19 October 2006 Internal T.I. 2006-0204171I7 - Business Profits attributable to Prior PE

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.

Principal Issues: Are the insurance policy renewal commissions earned by a non-resident insurance agent attributable to a prior PE that the agent had while he was resident of Canada?

Position: Yes it can be attributable to a prior PE that the agent had while he was resident in Canada.

Reasons: To what extent the commission income earned by the non-resident agent after his emigration is attributable to a PE that he had prior to his emigration is entirely a question of fact dependent on whether it was the activities taking place in his PE in Canada that gave rise to the commissions or whether it was the high level of contact with his clients after the emigration.

October 19th, 2006

	Robert Thomson				Isabeau Morrissette
	Burnaby-Fraser T.S.O 			International Tax Division
	9737 King George Highway,
	5th Floor Surrey Tower
	Surrey BC  V3T 5W6
							2006-020417

Business Profits attributable to Prior Permanent Establishment- Article VII of the Canada-US Tax Treaty

This is in response to your email to Olli Laurikainen regarding a case involving insurance policy renewal commissions earned by a non-resident insurance agent attributable to a prior permanent establishment ("PE") that the agent had in Canada while he was resident of Canada.

Our understanding of the facts of your case can be summarized as follow:

XXXXXXXXXX was a resident of Canada until XXXXXXXXXX. While residing in Canada, XXXXXXXXXX was an insurance broker with XXXXXXXXXX. He moved to the U.S. in XXXXXXXXXX as a result of his transfer to the XXXXXXXXXX and ceased to be a resident of Canada at that point. After his move to the U.S., the taxpayer has been paid commissions on the renewals of insurance policies that he had sold to his clients in Canada prior to emigrating from Canada in XXXXXXXXXX. None of the commissions received represent new policy sales in Canada.

The Taxpayer's position is that these commissions are entirely attributable to his marketing efforts since leaving Canada and, as such, these business profits are not taxable in Canada according to paragraph 1 of article VII of the Canada-US Tax Convention ("the Treaty"). The Taxpayer also argues that since he was resident in Canada while he was carrying business in Canada there was no "other Contracting State" at that time. On this basis, he concludes that the former place of business in Canada could not be found as constituting a PE under the Treaty.

Your position is that the marketing efforts taking place after emigration consisted of courtesy calls and the real marketing and sales effort occurred during the Canadian residency and PE period. In your view, the commissions earned on the renewals of these insurance policies are attributable to a PE that the taxpayer had in Canada.

In your email, you referred to two internal interpretations (Documents 2002-0130827 & 2002-0162287) written by Eric Allard-Pouliot on similar fact patterns.

In these documents, we expressed the view that the income derived by the taxpayer that is attributable to a PE or fixed base that a person had in Canada prior to his emigration may be taxed in Canada. This would be the case of a person who, since becoming a non-resident of Canada, has provided no further services to the agents that were trained by him while he was resident in Canada.

Income Tax Rulings' position remains unchanged and in applying these principles to the case at hand, it appears that the commissions earned on the renewals of these insurance policies could be determined to be attributable to a PE that the taxpayer had in Canada. Indeed, the fact situation in the present case is very similar to the one described in Document 2002-0130827. In that case, the taxpayer, Mr. X, was a resident of Canada until XXXXXXXXXX. While he was a resident of Canada, he acted as an insurance agent for various entities of an insurance company and also trained other insurance agents. Mr. X became a non-resident of Canada on XXXXXXXXXX and moved to the U.S. on that date as a result of his transfer to the U.S. office of the insurance company. Since he moved to the U.S., Mr. X has been paid commissions based on the commissions earned by the insurance agents that he trained while he was a resident of Canada. We expressed the view that although we did not have sufficient information to reach a conclusion in this regard, the commissions earned by Mr. X would be considered to be attributable to a PE that he had in Canada if Mr. X since becoming a non-resident of Canada, has provided no further services to the insurance agents that were trained by him while he was a resident of Canada.

It is our view that, with the exception that the commissions in that case were earned by the taxpayer for training insurance agents while he was a resident of Canada, the situation is very similar to the present one and you will note that Mr. X was also a resident of Canada while he was carrying business in Canada. We therefore agree with you that the taxpayer's former place of business could be found as constituting a PE under the Treaty, despite the fact that the taxpayer's former place of business was in the country of his residence at that time. The fact that there was no "other Contracting State" while the taxpayer was carrying a business in Canada is not relevant to this determination.

To what extent XXXXXXXXXX commission income after his emigration is attributable to the PE he had in Canada prior to his emigration is entirely a question of fact dependent on whether it was the activities taking place at his PE in Canada that gave rise to the commissions or whether it was the high level of contact he claims to have maintained with his clients after the emigration. Having said that, and, granted, without having expert knowledge of the insurance industry, we would have thought the bulk of the commissions would have been attributable to the activity comprising the sale of the original policy. Generally, assuming the price of a renewal remains competitive and the experience in reference to any claims has been good, we would have thought that renewals would take care of themselves with little or no contact from an insurance agent. If this is the case, we would attribute the bulk of the commission income to the Canadian PE.

I hope this is of assistance. If you have any further questions, please don't hesitate to call me.

Olli Laurikainen, C.A.

Manager
For Director
International Tax and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch