1946 (7) TMI 3 - HC - Income Tax

Summary

Issues Involved:
1. Definition and scope of "Canadian debtor" under the Income War Tax Act.
2. Liability of the appellant to withhold tax on dividends paid to non-residents.
3. Validity of Section 9B(2)(a) of the Income War Tax Act under the legislative powers of the Canadian Parliament, considering the Statute of Westminster, 1931.

Issue-wise Detailed Analysis:

1. Definition and Scope of "Canadian Debtor":
The appellant contended that it was not a "Canadian debtor" as defined by the Income War Tax Act. The Exchequer Court initially held that a "Canadian debtor" referred to a debtor of Canadian nationality, and for companies, it meant those registered under Canadian law. The Supreme Court of Canada reversed this view, stating that "Canadian debtors" are those resident in Canada, and this includes companies resident in Canada who owe dividends to shareholders. The appellant company, though incorporated in the United Kingdom, was found to be "resident" in Canada due to its business operations, head office location, and management being centered in Canada. The Privy Council agreed with the Supreme Court, emphasizing that the test for a "Canadian debtor" is based on residence, not nationality or place of incorporation.

2. Liability to Withhold Tax on Dividends Paid to Non-residents:
The appellant argued that its duty to withhold tax did not extend to dividends paid to non-residents because Section 84 and Section 87 of the Income War Tax Act should be interrelated. They claimed that the receipt from the Minister under Section 87 would not provide an adequate defense in an English court if sued by shareholders for the balance of the dividend. The Privy Council, however, held that Section 84 is absolute and does not depend on the effectiveness of Section 87 in foreign courts. The appellant is required to withhold the tax and remit it to the Receiver-General of Canada, regardless of potential liabilities in other jurisdictions. The machinery of the Act may result in the company bearing the tax burden, but this does not alter the clear statutory obligation imposed by Section 84.

3. Validity of Section 9B(2)(a) Under Legislative Powers:
The appellant contended that Section 9B(2)(a) was ultra vires the Canadian Parliament, even considering the Statute of Westminster, 1931. The Supreme Court of Canada effectively countered this argument, stating that Section 3 of the Statute of Westminster allowed the Canadian Parliament to legislate with extra-territorial effect. The power to tax non-residents is within the scope of "the raising of money by any mode or system of taxation" under Section 91(3) of the British North America Act. The Privy Council concurred, noting that the legislative competence of the Canadian Parliament includes the power to impose taxes on non-residents. The law, though it may face enforcement challenges abroad, is valid and enforceable within Canada.

Conclusion:
The Privy Council dismissed the appeal, affirming the Supreme Court of Canada's judgment that the appellant is a "Canadian debtor" required to withhold tax on dividends paid to non-residents, and that Section 9B(2)(a) of the Income War Tax Act is within the legislative powers of the Canadian Parliament. The appeal was dismissed with costs.