T-3842-76
John Pullman (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Dubé J.—Toronto, January 12;
Ottawa, February 16, 1983.
Income tax — Income calculation — Canadian taxpayer
resident in Switzerland — Solicited by Toronto broker to
invest in mortgages — Borrowers in U.S.A., Canada and other
countries — Taxpayer maintaining Toronto bank account —
Broker having power of attorney re same — Whether agency
relationship between taxpayer and broker and nature thereof
— Taxpayer not carrying on money-lending business in
Canada — No act in Canada by taxpayer — Decisions made
outside Canada — Taxpayer offering nothing for sale in
Canada — Not soliciting in Canada — Canadian income
subject to withholding tax — Other amounts not taxable —
Appeal allowed — Income Tax Act, S.C. 1970-71-72, c. 63,
ss. 231(7), 253(b).
The taxpayer, a Canadian citizen resident in Switzerland,
appeals assessments in respect of income from "a money lend
ing business carried on by him in Canada". The taxpayer was a
wealthy man who had funds available to invest in mortgages. A
Toronto broker would inform the taxpayer of lending oppor
tunities and he would decide in each instance whether to
participate. In the course of the two taxation years in question,
plaintiff became involved in some 52 of these transactions, 60%
of the loans being made to Americans in the U.S.A. and Puerto
Rico. Taxpayer maintained a Toronto bank account for these
transactions and the broker had a power of attorney to deal
with this account. The taxpayer's profit resulted from: interest,
commitment fees in compensation for risky loans and stand-by
fees. The taxpayer had no pied-à-terre in Canada. Many of
these loans were negotiated by the broker in last minute
telephone calls from the borrowers' places of business in
Canada, the United States or other country.
The issue is as to whether all this income—over two million
dollars—should be included in income under Part I of the Act,
as income earned by a non-resident carrying on business in
Canada or whether income from the Canadian loans should be
subject to non-resident withholding tax under Part XIII and
that from foreign loans not taxed in Canada. Taxpayer argues
that he is not taxable under Part I because he was not carrying
on a business in Canada. The Minister's position is that the
broker had been authorized to act as the taxpayer's "agent in
conducting his business of money lending in Canada".
Held, the appeal should be allowed and the assessments
referred back for reassessment. The broker held no exclusive
agency or general power to bind the taxpayer. Whatever agency
existed was limited and specific in nature. But the question was
not whether an agency relationship existed but whether the
taxpayer carried on a money-lending business in this country.
The taxpayer's links with Canada were as follows: phone calls
from the broker, a Toronto bank account, the broker's power of
attorney and the accounting kept by the broker through one of
his Canadian companies. Were these sufficient to constitute
"the carrying on of a money lending business in Canada"?
Clearly, the taxpayer was carrying on a business but was he
doing so in Canada? The taxpayer performed no act in Canada
and the basic decisions were made outside this country. The
Canadian ingredients were ancillary and merely for conve
nience. Loaning money did not constitute the exercise of a
business in Canada. That was dealt with under Part XIII and
was subject to a withholding tax. Paragraph 253(b) had no
application since it could not be said that the taxpayer was
soliciting orders or offering anything for sale in Canada
through an agent or servant. Loans are not "offered for sale".
Nor did the taxpayer solicit in Canada; he was solicited in
Switzerland by the Toronto broker.
CASES JUDICIALLY CONSIDERED
APPLIED:
Cutlers Guild Limited v. Her Majesty The Queen
(1981), 81 DTC 5093 (F.C.T.D.); Grainger and Son v.
Gough, [1896] A.C. 325 (H.L.).
DISTINGUISHED:
Loeck v. Her Majesty the Queen (1978), 78 DTC 6368
(F.C.T.D.).
REFERRED TO:
Kennedy v. De Trafford, [1897] A.C. 180 (H.L.); Bank
of New South Wales and Others v. Commonwealth and
Others, [1948] 76 C.L.R. 1 (H.C. Austr.).
COUNSEL:
Donald Bowman, Q.C. and W. Innes for
plaintiff.
Ian MacGregor and Roger Taylor for
defendant.
SOLICITORS:
Stikeman, Elliott, Robarts & Bowman,
Toronto, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
Dust J.: The plaintiff, a resident of Switzer-
land, appeals the assessments for his 1971 and
1972 taxation years including the total sums of
$1,116,712.10 and $934,691.04 respectively as
income from "a money lending business carried on
by him in Canada".
The plaintiff was born in 1901 in Russia and
immigrated to Canada with his family at the age
of seven. During his adolescent years he moved to
the United States where he joined the American
Army in the First World War and became a
naturalized American citizen in 1943. In 1948 he
returned to Canada and became a naturalized
Canadian citizen in 1954. In 1960 he moved to
Switzerland, became a resident there and married
a Swiss lady in 1962. They now both live in
Lausanne, Switzerland and share another home at
Monte-Carlo, Monaco.
In the course of his early life he accumulated
considerable wealth, first in bakery and then in
automobile accessories in the United States and
later on in the stock market, real estate and
money-lending in Canada, personally and through
Pullman Holdings Limited.
In 1970 he was approached in Switzerland by a
broker by the name of Joseph Burnett who used to
be a partner of Sam Gotfrid, a lawyer with whom
the plaintiff did business in Toronto. Mr. Burnett
was aware that the plaintiff had funds available
for investments in mortgages. Both men reached
an understanding whereby Mr. Burnett would
inform the plaintiff of loan transactions, as they
arose, and offer him participation in those loans if
he so desired. The plaintiff remained free to accept
or reject participation in any transaction. In the
course of the relevant period the plaintiff entered
into 52 such separate transactions involving some
708 entries.' Not all the loan transactions were
carried out in Canada. In fact, about 60% of the
' Item 6(1) in paragraph 9 of the statement of defence lists
an amount of $4,284.97 for the year 1971. That amount is
admitted by the Crown to be a duplication and ought to be
corrected in any event.
loans were made to American borrowers in the
United States and Puerto Rico. There was also one
loan to a borrower in London, England.
Following the visit of Mr. Burnett in Switzer-
land the plaintiff opened a second bank account
known as "J. P. #2" with the Bank of Commerce,
City Hall Branch, Toronto. The plaintiff gave Mr.
Burnett a power of attorney to complete the loan
transactions through that bank account, that is to
withdraw funds from, and to deposit funds into,
the bank account on behalf of the plaintiff.
Both Messrs. Pullman and Burnett testified at
the trial. They were the only witnesses. According
to their evidence, the plaintiff never solicited loans
and never held himself out to the public as being
ready to lend money. Mr. Burnett was actively and
heavily engaged in the financing of building
projects such as shopping centres, food stores,
convalescent homes, office buildings, etc. At the
time of closing, where there appeared to be a need
for bridge financing, Mr. Burnett would call the
plaintiff in Switzerland (or other prospective
money-lenders) and acquaint him with all the
essential elements of the transaction. The plaintiff
had full confidence in Mr. Burnett and still does.
He would assess the situation and decide whether
to accept or to reject participation in the transac
tion. Both parties would negotiate, mostly on the
telephone, the interest or the fee to be charged by
the plaintiff. The latter was not acquainted with
the commission earned by Mr. Burnett.
Apart from interest, the plaintiff would also
earn "commitment fees" and "stand-by fees".
Commitment fees were additional sums in com
pensation for risky loans. Stand-by fees were sums
paid to the plaintiff for agreeing to make sums
available on a stand-by basis, if and when
required. The three types of income, that is inter
est, stand-by and commitment fees are considered
by the Minister as income.
The plaintiff was not the only source of funding
available to Mr. Burnett. The latter could and
would turn to several other money-lenders. His
financing brokerage business is quite considerable,
involving millions of dollars and a large staff in
Toronto.
The plaintiff himself has no office and no pied-
à-terre in Canada. He does have some family in
this country which he visits from time to time. He
keeps the bank accounts aforementioned. A record
of his loan transactions with Mr. Burnett was kept
by one of Mr. Burnett's several Canadian compa
nies, Kelburn Management Limited, which
managed the book-keeping for all of Mr. Burnett's
transactions. Most of the loan transactions involv
ing the plaintiff were conducted through another
Burnett company, Ruthbern Holdings Limited.
Many of the transactions were not negotiated and
closed from Mr. Burnett's offices in Toronto but
from the borrowers' places of business in Canada,
the United States, Puerto Rico and the United
Kingdom. It usually was from those places that
Mr. Burnett would make last minute telephone
calls to money-lenders, including the plaintiff in
Switzerland, in order to complete the bridge
financing and close the deals.
The central issue to be resolved here is whether
all these interests, or stand-by, or commitment
fees, totalling over two million dollars, earned by
the plaintiff are to be included in his income under
Part I of the Income Tax Act [S.C. 1970-71-72, c.
63], as income earned by a non-resident carrying
on a business in Canada, or whether some portion
of it—from the Canadian loans—should be subject
to non-resident withholding tax under Part XIII of
the Income Tax Act (Part III of the old Income
Tax Act [R.S.C. 1952, c. 148]), and the balance—
from foreign loans—not taxable at all in Canada.
The plaintiff admits that the interest and fees paid
to him by Canadian residents is subject to the
withholding tax, but claims that he was not carry
ing on a business in Canada, and therefore should
not be included under Part I of the Income Tax
Act.
In its defence the Minister assumed that the
plaintiff was not a resident of Canada, but that he
earned the amounts aforementioned "from a
money lending business carried on by him in
Canada, which amounts were earned with respect
of the following transactions". Then follow a list of
351 transactions for the year 1971 and a list of 357
transactions for the year 1972. The Minister also
assumed that the plaintiff was at all material times
a Canadian citizen who maintains bank accounts
in Toronto, including one entitled "John Pullman
#2", in respect of which he has given full power of
attorney to Joseph Burnett whom he authorized
"to act as his agent in conducting his business of
money lending in Canada". The Minister also
assumed that the various amounts of commission
were paid or deposited into the bank account by
Joseph Burnett, Kelburn Management Limited,
Ruthbern Holdings Limited and other companies
controlled by Joseph Burnett.
In their evidence both the plaintiff and Mr.
Burnett denied the existence of any agency rela
tionship between them. Their denial, however, does
not settle the point as the existence of an agency is
a conclusion of law. The evidence indicates, how
ever, as already mentioned, that Mr. Burnett was
under no obligation to bring any particular trans
actions to the attention of the plaintiff, nor to
invite him to participate. Mr. Burnett could have
obtained his funding somewhere else, and often
did. On his part the plaintiff was under no obliga
tion to accept. He could reject and in fact did on
occasion. Mr. Burnett did not necessarily inform
the plaintiff as to the commission he was receiving.
There was no umbrella agreement, written or oral,
binding the two parties to any number, or amount,
or volume of transactions. It seems that any other
broker from Canada, or elsewhere, could have
contacted the plaintiff and made him an offer
which he would have assessed and accepted or
refused. In that sense, Mr. Burnett was no more an
agent of the plaintiff than any other broker seek
ing funding to close a deal. According to his own
evidence, which stands uncontradicted, the plain
tiff relied on Burnett because he had confidence in
him. Their relationship was profitable to both men.
The term "agent" is very wide and nebulous.
"No word is more commonly and constantly
abused than the word `agent'." 2 An agent is one
who acts for somebody else. In that very broad
sense, Mr. Burnett on many occasions acted on
behalf of the plaintiff, such as for the withdrawing
or the depositing of sums in the bank account
under the power of attorney. It appears, however,
from the evidence that Mr. Burnett held no overall
exclusive agency and no general power to bind the
plaintiff. Whatever agency existed was very lim
ited and specific in its nature. 3
The issue to be determined here is not whether
there existed an agency between the two, but
whether the plaintiff carried on a money-lending
business in Canada during the relevant period. The
question would be an easy one to answer if the
plaintiff had been physically present in Canada
with an office there, soliciting business from
Canadian borrowers, and lending money directly
to them. In the case at bar, however, the plaintiffs
only links to Canada were the phone calls from
Mr. Burnett—those that originated from Cana-
da—the bank accounts in Toronto, the power of
attorney to Mr. Burnett, the accounting kept by
Mr. Burnett through Kelburn Management Lim
ited. Are those links sufficient to constitute "the
carrying on of a money lending business in
Canada"?
Undoubtedly, the plaintiff was carrying on a
business. The frequency, intensity and volume of
his money-lending activities lead to the obvious
conclusion that he was in the money-lending busi
ness. He "habitually or systematically exercised"
Z Per Lord Herschell in Kennedy v. De Trafford, [1897] A.C.
180 [[H.L.], at p. 188].
3 In a separate inquiry under subsection 231(7) of the Income
Tax Act Mr. Burnett was interrogated before the Tax Review
Board. In the course of an answer he said this: "I then
re-arranged the funding of this loan with a Mr. John Pullman,
for whom I acted, and he agreed to take it." Faced with that
statement in cross-examination, Burnett explained that he
would have been acting for the plaintiff as a solicitor. That
answer, however, is difficult to reconcile with his statement in
direct examination to the effect that he had left the practice of
law because of a conflict of interest with his brokerage
business.
that business. 4 All the fees received in connection
with the loans, be they interest, commitment fees,
or stand-by fees, are income earned from the
money-lending business exercised by the plaintiff.
All these transactions and earnings are consistent
with the background, knowledge, experience and
previous activities of the plaintiff. But, was he
carrying on a business in Canada?
In a 1981 decision, Cutlers Guild Limited v.
Her Majesty The Queen, 5 I had the occasion to
review the tests used to determine whether a tax
payer is carrying on a business in another country.
While the issue there was the business of selling
silverware, still the following excerpt (at page
5095) might be of some assistance in the case at
bar:
Whether or not a taxpayer is carrying on a business in
another country is a question of fact to be determined in each
case. Courts have ruled that the place where sales, or contracts
of sale, are effected is of substantial importance. However, the
place of sale may not be the determining factor if there are
other circumstances present that outweigh its importance.
Another test emanating from the jurisprudence is "Where do
the operations take place from which the profits arise?" Solicit
ing orders in one country may only be ancillary to the exercise
of a trade in another county [sic]. Certain authorities establish
that activities and operations other than contracts for sale
constitute the carrying on of a business, especially where these
respective activities and operations produce or earn income.
While income may be realized through sales, it may not arise
entirely from that one activity or operation. Purchasing of
merchandise in one country (i.e. Japan) with the view of
trading in it elsewhere (Canada) does not, of course, constitute
an exercise of the trade in the former country.
In Loeck v. Her Majesty the Queen, 6 Mahoney
J. of this Court had to determine whether a non
resident taxpayer who was purchasing and selling
investment properties in Canada was carrying on
business in this country. This resident of Germany
invested in a number of Canadian properties. In
1971 he realized a profit of some $50,000 on the
sale of an apartment building in St. Catharines,
Ontario, and in 1972 a profit of some $70,000 on
the sale of two farms just outside the City. In both
° See Lord Morris in Grainger and Son v. Gough below at p.
343.
5 (1981), 81 DTC 5093 [F.C.T.D.].
6 (1978), 78 DTC 6368 [F.C.T.D.].
these transactions he invested jointly with a fellow
German who had taken up residence in Canada.
The resident negotiated the transactions and
managed the taxpayer's various Canadian invest
ments. The taxpayer would inspect the investments
and opportunities for further investment when he
visited Canada on holidays. The accountant pre
pared their accounts on the basis that the two were
partners, while the resident was receiving a man
agement salary. Mahoney J. held that the taxpayer
was actively engaged in the business of buying,
operating and selling real estate interests in
Canada either in partnership with or through the
agency of the resident. The business could not be
said to be part of a West German enterprise and
thus exempt from Canadian taxation under the
Canada-Germany Income Tax Agreement Act,
1956, [S.C. 1956, c. 33] .
I find the Canadian presence much stronger in
the Loeck case than in the case at bar. After all,
Loeck and a Canadian resident, acting in some
type of partnership, were buying and selling real
estate in Canada. In the case before me, the
plaintiff is not actively buying or selling anything
in Canada. He participates from abroad in the
bridge financing of projects which may be located
in the United States, or other countries, as well as
in Canada, through a Canadian broker. The plain
tiff himself performed no act in Canada, whereas
Loeck did, directly and through a managing part
ner, both involved in Canadian real estate.
An older case before the House of Lords,
Grainger and Son v. Gough,' deals with the ques
tion of carrying on business in the United King
dom. A French wine merchant used an English
firm as its sole agent to obtain orders to be trans
mitted to their principal for acceptance. The prin
cipal would forward the wine directly to the cus
tomers at their expense and risk. Accordingly, no
contracts were made in England and the only
activity there was that of the agent seeking orders.
It was held that the French wine merchant was not
7 [1896] A.C. 325 [H.L.].
exercising a trade in the United Kingdom. Lord
Herschell said this at page 335:
In the first place, I think there is a broad distinction between
trading with a country and carrying on a trade within a
country. Many merchants and manufacturers export their
goods to all parts of the world, yet I do not suppose any one
would dream of saying that they exercise or carry on their trade
in every country in which their goods find customers.
Similarly, in the present case the plaintiff
cannot really be said to be carrying on a business
in Canada. The basic administrative decisions, the
acceptance or rejection of financing opportunities,
were executed outside Canada. The only Canadian
ingredients in the transactions, namely the bank
account, the power of attorney and the book-keep
ing, were ancillary and merely for the purpose of
convenience. Loaning money to Canadians (or
Americans, Puerto Ricans and Britishers) does not
by itself constitute the exercise of a business in
Canada, whether the transactions are numerous,
complex or otherwise. That type of transaction is
dealt with under Part XIII of the Act and subject
to a withholding tax.
The Deputy Attorney General relies also on
paragraph 253(b) of the Act which reads as
follows:
253. Where, in a taxation year, a non-resident person
(b) solicited orders or offered anything for sale in Canada
through an agent or servant whether the contract or transac
tion was to be completed inside or outside Canada or partly
in and partly outside Canada,
he shall be deemed, for the purposes of this Act, to have been
carrying on business in Canada in the year.
In my view, it cannot be said that the plaintiff
was soliciting orders or offering anything for sale
in Canada through an agent, or servant, or other
wise. The plaintiff did not solicit orders in Canada
and did not have to. He remained in Switzerland
and was solicited there by a broker offering him
participation in money-lending activities. Neither
can it be said that loans can be offered for sale.'
Even if I were to accept that Parliament intend
ed money-lending to be included under paragraph
253(b), which I do not, surely that provision could
not be extended to include loans made in other
countries than Canada—the bulk of the loans
made by the plaintiff.
I therefore allow the appeal with costs and order
the assessments to be referred back to the Minister
for reassessment on the basis that the Canadian
interest and commission receipts are subject to
withholding tax under Part III of the old Act or
Part XIII of the new Act, as the case may be.
None of the other amounts assessed are taxable in
this country.
8 See Bank of New South Wales and Others v. Common
wealth and Others, [1948] 76 C.L.R. 1 (H.C. Austr.).
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