Post by Sapphire Capital on Oct 29, 2008 20:17:53 GMT 4
Canada: Permanent establishments
The issue of what constitutes a "permanent establishment" for purposes of the Canada-United States Tax Convention (the treaty) has recently been dealt with by the Tax Court of Canada in American Life Insurance Co v R and Knights of Columbus v R. In both cases the taxpayers were insurance companies, resident in the US, but carrying on an insurance business in Canada. The taxpayers were assessed by CRA on the basis that, in accordance with article IV of the treaty, they were carrying on business through a permanent establishment (PE) in Canada and thus subject to Canadian tax on such income.
Notwithstanding the significant business carried on by the taxpayers, the court held the taxpayers did not have PE's in Canada and thus were not subject to tax there. The taxpayers were listed in telephone directories, provided forms guidelines and promotional material, had office space in Canada and had various independent agents and territorial managers working in the country.
The court held that the taxpayers did not have a fixed place of business at their disposal in Canada and thus did not have a PE on that basis. Any office space in Canada was under the control of the independent agents and the independent agents were carrying on their own businesses from those offices, not the business of the taxpayers. The court also held that, because in both cases the agents were independent contractors and all contracts were subject to final approval in the US, the taxpayers did not have PE's in Canada as a result of having dependent agents who habitually have and exercise the ability to conclude contracts in Canada.
Some of Canada's tax treaties, based on the UN model, contain a specific insurance clause that provides that insurers resident in one contracting state can be subject to tax on income earned in the other contracting state even without a PE. The treaty does not contain this clause. The court, relying on expert evidence, found that an inference could be drawn that the failure to include such a clause meant that Canada had agreed that insurers could carry on substantial business activity without being subject to tax in Canada absent a PE. It will be interesting to see if courts will apply this analysis in the future in analysing other treaty provisions, such as the new limitation of benefits provision in the protocol to the treaty.
Source: ITR- Blake Cassels & Graydon
Bill Maclagan (wsm@blakes.com ) and Lisa Eastwood (lisa.eastwood@blakes.com)
Vancouver, Canada
Telephone +1 514 982 4000
www.blakes.com/
The issue of what constitutes a "permanent establishment" for purposes of the Canada-United States Tax Convention (the treaty) has recently been dealt with by the Tax Court of Canada in American Life Insurance Co v R and Knights of Columbus v R. In both cases the taxpayers were insurance companies, resident in the US, but carrying on an insurance business in Canada. The taxpayers were assessed by CRA on the basis that, in accordance with article IV of the treaty, they were carrying on business through a permanent establishment (PE) in Canada and thus subject to Canadian tax on such income.
Notwithstanding the significant business carried on by the taxpayers, the court held the taxpayers did not have PE's in Canada and thus were not subject to tax there. The taxpayers were listed in telephone directories, provided forms guidelines and promotional material, had office space in Canada and had various independent agents and territorial managers working in the country.
The court held that the taxpayers did not have a fixed place of business at their disposal in Canada and thus did not have a PE on that basis. Any office space in Canada was under the control of the independent agents and the independent agents were carrying on their own businesses from those offices, not the business of the taxpayers. The court also held that, because in both cases the agents were independent contractors and all contracts were subject to final approval in the US, the taxpayers did not have PE's in Canada as a result of having dependent agents who habitually have and exercise the ability to conclude contracts in Canada.
Some of Canada's tax treaties, based on the UN model, contain a specific insurance clause that provides that insurers resident in one contracting state can be subject to tax on income earned in the other contracting state even without a PE. The treaty does not contain this clause. The court, relying on expert evidence, found that an inference could be drawn that the failure to include such a clause meant that Canada had agreed that insurers could carry on substantial business activity without being subject to tax in Canada absent a PE. It will be interesting to see if courts will apply this analysis in the future in analysing other treaty provisions, such as the new limitation of benefits provision in the protocol to the treaty.
Source: ITR- Blake Cassels & Graydon
Bill Maclagan (wsm@blakes.com ) and Lisa Eastwood (lisa.eastwood@blakes.com)
Vancouver, Canada
Telephone +1 514 982 4000
www.blakes.com/