c r i m i n a t i o n p r o v i s i o n i n the Canada-U.S. t r e a t y was c o n s i d e r e d when the branch tax was brought i n . 3 6 9 However, the t r e a t y p r o v i s i o n speaks of c i t i z e n s r a ther than n a t i o n a l s , as i n the O.E.C.D. A r t i c l e . As I understand, Canada took the p o s i t i o n that c i t i z e n s c o u l d r e f e r only to i n d i v i d u a l s and not to c o r p o r a t i o n s and t h e r e f o r e there was no breach of the p r o v i s i o n . 3 7 0 N a t i o n a l s , by the O.E.C.D. d e f i n i t i o n , i n c l u d e c o r p o r a t i o n s . 3 7 1 The O.E.C.D. paragraph i n c l u d e s not only "more burdensome" t a x a t i o n but a l s o t a x a t i o n "which i s othe r " than the t a x a t i o n of n a t i o n a l s i n the other S t a t e . The O.E.C.D. paragraph i s , t h e r e f o r e , wider because i t appears to apply to any i n e q u a l i t y of tax treatment, whether or not more burdensome. 3 7 2 The new Canadian-German Double Tax Convention f o l l o w s the 1977 O.E.C.D. model convention i n p r o v i d i n g that n a t i o n a l s of one of the c o n t r a c t i n g S t a t e s w i l l not 1 1 3 have a more burdensome tax l o a d i n the other S t a t e than n a t i o n a l s of t h a t S t a t e ( n o n - d i s c r i m i n a t i o n c l a u s e ) . 3 7 3 A c c o r d i n g to para. 2, the term " n a t i o n a l s " does not only i n c l u d e i n d i v i d u a l s but a l s o p a r t n e r s h i p s and c o r p o r a t i o n s d e r i v i n g t h e i r s t a t u s from the law i n f o r c e i n one of the c o n t r a c t i n g s t a t e s . A l s o f o l l o w i n g the O.E.C.D.-model convention, para. 3 p r o v i d e s that a permanent es t a b l i s h m e n t of an e n t e r p r i s e r e s i d e n t i n the other s t a t e w i l l not have a more burdensome tax l o a d i n the s t a t e where the permanent establishment i s l o c a t e d than e n t e r p r i s e s r e s i d e n t i n that s t a t e . Paragraphs 5 and 6 of A r t . 24 of the O.E.C.D.-model t r e a t y have not been adopted. T h i s i s because Canada would d i s c r i m i n a t e i n i t s t h i n c a p i t a l i z a t i o n r u l e s 3 7 4 and i t s lower r a t e of tax for 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 , 3 7 5 and would have to surrender these p o i n t s . T h e r e f o r e , a r u l e d i f f e r e n t from t h a t c o n t a i n e d i n the O.E.C.D.-model t r e a t y was adopted i n para. 4 of A r t . 24. E n t e r p r i s e s of one s t a t e , the c a p i t a l of which i s wholly-owned, partly-owned or c o n t r o l l e d by r e s i d e n t s of the other s t a t e , w i l l not be s u b j e c t to tax more burdensome than a s i m i l a r e n t e r p r i s e the shareholders of which are r e s i d e n t in a t h i r d s t a t e . In the O.E.C.D.-model t r e a t y , r e f e r e n c e i s made to the s h a r e h o l d e r s r e s i d e n t i n the s t a t e i n which the e n t e r p r i s e i t s e l f i s l o c a t e d , which — as mentioned above — would not be i n accordance with the e x i s t i n g Canadian law. Should Canada s o f t e n on the 1 14 d i s c r i m i n a t i o n p r o v i s i o n i n other any t r e a t y , German r e s i d e n t s w i l l a l s o b e n e f i t . 11.2 SOME PROPOSALS For the Income Tax Act I would l i k e to propose to e l i m i n a t e d i s i n c e n t i v e s f o r no n - r e s i d e n t s and non-Candian c o n t r o l l e d c o r p o r a t i o n s , i n c l u d i n g the change of a l l s e c t i o n s p r o v i d i n g unequal treatment between r e s i d e n t s and n o n - r e s i d e n t s throughout the a c t . The p r o v i s i o n s which j u s t make sure that tax w i l l be c o l l e c t e d from n o n - r e s i d e n t s l i k e w i t h o l d i n g tax and the prepayment of taxes should be kept as t e c h n i c a l instruments. But the content and extent of those p r o v i s i o n s should be r e v i s e d . D i f f e r e n c e s i n the t a x a t i o n of r e s i d e n t s and non - r e s i d e n t s l i k e : no c a p i t a l gains tax exemption as i n the 1986 b u d g e t , 3 7 6 no c a r r y forward or backward of l o s s e s , 3 7 7 and no i n t e r v i v o s t r a n s f e r at c o s t base to spouse, minors, or t r u s t s as i n sec. 74, 75, and 75(2) I . T . A . 3 7 8 should be s t r a i g h t e n e d out. The w i t h o l d i n g tax p r o v i s i o n s should exclude i n t e r e s t s payable f o r f i n a n c i n g from sources o u t s i d e Canada, i n order to get e a s i e r and cheaper access to i n t e r n a t i o n a l f i n a n c i n g . 3 7 9 1 15 For Canadian companies there i s the concept of tax n e u t r a l i t y . 3 8 0 For non-resident c o n t r o l l e d c o r p o r a t i o n s t h i s concept doesn't apply. The f o l l o w i n g proposals are intended to remedy s i t u a t i o n s where t h i s n e u t r a l i t y i s not a c h i e v e d : The d i s t i n c t i o n between C a n a d i a n - c o n t r o l l e d and other p r i v a t e c o r p o r a t i o n s should be e l i m i n a t e d , and a c c o r d i n g l y a l l p r i v a t e c o r p o r a t i o n s , r e g a r d l e s s of the r e s i d e n c e of t h e i r s h a r e h o l d e r s , should be e n t i t l e d to the d i v i d e n d refund i n r e s p e c t of a l l of t h e i r investment income, i n c l u d i n g income from r e a l p r o p e r t y . P r i v a t e c o r p o r a t i o n s ( r e g a r d l e s s of c o n t r o l ) should be a l l o w e d to d e c l a r e and pay c a p i t a l d i v i d e n d s to t h e i r non-resident shareholders f r e e of any Canadian w i t h o l d i n g t a x . 3 8 1 The small business abatement should be a p p l i c a b l e not only f o r C a n a d i a n - c o n t r o l l e d companies and, s i n c e a l l investment i n Canada i s l i k e l y to leave net b e n e f i t s f o r the country, a l l i n c e n t i v e s given to Canadian-c o n t r o l l e d companies should be o f f e r e d to n o n - C a n a d i a n - c o n t r o l l e d companies as w e l l . Any i n t e r e s t payments r e c e i v e d by an NRO on which there would be no w i t h o l d i n g tax i f r e c e i v e d by a n o n - r e s i d e n t should be excluded from the computation of an NRO's income. A l s o , d i s t r i b u t i o n of such i n t e r e s t income by an NRO by way of d i v i d e n d s should 1 16 not be sub j e c t to w i t h o l d i n g t ax. The Income Tax Act should permit an NRO to d i s t r i b u t e such c a p i t a l gains f r e e of Canadian w i t h o l d i n g tax. An NRO's income should be s u b j e c t to a r a t e of tax equal to the r a t e of w i t h o l d i n g tax that would be payable i f such income were p a i d d i r e c t l y to i t s non-resident s h a r e h o l d e r s . The p r o v i s i o n s for the Part XIV tax ("Branch Tax") should be changed to have no d i f f e r e n t t a x a t i o n of branches and s u b s i d i a r i e s of f o r e i g n companies. The proposed changes would c o n t r i b u t e to make the Canadian tax system more n e u t r a l as regards the use by non-resident i n v e s t o r s of Canadian c o r p o r a t i o n s to h o l d t a x a b l e Canadian p r o p e r t i e s and earn Canadian investment income. 3 8 2 12. CONCLUSION The Canadian government changed some of the Canadian p o l i c y towards f o r e i g n investment. Part of t h i s g e n e r a l p o l i c y i s the Canadian tax law. Even i f the t a x a t i o n i s not the most important part of an investment d e c i s i o n , i t i s one of the main elements. At l e a s t i n terms of t h i s t h e s i s , d e a l i n g with the i m p l i c a t i o n of Canadian tax law on f o r e i g n investment, t a x a t i o n seems to be worth c o n s i d e r i n g when t a l k i n g about the g e n e r a l approach towards f o r e i g n investment w i t h i n Canada. The r e f o r e i t seems f a i r to say, that the c u r r e n t Canadian tax treatment of non-residents and non - C a n a d i a n - c o n t r o l l e d companies imposes a tax burden on f o r e i g n investment which i s unequal to the tax burden imposed on r e s i d e n t s and Canadian c o n t r o l l e d companies. Even i f . t h e Canadian d e f i n i t i o n of d i s c r i m i n a t i o n excludes unequal treatment, an equal tax treatment i n c l u d i n g tax i n c e n t i v e s should be ac h i e v e d between 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 c o r p o r a t i o n s . Furthermore, changes would e l i m i n a t e what i s p e r c e i v e d as a s i g n i f i c a n t and v e x a t i o u s b i a s . They a l s o would help to overcome some i n c o n s i s t e n c y i n Canadian p o l i c y . The new program "Investment C a n a d a " 3 8 3 and the f e d e r a l and p r o v i n c i a l entrepreneur programs t r y to g i v e i n c e n t i v e s f o r f o r e i g n investment, while the tax law i s l i k e l y to impose diadvantages on the f o r e i g n i n v e s t o r . 3 8 4 As a pa r t of the o v e r a l l scheme f o r f o r e i g n investment i n Canada, a d i f f e r e n t approach i n the 1 1 7 1 18 Canadian Income Tax Act would be a p p r o p r i a t e . 1 19 FOOTNOTES 1 In o l d e r days the import of c a p i t a l came mainly from the United Kingdom. In the 1960's there was a s e r i e s of government r e p o r t s which c r i t i c i s e d f o r e i g n investment i n Canada. So at the end of the 1960's and the beginning of the 1970's the concerns had reached a l e v e l which f i n a l l y r e s u l t e d i n the l e g i s l a t i o n of the F o r e i g n Investment Review Act (December 12, 1973). Both the Watkins and the Gray r e p o r t s concluded that e x i s t i n g c o n t r o l s on f o r e i g n investment were i n s u f f i c i e n t , and went on to c o n s i d e r p o s s i b l e e xtensions to l i m i t the c o n t r o l of f o r e i g n ownership. By t h i s time f o r e i g n investment accounted f o r 10% of the t o t a l n a t i o n a l wealth, and o n e - t h i r d of t o t a l business a c t i v i t y i n Canada was c o n t r o l l e d by f o r e i g n i n t e r e s t . Since the Canadian economy got i n t o t r o u b l e over the l a s t few years, f o r e i g n investment seems to be needed more than ever. As the Watkins Report i n d i c a t e d , f o r e i g n investment seems to be not so much the cause of Canada's economic malaise, but a v i c t i m of i t . 2 see Bakken; Beck; F i s h e r ; Hughes; Graeme; Nixon/Burns; O ' S u l l i v a n ; Spence/Rosenfeld 3 See B i b l i o g r a p h y . 1 20 4 See chapter 6. 5 See chapter 7. 6 See chapter 9. 7 The idea l a i d out s h a l l apply between i n d u s t r i a l i z e d c o u n t r i e s . General c o n s i d e r a t i o n s with respect to l e s s developed c o u n t r i e s (LDC's) s h a l l not be an i s s u e of t h i s t h e s i s . 8 To deal with a l l of them would be too broad f o r t h i s t h e s i s . 9 See the d i s c u s s i o n s i n economics over the l a s t 100 years or so, where the concepts of more or l e s s governmental i n f l u e n c e i n the economy were d i s c u s s e d . See F.A. Hayek, M i l t o n Friedman and the so c a l l e d Chicago School. 10 See i n d e t a i l below. 11 I'm convinced, that d e s p i t e other tendencies found i n the tax-, investment-, and t r a d e - p o l i c i e s of many c o u n t r i e s , we have to c o n s i d e r these p r i n c i p l e s on the way towards more economical c o - o p e r a t i o n s between i n d u s t r i a l i z e d c o u n t r i e s . In a way, the s i t u a t i o n today 121 i s not d i f f e r e n t from the s i t u a t i o n a couple of hundred years ago, when the domestic economies were so a f r a i d of cheaper and/or b e t t e r products imported from abroad that they implemented heavy trade b a r r i e r s . Even a f t e r a general agreement on f r e e trade (GATT) we see so many r e s t r i c t i o n s and imposed disadvantages, that the s i t u a t i o n i s - i n a way - s c h i z o p h r e n i c . Even in communities l i k e the EEC, where the w r i t t e n and d e c l a r e d goal i s to get r i d of the r e s t r i c t i o n s , we a c t u a l l y f i n d them, j u s t i n a more s o p h i s t i c a t e d form. The US r e p o r t on r e s t r i c t i o n s of f o r e i g n trade e t c . , l i s t i n g a l l of them, i s 9000 pages! 12 L i k e Canada. 13 so the USA and the P h i l i p i n e s . 14 see sec. 2(3)(a) I.T.A. 15 see sec. 2(3)(b) I.T.A. 16 as d e f i n e d i n sec. 248(1) and 115(1) I.T.A., see sec. 2(3)(c) I.T.A. 17 they are s u b j e c t to w i t h o l d i n g tax, Part XIII I.T.A.; see chapter 6.2. 1 22 18 means: country where he i s u s u a l l y taxed on h i s worldwide income, see above. 19 see. Schaumburg, p. 5. 20 i b i d 21 i n terms of t a x a t i o n . In Canada the d e f i n i t i o n of re s i d e n c y i s d i f f e r e n t i n tax law and i n immigration law; t h i s i s d i f f e r e n t i n the U n i t e d S t a t e s , where these are l i n k e d . 22 According to i n t e r n a t i o n a l law, t h e o r e t i c a l l y both c o u n t r i e s , Canada and the U n i t e d S t a t e s , c o u l d tax him on h i s worldwide income. 23 T h e r e f o r e , depending on every country, we f i n d some concepts to a v o i d double t a x a t i o n , e s p e c i a l l y the concept of F o r e i g n Tax C r e d i t s , the concept of Tax Exemptions and the concept of Exemptions with P r o g r e s s i o n . In most cases we f i n d double tax c o n v e n t i o n s . 24 see sec. 2(1) I.T.A. 25 see: Keyes 26 see Part I and XIII I.T.A.; Sec. 2(3) I.T.A. reads: 1 23 Sec. 2(3) , (3) Tax payable by non-residents persons. Where a person who i s not t a x a b l e under s u b s e c t i o n (1) f o r a t a x a t i o n year (a) was employed i n Canada, (b) c a r r i e d on a business i n Canada, or (c) d i s p o s e d of a taxable Canadian p r o p e r t y , at any time i n the year or a previous year, an income tax s h a l l be p a i d as 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 earned i n Canada f o r the year determined i n accordance with D i v i s i o n D. 27 see A r t . 14 Canadian-German Double Tax Convention. 28 see A r t . 7 Canadian-German Double Tax Convention. 29 For the d e f i n i t i o n of permanent e s t a b l i s h m e n t s see chapter 3.2. 30 f o r the US and Canada see A r t . V, Canada-U.S. Income  Tax Convention (1980). 31 see: Hansen 32 The s e c t i o n reads: Sec. 250(3) (3) O r d i n a r i l y r e s i d e n t . In t h i s Act, a r e f e r e n c e to a person r e s i d e n t i n Canada i n c l u d e s a person who was at the r e l e v a n t time o r d i n a r i l y r e s i d e n t in Canada. 33 [1980] CTC 2117; 80 DTC 1118 (T.R.B.) 34 (1904), 5T.C. 101 35 (1928) 13 T.C.511; [1928] A.C.234 36 [1949] C.T.C. 13; 4 DTC 536 37 (1964), 35 Tax A.B.C. 420; 64 DTC 449 38 (1958), 2 Tax A.B.C. 63; DTC 232 39 [1980] CTC 2845; 80 DTC 1749 40 [1928] A.C.217 41 [1981] CTC 2429; 81 DTC 366 42 For more i n f o r m a t i o n see IT-221 12, shown below: "INTERPRETATION BULLETIN IT-221R (May 26, 1980) Determination of an I n d i v i d u a l ' s r e s i d e n c e s t a t u s 1. The purpose of t h i s B u l l e t i n i s to e x p l a i n the Department's p o s i t i o n concerning the d e t e r m i n a t i o n of an i n d i v i d u a l ' s r e s i d e n c e s t a t u s f o r income tax purposes. General Comments 2 . The term " r e s i d e n t " i s not d e f i n e d i n the Income Tax A c t . The c o u r t s have h e l d that an i n d i v i d u a l i s r e s i d e n t i n Canada f o r tax purposes i f Canada i s the p l a c e where he, i n the s e t t l e d r o u t i n e of l i f e , r e g u l a r l y , normally or c u s t o m a r i l y l i v e s . In making t h i s d e t e r m i n a t i o n , a l l of the r e l e v a n t f a c t s i n each case must be c o n s i d e r e d . Leaving Canada 3 . Where an i n d i v i d u a l l eaves Canada a f t e r the date of t h i s b u l l e t i n , the f o l l o w i n g f a c t o r s w i l l be taken i n t o c o n s i d e r a t i o n i n determining whether the i n d i v i d u a l w i l l remain a r e s i d e n t of Canada f o r tax purposes while abroad: (a) permanence and purpose of stay abroad, (b) r e s i d e n t i a l t i e s w i t h i n Canada, (c) r e s i d e n t i a l t i e s elsewhere, and (d) r e g u l a r i t y and le n g t h of v i s i t s to Canada. Permanence and Purpose of Stay Abroad 4. In order for an i n d i v i d u a l to become a no n - r e s i d e n t of Canada, there must be a degree of permanence to h i s stay abroad. Where a Canadian r e s i d e n t i s absent from Canada ( f o r whatever reason) f o r l e s s than 2 ye a r s , he w i l l be presumed to have r e t a i n e d h i s r e s i d e n c e s t a t u s while abroad, unless he can c l e a r l y e s t a b l i s h t h a t he severed a l l r e s i d e n t i a l t i e s on l e a v i n g Canada. I f there i s an evidence that h i s r e t u r n to Canada was forseen at the time of h i s depa r t u r e (e.g., a c o n t r a c t f o r employment upon r e t u r n to Canada), the Department w i l l presume that he d i d not sever a l l r e s i d e n t i a l t i e s on l e a v i n g Canada. 5. Where an i n d i v i d u a l i s absent from Canada f o r 2 years or longer, he w i l l be presumed to have become a non-resident of Canada, p r o v i d e d that he s a t i s f i e s the other requirements f o r non-resident s t a t u s o u t l i n e d i n 6 to 12 below. R e s i d e n t i a l T i e s Within Canada 6. The primary r e s i d e n t i a l t i e s of an i n d i v i d u a l are h i s (a) d w e l l i n g p l a c e (or p l a c e s ) , (b) spouse and dependents, and (c) p e r s o n a l property and s o c i a l t i e s . 7. An i n d i v i d u a l who leaves Canada, but ensures t h a t a d w e l l i n g p l a c e s u i t a b l e f o r year-round occupancy i s kept a v a i l a b l e i n Canada f o r h i s o c c u p a t i o n by m a i n t a i n i n g i t (vacant or o t h e r w i s e ) , by l e a s i n g i t at non-arm's l e n g t h , or by l e a s i n g i t at arm's l e n g t h with the r i g h t to terminate the lease on short n o t i c e ( l e s s than 3 months) w i l l g e n e r a l l y not be c o n s i d e r e d to have severed h i s r e s i d e n t i a l t i e s w i t h i n Canada. 8. If a married i n d i v i d u a l l e a v e s Canada, but h i s spouse or dependants remain i n Canada, the i n d i v i d u a l w i l l g e n e r a l l y be c o n s i d e r e d to remain a r e s i d e n t of Canada d u r i n g h i s absence. An exce p t i o n to t h i s may occur where an i n d i v i d u a l and h i s spouse are l e g a l l y s eparated and the i n d i v i d u a l has permanently severed a l l other r e s i d e n t i a l t i e s w i t h i n Canada. The r e s i d e n t i a l t i e s of a s i n g l e person are f r e q u e n t l y of a more tenuous nature and, i n the m a j o r i t y of cases, i f such a person leaves Canada f o r 2 years or more and e s t a b l i s h e s r e s i d e n c e elsewhere, i t i s l i k e l y t h a t he w i l l be a non-resident of Canada d u r i n g h i s absence, unless other important t i e s w i t h i n Canada i n d i c a t e that he i s not. For example, where a s i n g l e person i s s u p p o r t i n g someone i n a d w e l l i n g maintained and occupied by him i n Canada and, a f t e r h i s departure, he c o n t i n u e s to support that person i n the d w e l l i n g , he w i l l not be c o n s i d e r e d to have severed h i s t i e s w i t h i n Canada. 9. G e n e r a l l y speaking, an i n d i v i d u a l who leaves Canada and becomes a non- r e s i d e n t w i l l not r e t a i n any r e s i d e n t i a l t i e s i n the form of p e r s o n a l p r o p e r t y (e.g. f u r n i t u r e , c l o t h i n g , automobile, bank accounts, c r e d i t c a r d s , e t c . ) or s o c i a l t i e s (e.g. r e s i d e n t c l u b memberships, etc.) w i t h i n Canada a f t e r h i s d e p a r t u r e . Where such t i e s are r e t a i n e d w i t h i n Canada, the Department may examine the reasons f o r t h e i r r e t e n t i o n to determine i f these t i e s are s i g n i f i c a n t enough to conclude that the i n d i v i d u a l i s a c o n t i n u i n g r e s i d e n t of Canada while absent. Other t i e s that may a l s o be r e l e v a n t i n t h i s d e t e r m i n a t i o n are the r e t e n t i o n o f : (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 medical insurance coverage, (b) a seasonal r e s i d e n c e i n Canada, (c) p r o f e s s i o n a l or other membership i n Canada (on a r e s i d e n t b a s i s ) , and (d) f a m i l y allowance payments. R e s i d e n t i a l T i e s Elsewhere 10. The Courts have h e l d t h a t : (a) everyone must be r e s i d e n t somewhere, and (b) i t i s q u i t e p o s s i b l e f o r an i n d i v i d u a l to be r e s i d e n t i n more than one p l a c e at the same time f o r tax purposes. A c c o r d i n g l y , where a r e s i d e n t of Canada goes abroad, but does not e s t a b l i s h a permanent r e s i d e n c e elsewhere, there i s a presumption that he remains a r e s i d e n t of Canada. A l s o , the f a c t t h a t an i n d i v i d u a l e s t a b l i s h e s a permanent re s i d e n c e abroad does not, i n any p a r t and by i t s e l f , mean that the i n d i v i d u a l has become a non-resident of Canada. 11. Where an i n d i v i d u a l i s r e s i d e n t i n Canada and, at the same time, r e s i d e n t i n another country by i t s laws, r e f e r e n c e should be had to any tax convention or agreement that Canada may have with the other c o u n t r y . R e g u l a r i t y and Length of V i s i t s to Canada 12. Where an i n d i v i d u a l l e a v e s Canada and pur p o r t s to become a n o n - r e s i d e n t , h i s tax s t a t u s as a non-resident w i l l not g e n e r a l l y be a f f e c t e d by o c c a s i o n a l r e t u r n v i s i t s to Canada, whether fo r p e r s o n a l or business reasons. However, where such v i s i t s are more than o c c a s i o n a l , p a r t i c u l a r l y where the v i s i t s occur on a r e g u l a r b a s i s , t h i s f a c t o r together with other r e s i d e n t i a l t i e s t h a t e x i s t (as set out i n 9 above) w i l l be examined to determine whether they are s i g n i f i c a n t enough i n t o t a l to conclude that the i n d i v i d u a l i s a c o n t i n u i n g r e s i d e n t of Canada. 43 see above 44 see a l s o A r t . IV Canada-U.S. Income Tax Convention (1980) . 45 see: Farnsworth; Pyrcz; S t a p e l s ; Wang; Ward 1 30 46 [1906] A.C.455; 5T.C. 198; 95L.T.221 (per Lord Loreburn). Being a mere q u e s t i o n of f a c t , i t i s to be determined upon a s c r u t i n y of the course of the business and t r a d i n g and not a c c o r d i n g to r e g u l a t i o n s or by-laws. 47 1929 AC 1 48 sec.250(4)(a) I.T.A.) 49 For the t a x a t i o n of non-Canadian c o n t r o l l e d companies see chapter 7. 50 see: Spence 51 A r t i c l e 5 of the Canadian-German Double Tax Convention reads: A r t i c l e 5 Permanent Establishment (1) For the purposes of t h i s Agreement, the term "permanent e s t a b l i s h m e n t " means a f i x e d p l a c e of business through which the business of an e n t r e p r i s e i s wholly or p a r t l y c a r r i e d on. (2) The term "permanent e s t a b l i s h m e n t " i n c l u d e s s p e c i f i c a l l y : a) a p l a c e of management; b) a branch; 131 c) an o f f i c e ; d) a f a c t o r y ; e) a workshop; and f) a mine, an o i l or gas w e l l , a quarry or any other pl a c e of e x t r a c t i o n of n a t u r a l r e s o u r c e s . (3) A b u i l d i n g s i t e or c o n s t r u c t i o n or i n s t a l l a t i o n p r o j e c t c o n s t i t u t e s a permanent establishment only i f i t l a s t s more than twelve months. (4) Nothwithstanding the p r e c e d i n g p r o v i s i o n s of t h i s A r t i c l e , the term "permanent establishment" s h a l l be deemed not to i n c l u d e : a) the use of f a c i l i t i e s s o l e l y f o r the purpose of storage, d i s p l a y or d e l i v e r y of goods or merchandise belonging to the e n t e r p r i s e ; b) the maintenance of a stock of goods or merchandise belonging to the e n t e r p r i s e s o l e l y f o r the purpose of storage, d i s p l a y or d e l i v e r y ; c) the maintenance of a stock of goods or merchandise belonging to the e n t e r p r i s e s o l e l y f o r the purpose of p r o c e s s i n g by another e n t e r p r i s e ; d) the maintenance of a f i x e d p l a c e of business s o l e l y f o r the purpose of p u r c h a s i n g goods or merchandise or f o r c o l l e c t i n g 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 ; e) the maintenance of a f i x e d p l a c e of business s o l e l y f o r the purpose of c a r r y i n g on, f o r the e n t e r p r i s e , any other a c t i v i t y of a p r e p a r a t o r y or a u x i l i a r y c h a r a c t e r ; f) the maintenance of a f i x e d p l a c e of business s o l e l y 1 32 for any combination of a c t i v i t i e s mentioned i n subparagraphs a) to e) pr o v i d e d that the o v e r a l l a c t i v i t y of the f i x e d p l a c e of business r e s u l t i n g from t h i s combination i s of a p r e p a r a t o r y or a u x i l i a r y c h a r a c t e r . (5) Notwithstanding the p r o v i s i o n s of paragraphs 1 and 2, where a person - other than an agent of an independent s t a t u s to whom paragraph 6 a p p l i e s — i s a c t i n g on be h a l f of an e n t e r p r i s e and has, and h a b i t u a l l y e x e r c i s e s , i n a C o n t r a c t i n g S t a t e an a u t h o r i t y to conclude c o n t r a c t s i n the name of the e n t e r p r i s e , that e n t e r p r i s e s h a l l be deemed to have a permanent establishment i n that S t a t e i n respect of any a c t i v i t i e s which that person undertakes for the e n t e r p r i s e , u n l e s s the a c t i v i t i e s of such person are l i m i t e d to those mentioned i n paragraph 4 which, i f e x e r c i s e d through a f i x e d p l a c e of business, would not make t h i s f i x e d p l a c e of business a permanent establishment under the p r o v i s i o n of that paragraph. (6) An e n t e r p r i s e s h a l l not be deemed to have a permanent establishment i n a C o n t r a c t i n g State merely because i t c a r r i e s on busi n e s s i n th a t State through a broker, general commission agent or any other agent of an independent s t a t u s , p r o v i d e d that such persons are a c t i n g i n the o r d i n a r y course of t h e i r b u s i n e s s . (7) The f a c t t h at a company which i s a r e s i d e n t of a C o n t r a c t i n g S t a t e c o n t r o l s or i s c o n t r o l l e d by a company which i s a r e s i d e n t of the other C o n t r a c t i n g S t a t e , or which c a r r i e s on business i n that other S t a t e (whether 1 33 through a permanent establishment or o t h e r w i s e ) , s h a l l not of i t s e l f c o n s t i t u t e e i t h e r company a permanent establishment of the o t h e r . 52 see: Green; Noble 53 [1978] C.T.C. 539 (Fed. c t . — T.D.) 54 Canadian Tax Paper No. 39, 1964 at p.38. 55 De Beers C o n s o l i d a t e d Mines L t d . v. Howe [1906] A.C. 455. 56 Under t h i s t e s t , a c o r p o r a t i o n may have a d u a l r e s i d e n c e f o r tax purposes. 57 21 Can. Tax J . 217 (1973). 58 supra 59 The i s s u e i n the Thibodeau case was whether a c a p i t a l gain r e a l i z e d by the Thibodeau Family T r u s t was s u b j e c t to tax on the b a s i s of Canadian r e s i d e n c e . Two t r u s t e e s were r e s i d e n t i n Bermuda, a t h i r d t r u s t e e r e s i d e n t i n Canada. The Canadian t r u s t e e had the s o l e power to appoint new t r u s t e e s . The t r u s t e e s c o u l d only a c t by m a j o r i t y d e c i s i o n , a l l meetings of the t r u s t e e s were h e l d 1 34 i n Bermuda, and the t r u s t a s s e t s and t h e i r a d m i n i s t r a t i o n were l o c a t e d i n Bermuda. 60 He r e i t e r a t e d h i s view that the s t a t u t e p r o v i d e d no " s t a t u t o r y formula to determine the r e s i d e n c e of the Thibodeau Family T r u s t " and that t h e r e f o r e he would employ "a j u d i c i a l formula a p p l i c a b l e to the f a c t s of the case alone". "As to the submission that the Court i n t h i s case ... even i f i t a l s o f i n d s that the t r u s t has a r e s i d e n c e i n Bermuda, i t should f i n d t h a t i t has r e s i d e n c e i n Canada in that p a r t of the paramount or supreme a u t h o r i t y i n r e l a t i o n to the management of t h i s t r u s t was c a r r i e d on i n Canada a p p l y i n g by analogy the p r i n c i p l e s i n the c i t e d cases of determining r e s i d e n c e f o r income tax purposes of c o r p o r a t i o n s , i n my view, such submission i s a l s o not v a l i d . The j u d i c i a l formula f o r t h i s r e s p e c t i n g a c o r p o r a t i o n , i n my view, cannot apply to t r u s t e e s because t r u s t e e s cannot d e l e g a t e any of t h e i r a u t h o r i t y to c o - t r u s t e e s . A t r u s t e e cannot adopt a " p o l i c y of masterly i n a c t i v i t y " as commented upon i n U n d e r h i l l on the Law of T r u s t s and T r u s t e e s ... and on the evidence, none of the t r u s t e e s d i d adopt such p o l i c y . T h e r e f o r e i t i s not p o s s i b l e f o r a t r u s t to have a dual r e s i d e n c e f o r income 135 tax purposes, and t h e r e f o r e i t i s not p o s s i b l e to f i n d t h at p a r t of the paramount or " s u p e r i o r and d i r e c t a u t h o r i t y " of a t r u s t i s and was i n two p l a c e s . In any event, a f i n d i n g of dual r e s i d e n c e of t h i s t r u s t i s not made i n t h i s case." The l o g i c of the above passage i s uncl e a r and has been h i g h l y c r i t i c i z e d . I t seems that the non-delegation r u l e i s not r e l e v a n t to the q u e s t i o n of dual r e s i d e n c e . However, i t i s r e l e v a n t to the qu e s t i o n of whether or not resi d e n c e i n the t r u s t context i s a de f a c t o or a de ju r e concept. 61 However, i n many ins t a n c e s a t r u s t e e w i l l r e f e r to the judgment and e x p e r t i s e of h i s c o - t r u s t e e , even though t h i s i s t e c h n i c a l l y a breach of h i s duty. 62 A f t e r r e j e c t i n g the submissions of the Crown, Gibson, J . then i d e n t i f i e d a number of f a c t o r s which he co n s i d e r e d r e l e v a n t to the de t e r m i n a t i o n of the residence of the t r u s t : 1) the m a j o r i t y of the t r u s t e e s were r e s i d e n t i n Bermuda; 2) the t r u s t document pe r m i t t e d a m a j o r i t y r u l e ; 3) the Canadian t r u s t e e d i d not c o n t r o l the t r u s t e e s r e s i d e n t i n Bermuda; 4) the t r u s t res was l o c a t e d i n Bermuda; 5) some b e n e f i c i a r i e s r e s i d e d o u t s i d e of Canada; and 6) no t r u s t business was done i n Canada. On the b a s i s of the f i r s t two f a c t o r s enumerated, the Court h e l d t h a t the t r u s t was not 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 , 1985 E s t a t e s and T r u s t s Q u a r t e r l y , p.83; D.B. M o r r i s , [1979] C R . 414; L. A m i g h e t t i , [1979] C R . 652. 63 T h i s B u l l e t i n reads: [Interpretation B u l l e t i n No. IT-447] Residence of a trust or estate. 1. The r e s i d e n c e of a t r u s t or e s t a t e ( h e r e i n a f t e r r e f e r r e d to as a t r u s t ) i n Canada or i n a p a r t i c u l a r p r o v i n c e or t e r r i t o r y w i t h i n Canada, i s a q u e s t i o n of f a c t to be determined i n each case. However, a t r u s t i s g e n e r a l l y c o n s i d e r e d to r e s i d e where the t r u s t e e , executor, a d m i n i s t r a t o r , h e i r or other l e g a l r e p r e s e n t a t i v e ( h e r e i n a f t e r r e f e r r e d to as the t r u s t e e ) who manages the t r u s t or c o n t r o l s the t r u s t a s s e t s r e s i d e s . 2. The t r u s t e e who has management and c o n t r o l of the t r u s t , while he may not have p h y s i c a l p o s s e s s i o n of the t r u s t a s s e t s , w i l l be the person who has most or a l l of the f o l l o w i n g powers or r e s p o n s i b i l i t i e s : (a) c o n t r o l over changes i n the t r u s t ' s investment p o r t f o l i o , (b) r e s p o n s i b i l i t y f o r the management of any business or p r o p e r t y owned by the t r u s t , (c) r e s p o n s i b i l i t y f o r any banking, and f i n a n c i n g 1 37 arrangements f o r the t r u s t , (d) c o n t r o l over any other t r u s t a s s e t s , (e) u l t i m a t e r e s p o n s i b i l i t y f o r p r e p a r a t i o n of the t r u s t accounts and r e p o r t i n g to the b e n e f i c i a r i e s of the t r u s t , and (f ) power to c o n t r a c t with and d e a l with t r u s t a d v i s o r s , e.g., a u d i t o r s and lawyers. 3 . In c e r t a i n cases, more than one t r u s t e e may be i n v o l v e d i n e x e r c i s i n g the management and c o n t r o l over the t r u s t . I f one such t r u s t e e c l e a r l y e x e r c i s e s a more s u b s t a n t i a l p o r t i o n of the management and c o n t r o l than the o t h e r s , the t r u s t w i l l r e s i d e i n the j u r i s d i c t i o n i n which the t r u s t e e r e s i d e s . Where two or more t r u s t e e s e x e r c i s e r e l a t i v e l y equal p o r t i o n s of the management and c o n t r o l of the t r u s t , and t r u s t e e s e x e r c i s i n g more than 50% of such management and c o n t r o l r e s i d e i n one j u r i s d i c t i o n , the t r u s t w i l l r e s i d e i n t h a t j u r i s d i c t i o n . 4. In some cases i t may not be c l e a r who has management and c o n t r o l of the t r u s t and i n these s i t u a t i o n s the Department w i l l examine other f a c t o r s r e l a t i n g to the t r u s t to determine r e s i d e n c e . The most important of these f a c t o r s a r e : (a) the l o c a t i o n where the l e g a l r i g h t s with respect to the t r u s t a s s e t s are e n f o r c e a b l e , and (b) the l o c a t i o n of the t r u s t a s s e t s . The r e s i d e n c e of the b e n e f i c i a r i e s of a t r u s t and d o m i c i l e of the s e t t l o r are not c o n s i d e r e d to be r e l e v a n t 1 38 except i n s i t u a t i o n s as d e s c r i b e d i n 5 below. 5 . Normally resi d e n c e of a t r u s t i s dependent upon r e s i d e n c e of the t r u s t e e or t r u s t e e s who can e x e r c i s e management and c o n t r o l of the t r u s t . In some s i t u a t i o n s the f a c t s may i n d i c a t e that a s u b s t a n t i a l p o r t i o n of the management and c o n t r o l r e s t s with some other person such as the s e t t l o r or the b e n e f i c i a r i e s . In these s i t u a t i o n s the r e s i d e n c e of t h i s other person may be c o n s i d e r e d to be the determining f a c t o r of the t r u s t r e g a r d l e s s of any c o n t r a r y p r o v i s i o n s i n the t r u s t agreement. 6 . Where an i n d i v i d u a l e x e r c i s e s the management and c o n t r o l of a t r u s t , the r e s i d e n c e of that i n d i v i d u a l i s determined based on the normal f a c t u a l t e s t s f o r determ i n i n g the residence of an i n d i v i d u a l . 7. Where a c o r p o r a t i o n e x e r c i s e s the management and c o n t r o l of a t r u s t , the r e s i d e n c e of that c o r p o r a t i o n i s determined based on the normal f a c t u a l t e s t s f o r determ i n i n g res i d e n c e of a c o r p o r a t i o n . An exception to the g e n e r a l r u l e may be encountered where the management and c o n t r o l of a t r u s t i s e x e r c i s e d by a branch of a t r u s t company. In these c i r c u m s t a n c e s , the t r u s t may be determined r e s i d e n t i n the j u r i d i c t i o n where the branch o f f i c e i s l o c a t e d even though the c o r p o r a t i o n i t s e l f i s o u t s i d e that j u r i s d i c t i o n . 8. In some s i t u a t i o n s , a f t e r examination of a l l f a c t o r s , i t may be determined that a t r u s t i s r e s i d e n t in Canada no t w i t h s t a n d i n g that another country may c o n s i d e r the 1 39 t r u s t to be r e s i d e n t i n that c o u n t r y . 9 . Pursuant to paragraph 94(c) a t r u s t not otherwise r e s i d e n t i n Canada may be deemed to be a r e s i d e n t i n Canada f o r the purposes of Part I of the Act i f the t r u s t i s such that the amount of the income or c a p i t a l to be d i s t r i b u t e d at any time to any b e n e f i c i a r y of the t r u s t depends upon the e x e r c i s e by any person o f, or the f a i l u r e by any person to e x e r c i s e , any d i s c r e t i o n a r y power. 10. Subsection 75(2) p r o v i d e s t h a t , where pr o p e r t y i s t r a n s f e r r e d by a person to a t r u s t c r e a t e d a f t e r 1934 on c o n d i t i o n that the p r o p e r t y , or p r o p e r t y s u b s t i t u t e d f o r i t , may r e v e r t to that person or pass to persons d e s i g n a t e d by him or that d u r i n g h i s l i f e t i m e the p r o p e r t y may be disposed of only with h i s concurrence, any income or l o s s or t a x a b l e c a p i t a l gain or a l l o w a b l e c a p i t a l l o s s from the p r o p e r t y , or p r o p e r t y submitted f o r i t , i s a t t r i b u t a b l e to that person d u r i n g h i s l i f e t i m e w h i le he i s r e s i d e n t i n Canada. In such s i t u a t i o n s a t t r i b u t i o n a p p l i e s whether or not the t r u s t i s r e s i d e n t i n Canada. 11. The f o r e g o i n g are the c o n s i d e r a t i o n s viewed as r e l e v a n t i n determining the r e s i d e n c e of a t r u s t or e s t a t e i n o r d i n a r y s i t u a t i o n s . Regard may be had to other f a c t o r s where the purported r e s i d e n c e of a t r u s t or e s t a t e appears to have been motivated by reasons of tax avoidance. 1 40 64 see below, chapter 6.2 65 see below, chapter 6.1 66 see below 67 I t w i l l be shown l a t e r t h a t there are c e r t a i n disadvantages r e s u l t i n g out of the d i v i d e n d tax c r e d i t f o r n o n - r e s i d e n t s . 68 I w i l l r e f e r to some anomalies l a t e r . 69 l i k e people who are l i v i n g i n Canada, but are r e s i d e n t s of Germany a c c o r d i n g to the d e f i n i t i o n of the Convention, or German companies which have a permanent establishment i n Canada and t h e r e f o r e being here a c t u a l l y without being a r e s i d e n t c o r p o r a t i o n . 70 source: F i s c h e r Weltalmanach 1986, s. 343 71 The U.S. garment i n d u s t r y and i t s lobby are f i g h t i n g imports from Hong Kong, Taiwan, South Korea. 72 see a l s o Olsen 73 I t i s not my i n t e n t i o n to cover a l l of them nor to go 141 i n t o a very d e t a i l e d d i s c u s s i o n . Most of them are not e l i g i b l e f o r n o n - r e s i d e n t s , as f o r example, the o i l incent i v e s . 74 see the Canadian MURB -Programs, where a 5% and i n some cases 10% d e p r e c i a t i o n f o r m u l t i p l e u n i t r e s i d e n c i a l b u i l d i n g s (MURB) was d e d u c t i b l e a g a i n s t other sources of income; see Reg. Sch. I I , C l a s s 31, 32. 75 see sec. 37 I.T.A. 76 sec. 65, 66 I.T.A. 77 Reg. 1208; Reg. Sch. I I , C l a s s 10 78 Even so c a l l e d "quick f l i p s " were in the beginning of t h i s tax program w i t h i n the p o l i c y of the government. 79 see Reg. Sch. I I , C l a s s 10, 12 and Reg. 1104(2) 80 Watkins Report, Gray Report 81 In Canada the Income Tax Act proposes tax n e u t r a l i t y . As a r e s u l t there i s the same tax burden f o r p r o f i t s d e r i v e d from a c o r p o r a t i o n i n means of d i v i d e n d s compared to p r o f i t s earned p e r s o n a l l y . In the U.S. d i v i d e n d s are taxed at the company l e v e l and i n the hands of the 1 42 shar e h o l d e r s , without having a d i v i d e n d tax c r e d i t a l l o w i n g f o r t o t a l tax n e u t r a l i t y as i t i s i n Canada. As a consequence i t i s cheaper to do investment i n the U.S. i f one expects to r e - i n v e s t p r o f i t s made by a company. 82 see below 83 A f t e r the U.S. Tax Reform Act 1986, investment l o s s e s from r e a l e s t a t e are l i m i t e d to income. 84 For the f i r s t year on l y , h a l f the r a t e , equals 2.5%, a p p l i e s . 85 i n s e r t from me 86 Bode, p. 4; Zimmermann, p. 29; Jae n i c k e , D i s k r i m i n i e r u n g , p. 387; Kipp, p. 137 87 Langenscheid's Taschenworterbuch L a t e i n i s c h - D e u t s c h ; Schmidt, Grundfragen, p. 12; Zimmermann, p. 29 88 Larousse du XX s s i e l e , V o l . 2, " d i s c r i m i n e r " ; Bertaux-Le p o i n t e , " d i s c r i m i n a t i o n " ; von Ackermann, p. 3 and i b i d ; Schmidt, Grundfragen, p. 12; Le grand Larousse Encyclopedique 1960 " d i s c r i m i n a t i o n " 89 Das grosse Dudenlexikon, V o l . 2, " d i s k r i m i n i e r e n , " 143 " D i s k r i m i n i e r u n g " ; Mackensen, " d i s k r i m i n i e r e n , " D i s k r i m i n a t i o n " 90 Loerke, p. 15 91 Zimmermann, p. 29 Fn. 35; Learner's D i c t i o n a r y "to d i s c r i m i n a t e " ; S c h i n d l e r , p. 67; Herbst, Worterbuch, V o l . 1, " d i s c r i m i n a t i o n " 92 S t a a t s l e x i k o n , V o l . 2, p. 990, " D i s k r i m i n i e r u n g " 93 Grundsatz der G l e i c h b e r e c h t i g u n g 94 Bode, p. 5; Kruse, p. 279, 530 f . , 518f 95 IMF: Annual Report 1965, p. 4; Sannwald-Stohler, p. 65 96 Bode, p. 5 97 In order to s t r e s s 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," " u n f a i r . " I t a l s o r e s u l t s from supplements l i k e " a g a i n s t , " "au detriment" or "au p r e j u d i c e . " 98 Zimmermann, p. 29f, d e f i n e s the term d i s c r i m i n a t i o n i n the l e g a l sense as: "disapproved by law, u n j u s t i f i e d or unlawful d i s c r i m i n a t i o n . " 1 44 99 In t h i s sense J a e n i c k e , B e g r i f f e , p. 32 f, 86 d e f i n e s the term of d i s c r i m i n a t i o n "inadmissable treatment" 100 see Hesse, p. 170 f, 187, 211 101 Schmidt, Grundfragen, p. 13 102 see Ipsen, E q u a l i t y , p. 113 f o r the s t a t u s of e q u a l i t y i n the p u b l i c law; Berber, volume 1, p. 210 f o r the i n t e r n a t i o n a l law. 103 J a e n i c k e , D i s c r i m i n a t i o n , p. 390; Zimmermann, p. 51; Schmidt, Grundfragen, p. 13/14, p. 62; Kipp, p. 143; Zerr, p. 16 f; A. Loerke, p. 19 104 Jaenicke i n : Strupp-Schlochauer, volume 1, p. 392; Berber, volume 1, p. 210 f f ; Schwarzenberger, volume 1, p. 229 f. 105 Ja e n i c k e , supra; the same term. p. 145; Schwarz-Lieberman, von Wahlendorf, p. 19; Zerr, p. 109; Guggenheim, volume 1, p. 164 f; Oppenheim-Lauterpacht, volume 1, p. 238 f f , Schwarzenberger, p. 26 f, Dahm, volume 1, p. 163. 106 see E r l e r , p. 141, 159 and see Verd r o s s , p. 229 1 45 107 Berber, volume 1, p. 179, 221 f . 108 Berber, volume 1, p. 179-184; see a l s o Schaumann, p. 148 f; K i s s : L'abus 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 , p. 159 110 J a e n i c k e , B e g r i f f , p. 143 f f ; Schaumann, p. 3 111 see Guggenheim, volume 1, p. 309; Berber, volume 1, p. 397 112 see J a e n i c k e , D i s c r i m i n a t i o n , i n : Strupp-Schlochauer, p. 388; Schwarzenberger, Standards, i n : QIL 2 (1948), p. 409, 412; Dahm, volume 1, p. 505, Berber, volume 1, p. 189, 377; S c h i n d l e r ; see a l s o E r l e r , p. 49 113 see Thieme, p. 13ff, 73-77; Ipsen, E q u a l i t y , p. 135; Kipp, p. 149; S c h i n d l e r , p. 54 114 J a e n i c k e , D i s c r i m i n a t i o n , supra, p. 392; L e i b h o l z , i n : Strupp-Schlochauer, volume 1, p 694 f f , E l s b e r n d , p. 47 115 Based 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 d i s c r i m i n a t i o n , K i s s , p. 80 f f , 85; see a l s o J a e n i c k e , Terms, p. 11 f; the same, D i s c r i m i n a t i o n , p. 387; the same, E q u a l i t y , p. 690 f f ; Schwarzenberger, volume 1, p. 231 f; Held, p. 12; E l s b e r n d , p. 47; Dahm, volume 2, p. 580 f; Ipsen, E q u a l i t y , p. 132; Kipp, p. 143; Ross, p. 154 f; Thieme, p. 13 f f , 69; see a l s o the judgement of the a d m i n i s t r a t i v e c o u r t of the pr o v i n c e Baden of the 29.11.1952; DVBl. 1953, p. 242 116 see Schwarzenberger, Standards, p. 402-418; the same, volume 1, p. 229 f f , 240; Scheuner, p. 54 117 Zimmermann, p. 39 118 Zimmermann, supra; Schwarzenberger, volume 1, p. 229 f 119 Zimmermann, supra 120 R i t t e r s h a u s e n , p. 259; Schwarzenberger, Standards, p. 410 121 see Schwarzenberger, volume 1, p. 24 f; the same, Most-favoured n a t i o n treatment, p. 96-114; Guggenheim, volume 1, p. 99 f; Dahm, volume 2, p. 593, 595 122 Dahme, volume 2, p. 593 147 123 see E r l e r , p. 131 f and a l s o A r t i c l e II GAT 124 see Scheuner, p. 56; Schwarzenberger, Standards, p. p. 410 125 see E r l e r , p. 52 f, 72 126 Schwarzenberger, supra; the same, volume 1, p. 232 127 Kipp, p. 144; Schwarzenberger, supra, p. 409 f 128 Zimmermann, p. 40; Ja e n i c k e , Equal Treatment, p. 691; Schwarzenberger, volume 1, p. 231 f, 240 129 Kipp, p. 137; Ja e n i c k e , D i s c r i m i n a t i o n , p. 388-390 130 see Kipp, p. 143 131 Schwarenberger, Standards, p. 408 f f 132 Schwarzenberger, supra; see a l s o E r l e r , p. 53 f 133 see J a e n i c k e , D i s c r i m i n a t i o n , p. 388 134 Schwarzenberger, supra 1 48 135 see A r t i c l e 2 of the d e c l a r a t i o n of human r i g h t s of the U.S.A.: "... without d i s t i n c t i o n of any k i n d . " See a l s o the g e n e r a l 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 of A r t i c l e 7 of the d e c l a r a t i o n : " A l l are equal before the law and are e n t i t l e d without any d i s c r i m i n a t i o n i n v i o l a t i o n of t h i s D e c l a r a t i o n and a g a i n s t any incitement to such d i s c r i m i n a t i o n . " See f o r the a c t i v i t y of the UN Commission f o r the Prevention of D i s c r i m i n a t i o n and f o r the P r o t e c t i o n of M i n o r i t i e s , supra, p. 389 136 see: E r l e r , p. 99; Zimmermann, p. 38. 137 see A r t i c l e 22 c i p h e r 5 of the League of Nations for the B-mandates in the scope of T r eaty of V e r s a i l l e s ; A r t i c l e 76 l e t t e r d) of the P r i n c i p l e of the U.S.A. f o r the t r u s t - a r e a s ; f u r t h e r examples: see E r l e r , p. 71 f . 138 RGB1. 1919, p. 687 f f . 139 A r t i c l e 104, c i p h e r 5; see a l s o A r t i c l e 33 of the D a n z i g - P o l i s h - T r e a t y of November 9, 1920 140 A r t i c l e 265 of the T r e a t y of V e r s a i l l e s 141 A r t i c l e 323 of the T r e a t y of V e r s a i l l e s 142 LNTS volume 97, p. 391; see a l s o A r t i c l e 45 of the 1 49 Havana Charter, A r t . 20 of the GATT; A r t . of the Convention e s t a b l i s h i n g the European Free 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 the R a i l r o a d - A c t , A r t . 6, 7 of the Seaport-Act. 144 see Martens, N.R.G. 3, volume 19, p. 19, p. 240 145 UNTS 2, p. 39 f f . 146 see A r t . 44g of the agreement about the 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 Organization (ICAO) of December 7, 1944; A r t . I GATT (LNTS 55 I , p. 196) the new v e r s i o n i n : Arch VR 7 (1958-59), p. 424 f f ; A r t . 7a of the codex of the l i b e r a l i z a t i o n of the OEEC i n the e d i t i o n of March 5, 1959 i n : Supplement of the BAnz. No. 78 of A p r i l 24, 1959; A r t i c l e 1(c) of the agreement of the Organization for Economic Co-operation and Development (OECD) of December 14, 1960-BGBl 1961 I I , p. 1151-1158; A r t i c l e VII of the Statu 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 see A r t i c l e 22, 23 Havana C h a r t e r ; A r t i c l e XVII GATT; A r t i c l e 14 EFTA-Treaty 150 A r t i c l e 29 of the Havana C h a r t e r ; A r t i c l e XVII of GATT; A r t i c l e 14 of the EFTA-Treaty. 151 A r t . 3(e), 7 ( a ) , 8, 9, 10, 20(e), 22(a), 23 of the codex. 152 Of A p r i l 29, 1952 - BGBl. 1952 I I , p. 445 153 Zimmermann, p. 22, 26, 27 154 Zimmermann, p. 23 155 see A r t . 86 MUV; Zimmerman, p. 27 156 BGBl. 1957 I I , p. 1014 157 see von Ackermann, p. 28-31 158 Kipp, p. 143 159 see J a e n i c k e , D i s c r i m i n a t i o n , supra, p. 390f; Zimmermann, p. 41; Kipp, p. 140 f f 160 see J a e n i c k e , supra 151 161 see Zimmermann, p. 41 162 Kipp, p. 143; Jaenicke, B e g r i f f e , p. 22 163 Kipp, 142, 144 164 Zimmerman, p. 43 165 see Zimmermann, p. 43 166 Ausweichklauseln, Ausnahmeklauseln, R i i c k t r i t t s k l a u s e l n and waivers 167 Zimmermann, p. 42; Jaenicke, Equal Treatment, p. 692 f . 168 Zimmermann, p. 43 169 see European Commission of Human Rights, Documents and Decisions 1955, 1956, 1957, p. 199; Kipp, p. 144 170 Schwarzenberger, volume 1, p. 240f 171 see A r t i c l e I GATT combined with the l i s t s of concession 172 K i p p , p. 144 173 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 , S t a n d a r d s , p. 408 f . 175 s e e K i p p , p. 146 f ; Zimmermann, p. 44 176 K i p p , p. 147; S c h e u n e r , p. 44 177 J a e n i c k e , B e g r i f f e , p. 8 6 f , 102, 1 l 0 f ; S c h i n d l e r , 143; K i p p , p. 147 178 s e e p. 7 179 s e e A d v o c a t e G e n e r a l L a r g a n g e , c l o s i n g a r g u m e n t i t h e Re SA 13/63 - Sa I X , p. 409 f 180 K i p p , p. 148 181 L a g r a n g e , s u p r a ; s e e C P J I , A r r e t s e t A v i s c o n s u l t a t i f s , s e r i e A/B, No. 64, p. 19 -" M i n d e r h e i t e n s c h u l e n i n A l b a n i e n " 182 s e e a l s o K i p p , p. 148 183 s e e B e l g i u m : A r t i c l e 6 p a r a g r a p h 2 o f t h e 153 C o n s t i t u t i o n of February 17, 1831; F e d e r a l Republic of Germany: A r t . 3 paragraph 1 of the C o n s t i t u t i o n (the German "Grundgesetz") of the May 21, 1949; France: the preamble and A r t . 2 paragraphs 1 and 2 of the C o n s t i t u t i o n of the October 4, 1958; Luxembourg: A r t . 11 paragraph 2 of the C o n s t i t u t i o n of October 17, 1968; I t a l y : A r t . 3 paragraph 1 of the C o n s t i t u t i o n of the December 27, 1947 184 A r t . 4 of the F e d e r a l C o n s t i t u t i o n of Swiss of 1874; see L e i b h o l z , p. 79 Anm. 1 and 2 185 because of the 14th amendment i n 1868 ("equal p r o t e c t i o n of the laws") 186 Donner, p. 201 f f , 203f; Van der Pot, p. 443, Ve g t i n g , p. 154; Z e r r , p. 95-98 187 A r t . 5 of the Dutch C o n s t i t u t i o n 188 A r t . 4 paragraph 1 of the Dutch C o n s t i t u t i o n 189 For the same p r o t e c t i o n f o r the a s s o c i a t i o n of churches see: A r t . 175 of the Dutch C o n s t i t u t i o n 190 S t e l l i n g a , p. 154; Kranenburg-Vegting, p. 186 1 54 191 see S t e l l i n g a , p. 254 192 Zerr, p. 98; De Laubadere, p. 205 f f ; see a l s o Jeanneau, p. 7 f f ; Letourneur, p. 27 f f ; Waline, p. 430 193 The p r i n c i p l e of e q u a l i t y i n the economic a d m i n i s t r a t i o n , l e c t u r e , Baden-Baden 1961 194 Jeanneau, p. 7-39; Loerke, p. 23f. 195 see Z e r r , p. 99; Ipsen, p. 196f; Loerke, aaO. 196 see CE 29.6.1951; CE 12.2.1960; see Loerke, p. 24 197 see a l s o the s p e c i a l 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 r e l a t i n g to the c o n s t i t u t i o n i n A r t . 37 ( p r i n c i p l e of the same s a l a r y f o r men and women f o r the same work) and A r t . 51 ( p r i n c i p l e that every c i t i z e n can take up p u b l i c o f f i c e s ) 198 see M o r t a t i , p. 714 199 see B e s c a r e t t i d i R u f f i a , p. 233; d'Eufemia, p. 131 200 see Ze r r , p. 105 201 see A r t . 6 and 112 of the Belgium C o n s t i t u t i o n ; the 1 55 summary of j u r i s d i c t i o n i n Sarot, p. 107 f . ; a l s o Z e r r , p. 100; Vigny p. 37; Buttgenbach, Manuel, p. 82 f f . ; the same, T h e o r i e , p. 8 4 f f . 202 see A r t . 3 of the "German C o n s t i t u t i o n " 203 see A r t . 11 paragraph 1 and 2 of the C o n s t i t u t i o n of the October 17, 1868 204 see BVerfGE 1, p. 321 (327); 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 see L e i b h o l z , p. 239-243; Ipsen, E q u a l i t y , p. 139 f . ; von 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 of the F e d e r a l Court 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 , p. 48 209 see Zimmermann, p. 33; C o n s t i t u t i o n of the U n i t e d S t a t e s of America. Annotations of cases decided by the Supreme Court of the U n i t e d S t a t e s to June 30, 1952, p. 1142 f . 156 210 see Zimmermann, p. 34 211 Zimmermann, supra 212 see Ipsen, p. 180 213 R a i s e r , P r i n c i p l e of Equal Treatment, p. 91: "The e q u a l i t y i n the sense of law i s always based on s e l e c t i n g and v a l u i n g e q u a l i z a t i o n " ; see Hueck, p. 172 214 see A r t . 3 paragraph 3 of the German "Grundgesetz" 215 Ipsen, p. 184 216 see Zimmermann, p. 35, 36 217 The Advocate General Lagrange r e f e r r e d to t h i s i n h i s f i n a l p l e a ReSa 13/63 Sa. IX, p. 409; Hueck, supra 218 Lagrange, supra 219 see H.J. Rinck i n : DVBl. 1961, p. 1; BVerfGE 2, p. 281; 4, p. 155; BGHZ 13, 265; BVerwGE 2, 1953; 257 f . 220 see BVerfGE 4, p. 155 221 see Zimmermann, p. 37; see BVerfGE 4, p. 155 222 BVerfGE aaO.; 1, p. 52; H.J. Rinck, supra. 223 BVerfGE aaO. 224 BVerfGE 9, p. 349; see a l s o Radbruch, p. 157-176; Coing, p. 118 f f ; Stratenwerth. 225 see the i n d i c a t i o n of L e i b h o l z , p. 80; Zimmermann 36, Fn. 55. 226 see Zimmermann, p. 37; L e i b h o l z , p. 215 227 see BVerfGE 8, p. 51, 64 228 DStZ 1970, p. 130 r e f e r r i n g to J a e n i c k e , D i s k r i m i n i e r u n g p. 391; Neumeyer, I n t e r n a t i o n a l e s Verwaltungsrecht 1936, V o l . IV p. 432 229 Debatin, i b i d 230 C o n s t i t u t i o n ("Basic law") f o r the F e d e r a l Republ of Germany 231 BVerfGe 1, 14 (15, 52) 232 i b i d 1 58 233 K l e i n , G l e i c h h e i t s s a t z und S t e u e r r e c h t , Koln 1966, p. 130; Debatin, DStZ 1970, 130 234 D r a f t Double Taxation Convention on Income and  C a p i t a l from J u l y 30, 1963, OECD-Doc. C (63) 87; see a l s o Debatin, AWD 1963, p. 289 235 OEEC-Doc. C (59)147 from J u l y 3, 1959; see a l s o Debatin DStZ 1970, 130 236 to be t r a n s l a t e d as " l i m i t e d " and " u n l i m i t e d " o b l i g a t i o n to pay taxes 237 u n l i m i t e d 238 Sass, Zur Auslegung der i n Doppelbesteurungsabkommen ubernommenen OECD-Klausel uber N i c h t d i s k r i m i n i e r u n g von B e t r i e b s s t a t t e n , AWD 1965, p. 106 239 C o n t r a r y : Raupach, Der D u r c h g r i f f im S t e u e r r e c h t , Munchen 1968, p. 88 240 SEE: HUGGETT 241 A r t . 14 Canada-German Double Tax Convention 1 59 242 sec. 2 ( 3 ) ( c ) , 115, 116 I.T.A. The $500,000 c a p i t a l gains exemption implemented by the 1985/86 budget p r o v i d e s o n l y f o r Canadian r e s i d e n t s . 243 see: Walker 244 I t reads: SEC. 116. Dispostion by non-resident person of certain property. (1) Where a non-resident person proposes to dispose of any p r o p e r t y that would, i f he di s p o s e d of i t , be taxable Canadian p r o p e r t y of that person (other than d e p r e c i a b l e p r o p e r t y or excluded p r o p e r t y ) , he may, at any time before the d i s p o s i t i o n , send to the M i n i s t e r a n o t i c e s e t t i n g f o r t h (a) the name and address of the person to whom he proposes to dispose of the p r o p e r t y ( i n t h i s s e c t i o n r e f e r r e d to as the "proposed p u r c h a s e r " ) , (b) a d e s c r i p t i o n of the p r o p e r t y s u f f i c i e n t to i d e n t i f y i t , (c) the estimated amount of the proceeds of d i s p o s i t i o n to be r e c e i v e d by him f o r the p r o p e r t y , and (d) the amount of the a d j u s t e d c o s t base to him of the p r o p e r t y at the time of the sending of the n o t i c e . Sec. 116(2) (2) C e r t i f i c a t e in respect of proposed d i s p o s i t i o n . Where a n o n - r e s i d e n t person who has sent to the M i n i s t e r a 1 60 n o t i c e under s u b s e c t i o n (1) i n r e s p e c t of a proposed d i s p o s i t i o n of any prop e r t y has (a) p a i d to the Receiver G e n e r a l , as or on account of tax under t h i s Part payable by him f o r the year, 25% of the amount, i f any, by which the estimated amount set f o r t h i n the n o t i c e i n accordance with paragraph (1)(C) exceeds the amount set f o r t h i n the n o t i c e i n accordance with paragraph ( l ) ( d ) , or (b) 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 a c c e p t a b l e to the M i n i s t e r i n resp e c t of the proposed 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 f o r w i t h i s s u e to the non-resident person and the proposed purchaser a c e r t i f i c a t e i n p r e s c r i b e d form i n respect of the proposed d i s p o s i t i o n , f i x i n g t h e r e i n an amount ( i n t h i s s e c t i o n r e f e r r e d to as the " c e r t i f i c a t e l i m i t " ) equal to the estimated amount set f o r t h i n the n o t i c e i n accordance with paragraph ( D ( c ) . Sec. 116(3) (3) N o t i c e to M i n i s t e r . Every non-resident person who i n a t a x a t i o n year has made a d i s p o s i t i o n of any taxa b l e Canadian p r o p e r t y of t h a t person (other than d e p r e c i a b l e property or excluded p r o p e r t y ) s h a l l , not l a t e r than 10 days a f t e r the day on which the d i s p o s i t i o n was made, send to the M i n i s t e r , by r e g i s t e r e d m a i l , a n o t i c e s e t t i n g f o r t h (a) the name and address of the person to whom he 161 disposed of the p r o p e r t y ( i n t h i s s e c t i o n r e f e r r e d to as the "purchaser"), (b) a d e s c r i p t i o n of the p r o p e r t y s u f f i c i e n t to i d e n t i f y i t , and (c) a statement of the proceeds of d i s p o s i t i o n of the prop e r t y and the amount of i t s a d j u s t e d c o s t base to him immediately before the d i s p o s i t i o n , u n l e s s the non-resident person has, at any time before the d i s p o s i t i o n , sent to the M i n i s t e r a n o t i c e under s u b s e c t i o n (1) i n respect of any proposed d i s p o s i t i o n of that p r o p e r t y and (d) the purchaser was the proposed purchaser r e f e r r e d to i n that n o t i c e , (e) the estimated amount set f o r t h i n that n o t i c e i n accordance with paragraph (1) (c) i s equal to or gr e a t e r than the proceeds of the d i s p o s i t i o n of the pro p e r t y , and (f ) the amount set f o r t h i n that n o t i c e i n accordance with paragraph ( l ) ( d ) does not exceed the a d j u s t e d c o s t base to the non-resident person of the pr o p e r t y immediately before the d i s p o s i t i o n . Sec. 116(4) (4) C e r t i f i c a t e i n r e s p e c t of p r o p e r t y disposed o f . Where a non-resident person who has sent to the M i n i s t e r a n o t i c e under s u b s e c t i o n (3) i n resp e c t of a d i s p o s i t i o n of any p r o p e r t y has (a) p a i d to the Receiver G e n e r a l , as or on account of 162 tax under t h i s Part payable by him f o r the year, 25% of the amount, i f any, by which the proceeds of d i s p o s i t i o n of the p r o p e r t y exceed the a d j u s t e d c o s t base to him of the p r o p e r t y immediately before the d i s p o s i t i o n , or (b) 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 a c c e p t a b l e to the M i n i s t e r i n r e s p e c t 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 f o r w i t h i s s u e to the non-resident person and the purchaser a c e r t i f i c a t e i n p r e s c r i b e d form i n respect of the d i s p o s i t i o n . Sec. 116(5) (5) L i a b i l i t y of purchaser i n c e r t a i n cases. Where in a t a x a t i o n year a purchaser has a c q u i r e d from a non-resident person any of that non-resident person's taxable Canadian pr o p e r t y (other than d e p r e c i a b l e p r o p e r t y or excluded p r o p e r t y ) , (a) the purchaser, u n l e s s a f t e r reasonable i n q u i r y he had no reason to b e l i e v e that the non-resident person was not r e s i d e n t i n Canada, i s l i a b l e to pay, as tax under t h i s P a r t f o r the year on behalf of the non-resident person, ( i ) 15% of the c o s t to the purchaser of the property so a c q u i r e d , i f no c e r t i f i c a t e has been i s s u e d under s u b s e c t i o n (2) i n resp e c t of the d i s p o s i t i o n of the property by the non-resident person to the purchaser, or 1 63 ( i i ) i n any other case, the l e s s e r of (A) 15% of the c o s t to the purchaser of the pr o p e r t y so a c q u i r e d , and (B) 25% of the amount, i f any, by which the c o s t to the purchaser of the p r o p e r t y so a c q u i r e d exceeds the c e r t i f i c a t e l i m i t f i x e d by the c e r t i f i c a t e i s s u e d under s u b s e c t i o n (2) i n respect of the d i s p o s i t i o n of the property by the non - r e s i d e n t person to the purchaser, and i s e n t i t l e d to deduct or w i t h o l d from any amount p a i d or c r e d i t e d by him to the non-resident person or otherwise recover from the non-resident person any amount p a i d by him as such tax; (b) at such time, i f any, as any c e r t i f i c a t e under su b s e c t i o n (4) i s i s s u e d to him by the M i n i s t e r i n respect of the p r o p e r t y , the purchaser ceases to be l i a b l e under t h i s s u b s e c t i o n to pay any amount as tax under t h i s Part f o r the year on behalf of the non-resident person; and (c) the purchaser s h a l l , w i t h i n 30 days a f t e r the end of the month i n which he a c q u i r e d the p r o p e r t y , remit to the Receiver General the tax f o r which he i s l i a b l e under paragraph ( a ) . Sec. 116(5.1) (5.1) Idem. Where a non-resident person has d i s p o s e d of or proposes to di s p o s e of a l i f e insurance p o l i c y i n 1 64 Canada, a p r o p e r t y d e s c r i b e d i n paragraph 59(2) ( a ) , ( c ) , or (d) or any p r o p e r t y that i s or would, i f he disposed of i t , be t a x a b l e Canadian p r o p e r t y of that person other than (a) excluded p r o p e r t y , or (b) p r o p e r t y that has been t r a n s f e r r e d or d i s t r i b u t e d on or a f t e r h i s death and as a consequence thereof to any person by way of g i f t i n t e r v i v o s or to a person with whom he was not d e a l i n g with at arm's l e n g t h f o r no proceeds of d i s p o s i t i o n or f o r proceeds of d i s p o s i t i o n l e s s than the f a i r market value thereof at the time he so disposed of i t or proposes to dispose of i t , as the case may be, the f o l l o w i n g r u l e s a p p l y : (c) the r e f e r e n c e i n paragraph (1)(C) to "the proceeds of d i s p o s i t i o n to be r e c e i v e d by him f o r the p r o p e r t y " s h a l l be read as a re f e r e n c e to "the f a i r market value of the p r o p e r t y at the time he proposed to d i s p o s e of i t " , (d) the r e f e r e n c e s i n s u b s e c t i o n s (3) and (4) to "the proceeds of d i s p o s i t i o n of the p r o p e r t y " s h a l l be read as r e f e r e n c e s to "the f a i r market value of the prop e r t y immediately before the d i s p o s i t i o n " ; (e) the r e f e r e n c e s i n s u b s e c t i o n (5) to "the c o s t to the purchaser of the p r o p e r t y so a c q u i r e d " s h a l l be read as r e f e r e n c e s to "the f a i r market value of the prop e r t y at the time i t was a c q u i r e d " ; and (f) the r e f e r e n c e i n s u b s e c t i o n (5.3) to the "amount 165 payable by the taxpayer f o r the p r o p e r t y so a c q u i r e d " s h a l l be read as a r e f e r e n c e to "the f a i r market value of the p r o p e r t y at the time i t was a c q u i r e d " . Sec. 116(5.2) (5.2) C e r t i f i c a t e i n r e s p e c t of d i s p o s i t i o n s . Where a non-resident person has, i n respect of a d i s p o s i t i o n or a proposed d i s p o s i t i o n to a taxpayer i n a t a x a t i o n year of a l i f e insurance p o l i c y i n Canada of the n o n - r e s i d e n t person, a p r o p e r t y d e s c r i b e d i n paragraph 5 9 ( 2 ) ( a ) , ( c ) , or (d) of the non-resident person or d e p r e c i a b l e p r o p e r t y that i s or would, i f he d i s p o s e d of i t , be taxable Canadian pr o p e r t y of the non-resident person, (a) p a i d to the Receiver General, as or on account of tax under t h i s Part payable by the non-resident person f o r the year, such amount as i s a c c e p t a b l e to the M i n i s t e r i n r e s p e c t of the d i s p o s i t i o n or proposed d i s p o s i t i o n of the p r o p e r t y , or (b) 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 a c c e p t a b l e to the M i n i s t e r i n r e s p e c t of the d i s p o s i t i o n or proposed d i s p o s i t i o n of the p r o p e r t y , the M i n i s t e r s h a l l f o r t h w i t h i s s u e to the non-resident person and to the taxpayer a c e r t i f i c a t e i n p r e s c r i b e d form i n r e s p e c t of the d i s p o s i t i o n , proposed proceeds of d i s p o s i t i o n or such other amount as i s reasonable i n the c ircumstances. Sec. 116(5.3) 166 (5.3) L i a b i l i t y of purchaser i n c e r t a i n c a ses. Where in a t a x a t i o n year a taxpayer has a c q u i r e d from a non-resident person p r o p e r t y r e f e r r e d to i n s u b s e c t i o n (5.2) , (a) the taxpayer, u n l e s s a f t e r reasonable i n q u i r y he had no reason to b e l i e v e that the non-resident person was not r e s i d e n t i n Canada, i s l i a b l e to pay, as tax under t h i s Part f o r the year on beh a l f of the no n - r e s i d e n t person, 50% of the amount, i f any, by which ( i ) the amount payable by the taxpayer f o r the pr o p e r t y so a c q u i r e d exceeds ( i i ) the amount f i x e d i n the c e r t i f i c a t e , i f any, i s s u e d under s u b s e c t i o n (5.2) i n respect of the d i s p o s i t i o n of the p r o p e r t y by the non - r e s i d e n t person to the taxpayer and i s e n t i t l e d to deduct or w i t h o l d from any amount p a i d or c r e d i t e d by him to the non-resident person or to otherwise recover from the non-resident person any amount p a i d by him as such tax; and (b) the taxpayer s h a l l , w i t h i n 30 days a f t e r the end of the month i n which he a c q u i r e d the pr o p e r t y , remit to the Receiv e r General the tax f o r which he i s l i a b l e under paragraph ( a ) . Sec. 116(5.4) 167 (5.4) Presumption. Where there has been a d i s p o s i t i o n by a non-resident of a l i f e i nsurance p o l i c y i n Canada by v i r t u e of s u b s e c t i o n 148(2) or any of subparagraphs 1 4 8 ( 9 ) ( c ) ( i ) to ( i i i ) and ( i v . 1 ) , the i n s u r e r under the p o l i c y s h a l l , f o r the purposes of s u b s e c t i o n s (5.2) and (5.3) be deemed to be the taxpayer who a c q u i r e d the p r o p e r t y f o r an amount equal to the proceeds of d i s p o s i t i o n as determined under s e c t i o n 148. Sec. 116(6) (6) D e f i n i t i o n of "excluded p r o p e r t y " . For the purposes of t h i s s e c t i o n , "excluded p r o p e r t y " of a non-resident person means (a) p r o p e r t y d e s c r i b e d i n subparagraph 1 1 5 ( 1 ) ( b ) ( i x ) ; (b) a share of the c a p i t a l stock of a p u b l i c c o r p o r a t i o n , or an i n t e r e s t t h e r e i n ; (c) a u n i t of a mutual fund t r u s t ; (d) a bond, debenture, b i l l , note, mortgage, hypothec or s i m i l a r o b l i g a t i o n ; or (e) any other p r o p e r t y that i s p r e s c r i b e d to be excluded p r o p e r t y . 245 see sec. 116(5)(a) I.T.A. 246 see Holmes 247 see CTS 212-11 248 The C a r t e r Commission recommended a g e n e r a l w i t h o l d i n g tax of 30%, see V o l . IV p.488 No. 6. For s p e c i f i c items the Commission recommended ( V o l . IV p.502/503): "Payments of p r o p e r t y income by r e s i d e n t s to n o n - r e s i d e n t s of Canada are s u b j e c t to w i t h o l d i n g taxes as f o l l o w s : (1) D i v i d e n d s of a company owned to the extent of 25 per cent or more by Canadians (with a v a r i a t i o n i n t h i s r u l e i f the shares are l i s t e d on a stock exchange) — 10 per cent; a l l other d i v i d e n d s — 15 per c e n t . (2) I n t e r e s t — 15 per cent with c e r t a i n e x c e p t i o n s , the most important being the exemption f o r i n t e r e s t payments on bonds i s s u e d a f t e r A p r i l 15, 1966, by the f e d e r a l , p r o v i n c i a l , and m u n i c i p a l governments, and f o r i n t e r e s t payments to o r g a n i z a t i o n s exempt from tax i n t h e i r country ( c o n d i t i o n a l on c e r t i f i c a t e s of exemption being p r o v i d e d ) . (3) R e n t a l s — 15 per cent, but i n the case of r e a l t y r e n t a l s a non-resident may e l e c t to pay tax at the a p p l i c a b l e Canadian tax r a t e s a f t e r f i l i n g an income tax r e t u r n of net Canadian r e n t a l income. (4) R o y a l t i e s — c o p y r i g h t r o y a l t i e s are not s u b j e c t to w i t h o l d i n g tax; f i l m and tape r o y a l t i e s - 10 per cent; a l l other r o y a l t i e s — 15 per ce n t . A r e c i p i e n t of timber r o y a l t i e s may e l e c t to be taxed on h i s net Canadian income by f i l i n g a r e t u r n as i n the case of a r e c i p i e n t of r e a l e s t a t e r e n t a l s . (5) E s t a t e and t r u s t income and patronage d i v i d e n d s — 15 per cent. (6) A 15 per cent tax i n l i e u of any other tax ( i n c l u d i n g the w i t h o l d i n g tax on d i v i d e n d s and i n t e r e s t paid) i s imposed on the income of a non-resident-owned investment c o r p o r a t i o n — a c o r p o r a t i o n s u b s t a n t i a l l y owned abroad whose income i s s u b s t a n t i a l l y from investments." 249 e.g. Canada-Germany, see A r t . 10(2) f o r d i v i d e n d s ; A r t . 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 sec. 212 ( l)(a) I.T.A.; see a l s o sec. 212(4) 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. 1 70 255 sec. 212(1)(e) I .T. A. 256 sec. 2 1 2 ( 1 ) ( f ) I .T. A. 257 sec. 212(1)(g) I .T. A. 258 sec. 212(1)(h) I .T. A. 259 sec. 212(1 ) ( i ) I • T. A. 260 sec. 2 1 2 (1 ) ( j . 1 ) I . T. 261 sec. 212(1)(k) I .T. A. 262 sec. 212(1)(1) I .T. A. 263 sec. 212(1)(m) I .T. A. 264 sec. 212(1)(n) I .T. A. 265 sec. 212(1)(o) I . T. A. 266 sec. 212(1)(p) I .T. A. 267 sec . 212(1)(q) I • T. A. 268 sec. 212(1)(r) I .T. A. 171 269 sec. 212(1)(s) I.T.A. 270 sec. 212(2) I.T.A. 271 So i n t e r e s t p a i d by a non-resident-owned investment c o r p o r a t i o n to a non-resident i s g e n e r a l l y exempt from w i t h o l d i n g tax by v i r t u e of sec. 2 1 2 ( 1 ) ( b ) ( i ) I.T.A.; c a p i t a l gains d i v i d e n d s p a i d by a non-resident-owned investment c o r p o r a t i o n are exempt by v i r t u e of sec. 212(2)(a) I.T.A.; See MacDonald, V o l . 4, No. 68444. 272 see sec. 2 1 2 ( 1 ) ( b ) ( v i i ) I.T.A. 273 CCH, Budget Message, p.13; P r e n t i c e H a l l , Budget Message, p.11: Non-Resident W i t h o l d i n g Tax An exemption from the non-resident w i t h o l d i n g tax i s c u r r e n t l y allowed f o r i n t e r e s t payments on c e r t a i n long-term debt 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 on debt o b l i g a t i o n s of Canadian governments, p r o v i d e d these are i s s u e d by the end of 1985. The budget proposed an e x t e n s i o n of t h i s exemption f o r such debt o b l i g a t i o n s i s s u e d before 1989. The e x t e n s i o n was to ensure that c o r p o r a t i o n s have continued access long-term debt f i n a n c i n g at c o m p e t i t i v e r a t e s . In a d d i t i o n , an exemption from the non-resident w i t h o l d i n g tax was being provided 1 72 f o r i n t e r e s t p a i d to the Bank f o r I n t e r n a t i o n a l S e t t l e m e n t s . The government a l s o proposed to examine over the coming year the extent to which the c u r r e n t exemption on w i t h o l d i n g tax on f o r e i g n c u r r e n c y d e p o s i t s h e l d i n banks can be broadened to i n c l u d e other f i n a n c i a l i n s t i t u t i o n s . To ensure that the exemption i s not e f f e c t i v e l y a p p l y i n g to f o r e i g n c u r r e n c y used to f i n a n c e domestic l e n d i n g , to the detriment of other l e n d e r s , the i s s u e of a p p r o p r i a t e safeguards was intended to be p a r t of the review. 274 see sec. 215(6) I.T.A. I t reads: Sec. 215(6) (6) L i a b i l i t y f o r tax. Where a person has f a i l e d to deduct or w i t h o l d any amount as r e q u i r e d by t h i s s e c t i o n from an amount p a i d or c r e d i t e d or deemed to have been p a i d or c r e d i t e d to a non-resident person, that person i s l i a b l e to pay as tax under t h i s Part on b e h a l f of the non-resident person the whole of the amount that should have been deducted or w i t h e l d , and i s e n t i t l e d to deduct or w i t h o l d from any amount p a i d or c r e d i t e d by him to the non-resident person or otherwise recover from the non-resident person any amount p a i d by him as tax under t h i s Part on behalf t h e r e o f . 1 73 275 sbgenannte S p e k u l a t i o n s f r i s t 276 Short form of " A k t i e n g e s e l l s c h a f t " , which means j o i n t stock company. 277 See example given by Dart/Brown, XXIV Can. Tax J . (1976), 151, Fn. 18, where they are a c t u a l l y c a l c u l a t i n g the bank's gross-up i n r e s p e c t to Canadian w i t h o l d i n g taxes on i n t e r e s t payments to a f o r e i g n bank. 278 - and there may be d i f f e r e n t economical and l e g a l reasons f o r t h i s -279 I t reads: Sec. 212(14) (14) C e r t i f i c a t e of exemption. The M i n i s t e r may, upon a p p l i c a t i o n , i s s u e a c e r t i f i c a t e to any non-resident who e s t a b l i s h e s to the s a t i s f a c t i o n of the M i n i s t e r that (a) an income tax i s imposed under the laws of the country of which he i s a r e s i d e n t ; (b) he i s exempt under the laws r e f e r r e d to i n paragraph (a) from the payment of income tax to the government of the country of which he i s a r e s i d e n t ; and (c) he i s ( i ) a person who i s or would be, i f he 1 74 were r e s i d e n t i n Canada, exempt from tax under s e c t i o n 149, ( i i ) a t r u s t or c o r p o r a t i o n e s t a b l i s h e d or i n c o r p o r a t e d p r i n c i p a l l y i n c o n n e c t i o n with, or the p r i n c i p a l purpose of which i s to a d m i n i s t e r or p rovide b e n e f i t s under, one or more superannuation, pension, or retirement funds or plans or any funds or plans e s t a b l i s h e d to p r o v i d e employee b e n e f i t s , or ( i i i ) a t r u s t , c o r p o r a t i o n or other o r g a n i z a t i o n c o n s t i t u t e d and operated e x c l u s i v e l y f o r c h a r i t a b l e purposes, no p a r t of the income of which i s payable to, or i s otherwise a v a i l a b l e f o r , the p e r s o n a l b e n e f i t of any p r o p r i e t o r , member, sha r e h o l d e r , t r u s t e e , or s e t t l o r t h e r e o f . 280 the London rate of gross up between banks 281 depending i f there i s a Double Tax Convention 282 T h i s does not take i n t o account the r i s k of f o r e i g n c u r r e n c y t r a n s a c t i o n s , which i s to be seen as an economic r i s k i n i t s e l f . 175 283 The C a r t e r Report suggested the p o s s i b i l i t y f o r non-residents to f i l e a r e t u r n : 7. "A w i t h o l d i n g tax of up to 10 percent should be imposed on payments f o r s e r v i c e s that were deducted i n the computation of b u s i n e s s or p r o p e r t y income and were not a l r e a d y s u b j e c t to a w i t h o l d i n g tax. These s e r v i c e s might w e l l be rendered o u t s i d e Canada but the b e n e f i t from them would be obtained i n Canada. T h i s w i t h o l d i n g tax should not apply to amounts p a i d in reimbursement of expenses. 8. In c e r t a i n s p e c i f i c cases non-residents should be e n t i t l e d to e l e c t to be taxed as r e s i d e n t s of Canada, r e p o r t i n g t h e i r world income from a l l sources and deducting f o r e i g n tax c r e d i t s on the present b a s i s for f o r e i g n taxes p a i d on income from f o r e i g n sources. T h i s e l e c t i o n should be a v a i l a b l e i n the f o l l o w i n g c a s e s : a) where a Canadian r e s i d e n t became non-resident and e l e c t e d to be taxed as a Canadian r e s i d e n t f o r each year a f t e r the change of r e s i d e n c e ; or b) where a non-resident r e c e i v e d c e r t a i n kinds of income from Canada, i n c l u d i n g g i f t s , i n h e r i t a n c e s , the income p o r t i o n of pension and annuity payments and employment income. The implementation of these recommendations would, we b e l i e v e , c o n f e r the f o l l o w i n g important advantages: 1. S u b s t i t u t i o n of a 30 percent gross-up and c r e d i t f o r 1 76 the s e c t i o n 28(1)(d) exemption: a) Removal of the exemption under s e c t i o n 28(1)(d) f o r f o r e i g n d i v i d e n d s r e c e i v e d by a Canadian c o r p o r a t i o n from a company i n which i t h e l d at l e a s t a 25 per cent i n t e r e s t would e l i m i n a t e a major loophole i n the present tax system through which some Canadians have i n e f f e c t avoided the payment of t h e i r f u l l Canadian tax on Canadian source income which has been d i v e r t e d through companies i n tax havens. b) The use of an a r b i t r a r y f l a t - r a t e tax c r e d i t would reduce, to a great extent, the s i g n i f i c a n c e of the tax mix of the source country. Thus, the balance between income taxes and w i t h o l d i n g taxes would be unimportant and the extent to which other taxes (e.g., s a l e s taxes) were u t i l i z e d i n the f o r e i g n j u r i s d i c t i o n would be l e s s important. c) Once i t was d e c i d e d that a broad e x c l u s i o n l i k e s e c t i o n 28(1)(d) was not a p p r o p r i a t e , the use of an a r b i t r a r y r a t e would s i m p l i f y the computations and remove much of the u n c e r t a i n i t y . Both of these advantages would be p a r t i c u l a r l y important to ensure that Canadian c o r p o r a t i o n s were not disco u r a g e d from e s t a b l i s h i n g f o r e i g n o p e r a t i o n s . Although the procedure would r e q u i r e the measurement of u n d e r l y i n g f o r e i g n source income from most c o u n t r i e s , t h i s would not g e n e r a l l y 1 77 apply to income d e r i v e d from the U n i t e d S t a t e s or the U n i t e d Kingdom (from which over three q u a r t e r s of the f o r e i g n source d i v i d e n d s of Canadians are d e r i v e d ) . T h i s s p e c i a l treatment c o u l d perhaps l a t e r be extended to other c o u n t r i e s a f t e r experience has been gained i n a d m i n i s t e r i n g the p r o v i s i o n s . In any case, the adjustments r e q u i r e d f o r the other c o u n t r i e s , although a r b i t r a r y , would be r e l a t i v e l y simple. Because p r o p e r t y gains would be taxed i n f u l l to Canadians on r e a l i z a t i o n , f u l l Canadian tax would be c o l l e c t e d i n the long run. A r b i t r a r y procedures to compute the annual tax l i a b i l i t y t h e r e f o r e would not be as i n e q u i t a b l e as they might otherwise be. d) A f l a t - r a t e gross-up and c r e d i t would r e s u l t i n the p r o g r e s s i v e r a t e schedule being a p p l i e d to f o r e i g n source d i r e c t investment income. e) Adoption of a r a t e of 30 per cent f o r the gross-up and c r e d i t would have two advantages: Canada would d e r i v e some ( a l b e i t small) net revenue from f o r e i g n source d i v i d e n d s , and most sh a r e h o l d e r s i n Canadian companies with f o r e i g n d i r e c t investments would pay no more Canadian tax .on f o r e i g n source d i v i d e n d s than they do at p r e s e n t . f) The gross-up r a t e c o u l d be a d j u s t e d from time to 1 78 time to meet p a r t i c u l a r c i r c u m s t a n c e s . A re d u c t i o n i n the ra t e might be necessary i f over time the expected before-tax r a t e s of r e t u r n on co r p o r a t e a s s e t s i n Canada d e c l i n e d f o l l o w i n g the adoption of the i n t e g r a t i o n p r o p o s a l . " See C a r t e r Report pp. 488-490. 284 see sec. 216 and 217 I.T.A. 285 See Ba 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., [1978] CTC 2055; 78 DTC 1062 (T.R.B.) 286 As an example l e t ' s take r e a l e s t a t e investments: I f a l l tenants are w i t h o l d i n g 25% of the ren t , t h i s w i l l u s u a l l y end up being more expensive than t a x a t i o n of the p r o f i t , which means gross rent minus a l l expenses. 287 see above 288 See IT-393R pa r a . 9. T h i s l i m i t s the f e a s i b i l i t y of a l l d i f f e r e n t kinds of investment which u s u a l l y have some l o s s e s , at l e a s t i n the beginning. 289 sec. 125(7)(b) I.T.A. reads: Sec. 125(7)(b) 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 c o r p o r a t i o n . "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 " means a p r i v a t e 179 c o r p o r a t i o n t h a t i s a Canadian c o r p o r a t i o n other than a c o r p o r a t i o n c o n t r o l l e d , d i r e c t l y or i n d i r e c t l y i n any manner whatever, by one or more non-resident persons, by one or more p u b l i c c o r p o r a t i o n s (other than a p r e s c r i b e d venture c a p i t a l c o r p o r a t i o n ) or any combination t h e r e o f . 290 see sec. 112(1),(2) ITA 291 see sec. 125 I.T.A. 292 The exact percentage d i f f e r s from p r o v i n c e to p r o v i n c e . In B.C. i t i s set at 27%. 293 Lawyers i n B.C. are not allowed to i n c o r p o r a t e , which i s a p i t y f o r them under tax a s p e c t s , but i n A l b e r t a i t i s p o s s i b l e . 294 see: Falcone 295 e x c l u d i n g share c a p i t a l or c o n t r i b u t e d s u r p l u s p r o v i d e d by persons other than s p e c i f i e d non-resident s h a r e h o l d e r s 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 and t r u s t s 297 formula taken from Ward, i n : F o r r y (Ed.), T h i n C a p i t a l i z a t i o n 180 298 see above 299 see above 300 i . e . , approximately o n e - t h i r d of the tax payable thereon 301 S u b j e c t , however, to c e r t a i n adjustments on account of the f o r e i g n tax c r e d i t allowed under sec. 126 I.T.A. 302 i . e . , at the normal w i t h o l d i n g tax r a t e of 25% 303 i . e . , the maximum rate of 34%, p l u s the 47% surtax 304 see above 305 i . e . , 50% of 62.5%, p l u s 50% of 25% 306 i . e . , 50% x 57.5%, plus 50% x 15% 307 see chapter 7 308 D i r e c t s u b s i d i e s as under APIP or FPIP may be r e s t r i c t e d e a s i e r , but t h i s would be a separate i s s u e . 309 see d e f i n i t o n of " c a p i t a l gains d i v i d e n d account" and 181 "Canadian p r o p e r t y " i n sec. 133(8)(b) and (c) I.T.A. 310 Looking at the s i t u a t i o n before the I.T.A. (S.C. 1970-71, c.63, formerly C-259), the treatment of NRO's seems worse than i t was under the o l d I.T.A. 311 see Cochrane 312 o r , under c e r t a i n l i m i t e d c i rcumstances, by r e s i d e n t c o r p o r a t i o n s 313 a f t e r c o r p o r a t i o n taxes and the r e t e n t i o n of some amount f o r c a p i t a l formation 314 see CTS 219-108B 315 MacDonald, Vol.4, No. 68325 316 u n l e s s reduced by t r e a t y 317 Non-Canadian c o r p o r a t i o n s which were r e s i d e n t i n Canada at any time i n the year w i l l pay a tax under t h i s Part on an amount equal to the aggregate of the f o l l o w i n g : the c o r p o r a t i o n ' s t o t a l t a xable income, p l u s t a x a b l e d i v i d e n d s deducted under sec. 112 or 115(1) I.T.A., p l u s 182 a n y r e s o u r c e a l l o w a n c e d e d u c t e d u n d e r s e c . 2 0 ( 1 ) ( V . 1 ) I . T . A . , p l u s t h e amount c l a i m e d by t h e c o r p o r a t i o n i n t h e p r e c e d i n g y e a r a s an a l l o w a n c e i n r e s p e c t o f i t s i n v e s t m e n t i n p r o p e r t y i n C a n a d a , p l u s t h e amount c l a i m e d u n d e r s e c . 2 1 9 ( 1 ) ( i ) I . T . A . ( s e e b e l o w ) f o r t h e p r e c e d i n g y e a r ( s e c . 2 1 9 ( 1 ) ( a ) , ( a . 1 ) , ( b ) , ( c ) I . T . A . ) , p l u s a m o u n t s r e f e r r e d t o i n s e c . 2 1 9 ( 1 ) ( a . 4 ) I . T . A . , m i n u s t h e a g g r e g a t e o f t h e t o t a l f e d e r a l i n c o m e t a x a n d n o n - d e d u c t i b l e p r o v i n c i a l i n c o m e t a x e s p a i d f o r t h e y e a r ( s e c . 2 l 9 ( l ) ( e ) a n d ( f ) I . T . A . ) , t h e f o r e i g n t a x c r e d i t t a k e n a g a i n s t t h e t a x o t h e r w i s e p a y a b l e u n d e r P a r t I ( s e c . 2 1 9 ( 1 ) ( g ) I . T . A . ) , h a l f t h e l o w e r o f t h e t a x a b l e i n c o m e o r t h e a g g r e g a t e o f i t s n e t f o r e i g n s o u r c e i n c o m e a n d t a x a b l e c a p i t a l g a i n s ( s e c . 2 1 9 ( 1)(g) I . T . A . ) , i f t h e c o r p o r a t i o n was c a r r y i n g on b u s i n e s s i n C a n a d a a t t h e e n d o f t h e y e a r , an a l l o w a n c e f o r t h e y e a r i n r e s p e c t o f i n v e s t m e n t p r o p e r t y i n C a n a d a , n o t e x c e e d i n g t h e maximum p r e s c r i b e d by s e c . 8 0 8 ( 1 ) o f t h e R e g u l a t i o n s ( s e c . 2 1 9 ( 1 ) ( h ) I . T . A . ) , t h e e x c e s s o f t h e a g g r e g a t e o f t h e d i v i d e n d s p a i d by t h e company s i n c e i t l a s t became r e s i d e n t i n C a n a d a o v e r t h e a g g r e g a t e , f o r e a c h t a x a t i o n y e a r e n d i n g 183 a f t e r i t l a s t became r e s i d e n t i n Canada, of h a l f of the l e s s e r of (1) i t s t a x a b l e income and (2) i t s net f o r e i g n source income and t a x a b l e c a p i t a l gains (sec. 2 1 9 ( 1 ) ( i ) I.T.A.), the amount by which any d i r e c t or i n d i r e c t p r o v i n c i a l r o y a l t i e s added to income or d i s a l l o w e d as a deduction under sec. 12(1)(o) or I8(l)(m) I.T.A. or under sec. 69(6) or (7) I.T.A., and any taxes or other amounts p a i d or payable to the Crown under the Petroleum and Gas Revenue Act which are d i s a l l o w e d as a deduction under sec. 18(1)(1.1) I.T.A., exceeds the amount, i f any, d e d u c t i b l e i n res p e c t thereof as p r o v i n c i a l income tax under sec. 2 l 9 ( l ) ( f ) I.T.A. or by way of an investment allowance under sec. 219(1)(h) I.T.A. (see above) (sec. 2 1 9 ( 1 ) ( J ) I . T . A . ) , and amounts r e f e r r e d to i n sec. 219(1)(k) I.T.A.. The investment pr o p e r t y i n Canada concept, r e f e r r e d to i n sec. 219(1)(b) and (h) I.T.A., i s designed to p r o v i d e some leeway f o r the formation of working c a p i t a l i n Canada on the same assumption that a s u b s i d i a r y company would r e t a i n p a r t of i t s p r o f i t s r a t h e r than d i s t r i b u t i n g them as d i v i d e n d s . Non-Canadian c o r p o r a t i o n s , i n the t e c h n i c a l sense of the term r e f e r r e d to above, which are not r e s i d e n t i n Canada throughout the year must pay the branch tax on the aggregate of the f o l l o w i n g : 184 the c o r p o r a t i o n ' s t a x a b l e income earned i n Canada (sec. 2 l 9 ( l ) ( a ) I.T.A.), p l u s the amount of any resource allowance deducted under sec. 20(1)(V.1) f o r the year, p l u s the allowance claimed f o r the preceding year i n respect of investment p r o p e r t y i n Canada (sec. 219(1)(b) I.T.A.), p l u s amounts r e f e r r e d to i n sec. 2 l 9 ( 1 ) ( a . 4 ) I.T.A. minus the aggregate o f : the aggregate of the net t a x a b l e c a p i t a l gains from d i s p o s i t i o n s of "taxable Canadian p r o p e r t y " (see sec. M 5 ( l ) ( b ) I.T.A.) not used i n c a r r y i n g on business i n Canada ( l i m i t e d to the amount of the net taxable c a p i t a l gains from the d i s p o s i t i o n of a l l taxable Canadian p r o p e r t y , whether or not used i n c a r r y i n g on the business i n Canada) (sec. 219(1)(d) I.T.A.), the f e d e r a l income tax and the non-deductible p r o v i n c i a l income taxes f o r the year except to the extent that such taxes apply to the net c a p i t a l gains r e f e r r e d to immediately above (sec. 219(1 H e ) and ( f ) I.T.A.), i f the c o r p o r a t i o n was c a r r y i n g on business i n Canada at the end of the year, an allowance f o r the year i n respe c t of investment p r o p e r t y i n Canada not exceeding the maximum p r e s c r i b e d by sec. 808(1) I.T.A. of the R e g u l a t i o n s ( s e c . 219(1)(h) I.T.A.), the amount of any d i r e c t or i n d i r e c t Crown r o y a l t i e s 1 8 5 added to income or d i s a l l o w e d as a deduction under sec. 1 2 (1 ) (o) or I 8 d ) ( m ) I .T.A. or under sec. 69(6)( or (7) I.T.A., and any taxes or other amounts p a i d or payable to the Crown under the Petroleum and Gas  Revenue Tax Act which are d i s a l l o w e d as a deduction under sec. 18(1) (1.1), to the extent that such amounts are not d e d u c t i b l e as p r o v i n c i a l income tax under sec. 219(1)(f) I.T.A. or by way of an investment allowance under sec. 219(1 ) ( J ) I.T.A.), and amounts r e f e r r e d to i n sec. 219(1)(k) I.T.A. [CTS 219-108C-E]. More d e t a i l e d i n f o r m a t i o n can be obtained through IT-137R2 and IT-227. 318 see sec. 2l9(2)(a) I.T.A. 319 see sec. 2 l 9 ( 2 ) ( b ) ( i ) I.T.A. 320 see sec. 2 1 9 ( 2 ) ( b ) ( i i ) I.T.A. 321 see sec. 2 1 9 ( 2 ) ( b ) ( i i i ) I.T.A. 322 see sec. 219(4) I.T.A. 323 see MacDonald No. 68325; Ward, i n F o r r y (Ed.): Branch Tax. 186 324 minus c e r t a i n amounts i n v e s t e d i n the year i n business a s s e t s i n Canada 325 see Bonzanigo, p.56. So a company i s l i k e l y to keep a branch i n Canada only as long as t h i s branch produces l o s s e s . Those l o s s e s c o u l d be o f f s e t a g a i n s t p r o f i t s i n the company's home c o u n t r y . Whenever the Canadian branch o p e r a t i o n s t a r t s making p r o f i t s , i t i s l i k e l y that i t would be changed i n t o a s u b s i d i a r y . See h e r e t o : Ward, i n F o r r y (Ed.), p.77/78 326 Canadian Business C o r p o r a t i o n Act 327 a c c o r d i n g to the B.C. Company Act, RSBC 1979, chapter 59 328 see sec. 133(1) BCCA 329 see sec. 133(1) BCCA 330 Acco r d i n g to Newman, p.277. i n the mid-70s, Howard Urquhart, then p r e s i d e n t and CEO of Rayonier Canada, a s u s i d i a r y of ITT, had to get approval from the US f o r any expenditure of more than $25,000. 331 i n chapter 9 1 87 332 See Robinson, M o t i v a t i o n on Flow of P r i v a t e F o r e i g n Investment. 333 see Powrie 334 We a l s o have German e x p l o r a t i o n firms l o o k i n g f o r minerals — mainly i n the northern part of the p r o v i n c e s and i n the t e r r i t o r i e s . German chemical and o i l p r o c e s s i n g f irms are i n v o l v e d e s p e c i a l l y i n A l b e r t a . 335 l i k e more c o m p e t i t i o n , higher expenses to a c q u i r e land and higher taxes 336 I n t e r e s t r a t e s of up to 25% and an almost equal i n f l a t i o n r a t e made busi n e s s almost impossible some years ago. 337 i n c l u d i n g a l l kinds of educat i o n , e s p e c i a l l y education on the job 338 T h i s i s another reason, why a l o t of p r o d u c t i o n i s not being t r a n s f e r r e d to lo w - s a l a r y c o u n t r i e s . 339 However, resource companies u s u a l l y don't have too much of a ch o i c e where they l i k e to do investment. They have to go wherever the resources a r e . 188 340 e s p e c i a l l y i n mining, f i s h i n g , and the lumber i n d u s t r y . 341 In t h i s sense Canada has some d i f f i c u l t y , s i n c e the geography causes f a i r l y high c o s t s f o r east-west t r a d e , which means f o r trade w i t h i n the country. 342 A new t r a c k i s j u s t going to be b u i l t through the Rocky Mountains, e n l a r g i n g a s i n g l e t r a c k to a double tr a c k l i n e between B.C. and A l b e r t a . 343 On the other hand, there are p o s s i b i l i t i e s of p u t t i n g up some investments i n Canada, c l o s e to the U.S. border. I w i l l come back to t h i s . 344 T h i s means any k i n d of product, not only i n p h y s i c a l form. 345 Sometimes lower p r o d u c t i o n c o s t s w i l l be p o s s i b l e i n an area f u r t h e r from the "market". 346 One of the problems of doing investment i n Canada i s that there i s onl y a smal l market f o r consumer goods. So unless Canada opens up f o r more people to come i n t o the country there i s b a r e l y a chance to improve t h i s s i t u a t i o n . By going t h i s way Canada c o u l d get away from 189 s e l l i n g r e s o u r c e s and change towards more manufacturing and p r o c e s s i n g . 347 I w i l l p o i n t t h i s out i n more d e t a i l l a t e r . 348 see sec. 125 I.T.A. 349 see Part V I.T.A., Reg. 500 350 see sec. 18(4) I.T.A. 351 see above 352 see sec. 74 I.T.A., sec. 75 I.T.A. and sec. 75(2) I.T.A. 353 see e.g., the d i f f e r e n c e between B.C. and Washington. 354 So i t might be b e t t e r to go d i r e c t l y to the S t a t e s than e x p o r t i n g from Canada. 355 I, t h e r e f o r e , w i l l r e f e r to some of the changes. CORPORATE TAXES The c o r p o r a t e tax r a t e f o r the U.S. was reduced from 46 % to 34%. On the other hand the investment tax c r e d i t i s gone. ( T h i s was 10% of the purchase p r i z e . I t was used 1 90 e s p e c i a l l y i n the s t e e l i n d u s t r y , i n the heavy machines i n d u s t r y e t c . ) T h i s only does apply f o r the normal c o r p o r a t e r a t e . There i s a l s o a new system i n t r o d u c e d , an a l t e r n a t i v e minimum tax (AMT) of 20%. T h i s i s l a i d down in sec. 55 to 59 of the new Code. In order to determine i t , b a s i c a l l y a company has to compare the AMT and the c o r p o r a t e tax r a t e a l l o c a b l e under the normal r u l e s . Then we have to take the d i f f e r e n c e , s p l i t i t by two (or m u l t i p l y i t by 50%) and add the AMT. On t h a t amount the company has to pay another 20% taxes. So the minimum tax i s 50% of the AMT times 20% taxes. T h i s system of AMT, which i s r e a l l y c omplicated i n p r a c t i c e and i n my understanding w i l l cause a l o t of problems f o r the accountants and g i v e work to tax lawyers i s o n l y implemented f o r the time from 1987 to 1989. Afterwards the US w i l l change the cor p o r a t e t a x a t i o n to a t a x a t i o n of t a x a b l e e a r n i n g s and p r o f i t s . BRANCH TAX For f o r e i g n companies having a branch i n the U.S. there i s a 30% w i t h o l d i n g tax on p o r t f o l i o income. Under the U.S.-German Double Tax Convention i t i s reduced to 15%. In t h i s context we have to look at the e f f e c t i v e l y connected income. There i s a l s o a secondary w i t h o l d i n g tax on d i v i d e n d s which are p a i d by a german c o r p o r a t i o n to f o r e i g n s t o c k h o l d e r s , i f 50% of the gross income of the german c o r p o r a t i o n (over a three year p e r i o d ) i s 191 d e r i v e d from the U.S. T h i s tax now i s 25%. A f t e r 1986 the U.S. c r e a t e d a "branch p r o f i t tax", t r i g g e r e d by the r e - p a t r i a t i o n of p r o f i t s . I f we compare t h i s to the e q u i t y p o s i t i o n of the branch p.a., t h i s ends up at 30% of the d i f f e r e n c e . Under the U.S.-German Double Tax  Convent ion a s u b s i d i a r y i s taxed 15%, and i t p r o h i b i t s a branch tax. But there are d i f f e r e n t exemptions which the U.S. implemented. (The d e t a i l s are not important to l a y down f o r the purpose of t h i s t h e s i s . ) FOREIGN INVESTORS AND PARTNERSHIPS For d i s t r i b u t i o n s from a U.S. p a r t n e r s h i p to f o r e i g n p a r t n e r s there i s a w i t h o l d i n g tax of 20%. T h i s w i l l be i n c l u d e d i n the tax payable by the s p e c i f i c p a r t n e r or i n v e s t o r . DEPRECIATION Under the 1981 Act the US gave i n v e n t i v e s f o r investments by implementing f a s t w r i t e o f f s (ACRS). There were c a t e g o r i e s of 3,5 and 10 year a s s e t s . In r e a l e s t a t e i t was 19 y e a r s . T h e r e f o r e r e a l e s t a t e investment i n the U.S. was very i n t e r e s t i n g and a l o t of German money was i n v e s t e d i n U.S. r e a l e s t a t e and a l l kinds of develeopments. In the 1986 U.S. Tax Reform Act i n r e a l e s t a t e we now f i n d two d i f f e r e n t c a t e g o r i e s : r e s i d e n t i a l and n o n - r e s i d e n t i a l ( = commercial) r e a l e s t a t e . The p e r i o d f o r the w r i t e o f f on r e s i d e n t i a l r e a l e s t a t e now 192 i s 27 1/2 yea r s , and f o r non r e s i d e n t i a l r e a l e s t a t e a c q u i r e d a f t e r 1986 i t i s 31 1/2 y e a r s . The i n v e s t o r has to use the s t r a i g h t l i n e method f o r d e p r e c i a t i o n . For other than r e a l e s t a t e the c a t e g o r i e s now are 3,5,7,10,15 and 20 year a s s e t s . For the 3,5,7 and 10 year a s s e t s we f i n d a 200% d e c l i n i n g balance d e p r e c i a t i o n . For example, l o o k i n g at a 5 year d e p r e c i a t i o n of a $100 a s s e t , we would have a d e p r e c i a t i o n of $20 p.a. s t r a i g h t l i n e . With a d e c l i n i n g d e p r e c i a t i o n we would have: In the 1st year $40, i n the 2nd year there would be a r e s t of $60 l e f t , so the d e p r e c i a t i o n would be $24, and so on. La t e r we c o u l d switch to the s t r a i g h t l i n e d e p r e c i a t i o n . For the 15 and 20 year a s s e t s we have a 150% d e c l i n i n g balance d e p r e c i a t i o n . For a l l a s s e t s other than r e a l e s t a t e we have a h a l f year convention f o r the f i r s t year. For r e a l e s t a t e we have a 1/2 month convention. If someone buys more than 40% of h i s a s s e t s i n the l a s t q u a r t e r of the year, we have a 1/4 month convention. For a s s e t s which are pl a c e d i n s e r v i c e a f t e r 1986, there i s an a l t e r n a t i v e d e p r e c i a t i o n system e l e c t a b l e , which i s the s t r a i g h t l i n e d e p r e c i a t i o n . For r e a l e s t a t e a d e p r e c i a t i o n f o r 40 years i s e l e c t i v e . The system i s mandatory i n three cases: a) i f a U.S. taxpayer buys a s s e t s o u t s i d e of the U.S. and uses i t f i r s t o u t s i d e of the U.S.; b) i f a U.S. taxpayer a c q u i r e s p r o p e r t y and i s s u e s bonds fo r i t , which l e a s e s i t ; 1 93 c) when the a l t e r n a t i v e minimum tax (AMT) i s c a l c u l a t e d . Another r u l e i s the uniform c a p i t a l i z a t i o n r u l e f o r r e a l e s t a t e and i n t a n g i b l e p e r s o n a l p r o p e r t y : Sales c o s t s , marketing c o s t s i n c l u d i n g taxes and i n t e r e s t s have to be c a p i t a l i z e d as w e l l as s i m i l a r c o s t s . For long term p r o j e c t s there was the a l t e r n a t i v e to use a percentage of completion method or to r e p o r t a f t e r completion. Now: i f at l e a s t 40% are completed, one has to use the percentage of completion method. With the new U.S. Tax Reform Act e s p e c i a l l y the r e a l e s t a t e lobby i n the U.S. was h i t r i g h t on t h e i r head. 356 Since the beginning of 1985 i t appears that i t ' s going b e t t e r i n e a s t e r n Canada, while western Canada i s s t i l l " i n the h o l e " . 357 i n m i l l i o n German Mark; c i t e d from Bundesministerium fur W i r t s c h a f t , A p r i l 1985, Anlage 1. 358 i n r e l a t i o n to the y e a r l y investments not too bad. 359 and not, as before, i n investment a c t i v i t y per year. U n i t s again i n M i l l i o n German Mark. C i t e d from: Deutsche Bundesbank, Die K a p i t a l v e r f l e c h t u n g 1976-1982, p.6/7, und: Die K a p i t a l v e r f l e c h t u n g ' 1 9 7 8 - 1 9 8 3 , p.23. 360 without h o l d i n g companies 1 94 361 i n the sense of investment 362 The f o l l o w i n g f i g u r e s were onl y a v a i l a b l e f o r 1976-1982; c i t e d from: Deutsche Bundesbank, Die K a p i t a l v e r f l e c h t u n g 1976-1982, p.6/7. 363 i n B i l l i o n German Marks 364 numbers in thousands 365 The Gray Report, as w e l l as the C a r t e r Report, admitted net economic b e n e f i t s f o r Canada r e s u l t i n g from f o r e i g n investment. 366 Some of the t r e a t i e s s p e c i f i c a l l y provide f o r Canada's i m p o s i t i o n of a branch tax. 367 i n : IFA, Non D i s c r i m i n a t i o n , A r t . 24, p.304/305. 368 Futhermore, where a t r e a t y i s n e g o t i a t e d on the b a s i s of a p a r t i c u l a r set of s t a t u t o r y p r o v i s i o n s , i t would be d i f f i c u l t l a t e r f o r a n a t i o n a l to complain that any such p r o v i s i o n s d i s c r i m i n a t e a g a i n s t him. The time f o r o b j e c t i o n would be d u r i n g n e g o t i a t i o n s , or when a new p r o v i s i o n i s enacted which appears to a C o n t r a c t i n g S t a t e to d i s c r i m i n a t e . While f o r the most pa r t the 195 n o n - d i s c r i m i n a t i o n a r t i c l e s may appear to be window d r e s s i n g , they do, on o c a s s i o n , cause over-eager l e g i s l a t o r s to pause before e n a c t i n g c l e a r l y d i s c r i m i n a t o r y p r o v i s i o n s . 369 see: IFA: S p e c i a l A n a l y s i s 370 see: IFA: S p e c i a l A n a l y s i s 371 N o n - d i s c r i m i n a t i o n c l a u s e s i n some of the Canadian double tax convent i o n s ( 1 i k e F i n l a n d , Germany, Sweden and the U.S.) depart markedly from the O.E.C.D. Model i n that they are con t a i n e d i n only one b r i e f paragraph. A r t i c l e XVII of the F i n l a n d Convention r e f e r s to " c i t i z e n s " r a t h e r than to " n a t i o n a l s " of the C o n t r a c t i n g S t a t e s . " C i t i z e n s " i s not a d e f i n e d term. In a d d i t i o n , the F i n l a n d A r t i c l e r e f e r s o n l y to t a x a t i o n which i s "more burdensome". A r t i c l e XIX of the o l d German Convention a l s o r e f e r r e d to " c i t i z e n s " r a t h e r than to " n a t i o n a l s " as i n the O.E.C.D. paragraph. Paragraph 3 of the German A r t i c l e , however, d e f i n e d " c i t i z e n s " and the d e f i n i t i o n i s e q u i v a l e n t to that of " n a t i o n a l s " i n paragraph 2 of the O.E.C.D. A r t i c l e 24. I t reads: Germany (Federal Republic of) Convention Proclaimed i n f o r c e January 1, 1958. A r t i c l e XIX 196 (3) The c i t i z e n s of one of the c o n t r a c t i n g S t a t e s s h a l l not, while r e s i d e n t s i n the other c o n t r a c t i n g S t a t e , be s u b j e c t t h e r e i n to other or more burdensome taxes than are the c i t i z e n s of such other c o n t r a c t i n g S t a t e , which are r e s i d e n t s i n i t s t e r r i t o r y . The term " c i t i z e n s " i n c l u d e s a l l j u r i d i c i a l persons, p a r t n e r s h i p s and a s s o c i a t i o n s c r e a t e d or o r g a n i z e d under the laws i n f o r c e i n the r e s p e c t i v e c o n t r a c t i n g S t a t e s . 372 T h i s makes a b i g d i f f e r e n c e i f we look at some of the Canadian ways, see above. 373 A r t . 24 Canadian-German Double Tax Convention 374 sec. 18(4) I.T.A. 375 sec. 125 I.T.A. 376 a l l o w i n g a $500,000 c a p i t a l gains exemption only f o r r e s i d e n t s ; see a l s o L a f f e r 377 see IT-393R para.9; f o r the consequences for r e a l e s t a t e investment see Boidman, 1981; Canadian Tax Foundation, Corporate Management Tax Conference 1983; Crawford; Hughes, G.A.; Smith 378 a l l o w i n g t r a n s f e r to spouses without r e a l i z a t i o n of 1 97 c a p i t a l g a i n s ; see Barbeau; Cohen; Cooper/Crawford/Gratias; C u l l i t y ; Goodman; Sakari 379 and i n order to a v o i d the strange s i t u a t i o n under the c u r r e n t law, d e s c r i b e d above. 380 Which b a s i c a l l y means that p r o f i t s r e c e i v e d through a c o r p o r a t i o n should not be taxed worse than those r e c e i v e d d i r e c t l y by the taxpayer. 381 As a c o r o l l a r y to t h i s , sec. 89(1.1) I.T.A. should be repealed: the c a p i t a l d i v i d e n d account of a p r i v a t e c o r p o r a t i o n should no longer lapse upon c e a s i n g to be c o n t r o l l e d by one or more non-resident persons. 382 In order to s t i m u l a t e investment i t might be a p p r o p r i a t e to c r e a t e some i n c e n t i v e s . In p a r t i c u l a r , there does not seem to be any compelling reason f o r r e s t r i c t i n g the refundable tax to 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 c o r p o r a t i o n s o n l y , or at l e a s t no e x p l a n a t i o n s were o f f e r e d when the l i m i t a t i o n s were in t r o d u c e d i n 1979 and i n 1981. I do not want to enter i n t o any d e t a i l e d d i s c u s s i o n of a p p r o p r i a t e and f e a s a b l e p r o p o s a l s , because t h i s would l e a d i n t o a longer essay about the l i n k between tax law and economic growth i n g e n e r a l . 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M. 1962 APPENDIX A INTERPRETATION BULLETINS ON THE TAXATION OF  NON-RESIDENTS, NON-CANADIAN-CONTROLLED COMPANIES AND RELATED ISSUES IT-59R3 I n t e r e s t on debts owing to s p e c i f i e d n o n - r e s i d e n t s (Thin C a p i t a l i z a t i o n ) IT-68R Exemption from income tax i n Canada — P r o f e s s o r s and t e a c h e r s from other c o u n t r i e s IT-76R2 Exempt p o r t i o n of pension when employee has been a non- r e s i d e n t IT-81R P a r t n e r s h i p s — Income of non-resident p a r t n e r s IT-122R U n i t e d S t a t e s s o c i a l s e c u r i t y tax and b e n e f i t s IT-137R2 A d d i t i o n a l tax on c o r p o r a t i o n s , other than Canadian c o r p o r a t i o n s , c a r r y i n g on business i n Canada IT-150R Taxable Canadian p r o p e r t y — A c q u i s i t i o n from non-resident by death or mortgage f o r e c l o s u r e IT-155R2 Non-resident tax — i n t e r e s t on bonds, debentures, notes, hypothecs or s i m i l a r o b l i g a t i o n s o f , or guaranteed by, the Government of Canada IT-161R3 Non-residents — Exemption from tax deductions at source on employment income IT-163R E l e c t i o n by non- 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 Canadian source income IT-171 Taxation of n o n - r e s i d e n t s — Determination of taxable income earned i n Canada 228 229 C a p t i a l gains by n o n - r e s i d e n t s — Canada-United S t a t e s Tax Convention Taxable Canadian p r o p e r t y Permanent establishment 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 Fore i g n tax c r e d i t — Part-time r e s i d e n t s Determination of an i n d i v i d u a l s ' s r e s i d e n c e s t a t u s Determination of r e s i d e n c e f o r i n d i v i d u a l s l e a v i n g Canada Losses of n o n - r e s i d e n t s and part-time r e s i d e n t s A d d i t i o n a l tax on c o r p o r a t i o n c a r r y i n g on business i n Canada, other than Canadian c o r p o r a t i o n s and non-resident insurance companies — E f f e c t of income tax agreements and conventions Non-resident-owned investment c o r p o r a t i o n — Meaning of p r i n c i p a l business Canada-U.S. Tax Convention - Number of days "present" i n Canada Know-how and s i m i l a r payments to n o n - r e s i d e n t s Exemption from tax on i n t e r e s t payments to non-residents E l e c t i o n re tax on r e n t s and timber r o y a l t i e s — Non-residents 230 Non-residents — Income earned i n Canada Residence of a t r u s t or e s t a t e 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 c e a s i n g to be or becoming r e s i d e n t i n Canada 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 c o r p o r a t i o n Non-resident b e n e f i c i a r i e s of t r u s t s Management or a d m i n i s t r a t i o n fees p a i d to no n - r e s i d e n t s H i r e of s h i p s and a i r c r a f t from n o n - r e s i d e n t s APPENDIX B INFORMATION CIRCULARS ON THE TAXATION OF NON-RESIDENTS, NON-CANADIAN-CONTROLLED COMPANIES AND RELATED ISSUES 72-17R2 Procedures Concerning D i s p o s i t i o n of Taxable Canadian Property by Non-Residents of Canada and P o t e n t i a l Tax L i a b i l i t i e s of Purchasers of Such Property 75-6 15% Tax W i t h o l d i n g from Amounts Paid to 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 Rate of Part XIII Tax on Amounts Pa i d or C r e d i t e d to Persons i n Tr e a t y C o u n t r i e s 77-16R2 Non-Resident Income Tax 231 232 INDEX OF CASES Barki v. M.N.R., [1975] CTC 2300, 178 Cooper v. Cadwalader, (1904), 5T.C. 101, 6 De Beers C o n s o l i d a t e d Mines L t d . v. Howe. [1906] A.C.455; 5T.C. 198; 95L.T.221, 10 Egyptian D e l t a Land & Investment Co. L t d . v. Todd, 1929 AC 1 , 11 Er i c k s o n v. M.N.R., [1980] CTC 2117; 80 DTC 1118 (T.R.B.), 5 I.R.C. v. Lysaght, (1928) 13 T.C.511; [1928] A.C.234, 6 Levene v. I.R.C. , [ 1 928] A.C.217, 7 Mallon, (1964), 35 Tax A.B.C. 420; 64 DTC 449, 6 Meldrum, (1958), 2 Tax 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 and Shpak v. M.N.R., [1981]CTC 2429; 81 DTC 366, 7 Thibodeau 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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