Supreme Court of Canada
Swiss Bank Corp. et al. v. Minister of National Revenue, [1974] S.C.R. 1144
Date: 1972-11-22
Swiss Bank Corporation Appellant;
and
Minister of National Revenue Respondent;
and
Swiss Credit Bank Appellant;
and
Minister of National Revenue Respondent.
1972: October 10; 1972: November 22.
Present: Judson, Ritchie, Spence, Pigeon and Laskin JJ.
ON APPEAL FROM THE EXCHEQUER COURT OF CANADA
Taxation—Income tax—Swiss banks—Investment in Canada—Public subscriptions to Swiss investment fund—Shares in corporation managing the fund held by bank—Ontario company incorporated and controlled by fund manager—Banks were the trustees of funds received from subscribers—Banks made interest-bearing loans to Ontario company from funds received from subscribers—Non-arm’s length dealing—Income Tax Act, R.S.C. 1952, c. 148, s, 106(1)(b)(iii)(A) as amended.
Appellants, non-resident corporations, invested in Canadian real estate using public subscriptions to a Swiss investment fund; subscribers to the fund were given bearer coupon certificates, signed by appellant banks as trustees and by the manager of the fund, the Société Internationale de Placements (S.I.P.), in which the banks were the major shareholders. Under the management regulations of the investment fund S.I.P. had full power of investment or reinvestment of the fund’s assets which, however, were to be in the custody of the appellant banks which were also to hold all proceeds of the sale of real estate and all shares of companies “owned” by the fund, and to act as paying agents in distributing annually to certificate holders the net profits from investments. Further, S.I.P. was to exercise the functions of a common contractual representative of the certificate holders, who had no right to dissolution or distribution of assets but could demand repurchase of their shares at any time. Safe custody, administration and representation of the fund had been entrusted by them to the managers and trustees. Acting under its powers S.I.P. caused the incorporation of an Ontario company, City
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Park Apartments Ltd., all the shares of which were held by S.I.P. as registered owner and which was to serve as the vehicle for the investment of moneys of the fund. The money for its entreprises was advanced by the banks by withdrawal from the fund, under interest‑bearing lending indentures which styled them as trustees of the fund. Under the indentures the company agreed to obtain its financing only from appellant banks. The Minister regarded the banks and S.I.P. as payees and assessed appellants for the interest received under the indentures. These assessments were upheld by the Exchequer Court. Appellants claimed to be exempt from tax under s. 106(1)(b)(iii)(A) of the Income Tax Act and appealed to this Court.
Held: The appeals should be dismissed.
The manager as agent and the depositaries as fiduciaries were merely the instruments through which the funds collected from certificate holders were channelled to City Park by way of an interest-bearing loan. The interposition of the managing agent and the depositaries between City Park and the certificate holders did not, despite the regulations governing the fund, create an arm’s length situation between them, within the meaning of the exception stated in s. 106(1)(b)(iii)(A). City Park was completely a captive to the interests of the certificate holders, acting through professional managers and fiduciaries. The disqualification expressed in s. 106(1)(b)(iii)(A) required that the payer and payee be not persons who, effectively, are dealing exclusively with each other through a fund provided by the payee for the benefit of the payee. The reason is to ensure that the interest rate will reflect ordinary commercial dealing between parties acting in their separate interests. A lender-borrower relationship which does not offer this assurance because there are, in effect, no separate interests must be held to be outside of the exception that exempts a non-resident from taxation on Canadian interest payments.
APPEALS from a judgment of the Exchequer Court, affirming income tax assessments. Appeals dismissed.
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D.K. Laidlaw, Q.C., and R.H. Baker, for the appellants.
G.W. Ainslie, Q.C., for the respondent.
The judgment of the Court was delivered by
LASKIN J.—The two appellants, Swiss Bank Corporation and Swiss Credit Bank, who make common cause, are non-residents claiming exemption from the fifteen per cent tax levied upon them in respect of interest paid to them by an Ontario real estate company pursuant to certain lending indentures between that company and the two banks. Assessments for the taxation years 1966, 1967 and 1968 are in issue, and the appeals depend on whether the amounts taxed were “interest payable—to a person with whom the payer is dealing at arm’s length”.
The quoted words come from s. 106(1)(b)(iii)(A) of the Income Tax Act, R.S.C. 1952, c. 148, as amended, which reads as follows:
Every non-resident person shall pay an income tax of 15% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to him as, on account or in lieu of payment of, or in satisfaction of,
(b) interest except
(iii) interest payable in a currency other than Canadian currency to a person with whom the payer is dealing at arm’s length, on
(A) any obligation where the evidence of indebtedness was issued on or before December 20, 1960.
It is conceded by the respondent Minister that the payments to the banks fall within the exception in all respects other than the arm’s length requirement. Thurlow J., from whose judgment of May 31, 1971 the banks have appealed to this Court, was of the opinion that this requirement was not met and, consequently, he affirmed the assessments. For the reasons which follow, I agree with his conclusion. I point out here that no issue is taken whether the banks should have been assessed at all; the
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proceedings are directed to the operation of s.106(1)(b)(iii)(A) in the circumstances hereinafter set out.
The appellant banks are not related to each other but they cooperated in raising money for investment in Canadian real estate by inviting public subscriptions to a Swiss fund known as the Canada-Immobil Investment Fund. Subscribers to the Fund (which itself had no juridical personality) were given bearer coupon certificates in one and five share denominations, signed by the two banks as trustees and also by the manager of the Fund, the Société Internationale de Placements (hereinafter referred to as S.I.P.), a Swiss corporation of which the two banks are major shareholders, each holding forty per cent of the shares. A third bank not directly involved in soliciting subscriptions to the Fund holds the remaining twenty per cent.
The certificates for shares in the Fund are in three languages, German, French and English, and bear the following inscription, in the English version, on their face:
Each share entitles the holder thereof to a proportionate right of co-ownership in the assets of the Fund according to article 1 of the Regulations reproduced overleaf. Each share’s participation in the co-ownership corresponds to the assets of the Fund divided by the number of shares outstanding. The determination of value of each share as well as the rights and obligations of the certificate holders are governed by the Regulations (articles 7 and 4). Each holder accepts these Regulations and any subsequent amendment thereof as binding (article 27).
I shall refer later to the regulations, but I note at this point that in 1966 the Swiss Parliament enacted legislation, effective February 1, 1967, which applied to all investment funds in the country, whether theretofore or thereafter established, and which provided that subscribers are creditors rather than persons having proportionate rights of co-ownership in the assets of the Fund. Although the regulations
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under which the Canada-Immobil Fund was administered were recast in 1969 to conform to the legislation, nothing turns on this in the present case. It will be convenient to refer to the regulations in force during the taxation years in question here.
The regulations state the purpose of the Fund to be the investment of its moneys in Canadian real estate by founding or financing or taking over real estate companies. Under the regulations, S.I.P. has full power of investment and reinvestment of the assets of the Fund which, however, are to be in the custody of the appellant banks which are also to hold all proceeds of the sale of real estate and all shares of companies “owned” by the Fund, and are to act as paying agents in distributing annually to the certificate holders the net profits from investments. The regulations provide that S.I.P. “shall exercise the functions of a common contractual representative” of the certificate holders and that “to the extent that [S.I.P.], in acting on behalf of the certificate holders, [has] to assume or incur any liability, the Fund shall be answerable for such liability”. Moreover, “as soon as such an obligation is in view, the trustees shall release investments to the extent required in order that the necessary cash amounts may be available on the due date”. The Fund was to be of unlimited duration subject to the right of S.I.P. to liquidate it upon six months’ notice. Certificate holders have no right to a dissolution or distribution of assets but may demand repurchase of their shares at any time. The regulations prescribe certain commissions on subscription of shares and on investment of moneys of the Fund which it is unnecessary to detail; and, in addition, operating expenses are chargeable against investments or income derived therefrom.
In the words of the regulations, “the holders of certificates entrust the managers and the trustees respectively with the safe custody,
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administration and representation of the…Fund”. Acting under its powers given by the Regulations, S.I.P. caused the incorporation of an Ontario company, City Park Apartments Ltd., to serve as the vehicle for the investment of moneys of the Fund. S.I.P. was the registered owner of all shares of this company which engaged in the construction and operation of apartment buildings. The money for its enterprises was advanced by the banks under lending indentures which styled them as trustees of the Fund and which provided for interest at seven and one-half per cent per annum. The Ontario company agreed under the indentures to obtain its financing only from the appellant banks which were entitled to convert their advances into a loan upon mortgage as a first charge upon the company’s real estate. No time limit was fixed for repayment, but either the lender or borrower could upon six weeks’ notice claim or offer repayment in whole or in part.
City Park’s profits on its operations were not sufficient in the taxation years in question to enable it to pay the prescribed interest on the loans made to it by the banks out of the Fund, and S.I.P. authorized waiver of portions of the required interest payments. In addressing himself to the “arm’s length” issue arising under s.106(1)(b)(iii)(A), Thurlow J. dealt with it both on the basis that the banks were recipients of the interest payments made by City Park and that the certificate holders were the recipients, but he preferred the view that the banks and S.I.P. were acting in concert in respect of the investment in and yield from City Park’s operations and that, having regard to the position of the two banks vis-à-vis S.I.P. and S.I.P.’s position vis-à-vis City Park, it could not be said that City Park, as payer, was dealing with them at arm’s length. He concluded that “as a practical matter, it appears to me that the payment of the interest by City Park did amount to nothing more than the moving of money from one of the fund’s pockets to another”.
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The appellant banks contend that the certificate holders were the persons to whom the interest was payable by City Park, within s.106(1)(b)(iii)(A); and although the Minister’s primary position was that the two banks and S.I.P. were the payees, as held by the trial judge, he rested his case equally on the alternative position that the certificate holders were the payees. In my opinion, the banks’ contention and the alternative position of the Minister are correct. Neither the manager nor the depositaries of moneys in the Fund, advanced as an investment for the benefit of the subscribing certificate holders, have any beneficial right to the interest. Indeed, the one as agent and others as fiduciaries are merely the instruments through which the funds collected from the certificate holders were channelled to City Park by way of an interest bearing loan. The regulations governing the Fund make clear the entitlement of the certificate holders to the net profits of investments, and it is equally evident from the lending indentures that it is only as trustees and pursuant to those regulations that the banks made the advances to City Park. The fact that management fees and commissions are involved in the investment of moneys of the Fund and in the annual distribution of profits does not detract from the substance of the matter under discussion.
Are then the certificate holders payees of the interest with whom City Park is dealing at arm’s length? Although S.I.P. is, in effect, a creature of the appellant banks and City Park, in turn, is a creature of S.I.P. and both are instruments for the investment of moneys subscribed by the certificate holders, the submission of the banks is that the regulations, binding as they are upon the certificate holders, establish a regime which puts them at arm’s length from City Park. Reference was made to the expert evidence of a Swiss lawyer that the certificate holders alone were the beneficiaries of income from the fund, but that, even before the Swiss legislation of 1966, they had no rights in rem in the capital assets of the Fund but only rights in personam, realizable on liquidation. Rights in rem were in
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the banks, although as fiduciaries, and similarly as to S.I.P. in so far as it obtained transfers of Fund moneys to its account and created City Park as a wholly-owned vehicle for investment of such moneys.
What this evidence is said to show is that there is an ownership position in the banks and in S.I.P. in respect of assets of the Fund; and that in view of the binding terms of the regulations giving independent investment discretion to S.I.P., there is a control in relation to City Park which precludes any conclusion that the latter is not at arm’s length with the certificate holders. This submission was fortified by pointing to the fact that the certificate holders cannot vote the shares of City Park or direct S.I.P. in the exercise of its powers, cannot enforce or waive payments of interest by City Park, or interfere with the assets of the Fund or the accounts in which they are held or to which they are transferred. In fine, since the certificate holders have only the right to have their coupons redeemed annually and to have their shares repurchased, they stand (so it is contended) completely outside of any relationship to City Park that would negate arm’s length dealing.
In my opinion, the interposition of the managing agent and the two depositaries between City Park and the certificate holders does not, despite the regulations, create an arm’s length situation between them, within the exception in s.106(1)(b)(iii)(A). City Park owes its very existence to the funds provided by the certificate holders, is without support from any other source and those funds are committed to provide a return only to the certificate holders. In short, City Park is completely a captive to the interests of the certificate holders, acting through professional managers and fiduciaries.
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Although the circumstances here do not present the common type of non-arm’s length dealing referred to by this Court in Minister of National Revenue v. Sheldon’s Engineering Ltd.[1], they bring this case within the principle that underlies the disqualification expressed in s.106(1)(b)(iii)(A), namely, that the payer and payee must not be persons who, effectively, are dealing exclusively with each other through a fund provided by the payee for the benefit of the payee. A sound reason for this that the enactment itself suggests is the assurance that the interest rate will reflect ordinary commercial dealing between parties acting in their separate interests. A lender-borrower relationship which does not offer this assurance because there are, in effect, no separate interests must be held to be outside of the exception that exempts a non-resident from taxation on Canadian interest payments. The fact that the interest actually authorized or paid is consistent with arm’s length dealing is not enough in itself to avoid this conclusion.
I would dismiss these appeals with costs.
Appeals dismissed with costs.
Solicitors for the appellants: McCarthy & McCarthy, Toronto.
Solicitor for the respondent: D.S. Maxwell, Ottawa.