Fowler v. MNR, 90 DTC 1834, [1990] 2 CTC 2351 (TCC)

Kempo, T.CJ.:—The appeals of Joseph Fowler concern his 1985 and 1986 earnings in Canada. He resides in the United States of America and his Canadian earnings arose out of his selling activities at the Pacific National Exhibition ("PNE") in Vancouver. This occurred once per year for an approximate three-week period. The appellant alleges these activities are not taxable in Canada due to the absence of a permanent establishment in Canada.

According to the Minister’s reply to notice of appeal, paragraph 4, the matters had been determined and assessed as follows:

4. In so assessing the Appellant, the Respondent relied upon the following assumption of facts, inter alia:

a) the Appellant is a resident of the U.S.A.;

b) the Appellant comes to Vancouver for approximately two weeks a year to sell knives, car washing mitts and kitchen devices at the Pacific National Exhibition ("PNE") in Vancouver, British Columbia;

c) in filing his 1984 individual income tax return, the Respondent [sic] reported a net business loss of $22,456.68 from his operations at the PNE;

d) the Appellant did not file tax returns for his 1985 and 1986 taxation years;

e) the Appellant advised the Respondent that he had incurred a net business loss from his operations of the PNE of $17,225 in 1985 and $20,929.96 in 1986. The breakdown of the alleged business losses as claimed in 1984, and as indicated to the Respondent for 1985 and 1986 are shown in the attached Schedule "A" to this Reply to Notice of Appeal;

f) an Auditor of the Respondent observed the Appellant's business operations at the PNE in 1987 and determined the Appellant's net business income on the following basis:

Gross sales	$65,752
Cost of Goods Sold	14,830.23
Gross Profit	$50,921.77
Expenses	32,729.33
Net Profit	$18,192.44

g) the Auditor of the Respondent determined that the cost of goods sold for the Appellant in his operation at the PNE amounted to 22.55% of gross sales;

h) the figures set out for the Appellant's business income for 1987 in subparagraph (f) above were agreed to by the Appellant as being accurate;

i) the Appellant had gross and net business income for 1985 and 1986 from his PNE operations as follows:

	1985		1986
Gross Sales	$75,974.45		$62,584.24
Cost of Goods Sold	17,135.80	(22.554%)*	14,115.75	(22.554%)*
Gross Profit	$58,838.65		$48,468.49
Expenses	25,891.59		25,374,35
Net Profit	$32,947.06		$23,094.14
percentage of sales

j) in 1985, 1986 and 1987 the Appellant had a cost of goods sold to gross sales ratio of 22.55% to 77.45%;

k) the cost of goods sold by the Appellant at the PNE in 1985 and 1986 was $17,135.80 and $14,115.75 respectively according to Canada Customs Declarations filed by the Appellant for those two years;

l) the Appellant's business activities at the PNE in 1985 and 1986 constituted carrying on a business in Canada.

Mr. Fowler did not contest any of these factual assumptions, except for those allegations encompassed in subparagraph (I). He testified that he had been entering Canada for the abovenoted purposes for at least 15 years. The arrangement with the PNE was on an annual basis and was apparently premised on a non-exclusive licence to occupy a certain area. Mr. Fowler did not produce the documents, however he testified that the licence could be varied, suspended or revoked at will by the licensor. He said if he did not operate his booths in a manner the PNE deemed acceptable, they could have closed him down or relocated his booths. Booth location and exposure was vital to the success of these undertakings.

During the years under appeal and also for many prior years Mr. Fowler had conducted these selling activities in the Santa Rosa and Pomono fairs in California, each for an approximate two-week period of time. He opined that approximately ten per cent of his total annual income for each of the years under appeal was earned from his Vancouver PNE activities. He conceded that for the three-year period 1984, 1985 and 1986 he had erroneously asserted he had losses in the magnitude of approximately $10,000 to $20,000 a year from the PNE operations and that his gross revenues therefrom had been wrongfully represented to be in the order of $20,000 for 1984 and 1985 and $10,000 for 1986.

With respect to his North America net income, Mr. Fowler said he was only guessing that the PNE source was ten per cent thereof, that he did not know what the proportion was and that having had open-heart surgery he could not have made $180,000 to $182,000 during those years.

In any event it is quite evident that the appellant's business income for the material times was derived from the three fairs being the one in Vancouver and the two in California. All were for approximately the same length of time. No corroborative evidence was produced as verification of the Canadian earning percentage as to the whole.

The equipment employed was movable. It represented a trailer and a collapsible booth. Both remained in Canada during all of 1985 and 1986 allegedly due to the need for chassis repairs and replacement of electrical equipment. Otherwise, it was said, the equipment would have been hooked onto the appellant's van and driven back to California in accordance with his usual practice.

Position of Parties

The appellant argued that there was no permanent establishment of his vending business in Canada for the following reasons:

— the PNE licence was annual and could be cancelled at their discretion;

— official entry into Canada was temporary and conditional;

— customers could not return the product once he had departed;

— the product could not be ordered and was not stored in Canada;

— there was no branch office, office, workshop or telephone in Canada;

— the equipment was collapsible and mobile. It was annually trailered into and out of Canada.

For the respondent, it was argued:

— each year for fifteen years the appellant returned the same time of year to the same location for the same purpose. There was permanency in the operation;

— cancellation rights to his annual PNE licensing agreement was speculative and had happened only once in fifteen years due to an unusual occurrence;

— the subject operation was the appellant's ordinary business which he carried on in three locations, and this business was fixed in these three locations;

— the appellant had not established the Canadian operation was merely sideline or incidental.

Analysis

The following provisions of the Canada-U.S. Income Tax Convention (1980) are of relevance:

Article VII —Business Profits

1. The business profits of a resident of a Contracting State shall be taxable only in that State unless the resident carries on business in the other Contracting State through a permanent establishment situated therein. If the resident carries on, or has carried on, business as aforesaid, the business profits of the resident may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

7. For the purposes of the Convention, the business profits attributable to a permanent establishment shall include only those profits derived from the assets or activities of the permanent establishment.

Article V-Permanent Establishment

1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of a resident of a Contracting State is wholly or partly carried on.

2. The term "permanent establishment” shall include 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.

9. For the purposes of the Convention, the provisions of this Article shall be applied in determining whether any person has a permanent establishment in any State.

Thus, the issue was joined as to whether the appellant's sales activities, as described, amounted to the carrying on of his business through a "permanent establishment" situated in Canada.

In my view the situation, taken in its entirety, supports the conclusion that the appellant had indeed been properly assessed. The following factors were, in my view, determinative of the issue.

The appellant attended the Vancouver PNE annually throughout the preceding 15 years, and his inventory sales occurred on site. Inferentially, the income from the Canadian venture amounted to a significant proportion of the business enterprise as a whole. If it had been otherwise, the information and proof being within the knowledge of the appellant, I am sure he could have, and should have, produced proper evidence in that regard. The appellant had "guessed" at ten per cent, but when the resulting figure of $180,000 was put to him he said no, it was not ten per cent, and that he did not really know what it was. I do not believe the appellant was forthright in his evidence in this regard. Obviously the lower the Canadian percentage the higher the overall earnings which he could not justify. Conversely, the higher the Canadian percentage, the less likely the subject venture could be regarded as merely incidental and insignificant.

Conceptually the Vancouver sales were actually being conducted at, or from, a place of business having the same attributes as that of a “place of management", as a "branch" of the whole operation, or as an “office”. The matters of mobility and the three-week time period are not in themselves overly material when taken into context. Indeed, it was the very nature of the business itself that mandated these aspects. The appellant had attempted, unsuccessfully in my view, to somehow turn it around on the premise that the Canadian business must have been wholly itinerant and insignificant because of its mobility and brief time periods. This approach is not in accord with the facts and cannot stand.

Conclusion

For the reasons given, it is the Court's finding that during the years under appeal the appellant had carried on a business in Canada through a permanent establishment situate at the Vancouver PNE within the meaning of the aforenoted articles of the Canada-U.S. Income Tax Convention.

The appeals for the 1985 and 1986 taxation years are dismissed.

Appeals dismissed.