FACULTY OF LAW APRIL LAW 410. International Tax Law. Professor Duff TOTAL MARKS: 100

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1 NOTES: 1. This is an open book examination. QUESTION FACULTY OF LAW TOTAL MARKS: 100 INDICATED IN SQUARE BRACKETS AFTER THE FINAL EXAMINATION LAW ALLOCATION OF MARKS WITHIN EACH QUESTION IS TIME ALLOWED: 3 HOURS 2. ANSWER ALL QUESTIONS. 3. THIS EXAMINATION CONSISTS OF 2 QUESTIONS. ***** ************** Professor Duff International Tax Law APRIL PLEASE ENSURE THAT YOU HAVE A COMPLETE PAPER PIus 30 minutes reading time THIS EXAMINATION CONSISTS OF 7 PAGES PLUS AN APPENDIX THE UNIVERSITY OF BRITISH COLUMBIA EACH QUESTION IS WORTH 50 MARKS

2 Law 410 Page 2/7 QUESTION I Kirsten D Addario is an American-born dancer, who grew up in southern Florida, where she trained at the Miami City Ballet School from 1990 to 2004, before joining the Miami City Ballet as a principal dancer. With financial support from her parents, Kirsten purchased a condominium in Miami when prices were depressed in 2008, where she resided when she was not on tour with the ballet company. In the spring of 2010, the Miami City Ballet announced that it would tour Canada in 2011, performing in Vancouver for three nights in February, in Ottawa for three nights in early March, in Montreal for three nights in late March, and in Halifax for one night in early April. Since this tour was in addition to the company s regular season in Miami, participating dancers were paid an additional sum of $1,500 for each performance, as a result of which Kirsten received $15,000. Although Kirsten included this amount in computing her income for U.S. tax purposes, she did not report it for Canadian tax purposes. The Canadian tour was a financial and critical success for the Miami City Ballet, and Kirsten was acclaimed for her performance in George Balanchine s abstract ballet Jewels. Shortly after returning to Miami in April 2012, she received a call from the artistic director of Les Grands Ballets Canadiens in Montreal, inviting her to join the company for its season as one of its principal dancers. Although reluctant to leave Miami, Kirsten was impressed by the international stature of the Canadian company, and accepted the offer which included a competitive salary and an accommodation allowance after she was able to negotiate a year s leave from the Miami City Ballet. After renting her Miami condo on an informal basis to a friend and fellow dancer, Kirsten moved to Montreal in September 2011 to begin rehearsals for the season, which began with Igor Stravinsy s The Firebird in October 2011 and culminated with Sergei Prokofiev s Romeo and Juliet in late May During this time, Kirsten rented a furnished apartment in Montreal, where she resided at all times except for a two-week holiday in January when she visited family and friends in Miami. In computing her income for Canadian tax purposes for her 2011 and 2012 taxation years, Kirsten included her salary from Les Grands Ballets Canadiens, but did not include the accommodation allowance, nor rental income that she received from her Miami condo. In July and August of 2012, Kirsten travelled with Les Grands Ballets Canadiens to Europe, where the company performed in Amsterdam, Madrid and Prague. As with the Miami City Ballet, dancers who participated in the tour

3 purposes, she did not report them for Canadian tax purposes. Canadiens, and Kirsten s performances in the Firebird and Romeo and Juliet bonus to facilitate her relocation to Montreal. In computing her Canadian income was forced to find another tenant who responded to an online advertisement and The season was an excellent year for Les Grands Ballets received additional payments beyond their annual salaries, based on the number Question I (continued) estate market was improving and that she might return to Miami after two more Although this meant that she would have to give up her position with the Miami Although Kirsten used the bonus to purchase a condominium in Montreal, Kirsten was invited to join the company for another two years as principal soloist. were especially well received. Before the company left for its European tour, Law 410 of performances. Although Kirsten included these payments for U.S. tax City Ballet, the offer was too good to refuse and included a generous signing for her 2012 taxation year, Kirsten did not include this bonus. Page 3/7 years in Montreal. Since the friend who had rented her condo for the previous year left the Miami City Ballet at the end of its season, however, she purposes. Canadiens, and Kirsten received rave reviews for her performance in Czech Vegas for their honeymoon, where Kirsten won $20,000 at roulette, 30% of which Theatre in Dalain, and the Guangzhou Opera House in Guangzhou. In computing Quebec-born soloist Jean-Sebastién Coté, who moved in with her in November payments that she received for these performances. The Moon Princess. She also began a whirlwind romance with fellow dancer, master Jir] Kylián s adaptation of an ancient Japanese folk tale, Kaguyahime: The season was another excellent year for Les Grands Ballets her income for Canadian tax purposes, Kristen did not include additional not claim any credit or deduction for U.S. taxes withheld at source. Les Grands Ballets Canadiens, which travelled to China to perform at the National Centre for the Performing Arts in Beijing, the Development Area Grand At the end of the season, in July 2013, Kirsten again toured with purposes for her 2013 taxation year, Kirsten did not include her winnings and did rental income from the condo in computing her income for Canadian tax insisted on a 12-month lease. As with the previous year, Kirsten did not include The couple was married in Montreal in January 2013, and travelled to Las ($6,000) the casino withheld as tax. In computing her income for Canadian tax she decided not to sell her Miami condo on the grounds that the Florida real

4 (1) whether and when she became a resident of Canada [10 marks]; (2) whether she is subject to Canadian tax on (a) payments received from (3) whether, for any period in which she is a resident of Canada, she can END OF QUESTION 1 where they hoped to start a family once Kirsten retired from dancing. In order to the Miami City Ballet in respect of its Canadian tour in 2011 [6 marks]; (b) salary payments from Les Grands Ballets Canadiens for its and Grands Ballets Canadiens in respect of its European tour in 2012 and its resident in Canada. China tour in 2013 [4 marks]; (d) rental income from her Miami condo from from the Miami City Ballet in respect of its Canadian tour in 2011, and that she finance the down payment for this house, Kirsten also sold the Miami condo at the end of August 2013, which had doubled in value as the Florida real estate market recovered. In computing her income for her Canadian tax purposes for her 2013 taxation year, Kirsten did not include a modest gain on the sale of her maintains that she is subject to Canadian tax on payments that she received and is therefore subject to Canadian tax on her worldwide income since that Montreal condo that she had purchased the year before, and purchase a house gain on the sale of the Miami condo [4 marks]. disposition of a taxpayer s principal residence for each year in which the In preparing your answers, please note that Canada exempts gains on the relevant judicial decisions, explaining: the signing bonus in 2012 [8 marks]; (c) additional payments from Les the Miami condo [4 marks], the roulette winnings [6 marks], or the capital Montreal condo, or a substantial gain on the sale of her Miami condo. Upon returning from China, Kirsten and Jean-Sebastién decided to sell the Kirsten was recently reassessed by the Canada Revenue Agency, which of the Montreal and Miami condos in 2013 [4 marks]; and time. Please advise Kirsten on this reassessment, referring to relevant provisions claim a credit or deduction in respect of U.S. taxes on rental income from Question I (continued) Law 410 of the Income Tax Act and the Canada-U.S. Income Tax Convention, as well as seasons, including the accommodation allowance in and Page 4/7 became a resident of Canada when she moved to Montreal in September 2011 September 2011 to August 2013 [4 marks]; and (e) capital gains on the sale residence was ordinarily inhabited by the taxpayer and the taxpayer was

5 QUESTION 2 Warrick Gold Corporation ( Warrick ) is the world s largest gold mining Australia, Chile, the Dominican Republic, Peru, Saudi Arabia, the United States wholly-owned subsidiaries based in the countries in which the mines are located, grew rapidly in the 1990s and 2000s by acquiring other mining companies in Australia, the remaining shares are owned by and Australian-based mining Republic, Peru, the United States and Zambia, but has not entered in to a tax not commenced negotiations for a TIEA with Saudi Arabia. As gold prices soared in the 2000s, rising from US$300 per ounce in Australia and the Dominican Republic, however, where Warrick carried on Warrick expanded aggressively in 2011, investing $3 billion in the development of New York Stock Exchanges. While most of Warrick s international operations are carried on through mining company. Canada has tax treaties with Australia, Chile, the Dominican Warrick s operations in Australia and the Dominican Republic are carried on as joint ventures through companies in which Warrick owns 50% of the shares. in Canada and other countries. The company is headquartered in Toronto, where its company, with active operations in several countries around the world, including and Zambia. Founded in 1983 by Canadian entrepreneur Peter Mulch, Warrick company. In the Dominican Republic, they are owned by another Canadian-based board of directors meets twice a year, and has shares listed on the Toronto and computing its tax payable for its 2011 taxation year, Warrick included all dividends new mines in Chile and Peru, and spending US$7 billion to acquire Australian- business through joint ventures, the boards of each company were unable to agree on the payment of dividends and instead decided to invest surplus cash in earnings from their mining operations, Warrick s U.S., Peruvian, and Saudi rose from US$17 in February 2002 to US$55 in September With substantial subsidiaries paid substantial dividends, which Warrick received in In treaty or a tax information exchange agreement (TIEA) with Saudi Arabia and has February 2002 to a peak of US$1,873 in September 2011, net profits of Warrick and its subsidiaries increased substantially, as did Warrick s share price, which income that the companies in Australia and the Dominican Republic received from Convinced that demand for gold and other metals would remain strong, deducted the full amount of these dividends in computing its taxable income under paragraph 113(1)(a), and did not include any amount in respect of investment that it received in computing its income under subsection 90(1) of the ITA, investments in securities. Law 410 fixed income securities while awaiting future investment opportunities. In Page 5/7

6 Page 6/7 Law 410 Question 2 (continued) based mining company Solstice Minerals Limited ( Solstice ), though which it acquired indirect ownership of Solstice s wholly-owned subsidiary, Lumwata Mining Company ( Lumwata ), which operates a copper mine in Zambia. In order to finance these acquisitions, Warrick used cash reserves and borrowed US$8 billion from its wholly-owned U.S. subsidiary ( Warrick U.S.), which was able to borrow these funds on better terms in the U.S. market. In computing its income for its 2011 and 2012 taxation years, Warrick deducted interest expenses on these borrowed funds and did not withhold tax on interest payments to Warrick U.S. After 2011, Warrick s fortunes changed dramatically, as environmental concerns delayed projects in Chile and Peru, higher mining royalties in the Dominican Republic and Zambia cut into expected profits, and gold prices declined to US$1,200 per ounce. Warrick reported net losses of $1 billion in 2012 and $11 billion in 2013, its share price fell below $16 per share by the end of 2013, and Peter Mulch was forced out as Board Chair and Chief Executive Officer in Notwithstanding his departure from these positions, he continues to own 2% of the company s 1.2 billion outstanding shares through his Canadian-based holding company, Mulch Holdings Limited ( MHL ), and continues to advise the company as Chairman Emeritus and a member the company s International Advisory Board, for which Warrick pays fees to Mulch s Swiss-incorporated management company, Mulch Management GmbH ( MMG ). In computing its income for its 2014 taxation year, Warrick did not withhold tax on these payments. After leaving Warrick, Mulch spent two months in Klosters, Switzerland, where he owns a ski chalet overlooking the Gotschnagrat Mountain which he and his wife Melanie have skied since the 1970s, as well as Montenegro where he keeps his 140 foot yacht Golden Accipitridae on which he and Melanie cruise the eastern Mediterranean in the summer. Although Mulch spends several months in Europe every year, he remains a resident of Canada, where he retains a home in Toronto s tony Forest Hill neighbourhood and maintains most of his social and economic contacts. At the same time, he also pursues other business activities in Europe, through Tn-Granite Development Corporation ( Tn-Granite ), a Hungarian based real estate development company in which he owns a 20% stake; Porto Montenegro Development Corporation ( PMDC ), another real estate company engaged in the development of a luxury yacht marina and adjacent waterfront community on the site of an old Austro-Hungarian naval base, in which Mulch owns 54% of the shares; and Porto Negro Finance Corporation ( PNFC ), a finance company that earns interest by lending money to investors in the Porto Montenegro development, in which Mulch and his wife Melanie each own 10% of

7 END OF EXAM the shares and four other Canadian investors own another 32% of the shares. Monenegro. In computing his income for his 2014 taxation year, Mulch did not Saudi subsidiaries in computing its income for its 2011 taxation year [8 received by PMDC or PNFC in computing his income for his 2014 taxation The Canada Revenue Agency (CRA) has asked you to review these investment income that its subsidiaries in Australia and the Dominican the dividends [8 marks]; and treaty provisions and relevant judicial decisions. In providing your answers, please refer to relevant provisions of the ITA, relevant (1) whether Warrick correctly reported dividends from its U.S., Peruvian and transactions to provide advice on how they should be assessed for Canadian tax purposes. In particular, please address the following issues: year [10 marks]. (2) whether Warrick should have included any amount in respect of (3) whether Warrick could deduct interest payments on the funds that it (5) whether Warrick should have withheld tax on fees that it paid to MMG [6 (6) whether Mulch should have included dividends that he received from Tn- (7) whether Mulch should have included any amount in respect of income these dividends or on the corporate income out of which Tn-Granite paid whether he could claim a deduction or credit in respect of Hungarian tax on a TIEA with Montenegro and has not commenced negotiations for a TIEA with income received by PMDC or PNFC. Republic received from securities in computing its income for its 2011 taxation year [10 marks]; borrowed from Warrick U.S, and whether Warrick should have withheld tax Granite in computing his income for his 2014 taxation year, and, if so, include dividends that he received from Tn-Granite nor any amount in respect of marks]; marks]; Question 2 (continued) Law 410 on interest payments to Warrick U.S. [8 marks]; While Canada has a tax treaty with Hungary, it has not entered in to a tax treaty or Page 7/7

8 Appendix Selected Tax Treaty Provisions Convention between Canada and Switzerland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income Article 3 General Definitions 1. In this Convention, unless the context otherwise requires: (h) the term national means: (ii) any legal person, partnership and association deriving its status as such from the laws in force in a Contracting State. Article 4 Resident 1. For the purposes of this Convention, the term resident of a Contracting State means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and in the case of Switzerland it includes a partnership created or organized under Swiss law. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein. 3. Where by reason of the provisions of paragraph I a company is a resident of both Contracting States, then its status shall be determined as follows: (a) it shall be deemed to be a resident of the State of which it is a national; (b) if it is a national of neither of the States, the competent authorities of the Contracting States shall settle the question by mutual agreement.

9 Article 5 Permanent Establishment 1. For the purposes of this Convention, the term permanent establishment means a fixed place of business through which the business of the enterprise is wholly or partly carried on. 2. The term permanent establishment includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; and (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. Article 7 Business Profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. Article 14 Independent Personal Services 1. Income derived by an individual who is a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that State unless he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities, If he has or had such a fixed base, the income may be taxed in the other State but only so much of it as is attributable to that fixed base.

10 activities of physicians, lawyers, engineers, architects, dentists and accountants. literary, artistic, educational or teaching activities as well as the independent 2. The term professional services includes especially independent scientific,