CHAPTER IV PERSONS LIABLE TO TAX Great Britain. THE GENERAL RULE. IN general, British income tax is imposed on the entire income from all sources of residents in Great Britain, and on the income of non-residents of Great Britain in so far as it arises in Great Britain. This general rule is subject to some exceptions, but in all cases the determining tests of liability to the tax are (1) the residence of the taxpayer, and (2) the place of origin of the income. FOREIGN INCOME.I In the case of foreign income, liability to tax is determined by three different conditions of residence. Foreign income is divided into three classes : (1) Income from foreign securities. This term includes debentures of foreign companies, mortgages on foreign property, money lent on foreign security, etc.2 See Income Tax Act, 1918, Rules applicable to Cases IV and V of Schedule D, and Miscellaneous Rules applicable to Schedule D. 2 Securities," as used in the Income Tax Acts, has been defined as follows: The word denotes a debt or claim the payment of which is in some way secured. The security would generally consist of a right to resort to some fund or property for payment; but I am not prepared to say that other forms of security (such as a personal guarantee) are excluded. In each case, however, where the word is used in its normal sense, some form of secured liability is postulated. No doubt the meaning of the word may be enlarged by an interpretation clause contained in a statute . . . or the context may show, as in certain cases relating to the construction of wills, that the word is used to denote, in addition to securities in the ordinary sense, other investments such as stocks or shares. But in the absence of any such aid to interpretation, I think it clear that the word (2) Income from foreign possessions (except stock, shares or rents).1 (3) Income from foreign stocks, shares and rents.2 Persons, classified according to residence, are : Case 1.-Persons ordinarily resident in the United Kingdom. Case 2.-Persons not domiciled in the United Kingdom, or, if British subjects, not ordinarily resident in the United Kingdom. Case 3.-Persons in the United Kingdom for some temporary purpose only, and not with any view or intent of establishing residence therein, and who have not actually resided in the United Kingdom at one time or several times for a period equal in the whole to six months in any year of assessment. The extent of income tax liability of the various persons in the above cases in connection with each kind of foreign income is as follows: Income from Foreign Securities Case 1.-Taxed on total amount of such income. Case 2.-Taxed on the amount of such income received in the United Kingdom. Case 3.-Not taxed at all on such income. securities must be construed in the sense above defined, and accordingly does not include shares or stock in a company" (Singer v. Williams, [1921] 1 A.C., at p. 49). " The term foreign possessions" has been judicially interpreted as follows: "Possessions is a wide expression, it is not a word with any technical meaning; the Act supplies no interpretation of it. I cannot see why it may not fitly be interpreted as relating to all that is possessed in Her Majesty's dominions out of the United Kingdom or in foreign countries and which is a source of income. And if so I do not think any violence would be done to the language if it were held to include the interest which a person in this country possesses in a business carried on elsewhere." And again, “ The word ' possessions' is not a technical word. It seems to me that it is the widest and most comprehensive word that could be used" (Colquhoun v. Brooks (1889), 14 A.C. 493, at p. 508 and P. 516). This term scarcely requires definition. It should be noted that it does not include shares in a company which, though operating entirely in a foreign country, has its seat of control or management in the United Kingdom. Where such income is subject to tax, the taxpayer is taxed on its amount (or, in Case 2, the amount received in the United Kingdom) in the year of assessment. Income from Foreign Possessions (other than Stocks, Shares and Rents). Case I and Case 2.-Taxed on the amount actually received in the United Kingdom on an average of the amount received in the three years preceding the year of assessment. Case 3.-Not taxed at all on such income. Income from Foreign Stocks, Shares and Rents. Case 3.-Not taxed at all on such income. Where such income is subject to tax, it is taxed on an average of its amount (or, in Case 2, on an average of the amount received) in the three years preceding the year of assessment. Having stated the general principles, further discussion of liability can best be carried on by treating separately individuals, partnerships and corporations. Individuals. The liability of individuals, as we have seen, depends upon residence and place of origin of income. In the case of income from foreign possessions, which term includes an interest in a foreign business, it is important to know whether or not a resident owner of the interest is engaged in the conduct of the business. If he is not, then he will be charged only on amounts of income from the business received in the United Kingdom. If he is, then such income is not income from a foreign possession, but from a trade carried on in the United Kingdom, and he will be taxed on his entire share of the profits, whether remitted to the United Kingdom or not. It does not matter that the business itself may be physically situated entirely in a foreign country.' First, as to the question of what constitutes a trade carried on within the United Kingdom. The distinction drawn by the courts is not perfectly clear. It is doubtful just where the line is to be drawn between what constitutes a trade carried on entirely without the United Kingdom and one partly carried on within the United Kingdom. Apparently very little activity is necessary to bring a taxpayer within Case 1 of Schedule D as one carrying on a trade within the United Kingdom. In Colquhoun v. Brooks,2 the taxpayer, a British resident, was a member of a partnership the business of which was entirely carried on in Australia. While, as a partner in the business, he could have intervened in the management at any time, in fact he did not do so and the court held him taxable only on amounts from the business received in the United Kingdom, In Ogilvie v. Kitton,3 the taxpayer, a resident of Great Britain, was sole owner of a business entirely conducted in Canada. He exercised nothing more than oversight, and never interfered in any way with the management of the business. Nevertheless he was held taxable, under Case I, on the entire profits of the business. The inference (if any) from these two cases is that mere possibility of intervention in the management of a foreign business does not constitute carrying on trade, unless the one who may intervene is in entire control and is sole owner of the business. The question of residence is at times a difficult one, and has been the subject of considerable litigation. While a man can have only one domicile, he can have more than one residence. It is not necessary for a person to have his principal" residence in the United Kingdom in order to be treated as a resident under the British income tax law. Nor is it necessary that he reside in the United Kingdom for any special length of time in any year. Perhaps the most Income Tax Act, 1918, Schedule D, 1 (a) (ii). 2 (1889), 14 A.C. 493; 61 L.T. 518. Ꭰ suggestive definition of residence is contained in Lloyd v. Sulley. In that case it is stated that a place of residence is a place" to which it is quite easy for the person to resort as his dwelling-place whenever he thinks fit, and to set himself down there with his family and establishment . . .; if he occupies that place of residence for a portion of the year . he is residing there in the course of that year." A person who lives in a foreign country for the greater part of the year and carries on his business, or is employed, there, but lives in the United Kingdom for a few months each year in a house which he owns, is a resident of the United Kingdom. He may be treated as a resident in some cases, even though he has been absent for the whole year.3 The term “ordinarily resident" is somewhat vague. The phrase,4" in the United Kingdom for some temporary purpose only, and not with any view or intent of establishing residence therein " is probably not difficult of application, especially as it is limited in its scope to persons who have not actually resided in the United Kingdom at one time or several times for a period equal in the whole to six months in any year of assessment. The difference between a person not "ordinarily resident" in the United Kingdom and a person in the United Kingdom for some temporary purpose only, and not with any intent of establishing residence therein, is by no means clear. Apparently one can have more than one ordinary residence. The distinction cannot be between an ordinary" residence and an "occasional" residence. Very little light is thrown on the distinction by the cases. A person in the United Kingdom for some temporary purpose would seem to be in much the same case as a person not ordinarily resident therein, since a person not ordinarily resident is certainly in the country merely for some temporary purpose. It would appear that one might be in the United Kingdom I (1884), II R. 687; 2 Tax Cas. 37. Lloyd v. Sulley (1884), 11 R. 687; 2 Tax Cas. 37; I.R. v. Cadwalader (1904), 7 F. 146; 5 Tax Cas. 101; Thompson v. Benstead, [1919] S.C. 8; 7 Tax Cas., 137. 3 Rogers v. I.R. (1879), 6 R. 1109; 1 Tax Cas. 225 4 Rule 2 of the Miscellaneous Rules applicable to Schedule D. |