Wolf – Federal Court of Appeal questions Tax Court view that an individual could derive business revenues through an LLC
A U.S. engineer provided services to Bombardier in Canada over a 188-day period (straddling the 2011 and 2012 years). The only issue as to whether he had a services permanent establishment in Canada under the Canada-U.S. Treaty was whether he satisfied the test in Art. V, 9(a) of the Treaty that “more than 50 percent of the gross active business revenues of the enterprise consists of income derived from the services performed in [Canada] by that individual.”
The taxpayer derived most of his income through a New York LLC. The Tax Court had found that the U.S.-source revenues received by the taxpayer as an LLC member qualified as active business revenues from the same enterprise as that for the earning of engineering fees from Bombardier, on the basis that such revenues were generated by the earlier design work of the taxpayer and another individual, and that the LLC was merely a passive vehicle for the allocation of the resulting profits. However, notwithstanding this favourable finding, the taxpayer was found by the Tax Court not to have established that he did not have a services PE given an evidentiary failing: the figures that he had provided to the Tax Court for the active business revenues generated through the LLC were for calendar 2012, whereas the 50% Treaty test was to be applied to the 188 day period straddling the two years – and there was no evidence of what the U.S.-source business revenues were for that precise period.
Webb JA seriously doubted the Tax Court finding that the taxpayer’s revenues from the LLC could be considered to be derived from the same enterprise, stating that “any enterprise of … LLC, as a separate person for Canadian tax purposes, would not be the enterprise of Lawrence Wolf.” However, this point was not argued – and the taxpayer’s appeal was dismissed anyway as there was no reversible error in the Tax Court’s finding that the taxpayer had not adduced evidence as to the US revenues of the LLC for the straddle period.
Neal Armstrong. Summary of Wolf v. Canada, 2019 FCA 283 under Treaties – Income Tax Conventions – Art. 5.