2 January 2003 Internal T.I. 2002-0162287 - Fixed base in Canada

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether the taxpayer has or had a fixed base in Canada for the purposes of the Canada-U.S. Tax Convention.

Position: Taxpayer does not have a fixed base in Canada.

Reasons: No control over the premises; business cannot be linked to a specific location; no character of permanency; no agents having authority to contract in his name; limited access to the premises; and premises cannot be identified with the taxpayer's business.

January 2, 2003

Mrs. Amy Ta Income Tax Rulings Directorate

International Audit International and Trusts Division
Calgary Tax Services Office Éric Allard-Pouliot
220 - 4 Avenue South East (613) 957-2097
Calgary AB T2G 0L1
2002-016228

Technical Interpretation Request
Fixed base in Canada

This is in reply to your memorandum of September 10, 2002, regarding the above-noted subject. More specifically, you have requested our opinion as to whether the taxpayer referred to below could be said to have a fixed base in Canada for the purposes of the Canada-United States Tax Convention (the "Convention").

Facts

The facts, as provided in your memorandum dated March 19, 2002, and the taxpayer's submissions forwarded to us on September 10, 2002, are as follows:

(a) XXXXXXXXXX (the "Taxpayer") is a Canadian citizen who was born in Ontario and who was resident in Canada until XXXXXXXXXX.

(b) The Taxpayer began working with XXXXXXXXXX as an independent contractor in XXXXXXXXXX.

(c) From XXXXXXXXXX to XXXXXXXXXX, the Taxpayer was an independent agent of XXXXXXXXXX.

(d) As an agent of these XXXXXXXXXX companies, the Taxpayer was licensed in the province he resided in, and he marketed products of these companies. As such, he also trained and developed agents.

(e) As a Regional Vice President ("RVP") while he worked in Canada, the Taxpayer was compensated by:

(i) Personal Sales: Personal Sales are sales made personally to a customer by an agent.

(ii) Overrides: Overrides are commissions paid to someone who is in a higher position than the actual selling agent. When an agent makes a sale, the difference between contracts generates an Override to the agent's manager.

(iii) Trail Commissions: Trail commissions are service fees paid on mutual funds assets under management. They are also paid to RVPs on the production of an RVP office.

(iv) Bonuses: Bonuses are based solely on life insurance production. They are paid to RVPs on the production within an agency every month. They are also paid to RVPs from the production that occurs from RVPs they have developed.

(f) On XXXXXXXXXX, the Taxpayer relocated to the United States (the "U.S."), and became a resident of XXXXXXXXXX, to work as a Marketing Manager for XXXXXXXXXX. For the XXXXXXXXXX taxation year the Taxpayer filed a departure tax return reporting that he departed Canada on XXXXXXXXXX

(g) In this position, the Taxpayer manages the promotion and direction of the marketing of XXXXXXXXXX financial products and services. In addition, the Taxpayer manages promotional activities for customers, holds meetings and insures the representatives are kept informed of changes that might affect sales. The Taxpayer also prepares forecasts on anticipated market sales, submits reports of sales activity, maintains records and promotes satisfactory client relations.

(h) Since XXXXXXXXXX, all of the Taxpayer's residential ties have been with the U.S. and he has spent less than 183 days in Canada in each taxation year since then.

(i) After his departure from Canada on XXXXXXXXXX, the Taxpayer did not receive Personal Sales income from any source within Canada. However, the Taxpayer kept receiving Overrides, Bonuses and Trail Commissions (collectively the "Commissions") after that date based on the production of the agents and RVPs he had developed and trained.

(j) For the part of the XXXXXXXXXX taxation year that the Taxpayer was a non-resident of Canada, he received Commissions amounting to $XXXXXXXXXX, which were not reported on his T1 for that year.

(k) During the XXXXXXXXXX taxation year, the Taxpayer has received $XXXXXXXXXX in Commissions. These Commissions were reported on a T4A-NR slip with 15% tax deducted. The Taxpayer did not file a T1 for the XXXXXXXXXX taxation year.

(l) The Taxpayer currently has XXXXXXXXXX RVPs under him in Canada. The Taxpayer does not perform any services relating to the day-to-day operations of these agents and their businesses. His responsibilities to the RVPs are solely communications of compliance, which are done through monthly conference calls and one mandatory office visit per year.

(m) During the XXXXXXXXXX taxation year, the Taxpayer spent XXXXXXXXXX days in Canada inspecting offices, hiring new recruits and training agents. During the XXXXXXXXXX taxation year, the Taxpayer spent XXXXXXXXXX days in Canada performing the same duties.

(n) For the XXXXXXXXXX taxation years, the Taxpayer performed the above duties in the XXXXXXXXXX offices of XXXXXXXXXX.

(o) The Taxpayer was never reimbursed for expenses incurred relating to the performance of these duties in Canada.

Along with your memorandum dated March 19, 2002, you provided copies of the following contracts, which were entered into between the Taxpayer and various XXXXXXXXXX entities:

? Basic Agreement;

? XXXXXXXXXX;

? XXXXXXXXXX;

? XXXXXXXXXX;

? XXXXXXXXXX;

? Agreement of Approved Person;

? Regional Vice President Agreement;

? Agreement with XXXXXXXXXX;

? XXXXXXXXXX;

? XXXXXXXXXX;

? XXXXXXXXXX.

Having regards to these facts and documents, you have requested our opinion as to whether it could be argued that the Taxpayer had a fixed base regularly available to him in Canada within the meaning of Article XIV of the Convention for the part of the XXXXXXXXXX taxation year that he was a non-resident of Canada and for the XXXXXXXXXX taxation year.

Our comments

For the reasons hereinafter set forth, in our opinion, based on the information provided to us, it could not be successfully argued that the Taxpayer had a fixed base regularly available to him in Canada since his departure from Canada on XXXXXXXXXX.

1. "Fixed" base

In the case of Dudney v. The Queen, 99 DTC 147 (T.C.C.), aff'd 2000 DTC 6169 (F.C.A.), leave to appeal to the Supreme Court of Canada dismissed on November 2, 2000, ("Dudney") both the Tax Court of Canada and the Federal Court of Appeal came to the conclusion that there was not much difference between the expressions "fixed base" and "permanent establishment" as used in the Convention. Their conclusion in this regard basically relied on the Commentary to Article 14 of the OECD Model Tax Convention. Such a conclusion is further supported by the deletion, on April 29, 2000, of Article 14 of the OECD Model Tax Convention on the basis that "there were no intended differences between the concepts of permanent establishment, as used in Article 7, and fixed base, as used in Article 14". It flows therefrom that the principles set out with respect to the concept of "permanent establishment" can be applied to that of "fixed base".

Paragraph 5 of the Commentary on Article 5 of the OECD Model Tax Convention states that "there has to be a link between the place of business and a specific geographical point" in order for that place of business to constitute a permanent establishment. Therefore, it would be difficult to say that the Taxpayer had a fixed base in Canada if his business cannot be linked to a specific location in Canada. Given that the Taxpayer visited XXXXXXXXXX different locations during the XXXXXXXXXX days, respectively, that he spent in Canada during the XXXXXXXXXX taxation years, in order for him to be considered as having a fixed base in Canada at least one of those locations would have to qualify as such. In our opinion, we do not think that any of these locations has the required degree of fixity necessary to amount to a "fixed base" within the meaning of the Convention. Moreover, it does not stem from the facts provided to us that the Taxpayer's visit at each of those XXXXXXXXXX locations necessarily occurred at the same exact spot. We have no evidence that the Taxpayer had a specific office or space available to him in any of these locations where he could meet his agents and RVPs. It is rather assumed that such meetings took place either in the agents' or RVPs' own office or in a boardroom, which could basically be subject to change in between visits.

2. Duration test

In accordance with the Commentary to Article 5 of the OECD Model Tax Convention and the Dudney case, a place of business must also have a certain degree of permanency in order for it to amount to a "fixed base". In other words, the place of business must not be of a purely temporary nature. Given that the Taxpayer did not spend more than a few days in each of the XXXXXXXXXX locations in Canada he went to during the taxation years in issue, even if we were to assume that he had a specific location made available to him in either one or all of those locations, we do not think that such a location would have the required degree of permanency to constitute a fixed base within the meaning of the Convention. It would be difficult to say there is any permanency in any of those places when there is absolutely no evidence that the Taxpayer set up a specific office or room in any of these locations with the intention of using it on a regular basis for his annual meetings with his agents and RVPs.

3. Control of space

In the Dudney case, the Federal Court of Appeal came to the conclusion that the taxpayer did not have a fixed base in the space provided by his client while performing services there because, among other factors, he did not have physical control of the place where he worked, even though he worked in the same place in excess of one year. Such a criterion was also accepted by various foreign courts in other cases involving Tax Conventions using the same concept of fixed base as that found in the Convention (for example, see the following cases: S.F.W.I. v. Belgium, Revue Générale de Fiscalité, No. 10, October 1992, at 271 (Belgian Ct. of Appeal), referred to in the Dudney case; Alphawell Limited and Richard M. Pegrum v. Stavange Kommune, involving the Norway-United Kingdom Tax Convention and referred to in Technical News No. 18, dated June 16, 2000; and the cases referred to at pages 286-7 of Klaus Vogel on Double Taxation Conventions, Third Edition, Kluwer Law International, London)

The Canada Customs and Revenue Agency's (the "CCRA") position with respect to the Dudney case has been clearly set out in Technical News Issue No. 22, dated January 11, 2002, where it is provided:

"The CCRA will apply Dudney in cases where it can be concluded that, based on the facts, the taxpayer does not have sufficient physical control of space to be carrying on his or her business in a particular place. We do not propose to litigate another case based on the taxpayer's use of space within the premises of another person unless we can reasonably maintain, based on the particular facts, that the taxpayer had sufficient physical control of the space to carry on those aspects of his or her business that are appropriate to the space."

In the present file, we have no indication that the Taxpayer had physical control over or exclusive or unlimited access to the space located in any of XXXXXXXXXX premises in Canada that he used to meet with his agents or RVPs on an annual basis. In fact, as previously mentioned, it is more likely that such meetings occurred in the agents' or RVPs' offices over which the Taxpayer obviously has no control.

4. The identification of the place with the Taxpayer's business

As mentioned by the Federal Court of Appeal in Dudney at page 6173, "a particular location is a "fixed base regularly available" to a person who provides independent personal services only if the business of that person is being carried on there." This criterion was also considered by the U.S. Tax Court in Consolidated Premium Iron Ores Limited v. Commissioner of Internal Revenue, 57 DTC 1146, aff'd 59 DTC 1112 (U.S. Ct. of Appeals), with respect to the concept of "permanent establishment". At page 1162, the Court stated:

"The term "permanent establishment" normally interpreted suggests something more substantial than a license, a letterhead and isolated activities. It implies the existence of an office, staffed and capable of carrying on the day-to-day business of the corporation and its use for such purpose, or it suggests the existence of a plant or facilities equipped to carry on the ordinary routine of such business activity."

This statement was adopted and applied by the Tax Court of Canada in Fiebert v. M.N.R., 86 DTC 1017, at pages 1017-8.

In the present file, there is no evidence whatsoever that the Taxpayer could use or used any of the premises situated in any of the XXXXXXXXXX offices he visited on an annual basis to carry on the ordinary routine of his business activity, or that any of these premises could be identified with the Taxpayer's business. The facts rather indicate that the Taxpayer's use of these premises was solely for the purpose of meeting and training his agents and RVPs that were on site. It does not appear that the Taxpayer could or did use any of these premises as his own, or that he could use them as a base for the general operation of his own business.

5. Recurring activities

It stems from the facts provided to us that the Taxpayer comes to Canada on a recurring basis to perform the same or similar business activities. Moreover, it appears that such activities are carried at the same locations across Canada on a yearly basis. However, unless it can be said that the Taxpayer had a fixed place of business in that he had physical control of the place where its business was carried on, it would be difficult to conclude that he had a fixed base regularly available to him in Canada during those years, notwithstanding the recurring activities that he conducted there.

The present file can be distinguished from Fowler v. M.N.R., 90 DTC 1824 (T.C.C.), where the taxpayer had physical control of the space at which he conducted business even though he was there for just a few weeks each year, which is not the case in the present file. Moreover, in that case the taxpayer conducted his business in the exact same location year after year. It is also to be noted that in cases involving theatrical shows where performances were given in different places, both the U.S. and New Zealand, which Tax Conventions use the same concepts of "permanent establishment" and "fixed base" as that found in the Convention, denied that a permanent establishment existed (see technical interpretation # E 2000-0036167). These cases are strong indication that the fact that a taxpayer renders services in a country following the same circuit year after year does not necessarily results in such taxpayer having a permanent establishment or fixed base in that country (see also Klaus Vogel on Double Taxation Conventions, supra, at page 288).

6. Authority to conclude contracts

The Taxpayer did not have any agent or employee in Canada who had authority to conclude contracts in his name or bind him. The agents and RVPs he visited in Canada on an annual basis were neither his employees nor his agents. It appears from the facts provided to us that these agents and RVPs are independent contractors, just like the Taxpayer, who are acting in the ordinary course of their own business. What these agents and RVPs are offering for sale in the course of their business is XXXXXXXXXX financial products and services, not that of the Taxpayer. In our view, these agents and RVPs are similar to general commission agents acting in the ordinary course of their own business and, therefore, they cannot constitute a fixed base in Canada for the Taxpayer.

Summary

Based on the facts provided to us, it is our opinion that there is not sufficient evidence for us to conclude that the Taxpayer has a fixed base regularly available to him in Canada since he departed for the U.S. on XXXXXXXXXX.

However, pursuant to Article XIV of the Convention, the income derived by the Taxpayer that is attributable to a fixed base that he had in Canada prior to his departure to the U.S. may be taxed in Canada. It appears from the facts provided to us that since becoming a non-resident of Canada the Taxpayer has provided no further services to the agents and RVPs that were trained and developed by him while he was resident in Canada. The Taxpayer's annual meeting with these agents and RVPs seems to be strictly of a follow-up and compliance nature. Hence, in our view, the income derived by the Taxpayer after XXXXXXXXXX, from the agents and RVPs trained and developed by him prior to his departure for the U.S. could be said to be attributable to a fixed base that the Taxpayer had in Canada and, therefore, such income may be taxed in Canada. However, the income derived by the Taxpayer in respect of the agents and RVPs developed and trained by him following his departure for the U.S. would not be subject to tax in Canada as it would not be attributable to a fixed base that the Taxpayer has or had in Canada.

Notwithstanding the foregoing, the obtaining of additional information might be necessary in order to reach a final conclusion as to whether some of the Commissions could be said to be attributable to a fixed base that the Taxpayer had in Canada prior to his departure. In this regard, you may want to ask the Taxpayer to provide the following information: details surrounding the computation of the Commissions following his departure from Canada; detailed description of the tasks performed in Canada in relation to the Commissions; detailed description of the tasks performed in the U.S., if any, to earn the Commissions; whether the Taxpayer has a fixed base in the U.S. to which the Commissions could be said to be attributable; and details surrounding the relationship, if any, between his employment with XXXXXXXXXX in the U.S. and the Commissions.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CCRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Alain Godin
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch