Reversible?: Landbouwbedrijf Backx B.V. and Residency Determinations by the CRA

  • April 05, 2021
  • Dennis Do, articling student, PwC Law LLP

In Landbouwbedrijf Backx B.V. v. The Queen,[1] the Tax Court of Canada (the “TCC”) held that a taxpayer was resident in Canada, despite the Canada Revenue Agency (the “CRA”) having assessed it as a non-resident for ten years. The TCC held the CRA was not estopped from changing its position on the taxpayer’s residency. The decision invites some reflection on the principles of fairness, certainty and predictability in respect of a taxpayer’s claimed and accepted residency.


The taxpayer, a Dutch B.V., held an Ontario dairy farm in partnership with a married couple during the period 1998 - 2009. In 2009, the taxpayer sold its partnership interest to a newly-formed Ontario corporation that was owned and controlled by the couple. The parties claimed the transferred partnership interest was “treaty-protected property” pursuant to subsection 116(5.02) of the Income Tax Act (the “Act”). Accordingly, the purchaser was not required to withhold and remit a portion of the purchase price pursuant to subsection 116(5) of the Act.

The taxpayer had filed its returns for the 1998 - 2008 taxation years on the basis that it was a non-resident of Canada. The CRA accepted this filing position. However, in 2009, the CRA assessed the taxpayer as a resident of Canada. According to the CRA, the taxpayer corporation was effectively managed and controlled by the couple under the common law test of central management and control.[2] As a result, the CRA determined the partnership interest was not treaty-protected property and assessed the taxpayer on the basis that it had realized a capital gain of $1.7 million.

The taxpayer appealed to the TCC, which dismissed the appeal on the basis that the taxpayer was a resident of Canada in 2009.[3] The taxpayer then appealed to the Federal Court of Appeal, which allowed the taxpayer’s appeal on the basis that the TCC erred in concluding that (i) the deemed disposition rule in section 128.1 of the Act did not apply, and (ii) the Canada-Netherlands Tax Treaty (the “Treaty”) was not engaged in this case.[4] The matter was referred back to the TCC trial judge on these two issues.