Hinkley v. MNR, 91 DTC 1336, [1991] 2 CTC 2778 (TCC)

Lamarre Proulx, T.CJ.:—The appellant is appealing the assessment of income tax made by the respondent, the Minister of National Revenue, for the year 1988.

The question at issue is whether the appellant's income is exempted from taxation in Canada by virtue of Article 14 of the Canada-United Kingdom Income Tax Convention, 1980, S.C. 1980-81-82-83, c. 44, part X (the "Convention"), and whether Article 15 of this Convention is applicable.

Article 14 and the pertinent part of Article 15 of the said Convention read as follows:

Article 14

1. Income derived by a resident of a Contracting State in respect of professional services or other independent activities of a similar character shall be taxable only in that State unless he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities. If he has such a fixed base, the income may be taxed in the other Contracting State but only so much of it as is attributable to that fixed base.

2. The term "professional services” includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants.

Article 15

1. Subject to the provisions of Articles 17 and 18, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.

2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:

(a) the recipient is present in the other State for a period or periods not

exceeding in the aggregate 183 days in the calendar year concerned, and

(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and

(c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.

The facts upon which the respondent relied in assessing the appellant are described in section 9 of the amended reply to notice of appeal and are the following:

a) The appellant, an engineer, is a resident of United Kingdom;

b) During part of the year 1988, the appellant was employed in Canada by Techni- can International, a Canadian firm based in Toronto and carrying on a placement agency business;

c) Technican International, in turn, provided the appellant’s services to Canadair in Montreal;

d) The appellant performed each day the duties of his employment at Canadair's place of business, in Montreal, and an office was regularly available to him at Canadair’s plant;

e) The appellant had a fixed base regularly available to him in Canada for the purpose of performing his activities.

Though the Court has reservations as to whether the appellant was indeed a resident of the United Kingdom and not a resident of Canada, the respondent having admitted that fact in paragraph (a) of the amended reply to notice of appeal, the Court will not dispute this assumption.

The appellant was hired by Technican International (Technican), an employment agency, to work for one of Technican's clients, Canadair Inc. (Canadair), Montreal. The letter of confirmation, Exhibit A-1 was sent to Mr. Hinkley on June 15, 1988. That letter stipulates the terms and conditions of the contract. Mr. Hinkley was to be paid on an hourly basis including certain benefits. He was paid weekly by Technican on submission of time sheets signed by someone in authority at Canadair. The letter of confirmation stated, among other things: “Health care is covered by the Province of Quebec from Income Tax after 3 months' residence”. A work permit was obtained for a year. The evidence showed that, durin the year in question, the appellant lived in an apartment in Montreal. At the time of the hearing, the appellant was still working for Technican on Canadair's premises in Montreal.

The appellant worked as a structural engineer. The evidence showed that there was no distinction as to the manner in which he was supervised, or executed his work with other Canadair permanent employees. The appellant had to provide the services himself, had regular hours of work and was supervised by his superior. What essentially differentiated the appellant from the other permanent employees was that the other permanent employees had their contractual relationship with Canadair, where the appellant had his with Technican.

In accordance with the letter of confirmation of June 15, 1988, Exhibit A-1, Technican deducted 15 per cent on the payments it made to the appellant. This is said to be in accordance with subsection 105(1) of the Income Tax Regulations (the "Regulations"). Subsections 105(1) and (2) of the Regulations read as follows:

105. (1) Every person paying to a non-resident person a fee, commission or other amount in respect of services rendered in Canada, of any nature whatever, shall deduct or withhold 15 per cent of such payment.

(2) Subsection (1) does not apply to a payment described in the definition “remuneration” in subsection 100(1).

The appellant submitted that he was a resident of the United Kingdom and that from August 1988 he derived income in respect of professional services provided to a Canadian firm but that he had no fixed base regularly available to him in Canada for the purpose of performing his activities and therefore, his professional income should be taxed in the United Kingdom pursuant to Article 14 of the Convention. He also submitted that Article 15 of the Convention did not apply to him as he was not in a contractual relationship of employment.

The respondent submitted that the appellant had a fixed base regularly available to him in Canada in the event that he was an independent worker. Counsel for the respondent submitted that most probably the appellant was an employee but because of a court decision stating that a person hired by an employment agency to work under someone else's supervision and control was not a contract of employment but a contract sui generis, counsel for the respondent was resting his case on both Articles. I will discuss the said decision further on.

The agent for the appellant asked the Court in an alternative pleading to find that the aforementioned 15 per cent deducted pursuant to subsection 105(1) of the Regulations was the tax payable by the appellant as it was, apparently, what the other persons recruited by Technican paid. The appellant, believing that he was tax exempt by the application of Article 14 of the Convention had asked for a reimbursement of the tax paid on his behalf by Technican. He was then assessed by the respondent pursuant to subsection 2(3) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") and Division D of the Act. Subsection 2(3) of the Act reads as follows:

Where a person who is not taxable under subsection (1) for a taxation year

(a) was employed in Canada,

(b) carried on a business in Canada, or

(c) disposed of a taxable Canadian property,

at any time in the year or a previous year, an income tax shall be paid as hereinafter required upon his taxable income earned in Canada for the year determined in accordance with Division D.

I will dispose of this alternative pleading by saying that subsection 105(1) of the Regulations is not relevant to the matter at issue. That subsection concerns the payer and not the payee. It does not determine the tax to be paid by the payee.

On the substance of the matter, the appellant relied on the application of Article 14 of the Convention. The Convention has followed nearly word for word the Model Convention for avoidance of double taxation with respect to taxes on income and capital, adopted by the Organization for Economic Cooperation and Development (O.E.C.D.) on April 11, 1977. With respect to the Model Convention, the O.E.C.D. fiscal committee has also prepared and published a commentary for each article, the Commentary.

In Sun Life Assurance Co. of Canada v. Pearson (H.M. Inspector of Taxes), Mr. Justice Fox says at page 331: “We should add that it is common ground that we are entitled to consider the Commentary in determining the construction of the Treaty (see Fothergill v. Monarch Airlines Ltd., [1981] A.C. 251 at page 280).”

With regards to Article 14 of the Convention, the Commentary says in part the following:

1. The Article is concerned with what are commonly known as professional services and with other activities of an independent character. This excludes industrial and commercial activities and also professional services performed in employment, e.g. a physician serving as a medical officer in a factory. It should, however, be observed that the Article does not concern independent activities of entertainers and athletes, these being covered by Article 17.

3. The provisions of the Article are similar to those for business profits and rest in fact on the same principles as those of Article 7. The provisions of Article 7 and the Commentary thereon could therefore be used as guidance for interpreting and applying Article 14.

4. Even if Articles 7 and 14 are based on the same principles, it was thought that the concept of permanent establishment should be reserved for commercial and industrial activities. The term “fixed base” has therefore been used. It has not been thought appropriate to try to define it, but it would cover, for instance, a physician’s consulting room or the office of an architect or a lawyer. A person performing independent personal services would probably not as a rule have premises of this kind in any other State than of his residence. But if there is in another State a centre of activity of a fixed or a permanent character, then that State should be entitled to tax the person's activities.

If we turn to the comments respecting Article 7 of the Convention, as suggested by the immediately preceding text, they refer to the interpretation of the terms of permanent establishment used in Article 5 of the Convention. Subsections 1(5) and 1(6) of the Commentary on Article 5 concerning the definition of permanent establishment read as follows:

(5) According to the definition, the place of business has to be a “fixed” one. Thus in the normal way there has to be a link between the place of business and a specific geographical point. It is immaterial how long an enterprise of a Contracting State operates in the other Contracting State if it does not do so at a distinct place, but this does not mean that the equipment constituting the place of business has to be actually fixed to the soil on which it stands. It is enough that the equipment remains on a particular site (but cf. paragraph 19 below).

(6) Since the place of business must be fixed, it also follows that a permanent establishment can be deemed to exist only if the place of business has a certain degree of permanency, i.e. if it is not of a purely temporary nature. If the place of business was not set up merely for a temporary purpose, it can constitute a permanent establishment, even though it existed, in practice, only for a very short period of time because of the special nature of the activity of the enterprise or because, as a consequence of special circumstances (e.g. death of the taxpayer, investment failure), it was prematurely liquidated. Where a place of business which was, at the outset, designed for a short temporary purpose only, is maintained for such a period that it cannot be considered as a temporary one, it becomes a fixed place of business and thus—retrospectively—a permanent establishment.

From the evidence, it appears clear that the appellant was not providing activities of an independent character. However, had it been the case, the evidence showed that the appellants place of business had a definite degree of permanency and was not of a purely temporary nature and therefore the appellant had a "fixed base regularly available to him" in Canada. In this way, his professional income is not taxable in the Contracting State (United Kingdom) but in the other Contracting State (Canada).

In my view, however, after having heard the evidence, Article 15 of the Convention is the provision that applies as the appellant's income is income from employment. Paragraph 1 of the Commentary on Article 15 is the following:

Paragraph 1 establishes the general rule as to the taxation of income from employment (other than pensions), namely, that such income is taxable in the State where the employment is actually exercised. One consequence of this would be that a resident of a Contracting State who derived remuneration, in respect of an employment, from sources in the other State could not be taxed in that other State in respect of that remuneration merely because the results of this work were exploited in that other State.

The decision previously referred to, which in the view of counsel for the respondent, shed some doubts as to whether the appellant was in a situation of employment, is a decision rendered by Mr. Justice Cattanach in T.E.G. International Ltd. v. M.N.R. (1982), 83 C.L.L.C. 17,061 in a matter of the Unemployment Insurance Act, 1971, on October 21, 1976, respecting the nature of a contract with an employment agency. The learned judge said at page 5:

On the basis of these facts it is abundantly clear that there was no contract of any kind between the appellants clients and the workers who were supplied by the appellant to the client. That being so, there was no contractual relationship between the workers and the appellant's clients.

page 7:

The classical concept of a contract of service consists of three elements, (1) one party, the servant or employee, agrees that in consideration of remuneration he will supply his personal work and skill in the performance of some services for the other party to the contract, the master or employer, (2) the servant or employee agrees, either expressly or impliedly, that in the performance of that service that he will be subject to the other party's control in a sufficient degree to make that other party the master and (3) the provisions of the contract are consistent with it being a contract of service.

page 8:

These contracts between the workers and the appellant were contracts whereby the workers contracted with the appellant to do work for third parties, the appellant's clients. Therefore in my view these contracts are not contracts of service but contracts sui generis, a contract of a type different from the two more familiar types of contracts, in matters of this nature, "contracts of service" and "contracts for service".

[Emphasis added.]

I believe however that a recent decision of the Supreme Court of Canada in Public Service Alliance of Canada v. The Queen and Econosuit Inc., 123 N.R. 161 has confirmed that this relationship is one of employment, by agreeing with the majority judgment of the Federal Court of Appeal, written by Mr. Justice Marceau.

I wish to quote Mr. Justice Marceau in his majority judgment for the Federal Court of Appeal, [1989] 2 F.C. 633 at 642:

There was no question in the case at bar of a problem of employees disguised as independent contractors, a problem for the solution of which,as we know, courts and tribunals both civil and labour have developed a number of distinguishing

criteria. I do not think anyone could dispute that the outside teachers were employees, not contractors. The only question was as to whose employees.

It is well known that in the private sector the status of employee of a person acting for another, though involving a contract resulting from deliberate acts, is often in practice inferred from the circumstances which actually surround the doing of the work. The reason is that the employer-employee relationship is primarily a legal relationship which the law associates with a situation of facts: the contract of employment may not take any particular form and may result simply from the behaviour of the parties concerned, hence the establishment of criteria by which such a contract can be identified behind appearances which may conceal it.

[Emphasis added.]

Counsel for the respondent referred the Court to section 3 of the Income Tax Conventions Interpretation Act, S.C., c. 1-4 which says the following:

3. Notwithstanding the provisions of a convention or the Act giving the convention the force of law in Canada, it is hereby declared that the law of Canada is that, to the extent that a term in the convention is

(a) not defined in the convention,

(b) not fully defined in the convention, or

(c) to be defined by reference to the laws of Canada,

that term has, except to the extent that the context otherwise requires, the meaning it has for the purposes of the Income Tax Act, as amended from time to time, and not the meaning it had for the purposes of the Income Tax Act on the date the convention was entered into or given the force of law in Canada if, after that date, its meaning for the purposes of the Income Tax Act has changed. 1984, c. 48, s. 3.

This section has for purpose, inter alia, to ensure that the terms of the Convention are to be interpreted in accordance with the current case law.

As it seems clear now that the contractual relationship of the appellant with an employment agency may be one of employment and as the circumstances of work of the appellant were otherwise those of an employee, Article 15 of the Convention applies. This Article is to the effect that income from employment is taxable in the State where the employment is actually exercised.

Therefore, the Court finds that the appellant was duly assessed in accordance with Article 15 of the Convention as the appellant's income was derived from an employment exercised in Canada. (Even if the Court had reached the conclusion that the appellant was an independent contractor, no relief from taxation would have been available to him under Article 14 of the Convention as the appellant had a fixed base regularly available to him in Canada.)

The appeal is dismissed.

Appeal dismissed.