Citation: 2008TCC306
Date: 20080516
Docket: 2005-170(IT)G
BETWEEN:
AMERICAN INCOME LIFE INSURANCE COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Miller J.
[1] American Income
Life Insurance Company (AIL) is an American company carrying on the insurance business
in the United States, New Zealand and Canada. To be subject to tax in Canada, AIL must be found, in
accordance with Article V of the Canada-U.S. Tax Treaty (the Treaty),
to carry on its business through a permanent establishment in Canada. The Minister of National
Revenue assessed AIL in Canada for the years 1996 to 1999 on the basis that it did carry
on its business in Canada through a permanent establishment. AIL's position is that:
(i) it
did not have a permanent establishment in Canada, as it did not have a fixed
place of business in Canada as required by Article V(1) of the Treaty;
(ii) it did not
have a deemed permanent establishment in Canada as:
(a) there
was no person in Canada who habitually exercised authority to conclude contracts in AIL's name,
as required by Article V(5) of the Treaty; and
(b) if
there were such persons, they were agents of an independent status acting in
the ordinary course of business, an exception to the deemed permanent
establishment provision (Article V(7)).
If I find AIL has a permanent
establishment in Canada and is consequently taxable in Canada, the secondary issue arises as to
whether penalties are in order. Having decided AIL does not have a permanent
establishment in Canada, it is unnecessary to address that secondary issue.
Facts
[2] The facts of this
case were addressed through the evidence of Ms. Melinda-Rae Lyse, a
Provincial General Agent in Quebec, three officers of AIL, Ms. Debbie Gamble, a
Senior Vice-President, Mr. Gayle Emmert, a Vice‑President and Actuary
and Mr. John Rogers, the Controller.
[3] AIL is an American
insurance company, wholly-owned by a public company, carrying on the insurance
business in the United States, New Zealand and Canada. It offers whole life
insurance (50% to 60% of its business), term and accidental and health
insurance products. It has created a niche market, focussing on unions, credit
unions and other member-based organizations. It reflects this union-based
philosophy by both marketing unions and by ensuring its staff in the United States are unionized, and also
by having its Canadian agents subject to collective agreements. The marketing
approach is one of union people selling insurance to union people.
[4] AIL does not
operate through a separate company in Canada, but utilizes a hierarchy of
agents: Provincial or State General Agents (PGA), Master or Managing General Agents
(MGA), General Agents (GA), Supervisory Agents (SA), Agents (A), Public
Relations Representatives (PRR) and a Canadian Chief Agent.
Provincial General Agent
[5] PGAs have a
specific territory within which they carry on business. In the years, in
question there were three to seven PGAs in Canada. The PGA is the key cog in the
agents' hierarchy, as it is the PGA who develops and expands the agency by the
recruitment, training and managing of agents at all other levels, as well as by
offering leadership development for such agents, assuring the quality of their
work and serving as a resource for these agents. The PGA enters an agency
contract with AIL that provides, in part, for the following responsibilities:
(a) to
devote full time exclusively to AIL. It was acknowledged by Ms. Gamble and Ms.
Lyse that a PGA could carry on another business unrelated to the insurance
business (an example was given of a Mr. Altig, a PGA, who carried on a printing
business);
(b) to follow
company regulations;
(c) to
be responsible for agents "coded" to a PGA, including responsibility
for any debts owed by an agent to AIL (for example, advances versus
commissions);
(d) to keep records
and give them to AIL on request;
(e) to
hold, in trust, monies received for transmission to AIL;
(f) to
use all business records etc only for the business purposes of AIL … and to
recognize that such records are the property of AIL; and
(g) to
advise AIL in writing whenever the provincial general agent becomes a
representative of another insurance company. If this occurred, it was clear that
AIL would terminate the contract.
[6] Included in the
contract were several limitations on authority, providing that the PGA had no
authority to obligate AIL except by the terms of the insurance application or
written authority from AIL.
Ms. Gamble could not recall any
instance where the company ever gave written authority to a PGA to bind the company.
Other limitations were:
(a) not to alter
the terms of any policy or contract of AIL;
(b) not
to receive money on behalf of AIL except initial premiums on applications;
(c) not to accept
renewal premiums for insurance; and
(d) not
to use advertising or printed matter other than that provided or approved by
the company.
AIL has authority to cease to do
business in any territory without becoming liable to the PGA, and also to
reject any application for insurance. The agency contract could be terminated
on 30 days’ notice. Finally, the agreement stipulates that the PGA is not an
employee of AIL.
[7] AIL has no say
where, within a territory, the PGA wishes to locate. The PGA determines the
level of commission of an agent, though it is AIL who sets the category of
parameters for different levels of agency. So, for example, an agent may be in
a General Agent category for which AIL sets a range of percentage commission.
It is then for the PGA to determine the exact commission. It is also the PGA's
call as to which category the agent falls into, and also who advances from one
category to the next. The lower level agent's contracts are signed by both AIL
and the PGA. It is the PGA who would terminate an agent should the need arise.
[8] Ms. Lyse, a Quebec
PGA, indicated that the PGA is remunerated based on a commission on initial
premiums and also on renewal premiums. She moved from Alberta to Quebec to become a PGA due to
the renewal opportunities as a PGA in Quebec. She anticipated she could build a large agency in Quebec, and it appears she
has. It was clear that, as a PGA, she takes a very active role in monitoring
the agents, assisting with their sales’ approaches and motivating them. She
instructs them on the mechanics of the commission arrangements.
Master General Agent, Regional
General Agent, General Agent, Supervisory Agent
[9] I am lumping these
categories of agents together as their roles are similar, the distinguishing
feature being the level of commission. Their agency contract is signed by both
AIL and the PGA, as it is the PGA who determines their level of commission. These
agents all have some managerial responsibilities; the further up the hierarchy,
the more supervisory and management responsibilities they assume, including
recruiting and training other agents. These managerial agents will also try to
expand business by obtaining agents coded to them. Managerial agents receive
commissions on the sales of those agents coded to them. So, for example, on an initial
premium, 100% of the commission could be broken down to 57.5% for a General Agent,
12.5% commission override for a Master General Agent, and 30% commission override
for a Provincial General Agent. The managerial agents will also engage in
direct solicitations.
Agents
[10] The Agent, at the
bottom of the ladder, is strictly a commission sales agent. There is no
requirement of exclusivity, and the Agent may sell other insurance products,
though this is highly unlikely, as the Agent will prosper by advancing up the
hierarchy by selling exclusively AIL insurance.
[11] The Agents take
their guidance and look for supervision primarily from the PGA. They need their
license to sell insurance, products to sell, a vehicle, a cell phone and
perhaps a home office. Apart from the insurance product itself, they provide
the rest of these necessities themselves.
Public Relations Representative
(PRR)
[12] Up until 1998-1999,
these individuals had a contract with AIL, but thereafter the contract was between
the PRR and PGA. The PRR's role is to provide leads of potential customers to
the Agents. For example, they contact unions to attempt to put some blanket
group coverage in place, which would lead to access to membership lists. The Agents
would then approach the members for individual coverage. The PRRs are paid in
accordance with their collective agreement on a per lead basis. It is the PGA
who pays them for leads for the Agents.
Canadian Chief Agent (CCA)
[13] The Office of
Superintendent of Financial Institutions (OSFI) requires that there be a Chief Agent
in Canada. This individual is
mandated to help ensure AIL adheres to Canadian regulatory requirements. The
CCA for AIL in Canada was Mr. Cumine, a lawyer with a Toronto law firm. He acted as CCA for more than one
insurance company. He was not involved in selling insurance products. He was
also not an officer, director nor was he involved in management of AIL.
[14] AIL's actuary, Mr.
Emmert, was responsible for ensuring that AIL management took reasonable steps
to comply with Standards of Sound Business and Financial Practice for Life and Health
Insurance. The CCA signs a confirmation to this effect, which is submitted
to OSFI. The CCA is not himself actively involved in ensuring such compliance.
The CCA acts as an intermediary between OSFI and AIL, though the CCA is
required by OSFI to maintain certain AIL files in Canada. Mr. Cumine also provided legal
advice to AIL. He billed AIL as a client of the law firm.
[15] OSFI published a
memo in November 1992 entitled "Guideline - Role of CCA and Record Keeping
Requirements". It discusses the role of the CCA "in protecting
the interest of the Canadian policyholder by fulfilling statutory obligations
with respect to records and documents which shall be maintained at the Chief
Canadian Agency". This is done by ensuring compliance with "ICA, Regulations, Policy,
Guidelines and Statement completion requirements". The Guideline
goes on to discuss the CCA's responsibilities to ensure an adequate margin of
assets to liabilities is maintained in Canada. It appears the Guideline
contemplates a more hands-on role for the CCA than what I understand in fact
occurred. Mr. Emmert was clear that it is he, and not Mr. Cumine, who monitors
and fully comprehends AIL's financial situation vis-à-vis the OSFI requirements.
[16] The Guideline
also covers the record-keeping requirements, including a requirement that bank
accounts in Canada be under the control of the CCA. The CCA must also sign policies.
[17] OSFI conducted an
audit of AIL in 1997, acknowledging in their management letter to AIL of
November 13, 1997, that the CCA did not have "an intimate working
knowledge of the business being transacted in Canada". OSFI recommended the
"establishment of a stronger presence in Canada by developing the Chief Agency
into a functional branch office with employees dedicated to the Canadian
business." Mr. Emmert testified this was never done and AIL has never been
sanctioned by OSFI.
[18] OSFI also requested
a business plan from AIL outlining what functions would be performed in Canada. AIL responded with a
concise business plan indicating, in part:
"METHOD OF DISTRIBUTION" –
American Income Life sells its insurance products only through state general
agents and their agents who represent only American Income Life Insurance Company.
"COMMISSION STRUCTURE" –
Commissions are established for state general agents, from which flow
commissions to the various types of general agents and agents.
Out of commissions the state general
agents must pay their own operating and overhead expenses.
[19] The business plan
did not address the thrust of OSFI's recommendations, and, again, Mr. Emmert
advised no sanctions were forthcoming from OSFI. Finally, OSFI recommended that
the CCA have control of the Canadian trust accounts and the Canadian
disbursement accounts. The month after it received these recommendations, AIL
passed directors' resolutions giving the CCA complete control over the AIL
deposit account at CIBC, and sole signing authority for the CCA on the CIBC
disbursement account for amounts less than $10,000. For amounts greater than
$10,000, the CCA's and one AIL's officer's signature were required. AIL dealt
with this by using a facsimile signature of the CCA.
[20] By Directors' Resolution
of January 1998, AIL resolved that the CCA signature was required with that of
one officer on any withdrawal from the trust account with RBC Trust Company. It
was noted that the trust agreement between AIL and RBC Trust Company of May 13,
1993, had certain built-in protections required by OSFI, including the
Superintendent's approval for vesting an asset in trust, or withdrawing an
asset vested in trust, subject to exceptions on certain assets. Other
protections included:
(i)
an
override of access by the Superintendent to income from vested assets;
(ii)
a
requirement to regularly report the value of assets in Canada;
(iii)
access
by the Superintendent to all assets held in trust; and
(iv) the
requirement of such assets assigned to the Superintendent in certain events
(for example, insolvency).
Operation of AIL's business
[21] The basic
distinction between what business occurred in Canada and what occurred in the United States is as follows: the
product (insurance) was developed and issued in the United States, and the
underwriting process took place in the United States; the sales force,
however, was in Canada, through the hierarchy of commission agents. It is important to describe
in greater detail the business carried on in Canada.
[22] Selling AIL
insurance in Canada revolves around the PGA. In Ms. Lyse's case, it is her office, leased
space at her expense, that is the centre for recruitment, training and
monitoring the Agents. The office has a reception area with a fulltime office
manager who greets Agents. There is an AIL sign at the reception. The office
phone number is listed under AIL. Ms. Lyse also employs two other employees.
She has one large office, four smaller offices for managers to meet with Agents
and a supplies room. There is no office designated for an AIL representative.
Ms. Lyse has had only one visit from a representative from AIL and that was a
public relations visit. The Agents' business cards are required by law to name
the insurer. The PGAs must describe themselves on their cards as being just
that, Agents. It was clear from AIL memos to the PGAs that the PGAs were
forbidden from using AIL's name on any leases, equipment purchases or incur any
expenditure in AIL's name.
[23] The Agents follow up
leads from the PRR or personal leads. Any new business is recorded by
completing a new business transmittal form. With a new customer, the Agent will
also complete the application form on which the customer will identify the specific
insurance sought. The Agent will collect the first premium and provide either a
premium receipt or, in the case of whole life, a conditional receipt. It is
clear on the premium receipt that no obligation is incurred by AIL until the
application is approved by the company after the underwriting process. The
conditional receipt reads differently, providing coverage may be effective as
early as the time of application and payment of the first premium. If an
applicant dies while the underwriting process is ongoing, the applicant
may still be covered if the underwriting would have led to approval.
[24] The Agents deliver
the transmittal form and application to Ms. Lyse on Thursday. She checks the
application and forwards the information to AIL in Waco, Texas.
[25] It is in Waco, in the United States, that the underwriting
process is completed, which may, for example, include requests for more
detailed medical information. Agents are not involved in that process. Once the
underwriting process is complete and the risk fully assessed, AIL will accept
the application as is, counter with different coverage or decline the application.
If there is a counter‑offer, an Agent may need to discuss this further
with the customer. If the application is accepted, AIL issues a policy from the
United
States.
Renewals of coverage are handled directly with AIL in the United States. Often, premiums are
arranged to be paid by automatic bank deductions. It is on the renewals that
AIL makes its money, as in the first year of a policy AIL pays out all of
the premium in commissions, but the commission rates drop on the renewals.
[26] As well as the
transmittal forms, the PGA sends weekly production reports to Waco, and it in
turn provides in the relevant years the following reports:
(1) a
weekly underwriting bulletin indicating pending applications and requirements
to complete the process;
(2) weekly
advance reports showing business transmitted, cases declined or withdrawn;
(3) agents'
progress and persistency report, showing the gross submissions, declines,
withdrawals, cancellations and net submissions and retention rates; and
(4) a
monthly ledger report showing all the policies in the books, premiums,
renewals, etc., on an individual basis.
[27] Also, several forms
were generated from Waco:
application forms, underwriting questionnaires, claims statements, funeral benefit
certificates, family information guides, summary worksheets of what policies
will provide and some recruiting brochures.
[28] Both AIL and the PGA
provide certain incentives for their Agents; for example, based on production,
an Agent may qualify for a yearly trip to a resort from AIL. AIL also provides
a leadership development seminar, which the Agents could attend at their own
expense.
[29] OSFI also requires
certain reports from AIL, through an appointed Canadian actuary, including a report
covering the financial well-being of AIL, insolvency report (report on dynamic
capital adequacy testing) and a test of adequacy of assets in Canada and margin
requirements from foreign life insurance companies (TAAM). AIL also completed
an annual return for OSFI(OSFI 55), a form especially for Canadian branches of
foreign companies.
[30] AIL reported its
Canadian income in the US in combination with its US income, though, for
regulatory and internal management purposes, kept the Canadian income separate.
[31] The Respondent
assessed AIL for tax under Part I and Part XII.3 of the Income Tax Act
on the basis that AIL carried on its business through a permanent establishment
in Canada. Tax assessed was as follows:
|
|
1996
|
1997
|
1998
|
1999
|
|
Part I
|
$1,486,013
|
$1,793,873
|
$3,027,728
|
$3,672,488
|
|
Part XII.3
|
$28,710
|
$44,623
|
$64,489
|
$88,031
|
|
Part I interest
|
$779,507
|
$838,705
|
$901,057
|
$939,126
|
|
Waived
|
$(505,363)
|
$(416,803)
|
|
|
|
Part XII.3 interest
|
$5,649
|
$10,556
|
$20,649
|
$23,767
|
|
Penalty (Part I)
|
|
$24,357
|
$37,926
|
$62,328
|
|
Penalty (Part XII.3)
|
|
$223
|
|
|
Issue
[32] AIL’s liability for
tax in Canada depends on the
interpretation of the Treaty, the relevant provisions of which are
attached as Schedule “A” to these reasons. AIL is liable for tax in Canada if it carries on its
business in Canada through a permanent establishment. There are three questions to address
in determining whether AIL had a permanent establishment in Canada:
(i) Did
AIL have a permanent establishment as a result of having a fixed place of
business in Canada (Treaty, Article V(1), (2) and (6))?
(ii) Did
AIL have a deemed permanent establishment as a result of having agents in
Canada who habitually exercised, in Canada, an authority to conclude contracts in the name of
AIL (Treaty, Article V(5))? and
(iii) If
so, were such agents general commission agents or any other agent of an
independent status, acting in the ordinary course of their business (Treaty,
Article V(7))? If so, AIL is not deemed to have a permanent establishment and,
therefore, is not liable for Canadian tax. If not, AIL is deemed to have a
permanent establishment and therefore is liable for tax in Canada.
Analysis
[33] It is agreed by the
parties that AIL, as a non-resident, carried on business in Canada within the meaning of paragraph
253(b) of the Act. AIL is therefore liable for tax in Canada
pursuant to subsection 2(3) and Part XII.3 of the Act, subject to the
relevant provisions of the Treaty, specifically Articles V and VII which
require the business be conducted through a permanent establishment in Canada.
[34] The Treaty
provides a two-pronged analysis to the question of “permanent establishment”:
Article V(1) (fixed place of business) and Articles V(5) and (7) (dependent
agent). If the fixed place of business analysis does not result in a finding of
permanent establishment, then one turns to the dependent agent permanent
establishment analysis. While there is some overlap between the factors to
consider in the two analyses, it is important, for clarity’s sake, not to lose
sight of which analysis is being undertaken. The key factors in the fixed place
of business analysis are:
(i) the
existence of a place of business;
(ii) a
degree of permanence to such place; and
(iii) the
carrying on by AIL of business through this fixed place.
[35] The key factors in
the dependent agent permanent establishment analysis are:
(a) an agent’s
authority to conclude contracts in Canada;
(b) was
the agent of independent status, both legally and economically; and
(c) was the
agent acting in the ordinary course of his or her business.
[36] In both analyses,
one issue to be determined is whose business is being carried on by the agents.
The Appellant argues there are two businesses being carried on – AIL’s business
of the sale of insurance products and the agent’s business of soliciting such
sales as independent contractors. The Respondent’s position is that the only
business carried on is AIL’s and the agents, in carrying out their
responsibilities of soliciting sales, are in effect carrying on AIL’s business.
This may seem to some as splitting hairs, but for better or worse, that is what
law oft times is. What follows is the hair-splitting analysis.
Did AIL have a fixed
place of business in Canada?
[37] The Organization for
Economic Cooperation and Development (“OECD”) has a model tax convention which
in many ways, but not all, mirrors the provisions of the Treaty. It
is helpful to consider the OECD commentary regarding “permanent establishment”.
The commentary identifies the following conditions for a permanent
establishment arising from a fixed place of business:
·
The
existence of a “place of business”, i.e. a facility such as premises or, in
certain instances, machinery or equipment;
·
This
place of business must be fixed, i.e. it must be established at a distinct
place with a certain degree of permanence; and
·
The
carrying on of the business of the enterprise through this fixed place
of business. This means usually that persons who, in one way or another, are
dependent on the enterprise (personnel), conduct the business of the enterprise
in the state in which the fixed place is situated.
[38] The commentary goes
on in paragraphs 4 and 10 as follows:
4. The term “place of business”
covers any premises, facilities or installations used for carrying on the
business of the enterprise whether or not they are used exclusively for that
purpose. A place of business may also exist where no premises are available or
required for carrying on the business of the enterprise and it simply has a
certain amount of space at its disposal. It is immaterial whether the premises,
facilities or installations are owned or rented by or are otherwise at the
disposal of the market place, or by a certain permanently used area in a
customs depot (e.g. for the storage of dutiable goods). Again the place of
business may be situated in the business facilities of another enterprise. This
may be the case for instance where the foreign enterprise has at its constant
disposal certain premises or a part thereof owned by the other enterprise.
10. The business of an enterprise
is carried on mainly by the entrepreneur or persons who are in a
paid-employment relationship with the enterprise (personnel). This personnel
includes employees and other persons receiving instructions from the enterprise
(e.g. dependent agents). The powers of such personnel in its relationship with
third parties are irrelevant. It makes no difference whether or not the
dependent agent is authorised to conclude contracts if he works at the fixed
place of business (cf. paragraph 35 below). But a permanent establishment may
nevertheless exist if the business of the enterprise is carried on mainly
through automatic equipment, the activities of the personnel being restricted
to setting up, operating, controlling and maintaining such equipment. Whether
or not gaming and vending machines and the like set up by an enterprise of a
State in the other State constitute a permanent establishment thus depends on
whether or not the enterprise carries on a business activity besides the
initial setting up of the machines. A permanent establishment does not exist if
the enterprise merely sets up the machines and then leases the machines to
other enterprises. A permanent establishment may exist, however, if the
enterprise which sets up the machines also operates and maintains them for its
own account. This also applies if the machines are operated and maintained by
an agent dependent on the enterprise.
[39] I also draw guidance
from case law, specifically the cases of Sunbeam Corporation (Canada) Ltd. v. M.N.R., The Queen v. Dudney, M.N.R. v. Panther
Oil & Grease Manufacturing Co. of Canada Ltd., American
Income Life Insurance Co. v. Canada (Minister of National Revenue) and employee/independent
contractor cases.
[40] The Respondent
relied on Panther Oil, a 1961 decision of President Thorson, dealing
with whether there existed a permanent establishment in Quebec, pursuant to the
Income Tax Regulation 411(1)(a), which reads:
411(1)(a) For the purpose
of this Part, a “permanent establishment” includes branches, mines, oil
wells, farms, timberlands, factories, workshops, warehouses, office, agencies
and other fixed places of business.
President Thorson concluded it was
not an essential requirement of the permanent establishment that there be a
fixed place of business. He proceeded then to determine that a group of sales
agents in Quebec constituted a branch or agency and, consequently, a permanent
establishment by virtue of having a well established selling organization in Quebec. Panther Oil had
sought a ruling that it had a permanent establishment so it could claim a Quebec credit. President Thorson
found they were entitled to such a credit.
[41] This case is clearly
distinguishable on a very fundamental basis: the Treaty, unlike the Regulations,
requires a fixed place of business, and a fixed place of business from which
AIL carries on its business. This is not the same issue dealt with by President
Thorson. Respondent’s counsel stressed how integrated the agents in Canada were in AIL’s business,
and drew parallels to the agents in Panther Oil. I am not satisfied the
parallels are justified given the very different legal parameters within which President
Thorson rendered his decision, and the legal parameters provided by the Treaty.
The question before me is whether AIL’s business was being carried on at a
fixed place of business, not whether there were “agencies”.
[42] The reasoning in Panther
Oil was not followed by the Supreme Court of Canada in the case of Sunbeam,
published in 1962, even though the same regulations were at issue. The Court
held that an Ontario manufacturer of electrical appliances which employed sales
representatives, who maintained home offices, and junior salespeople in Quebec,
did not have a permanent establishment in Quebec for purposes of the Act.
The relevant salespeople received no rent or compensation from the Ontario company for maintaining
their offices. The Court held that the sales representatives’ home offices did
not constitute a Quebec permanent establishment because the Quebec offices were not the Ontario company’s fixed place
of business. Justice Martland, in a concise judgment, found the Appellant had
no permanent establishment. He stated:
On this evidence I am not prepared to hold that the
appellant had a "permanent establishment" in the Province
of Quebec in the years in question. Interpreting those words, apart
from the provisions of s. 411(1)(a) of the Regulations, my
opinion is that the word "establishment" contemplates a fixed place
of business of the corporation, a local habitation of its own. The word
"permanent" means that the establishment is a stable one, and not of
a temporary or tentative character.
...
I do not agree that the fact that such employee, for the
discharge of his duties under his contract, set up an office in his own
premises constituted that office a branch, an office or an agency of the
appellant. It is the appellant who must have the permanent establishment in the
Province of Quebec to qualify for the tax deduction …
[43] In the case of Dudney,
a more recent decision of the Federal Court of Appeal (2000), the Court dealt
with Article XIV of the Canada–U.S. Treaty, which refers to a “fixed
base regularly available to him in Canada”. The Court, however, referred to the term
“permanent establishment”, as used in Article V(1) of the Treaty and its
reference to a fixed place of business.
[44] Mr. Dudney was a
resident of the US.
who was contracted to supply training to employees of a Canadian company. For
the purposes of the training contract, he was given various offices at the
premises of the Canadian company, which he was only allowed to enter at normal
office hours. He was allowed to use the client’s telephone only on client’s
business. He spent 300 days in one tax year, and 40 in the subsequent year at
the premises. Both the Tax Court of Canada and the Federal Court of Appeal
confirmed he had no fixed base in Canada. Justice Sharlow, at the Federal Court of Appeal,
relying in part on the 1977 OECD Model Convention and citing international
cases, concluded that the taxpayer did not have exclusive use of the client’s
office and did not have control over the premises in which he worked. In
addition, the taxpayer did not have freedom to enter the building whenever he
chose and did not have a fixed base regularly available to him. At paragraphs
19 and 20 of the decision, Justice Sharlow stated that:
[19] Thus, where a person is
denied the benefit of Article XIV on the basis that he has a fixed base
regularly available to him in Canada, the question to be asked is whether the person carried on his
business at that location during the relevant period. The factors to be taken
into account would include the actual use made of the premises that are alleged
to be his fixed base, whether and by what legal right the person exercised or
could exercise control over the premises, and the degree to which the premises
were objectively identified with the person's business. This is not intended to
be an exhaustive list that would apply in all cases, but it is sufficient for this
case.
[20] In this case, the Tax
Court judge was correct to consider these factors to be relevant and
determinative. The evidence as a whole gives ample support for the conclusion
that the premises of PanCan were not a location through which Mr. Dudney carried
on his business. Although Mr. Dudney had access to the offices of PanCan and he
had the right to use them, he could do so only during PanCan's office hours and
only for the purpose of performing services for PanCan that were required by
his contract. He had no right to use PanCan's offices as a base for the
operation of his own business. He could not and did not use PanCan's offices as
his own.
[45] Although the issue of the
independent status of the agents is most pertinent in considering the application
of Articles V(5) and (7) (dependent agent permanent establishment), it also
comes into play in considering a fixed place of business: dependent agents are an
indication that the enterprise, in this case, AIL, carries on business from a fixed
place. In effect, if the agents are dependent, they are seen as carrying on
AIL’s business, not their own business. Counsel also referred me to the
standard independent contractor versus employee test most recently reviewed by
the Supreme Court of Canada in 671122 Ontario Ltd. v. Sagaz Industries
Canada Inc.,
and by the Federal Court of Appeal in subsequent decisions of Royal Winnipeg Ballet v. M.N.R. and Combined Insurance Company
of America v. Canada (National
Revenue), to name just a couple. Indeed,
this was the very issue before Justice Rowe in the case of American Income
Life, where he was faced with the same Appellant. He heard some of the same
witnesses who appeared before me. He reviewed the factors of control, provision
of equipment, degree of risk and responsibility for investment in management
and opportunity for profit. He concluded:
The agents were performing services as persons in business on their own account.
He
stated:
In the within appeals, it is apparent there are two
different businesses operating at the same time. One of them – from the
perspective of Burbank – arises from his activity as a
self-employed person carrying on the business of soliciting insurance coverage
from members of the public. He undertook the necessary steps to become licensed
and trained in order to put himself in a position where he could earn
commission revenue from policy sales. Once he had completed the application
form and provided the necessary information – including a method for premium
payment – his task was concluded. Whether or not a policy was issued depended
on American, the insurer having the authority to underwrite the policy. Up to
that point, he had to depend on his ability to use the leads wisely, and to
utilize his administrative and organizational skills to set up appointments in
an efficient and cost-effective manner and to maximize his presentation skills
in order to close a higher proportion of sales in relation to sales calls.
Again, it must be emphasized that the jurisprudence demands that the Court
approach the analysis from the standpoint of the persons alleged to have been
employees.
[46] The approach of the Federal
Court of Appeal in decisions such as Royal Winnipeg Ballet and Combined
Insurance, both subsequent to Sagaz, address the traditional
determining factors in light of what the parties intended.
[47] What I draw from this review of
the Treaty provisions, the OECD commentary and the case law are the
following guidelines for the determination of what constitutes a fixed place of
business and, consequently, a permanent establishment for purposes of Articles
V(1) and (2).
1.
A
permanent establishment requires a fixed place of business meaning:
(a)
existence
of a place of business;
(b)
degree
of permanence to such place; and
(c)
the
carrying on of the business of the enterprise through such fixed place.
2.
The
enterprise need not own or lease property for it to be a fixed place of
business.
3.
The
premises need not be used exclusively by AIL.
4.
To
determine if AIL’s business is being carried on from the fixed place of
business, the following factors should be considered:
-
use
of premises by AIL
-
control
by AIL over premises
-
legal
right to exercise control over premises
-
degree
to which premises identified with AIL business
-
who
paid for expenses of premises
-
who paid
for equipment used at premises
-
who
made management decisions
-
what
contracts were concluded from premises
-
what
AIL products were kept on premises
-
did
AIL have any Canadian employees
-
who
bore the risk of the operation from premises
-
how
many principals were represented by the agent
-
were
agents subject to detailed instructions or comprehensive control
[48] Respondent’s counsel
stressed the concept of integration, though apart from the case of Panther
Oil, this does not appear to be a consideration, let alone a determinative
factor.
[49] All agents work from
a place, whether a PGA’s office or the agent’s home office, that meets the
criteria of a place of business and one of permanence. It is the question of
whose business is being carried on at such place that is the crux of this
issue. AIL and the agents intended that the agents not carry on AIL’s business
but carry on their own business. Given that intention, do the factors to be
considered in determining whose business is being carried on from the fixed place
of business support that intention. I believe they do. I will consider each
level of agent separately.
Chief Canadian Agent
[50] Mr. Cumine, the
Chief Agent during the relevant period, is not an employee of AIL. He is a
lawyer with the Toronto law firm of McLean & Kerr LLP. Among the legal tasks that he performs
for some of his non-resident insurance clients is to act as Chief Agent for
these clients, including the Appellant. Mr. Cumine’s role is not to conclude
insurance sales contracts on behalf of the Appellant or to perform the
day-to-day running of the Appellant’s business either in Canada or the United States. It was intended that
his services be retained as a lawyer in Canada to fulfill the Canadian regulatory
requirements pursuant to the Insurance Companies Act. His role,
performed in his capacity as a lawyer of a Canadian law firm, is purely
regulatory in nature.
[51] The Insurance
Companies Act is clear that a Chief Agent is a statutory creation designed:
- to
keep and maintain certain records in respect of the foreign insurance company;
-
to
receive reports of the actuary with a view to understanding the financial
position of the foreign insurance company; and
-
to
receive reports of the auditor with a view to understanding the wellbeing of
the foreign insurance company.
Also, the guideline of
the Office of the Superintendent of Financial Institutions (“OSFI”) talks in
terms of insurance compliance to protect the Canadian policy holder.
Notwithstanding recommendations from an OSFI review that the Chief Agent
be developed into more of a functional branch office with employees dedicated
to the Canadian business, AIL resisted. Mr. Cumine did not proceed with any
such changes.
[52] AIL simply has no
control over how Mr. Cumine fulfills his responsibilities, nor does it have any
control over Mr. Cumine’s premises. I am satisfied that whatever duties he
carried out for AIL from his office, he did so carrying on his own legal
business, not that of AIL.
PGAs
[53] Are the
circumstances surrounding the PGA’s operation consistent with the PGA carrying
on its own business or that of AIL? There are certainly a number of factors
that point to some involvement of AIL in the PGA’s operation: signage,
telephone listing, provision of forms and guidelines, promotional materials and
being the sole provider of the insurance product. According to the Respondent,
these point to a level of integration that renders PGA’s activities part of
AIL’s business. I disagree. I find there are far more, and significant factors
that suggest the PGA was truly engaged in carrying on his or her own business
of soliciting sales and developing a hierarchy of agents beneath him or her. To
be clear, I see the PGA’s business as involving both solicitations and the
building of a network of agents. The factors I rely upon to reach this
conclusion are as follows:
- The
PGA’s premises were completely under their control; AIL had no interest in the
premises, not even to the extent of having any space designated for an AIL
representative, let alone any legal right to exercise control over the
premises.
- The
PGA’s premises were used entirely in the PGA’s operation.
- No
expenses for the premises were paid by AIL; all expenses incurred in running
the office were to the PGA’s account.
- All
equipment at the PGA’s office was owned or leased by the PGA.
- Management
decisions of the PGA were made without the involvement or influence of AIL;
conversely, the PGA was not involved in any AIL management decisions.
- AIL
had no employees working out of the PGA offices.
- The
PGA assumed all risk for the operations of the PGA.
- While
AIL provided some overall guidance to the PGA there was not the level of
detailed instruction one would expect of an entity carrying on its own
business; in common vernacular, the PGA was left to his or her own devices.
- The
PGA hired his/her own staff.
- The
training of agents taking place at the PGA’s offices was undertaken by the PGA
for the purpose of broadening the agent base, and consequently increasing
profits arising from the PGA’s cut of the agent’s commission.
- No
expenses of training were reimbursed by AIL to the PGA.
- Notwithstanding
that AIL set categories for commissions, the PGA negotiated the final rate of
agent’s commissions.
- PGAs
cannot conclude the AIL sales contract.
[54] These factors lead
me to the conclusion that the PGAs were independent contractors carrying on their
own business and not carrying on AIL’s business from their premises. AIL does
not have a fixed place of business, and consequently, no permanent
establishment through the PGA.
Subordinate Agents
[55] I will group
together other categories of agents together, including the public relations
representative. The fixed place of business for such individuals would, in most
cases, be the home office. These agents divide their time between their home
office, the PGA’s office, the customer’s place and their car. Their home
office would be the only location that could constitute their fixed place of
business. Do they carry on AIL’s business from such fixed place? No. The
responsibility for the establishment and the maintenance of these agents’
business falls on them, or on them in conjunction with the agents superior to
them in the PGA’s hierarchy. It does not fall on AIL nor any employee of AIL.
[56] The factors which I
have considered which lead me to this conclusion are similar as those referred
to in dealing with the PGA:
- None
of the executive, managerial or operational decisions in respect of AIL’s
business were made in the offices of any subordinate agents; such decisions
were made in the Appellant’s office in the United States.
- None
of AIL’s directors, officers or managers were located in the offices of any
agent.
- The
Appellant does not own or rent any of the home offices or other facilities in Canada out of which an agent
works.
- Those
assets that AIL does maintain in Canada, for example financial assets, are maintained in order to
comply with Canada’s insurance laws, and are not kept in any agent’s offices.
- There
is no space in any of the subordinate agent’s offices at the disposal of
employees of the Appellant, who would have no occasion to visit a home office
in any event.
- AIL’s agents in
Canada are independent
contractors.
- The
agents incur the expenses required to maintain and operate their home offices,
and the Appellant does not reimburse them for such expenses.
- The
agents maintain their own books and records and are responsible for the
preparation of their own financial information for tax and other business
purposes.
- To
the extent that agents negotiate their level of sales commissions, the
negotiations take place with a provincial general agent, not with the
Appellant.
- Agents
undertake all of the risk inherent in their own business.
- Agents
have no involvement in the Appellant’s decisions regarding whether, and in what
terms, the Appellant will accept or reject risks.
- Agents
are not involved in the issuance of insurance policies, ongoing premium
collection, policy renewals or the evaluation or payment of claims.
[57] I conclude it is the
agent’s business being carried on out of the home office, notwithstanding the
exclusivity of the product.
Does AIL have a
Dependent Agent Permanent Establishment? (Article V(5))
[58] As I have found AIL
does not have a fixed place of business through any level of agent, does AIL
have a dependent agent permanent establishment by virtue of having a Canadian
agent who habitually exercises in Canada an authority to conclude contracts in
the name of AIL (Treaty Article V(5)). I find AIL does not have a
Canadian agent who exercises such authority.
[59] Again, it is useful
to consider the OECD commentary, particularly as it relates to the type of
contract which an agent has authority to conclude. The commentary states
as follows:
32. Therefore, paragraph 5 proceeds
on the basis that only persons having the authority to conclude contracts can
lead to a permanent establishment for the enterprise maintaining them. In such
a case the person has sufficient authority to bind the enterprise’s
participation in the business activity in the State concerned. The use of the
term “permanent establishment” in this context presupposes, of course, that
that person makes use of this authority repeatedly and not merely in isolated
cases.
…
33. The authority to conclude contracts
must cover contracts relating to operations which constitute the business
proper of the enterprise. It would be irrelevant, for instance, if the person
had authority to engage employees for the enterprise to assist that person’s
activity for the enterprise or if the person were authorised to conclude, in
the name of the enterprise, similar contracts relating to internal operations
only. Moreover the authority has to be habitually exercised in the other State;
whether or not this is the case should be determined on the basis of the
commercial realities of the situation. A person who is authorised to negotiate
all elements and details of a contract in a way binding on the enterprise can
be said to exercise this authority “in that State”, even if the contract is
signed by another person in the State in which the enterprise is situated.
Since, by virtue of paragraph 4, the maintenance of a fixed place of business
solely for purposes listed in that paragraph is deemed not to constitute a
permanent establishment, a person whose activities are restricted to such
purposes does not create a permanent establishment either.
[60] The Respondent
argues there are two types of contracts which agents habitually have authority
to conclude which bind AIL: the agent’s contracts and the conditional receipt.
I am somewhat perplexed by the Respondent’s reliance on the agent’s contracts
as, for subordinate agents, these are signed by the PGA, who does their
recruiting, and by AIL, often by means of facsimile stamped signatures. I was
not left with the impression that PGA was signing on behalf of AIL, but on his
or her own behalf as a responsible PGA. Indeed this is a strong indicator of
the PGA carrying on its own business of developing the hierarchy of agents. I
find that the evidence does not support a conclusion that the PGA was
concluding these agent’s contracts in the name of AIL. I was not directed to
any law dealing with facsimile signatures. I accept such a signature of an AIL
officer as that officer’s signature and that may bind AIL. It is not the PGA’s
signature that binds AIL.
[61] With respect to the
conditional receipt, both parties spent considerable time on this issue. Does
the conditional receipt signed by an agent bind AIL prior to actual delivery of
an insurance policy? In other words, by signing the conditional receipt is the
agent concluding a contract in Canada?
[62] The conditional
receipt is clear that coverage may be effective prior to policy delivery, but only
if and until all conditions of the receipt are met. AIL still goes through
the underwriting process, and if the applicant is found to be insurable, then
coverage will extend back to before the issuance of the policy. I distinguish
between the effective time of concluding the contract and the effective time of
coverage. Until AIL does something in the United States, there is no contract
concluded; when AIL accepts that the applicant is insurable, there is a
contract effective back to an earlier time. I do not interpret this as giving
agents authority, by having them sign conditional receipts, to conclude
contracts in Canada. This is hammered home by the inclusion in the receipt itself of the
words “no agent has authority to alter the terms or conditions of this
receipt”.
[63] The Respondent,
however, refers to the Federal Court decision in London Life Insurance
Company v. The Queen
for the proposition that agents could bind a principal to interim coverage
and that the interim coverage is a contract completed in the agent’s
jurisdiction, in that case, Bermuda. Appellant’s counsel went to great lengths
to persuade me not to rely on this particular case.
[64] The cases upon which
London Life relied, Zurich Life Insurance Company of Canada v. Davies and Matchett et al.
v. London Life Insurance Co.,
do not address the question of interim coverage being a separate contract.
It was also notable that in London Life, the Court found that the
ultimate policy issued was also issued in Bermuda. There is no question that the
ultimate policy issued by AIL was issued in the US.
[65] In the subsequent
case of Wagner Brothers Holdings Inc. v. Laurier Life Insurance Co., the Ontario Court
of Appeal overturned the trial Judge’s finding that the traditional insurance
policy was separate from the final underlying policy, and held that the
application and the policy constitute one contract.
[66] Justice Berger in Rainer
v. Primerica Life Insurance Co. of Canada
addressed the same issue as follows:
In Wagner Brothers Holdings Inc. v.
Laurier Life Insurance Co. (1992), 8 O.R. (3d) 609, cited by the Appellant,
the Ontario Court of Appeal stated that the trial judge erred in holding that
the main policy and the conditional insurance agreement were separate and
distinct contracts. However, the Court of Appeal’s decision rested upon the
specific words of the application which clearly provided that the policy would
take effect in accordance with the conditional insurance agreement. The case
does not then stand for a universal proposition that all conditional insurance
agreements and policies are one contract. Whether they are one contract or
two distinct contracts will rest upon the wording of the application, the
receipt and the policy. (emphasis added)
[67] I conclude from
these cases that the question of one contract or two contracts depends on
whether a sufficient link can be established between the insurance application
and the interim coverage on one side, and the underlying insurance policy on
the other. I find assistance on this issue also in legislation. For example,
subsection 151(2) of the Manitoba Insurance Act provides that for
most kinds of life insurance policies the provisions in (a) the application;
(b) the policy; and (c) any document attached to the policy when issued; and
(d) any amendment to the contract agreed upon in writing after the policy is
issued, constitutes the entire contract.
[68] The link between the
application (the conditional receipt) and the AIL policy is found in the
policy itself which stipulates “the entire contract consists of the application
and the policy”. Combined with the wording of the conditional receipt, which
includes little detail of the separate contract, I am satisfied there is only
one contract. That insurance contract was not concluded in Canada on the
signing of the conditional receipt, but was only concluded in the United States by AIL personnel. This
was only done after completion of the underwriting process and the issuance of
the policy, the effective date of the policy being immaterial to the conclusion
of the contract.
[69] There were two other
possibilities of Canadian agents having authority to conclude contracts in Canada: the Chief Canadian
agent’s signing authority on bank accounts, and an agent signing a collective
agreement on behalf of AIL. The former is more of an internal matter, and the
latter is neither an authority exercised habitually nor does it go to the
exercise of the business aspect of selling insurance. I conclude there is no
agent in Canada who habitually
exercises, in Canada, authority to conclude contracts in the name of AIL. Consequently, there
is no deemed permanent establishment pursuant to Treaty provision V(5).
[70] If my conclusion is
wrong in this respect, is AIL saved by the application of Article V(7); that
is, are the agents in Canada agents of an independent status acting in the
ordinary course of their business? As is apparent from my comments dealing
with a fixed place of business, I find the agents are independent contractors
acting in the ordinary course of their business, though that does not fully
answer the issue. The analysis in this context is slightly different from the
fixed place of business analysis, which addresses, specifically, the question
of whose business is being carried on from the fixed place. I found the agents
were carrying on their own business. There remains though the question of
whether they were independent or dependent on AIL, a subtle difference from the
independent contractor status. A few comments on independent status are in
order.
[71] Certainly, Justice
Rowe found in the AIL case dealing with the issue of employment versus
independent contractor that the agents were independent contractors. That goes
more to the question of whose business is it. The issue presented by the
interplay between Article V(5) and V(7) raises the question of whether the
agents, even in their own business, are independent. This leads to the
interesting possibility of an independent contractor carrying on its own
business, but doing so as a dependent agent. This is not unlike the situation
in the case of The Taisei Fire and Marine Insurance Co., Ltd., et al. v.
Commissioner of Internal Revenue.
on which I will have more to say later.
[72] What is meant by
dependent versus independent? Is it enough to conclude that because the agents
are carrying on their own business, they are therefore of independent status?
No it is not.
[73] The OECD commentary
is clear that the agent must be independent both legally and economically. The
commentary states:
38. Whether a person is independent
of the enterprise represented depends on the extent of the obligations which
this person has vis-à-vis the enterprise. Where the person’s commercial
activities for the enterprise are subject to detailed instructions or to
comprehensive control by it, such person cannot be regarded as independent of the enterprise. Another
important criterion will be whether the entrepreneurial risk has to be borne by
the person or by the enterprise the person represents.
…
38.3 An independent agent will
typically be responsible to his principal for the results of his work but not
subject to significant control with respect to the manner in which that work is
carried out. He will not be subject to detailed instructions from the principal
as to the conduct of the work. The fact that the principal is relying on the
special skill and knowledge of the agent is an indication of independence.
…
38.6 Another factor to be considered
in determining independent status is the number of principals represented by
the agent. Independent status is less likely if the activities of the agent are
performed wholly or almost wholly on behalf of only one enterprise over the
lifetime of the business or a long period of time. However, this fact is not by
itself determinative. All the facts and circumstances must be taken into
account to determine whether the agent’s activities constitute an autonomous
business conducted by him in which he bears risk and receives reward through
the use of his entrepreneurial skills and knowledge. …
38.7 Persons cannot be said to act in
the ordinary course of their own business if, in place of the enterprise, such
persons perform activities which, economically, belong to the sphere of the
enterprise rather than to that of their own business operations. …
[74] In Taisei,
the U.S. Tax Court dealt with similar provisions in the U.S. Japan Tax
Treaty, specifically addressing the interpretation of the expression “agent
of an independent status”. In that case, the issue was whether four unrelated
Japanese insurance companies who wrote re-insurance through a North Carolina
company (“Fortress”) had a permanent establishment in the US. The parties agreed
that Fortress habitually concluded contracts in the name of the Japanese
insurance companies, and that Fortress was acting in its ordinary course of
business in representing the insurance companies, so that the only issue was
whether Fortress was an agent of independent status. The U.S. Tax Court
concluded that Fortress was an agent of independent status because it was both
legally and economically independent of the Japanese insurance companies.
The case provides some useful guidelines regarding legal and economic
independence, notwithstanding the Respondent’s view that the facts were significantly
dissimilar from the case before me. That may be so, but it is the Court’s
comments on the question of independence that I find helpful. On the issue of
legal independence, the Court considered:
-
There
is a separate management agreement in respect of each of the Japanese insurance
companies.
-
The
Japanese insurance companies had no ownership interest in Fortress.
-
No
representative of any of the Japanese insurance companies was a director,
officer or employee of fortress.
-
Fortress
had independence with respect to its day-to-day operations.
-
There
is no evidence that the Japanese insurance companies acted in concert to
control Fortress.
-
Fortress
acted separately in respect of each of the Japanese insurance companies, and it
was incorrect for the Internal Revenue Service to suggest that Fortress acted
exclusively for one principal.
[75] With respect to
economic independence, the Court noted:
-
There
is no guarantee of revenue to Fortress.
-
Fortress
was not protected from loss due to insufficient revenue.
-
Fortress
had four separate clients, any of whom could terminate its contract with
Fortress on six months notice.
-
Fortress’
profits were significant.
[76] Based on the OECD
commentary, domestic law such as Sagaz and Royal Winnipeg Ballet
(though dealing with the issues of employee versus independent contractor), and
also based on the U.S. Tax Court’s comments in Taisei, I conclude that
the PGA and other agents were both legally and economically independent of AIL.
The factors I have considered are: firstly, with respect to legal independence:
-
The
agents in AIL intended that the agents have no legal dependence on AIL.
-
AIL
has little control, apart from the provisions of certain forms, in how the
agents carried on their business.
-
AIL
had no ownership interest in the agent’s business.
-
AIL
did not own any capital assets in Canada.
-
AIL
did not reimburse agents for costs of acquisition or use of assets.
-
The
workers engaged by the PGAs were the PGA’s, not AIL’s responsibility.
-
Agents
were not involved in making final decisions on coverage or claims.
-
Although
agents were part of the collective agreement, the evidence was that this was
more a marketing ploy than to create any dependence of the agents legally on
AIL.
[77] With respect to
economic independence, the Respondent argues that even had the agents been
carrying on their own business, they were economically dependent on AIL to such
a degree that they could not be considered of independent status. With respect,
I disagree. The factors I rely upon in concluding the agents were economically
independent are as follows:
-
As
commission agents, profit was tied to the agent’s own abilities and results.
-
The
initial premium created the agent’s income.
-
AIL’s
income derived from renewals. Dependence in effect is one of AIL on the agents
rather than vice versa.
-
There
are no caps on income nor minimum levels guaranteed by AIL.
-
Agents
could solicit from anyone, not just PRR leads.
-
Apart
from PGAs, agents were not required to act exclusively for AIL.
-
The agents
bore all their own economic risks.
-
The
fact that PGAs and most agents dealt with only AIL products is not
determinative of economic dependency.
-
The
supply of product in and of itself is not sufficient to create an economic
dependence; it was the expansion of the agent’s hierarchy that drove profits.
[78] The Respondent ties
the question of economic dependency closely to the concept of integration.
Without AIL’s product and support, there would be no profits for the agents:
their work was inextricably linked to AIL. I see the situation differently.
Certainly, there was product and some support, but the economic success hinged
on the agent’s efforts in soliciting and in establishing networks of other
agents, activities over which they had complete control.
[79] With respect to the
Chief Agent, I conclude Mr. Cumine was a lawyer acting as such when serving as
AIL’s Chief Agent, and can in no manner be seen as legally or economically
dependent on AIL.
[80] Finally, Appellant’s
counsel referred me to paragraph 39 of the OECD commentary:
According to the definition of the term
“permanent establishment” an insurance company of one State may be taxed in the
other State on its insurance business, if it has a fixed place of business
within the meaning of paragraph 1 or if it carries on business through a person
within the meaning of paragraph 5. Since agencies of foreign insurance
companies sometimes do not meet either of the above requirements, it is
conceivable that these companies do large-scale business in a State without
being taxed in that State on their profits arising from such business. In order
to obviate this possibility, various conventions concluded by OECD Member
countries include a provision which stipulates that insurance companies of a
State are deemed to have a permanent establishment in the other State if they
collect premiums in that other State through an agent established there – other
than an agent who already constitutes a permanent establishment by virtue of
paragraph 5 – or insure risks situated in that territory through such an agent.
[81] The Appellant argued
that the fact that there was no such insurance provision in the Canada–U.S.
Treaty suggests that it is possible, and perhaps expected, that a
non-resident insurance company can do large-scale business in Canada without there being a
permanent establishment in Canada. Without further detail in the commentary regarding the
nature and organization of “large scale business”, it is difficult to conclude
determinatively that the AIL arrangement is what was contemplated. I do
not place much merit in this approach, nor is it necessary to do so to reach the
conclusion I have reached. My conclusion is that if the Canadian and
American Governments intend to render AIL’s profits taxable in Canada through a permanent
establishment, it is for them to amend the Treaty accordingly.
Experts
[82] To this point, my
reasons for the most part were written prior to hearing any expert evidence. At
the time of the trial in May 2007, it was determined that I defer judgment
until I had heard expert evidence called by the Knights of Columbus in their
appeal before this Court, evidence I heard in January, 2008. Any such expert
evidence would be heard as part of both the Knights of Columbus case and this
case.
[83] At the beginning of
the Knights of Columbus trial in January 2008, the Respondent brought a
motion for an order declaring that the expert evidence of the Appellant’s
proposed witnesses is inadmissible. For reasons delivered from the bench at
that time, I decided to hear the three expert witnesses and determine
admissibility thereafter. All three experts were extremely well qualified to
provide evidence with respect to the interpretation of the OECD Model
Convention (Messrs. Vann and Arnold), the development of the OECD Model
Convention and the United Nations Model Double Taxation (Mr. Vann), and the
interpretation of the Canada-US Convention from an American perspective (Mr. Rosenbloom).
I have determined to admit their evidence, but to a limited extent. My reasons
on these matters are more fully provided in my decision in The Knights of
Columbus
released simultaneously with this decision.
[84] How has the experts’
evidence impacted on my reasons to this point? Their evidence does not
alter my ultimate decision to allow the appeal, but supports that decision.
[85] There are two
aspects of the experts’ opinion that I found particularly useful. First, was
their evidence with respect to the absence of a special provision in the Treaty
deeming a permanent establishment of an insurance company to exist in Canada if
a non-resident insurer collects premiums in Canada, or insures Canadian risks (an
“insurance clause”). An insurance clause is referred to in paragraph 39 of the
OECD commentary reproduced at paragraph 80 of these Reasons. The Respondent
asked me not to infer that, because of the absence of such a clause, Canadian
authorities have acknowledged that AIL could carry on extensive business in Canada without having a
permanent establishment in Canada: the insurance clause is simply a different test. That is
not how I heard the experts. Mr. Vann, in particular, went into some detail
regarding the history and development of the insurance clause. He pointed out
how the UN model was drafted to include an insurance clause. The OECD had
extensively studied the problem of the possibility of a lot of insurance
activities carried on in a country through agents without the establishment of
a permanent establishment. Paragraph 39 of the commentary recognizes this and
addresses the very type of insurance clause the UN was at that time drafting.
The OECD decided against such a provision for what Professor Vann described as
reciprocal reasons; that is, an attitude that “we’d collect the same amount
from them as they collect from our people”. This is all well and good with
developed countries dealing with one another, but becomes problematic in treaties
between developed and developing countries. Though, as Professor Vann pointed
out, nothing precludes countries, at whatever stage of development, from inserting
such an insurance clause. A state’s decision to do so relates to the
balance between States. With respect to insurance clauses, Professor Vann
concluded:
If countries don’t include them in their
convention, then I think it’s a strong assumption that they are willing to let
go this kind of situation, the one I outlined where the underwriting decision
is taken in head office and the contract is concluded when the underwriting
decision is made in head office.
[86] I conclude the lack
of insurance clause does suggest that Canada and the US do recognize considerable activity
of an insurance business can take place without finding there is a permanent
establishment. I find this evidence supportive of my conclusion.
[87] The second element
of expert testimony that cemented my view with respect to the fixed place of
business permanent establishment is the experts’ testimony regarding the need
for a power of disposal of the premises. The Respondent maintains that the
paragraphs of the OECD commentary casts doubt on this principle, confirmed by
both Mr. Rosenbloom and Mr. Vann, that a fixed place of business can only exist
if the premises are at the disposal of the non-resident. I disagree with the
Respondent. The commentary gives several examples. I read nothing in them that
diminishes the importance of the power of disposal: quite the contrary. I
concluded that AIL did not have a fixed place of business. The experts’
testimony regarding the need for a power of disposal, applied to the facts
before me, confirms my view that AIL does not have a fixed place of business in
Canada, as there are no premises over which AIL has any power of disposition.
[88] With respect to a
deemed permanent establishment, the Appellant referred to expert evidence
regarding the following issues:
(i) Was the
conditional receipt one contract or two?
(ii) If
the conditional receipt is a separate contract, was it concluded in Canada?
(iii) Were
the agents of an independent status?
With respect, none of these issues
required expert evidence, and did not form any part of the written opinion
provided by the experts. Their evidence on these matters arose primarily in
cross examination. Consequently, my conclusion on these matters remains as set
out earlier in these Reasons.
Conclusion
[89] I conclude that AIL
does not have a permanent establishment, as it has neither a fixed place of
business through which it carries on its business, nor does it operate through
agents who habitually exercise in Canada an authority to conclude contracts in
its name. Further, even had I found agents did have such an authority, then
there is still no permanent establishment as the agents are agents of
independent status within the meaning of paragraphs 5 and 7 of Article V of the
Treaty. The appeal is therefore allowed, and the assessments are vacated
on the basis that AIL did not have a permanent establishment in Canada in the years in
question.
[90] Costs are awarded to
the Appellant.
Signed at Ottawa, Canada, this 16th day of May 2008.
"Campbell J. Miller"
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