Samuel Wuslich v. Minister of National Revenue, 91 DTC 704, [1991] 1 CTC 2473 (TCC)

Rowe, DJ.T.C.:—The appellant appealed from reassessments of income tax for his taxation years 1977 to 1987, both years inclusive. However, the appeal with respect to his 1987 taxation year was not done in compliance with section 165 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") and the Court is without jurisdiction to entertain the appeal for that year and it is hereby dismissed.

The respondent, by way of notices of assessment issued at various times, reassessed the appellant for his 1977 to 1987 taxation years by assessing penalties for late filing and also for failure to pay instalments and accumulated arrears in respect of said instalments thus, incurring interest charges as set forth in paragraph 9 of the amended reply to notice of appeal, amounting to a total of $420,801.34. It was agreed by the parties at the outset that the proper amounts to be assessed as penalties for late filing of returns in various years were to be amended as follows:

1977—$13,003.01

1978—$ 9,928.51

1979—$ 5,294.53

1980—$ 5,291.91

1981—$ 7,037.26

1982—$18,397.41

1984—$19,250.41

1985—$18,593.57

Total: $96,796.61

The imposition of penalties for the 1983 taxation year had previously been abandoned by the respondent.

The following facts are not in dispute. The appellant at all times material to this appeal was a non-resident of Canada and worked in Canada less than 183 days of each and every year. Prior to, and at all times material to this appeal, he established a " permanent establishment” in Canada, as defined in the Canada- United States tax conventions of 1942 and 1980. The permanent establishment of the appellant was the business of the practice of orthodontics engaged in by the appellant in Regina, Saskatchewan. The respondent took the position that 100 per cent of the profits of the business were profits earned at the permanent establishment and that none of the profits were attributable to another establishment.

The position of the appellant is that between 40 and 50 per cent of the profits earned by the taxpayer during the years under appeal should, by virtue of the tax treaty between Canada and the United States, be attributable to the appellant's activities performed in Pittsburgh, Pennsylvania, United States of America. If that is the case, then the penalties and other assessments by the respondent must be varied by the amount not attributable to the permanent establishment and that the respondent is incorrect in allocating 100 per cent of the profits of the appellant to the permanent establishment in Regina.

Dr. Samuel Wuslich testified he is an orthodontist, resident in Pittsburgh from 1977 to 1988. He is a graduate from the University of Pittsburgh and has been practicing exclusively in the field of orthodontics since 1965. In 1977, he learned that Regina and area was in need of an orthodontist and decided to come to Regina for a dental convention. He did some preliminary investigation into the viability of setting up a practice in Regina and anticipated he would be in that City for about 50 days per year. He made some inquiries of someone at the local office of Revenue Canada as to the method of filing tax returns and received advice that he should file U.S. tax returns. The Saskatchewan College of Dental Surgeons granted him a license to practice, without requiring any examinations, and in February 1977 he opened up a practice in premises in Regina he had acquired for that purpose. Between 1977 and 1987 he came to Regina approximately ten times per year and his trips were between five and eight days in duration. From 1977 to 1980 his Regina practice was relatively slow but in 1980 it increased rapidly and he had a staff of five employees hired for his visits to Regina together with two others who worked full-time. He had a full working office suitable for the specialized practice of orthodontics in Regina and also carried out a practice in Pittsburgh. For the taxation years 1977,1978 and 1979 he reported his Canadian income on his U.S. tax returns. In 1980 he received from Revenue Canada a demand to file a tax return and Canadian Pension Plan return, for his 1978 taxation year (Exhibit A-1). He contacted Mr. E.J. Dombowsky, a man who offered certain financial services including tax advice. Dombowsky wrote a letter (Exhibit A-2) to Revenue Canada advising that Dr. Wuslich was a resident of the United States as of December 31, 1978, and had filed U.S. individual income tax return for 1978 reporting all income received. Therefore, Dombowsky concluded the returns requested by Revenue Canada were not required. The appellant indicated no response was forthcoming from Revenue Canada to that letter.

In 1980, his advisor, Dombowsky, approached him to discuss implications of tax in view of Dr. Wuslich being a non-resident of Canada. The appellant advised Dombowsky it did not matter to which country he paid his income tax and Dombowsky then advised that the appellant should incorporate a holding company and to then obtain a visa so he could be employed by that company with the appropriate withholding tax to be paid. On July 15, 1980, Regina Ortho Associates Ltd. (referred to as "ROA") was incorporated in accordance with the laws of the Province of Saskatchewan. The appellant was the sole shareholder. On December 17, 1980, Dombowsky sent a letter (Exhibit A-3) to the appellant’s accountants in the United States advising, inter alia, that Dr. Wuslich would be taking a management fee from the limited company and would be subject to a 25 per cent non-resident tax which would be deducted from each payment made to him. This procedure was to take effect on January 1, 1981.

In 1983, the appellant also had an orthodontic practice in Marquette, Michigan, U.S.A. Revenue Canada attended at his Regina office and conducted an audit on the Saskatchewan corporation ROA from its inception. At the conclusion of the audit, he paid on behalf of ROA, approximately $40,000 to Revenue Canada for the 1980 and 1981 taxation years. He ascertained that the amount of the withholding tax for non-residents was 15 per cent instead of 25 per cent. In October 1983, he purchased an office building in Regina, partially to placate local dentists who wanted him to make a visible commitment to their fair city and he began to receive rental income from that building. The building was owned by him in his personal capacity and he began filing tax returns reflecting rental income and expenses. By 1985, he employed ten people in his Regina dental office, seven part-time and three on a full-time basis. He had an active case load of 300 patients and in 1985 no longer carried on a practice in Marquette, Michigan. In February 1985, Revenue Canada again began to Perform an audit of his financial affairs and Dombowsky was contacted and turned over books and records for that purpose. The appellant also contacted a U.S. attorney specializing in tax who gave advice, the import of which was that he had trouble with a capital "T" right there in Queen City. In 1986 and 1987, his dental practice in Regina declined largely due to competition and the reluctance of Regina dentists to continue to make referrals to him. At the end of 1987, he had reduced staff to one full-time and one part-time position.

In summarizing the manner of filing tax returns for the years under appeal the appellant stated that for the 1977, 1978 and 1979 taxation years the income from his Regina orthodontic practice was reported to the Internal Revenue Service in the United States. He reported income in the same manner up to June 30, 1980, after which his limited company, ROA reported all income from the Regina practice. The appellant, after expenses of operation, drew out the balance as a management fee and withholding tax was paid to Revenue Canada. His income by means of a management fee from ROA was reported to the I.R.S. In 1983, rental income was reported to Revenue Canada. Exhibit A-4 is a chronology of the paper trail relating to the appellant's tax matters with Revenue Canada on a personal reporting basis. Exhibit A-5 contains the tax returns and related material pertaining to the limited company, ROA Exhibit A-6 contains the appellant's individual tax returns and related material concerning the reporting of income to the I.R.S. The appellant received from Revenue Canada a Notice of Assessment dated August 31, 1984, advising that no T1 return for him had been filed for his 1983 taxation year. He also discovered the tax return for ROA for the 1983 taxation year was dated February 17, 1984. His T1 return for the 1984 taxation year was dated March 20, 1985, and his T1 return for the 1985 taxation year was dated June 26, 1986. The tax return for the 1985 taxation year of ROA bore the same date. The appellant did not know why no tax return for the 1984 taxation year was ever filed for ROA. He indicated that his U.S. income tax for the years 1977 to 1987, inclusive, was fully paid.

The appellant testified that orthodontics is the dental specialty providing for the realignment of crooked teeth. He uses a method known as the edge-wise technique involving use of full appliances and metal braces. It is a conservative method of treatment designed to retain the patient's teeth by limiting extractions. In Pittsburgh, he had an office in his home and had a laboratory and the necessary tools, supplies and other equipment required for the manufacture of appliances. In 1988, he prepared a survey relating to the time spent on a typical patient which was filed as Exhibit A-5. The schedule of treatment for a typical patient began with an examination in Regina and a discussion with the parents concerning the diagnosis and proposed treatment. Photographs and x-rays were taken as were the necessary casts and molds. He then took the patient’s records including health questionnaire, work sheet, photos, x-rays and molds with him to Pittsburgh on his return and the usual number of patient files per trip was 15. At his office in Pittsburgh he examined the x-rays, performed measurements and did comparisons with published studies. This procedure enabled him to understand the specific nature of the problem and to then devise a treatment plan. He then examined the photos and molds in order to ascertain if the treatment plan was feasible. Once the treatment plan was formulated to his satisfaction he condensed it and placed it on a master chart. The parents of the patient, or on occasion the patients, if adults, were sent a generalized treatment plan together with information about dental care of the patient over the course of the treatment. If an extraction was required the referring dentist was sent an extraction slip together with a letter of acknowledgement for having referred the particular patient. The entire process involved about 90 minutes of his time. Before making a trip to Regina he would examine the patient records to familiarize himself with their mouth and specific problems as once in Regina he would see between 60 and 80 patients per day. During the busy period around 1985, he had eight chairs in his office. A typical visit by a patient at his Regina office to begin the treatment occupied approximately two hours. The braces would be installed and much of the work could be done by qualified dental assistants under his supervision. Once the braces were installed, appointments were scheduled for the patient to attend at the office every five or six weeks. A typical patient was seen about 15 to 20 times over a treatment period of 20 months. Again on his return to Pittsburgh he would take the patient records with him. In the event a problem arose with one of the patients, he would deal with it by telephone after having reference to the patient record and could then offer advice to the parent, his staff or to a local dentist if required. At the conclusion of the treatment to straighten the teeth, molds were made and the braces were ready to be removed. He would take the molds with him to Pittsburgh and in his laboratory would manufacture the retainers which involved a process of poured plastic and wire using the molds as a guide. The creation of the retainer occupied 45 minutes and most patients required two retainers. On his next trip to Regina he would remove the braces and install the retainers. Instructions were given to the patient on care of the retainers together with other related information and this process involved 30 minutes. At this point the patient needs to return for a checkup every six months for two years. The purpose of the retainers is to prevent relapse.

The fee required to undertake the treatment was discussed at the initial interview. The appellant requested payment be made at four separate intervals. The first payment was required upon installation of the braces and the remainder were secured by post-dated cheques to be deposited at six-month intervals. The cheques were taken by the appellant to Pittsburgh and when one was ready for presentment he would take it to Regina and make a deposit in his bank. He did bank reconciliations and other administration in Pittsburgh including paying of accounts and ordering necessary materials which were stored until transported to Regina to be used in patient treatment. In the event a patient under 12 years of age was being treated, then the process was known as Phase One treatment which was preparatory to Phase Two which is the actual straightening of the teeth with braces. About ten to fifteen per cent of his work involved Phase One patients which occupied about 50 per cent of the time needed for a Phase Two patient. The documents generated in relation to the typical patient were filed as Exhibit A-9.

The appellant stated that in 1985 and 1986 he opened dental offices in Weyburn and Moose Jaw and at the present time also has offices in Estevan and Wynyard, all located in the province of Saskatchewan.

In cross-examination, the appellant stated the Regina office had a laboratory to make molds and casts. For the most part he had two full-time dental nurses on staff and a receptionist even for the periods when he was not in Regina. All employees were paid from a Regina bank account and his Regina office had stationery which was used in corresponding with patients. The survey of time spent on a typical patient (Exhibit A-8) was prepared by him in 1988 and was based on his total professional experience to arrive at the various estimates of time used therein. As for the late filing of his returns, he indicated that he trusted Dombowsky who would hand him returns to be signed, usually in the month of March, and cheques payable to Revenue Canada would be signed by him. He always assumed that Dombowsky was properly filing the various tax returns required. It was necessary for him to access his cancelled cheques over a period of several years in order to establish to Revenue Canada that instalment payments had been made. Supporting documents and a payment schedule were filed as Exhibit A-10 indicating that from 1982 to 1987, inclusive, instalment payments totalling nearly $250,000 were paid by him to Revenue Canada. In 1983, payments totalling $75,006.15 were sent to Revenue Canada, of which amount about one third was applied to the corporate tax of ROA.

The testimony of other witnesses pertaining to the method of filing tax returns, although out of sequence, will be dealt with at this point. Larry Baran has been the appellant's accountant since 1987. Referring to Exhibit A-10 he indicated it took a period of 18 months to resolve the question of instalment payments and the manner in which they were allocated. He prepared an amended return for the appellant's 1984 taxation year and took it to Revenue Canada for filing. He indicated that the profit from the appellant's professional practice in Regina had been reported as corporate income of ROA for certain periods but was treated by Revenue Canada as personal income of the appellant in that the Province of Saskatchewan did not permit a professional to carry on a practice by using a Professional Corporation.

Brian Sackvie is a business auditor with Revenue Canada and has been in that position since 1986. Prior to that, he worked as field auditor and then a senior field auditor. He has been employed with Revenue Canada since 1978 and performed the audit on the appellant for the years 1977 to 1987, inclusive. He stated that from the taxation years 1977 to 1983, inclusive, no tax returns for the appellant had been filed. In fact, he prepared the returns for the appellant on November 5, 1985, and penalties were assessed for late filing, calculated as at April 30 in the appropriate year. The appellant's personal tax return for his 1984 taxation year, ostensibly prepared by E.J. Dombowsky reported only rental income, was dated March 20, 1985, is unsigned by the appellant and was filed with Revenue Canada on March 28, 1988. Larry Baran, on March 28, 1988, filed with Revenue Canada, in fact with Sackvie personally, an amended return for the appellant's 1984 taxation year in which professional income of nearly $250,000 was reported. The return for the appellant's 1985 taxation year again apparently prepared by Dombowsky dated June 26, 1986, unsigned by the appellant, reported rental income and was filed on March 28, 1988. An amended return for the appellant's 1985 taxation year was prepared and filed by Baran on March 28, 1988, reporting nearly $200,000 in professional income. Sackvie indicated that he was unable to confirm that Exhibit A-2, the letter of March 18, 1980, from Dombowsky to Revenue Canada had ever been received. The appellant did not have a Social Insurance Number unless one was issued to him upon filing a return for the 1983 taxation year but if that was the case such number was not used on a subsequent Notice of Assessment. When Sackvie filed returns on behalf of the appellant on November 5, 1985, for the taxation years 1977 to 1983, inclusive, a Social Insurance Number was then issued to the appellant. The appellant's return for the 1983 taxation year could not be located but there was some indication it had been filed so Revenue Canada did not assess penalties for late filing of same. Referring to Exhibit A-10, the schedule of payments made to Revenue Canada beginning on December 30, 1982, the cheques were drawn on an account of Ortho Associates (Regina) Ltd. and signed by S. Wuslich. Since there was no direction to whether these moneys would be applied and the appellant had no S.I.N. number for a portion of the time covered by the remittances a problem was created in locating and allocating the payments. It is reasonable to draw the inference from the evidence necessary due to lack of direct testimony on the point that the tax returns, prepared by Dombowsky but not previously filed, were discovered by Baran in the books and records once in the hands of Dombowsky but turned over neither to the appellant or Revenue Canada during an audit and then, were given to Baran when he was retained to sort out the mess.

Before continuing with the evidence as it pertains to the issue of whether or not the appellant can allocate a portion of his overall income in the years under appeal to work done in Pittsburgh, some observations are in order relating to the filing of tax returns. It is apparent that Regina Ortho Associates Ltd., referred to as ROA, is the same corporation as Ortho Associates (Regina) Ltd. Not having seen the Certificate of Incorporation the correct name is in doubt but is not relevant in any event. However, it is another example of the overall confusion surrounding the affairs of the appellant for the years in question in which returns were not filed, improperly filed as to only rental revenue, professional income reported as corporate income of ROA, if at all, and payments purporting to be on instalments attributed to the account of ROA. It is doubtful that anyone would be able to completely unravel the trail of errors and omissions over a period of nearly eight years.

Ellen Grady testified she is a resident of Pacific Palisades, California. She is a management consultant and educator whose professional career involves examination of office systems of the dental profession, mostly orthodontists. She holds a B.A. in speech therapy and has undertaken post-graduate studies in marketing. She was employed by an orthodontist between 1979 and 1982 and was involved in the treatment of patients having cleft palates. She has worked as a receptionist in a dental office, a dental assistant and a secretary at dental seminars. In 1972, she went to work for a management consulting firm begun by orthodontists and was there for ten years. The business organization, known as the Millenium Society, held seminars and attended at offices of dental practitioners in order to assist in the formulation of goals, undertook analysis of statistics, marketing studies and time studies on the entire staff in a dental office. Since 1972, she has performed nearly 1000 time studies on orthodontists' offices. She looks at matters such as profitability, cost containment and budgeting in relation to the professional practice. In 1982, she started her own company and began to conduct analyses of other dental practices including those of general practitioners. She conducts between 20 and 30 seminars per year for orthodontists and the American Dental Society and has worked in the United States, Canada, Western Europe and Japan. To her knowledge there are 12 organizations doing her type of work but only two individuals involved have had more experience that her. Ellen Grady was qualified as an expert in the field of assessing time in orthodontic functioning and on the profitability of orthodontists.

Grady stated she had not met the appellant until prior to giving evidence and had not examined his dental practice. However, in order to prepare her report and testimony, she did an analysis of the individual functions of the appellant in his practice by discussing with him, over the telephone, his methods and by a review of Exhibit A-5, the time allocation survey done by him. She examined certain patient files in order to compare functions recorded therein with the appellant's own estimates of time spent. Based on a similarity of practice, she used 13 files of solo practitioners in orthodontics from 1988 to 1990 in which these individuals had a patient load of 100 to 300 treatment starts per year. In her opinion, the extent of the orthodontist's experience is not a significant factor in terms of time expended. She then reduced the 13 files to three for purposes of her evidence. In the course of her consulting practice she had done time studies by observing the actual performance of various individuals in an orthodontic office. Filed as Exhibit A-11 was a report prepared by her on orthodontic statistics in key performance areas dealing as well with scheduling and cost evaluations. Based on the information gathered by her and on her knowledge of orthodontic procedures, she then undertook an analysis of the time spent by the appellant in the course of treatment of a typical patient and allocated amounts of time to the Regina office and to work done by the appellant in Pittsburgh. The document prepared by her, entitled "Allocation of Treatment & Administration Time Between Canada & The United States" was filed as Exhibit A-12. Grady allocated time to certain functions and procedures throughout the treatment phase from beginning to end. Her conclusions were that having regard to the appellant's typical patient, with adjustments built in for Phase One patients, the total time spent by him would be 996.5 minutes. Of this amount, 602 minutes would be spent in what was referred to as "chair time" that is, in the Regina office. The total time spent undertaking necessary functions in the United States at Pittsburgh amounted to 394.5 minutes or 39.61 per cent of total patient treatment time. In her opinion, the industry norm of administrative time in proportion to total treatment time is about 50 per cent. Administrative time is defined by Grady as work that is necessary to the function of the practice but not actual treatment time. The allocations of time used by her in her report and evidence are, in her opinion, valid for the years 1977 to 1987. A large portion of time (96 minutes) was allocated by her to the fabrication of retainers which was done in Pittsburgh and 75 minutes attributable to the initial preparation of complete diagnosis and treatment plan for the patient. From the standpoint of the overall practice of the appellant based on the information before her, she would allocate 45 per cent of total time spent in all aspects and phases of his practice to the functions carried out in Pittsburgh.

In cross-examination, Grady agreed that she had not observed the appellant at work in Regina or Pittsburgh and to some extent her report and testimony was predicated on the information received from the appellant during telephone conversations and on her own extensive experience in the field.

Kevin Passarello is a tax attorney practicing in Pennsylvania as a member of the State Bar for the past five years. He is a graduate of the Georgetown Law School with a major in business tax and for four years practiced exclusively in the area of business tax and recently has added other aspects of business law to his field of practice. He was qualified as an expert in United States tax law.

Passarello stated he is the appellant's tax attorney in the U.S. and that in Pennsylvania profession corporations are permitted and the owner is deemed to be an employee of the entity. During the period 1977 to 1987, citizens of the United States were required to pay tax to the Internal Revenue Service on worldwide income. The treaties in effect for the years under appeal are the Canada-United States Tax Convention^ 1942 and the Canada-U.S. Income Tax Convention, 1980, as amended. The purpose of the treaties was to prevent double taxation and to harmonize tax laws as between the two countries. The 1942 Tax Convention applied to the period between 1942 and 1984. In accordance with the treaties, the United States would not tax profits if they were allocable to a permanent establishment in Canada and that permanent establishment would be regarded as though it were a separate entity and separate accounts had been generated. If a Canadian business entity, as a natural person or corporation, were in the U.S. for a period less than 183 days, then the United States would tax that enterprise only if it had a permanent establishment in the U.S. and then only on profits allocable to that country. The United States has regulations pursuant to the treaties as to method of allocation and the general test is that profits are taxed in the U.S. if "effectively connected" meaning a material factor in the production of the income. The 1980 treaty affects taxable income after January 1, 1985, and taxes only profits derived from specific assets or activities in the United States. The amendment did not change the basic intent of the 1942 Convention and it was basically a recodification of the earlier treaty. In his experience, the allocation of profits was difficult and in the U.S. business organizations often maintained separate books and records and many allocations were done on the basis of the facts and circumstances of the individual taxpayer. Further, the Internal Revenue Service and taxpayers were generally able to agree on the issue of allocation of profits.

Counsel for the appellant submitted it was common ground the appellant was at all times material a non-resident of Canada working here less than 183 days per year. It was also clear that he had a permanent establishment in Regina. The tax treaties between Canada and the United States are the operative documents in this litigation and the treaties permit the concept of the appellant as two people—one earning business profits in Regina and the other producing profits in Pittsburgh. In accordance with the evidence, a portion of the profits should then be allocated to Pittsburgh and the position of the respondent that 100 per cent of the appellant's profits were to be attributed to the appellant's permanent establishment in Canada was incorrect.

Counsel for the respondent countered that the flaw in the appellant's position was that the work done in the U.S. was allocable. The work done there was not a separate enterprise and could not survive a "stand-alone" test and all the work done, whether in Regina or Pittsburgh, was all part of the practice of orthodontics in Regina. The treaties were not intended to cover the division of time spent in both countries in the course of the same business. The appellant's situation can be adequately addressed under the head of allowable expenses against his Regina income. The submission was that there was no earning activity in the U.S. as a distinct and separate enterprise and time spent working there by the appellant was not sold as a separate component to the patient in Regina. Even if the profits could be said to be allocable between Regina and Pittsburgh as a matter of law, then the evidence adduced was not sufficiently hard or precise in order for that determination to be made as it is requested to be done solely on the basis of estimates and reconstruction of time in accordance with a model patient treatment plan created solely for the purposes of the litigation.

As to the issue of penalties and instalment arrears and interest, counsel contended there was no evidence on which to vary the reassessments.

First, the issue of the validity of the reassessments of late filing penalties and instalment interest must be dealt with, prior to any subsequent determination, as to whether they would be adjusted as a result of a finding that something less than 100 per cent of the appellant's profits for the years under appeal should be allocated to Regina, Canada.

It is clear that all professional income earned by the appellant for the years under appeal should have been reported as personal income and not as the corporate income of ROA. Either the required tax return of a taxpayer is filed in time in accordance with the Income Tax Act or it is not.:If a return is filed late then penalties apply.

There is no suggestion flowing from the evidence that the appellant in any way intended not to report income, either to Revenue Canada or the Internal Revenue Service in the United States. It appears that he was badly served by his tax preparer and advisor, E.J. Dombowsky, who was not called to give evidence although he appears to still be living in Regina. The Province of Saskatchewan did not permit the appellant to carry on the practice of orthodontics via the vehicle of a corporation. Therefore, the reporting of professional income as corporate income of ROA was not in compliance with the Income Tax Act. It is not sufficient that an individual's income be reported to Revenue Canada as forming a portion of the income of another taxpayer. There is no duty on the respondent to undertake a massive computer analysis of the similarity of names or occupations of taxpayers in order to determine if income has been incorrectly reported as the revenue of another business organization owned or controlled by the individual.

The instalment payments were made by the appellant in good faith in accordance with the overall bad advice he was receiving on an ongoing basis from Dombowsky. The payments were not directed to his personal account at Revenue Canada and for at least three years the appellant had no Social Insurance Number or if he did acquire one in 1983 it was not used to identify him. The cheques for instalments were drawn on the Regina bank account of Ortho Associates (Regina) Ltd. The moneys may have gone into the hungry, generic furnace of the consolidated general revenue of Canada until they could be identified and credited to the appellant, and/or his corporation, ROA, which if done, was in error. The reporting of only rental income from the building owned by the appellant in some years only served to further muddy the troubled waters.

The amounts of the late filing penalties in accordance with the advice of counsel at the commencement of the appeal were presented to the Court on a year by year basis with the total announced as being the sum of $86,868.20. However, repeated addition of the yearly amounts totals $96,796.61 and the discrepancy cannot be accounted for except for an error in addition by counsel.

The amount owing by the appellant on instalment arrears interest, accumulating over a ten-year period, is staggering even allowing for the astonishing effect of compound interest at rates that may well have hit 15 per cent at various times. However, for the appellant's 1981 taxation year, he owed a balance on tax of $207,000 and for the 1982 taxation year his indebtedness for that particular year was nearly $240,000. Both years had been the subject of late filing penalties and arrears interest.

There is no evidence before me to permit any revision or variation to the penalties or to the amount calculated by the respondent to be owing on the instalments other than in accordance with the reduced amount agreed to by both counsel at the outset relating to the late filing penalties, which as I noted earlier, did not accord with the total calculated during the course of these reasons.

The only capacity for variation of the amount of penalties and arrears interest now lies in the issue of the allocation of profits between Regina, Canada and Pittsburgh, U.S.A in accordance with the relevant tax treaties between the two countries. If less than 100 per cent of the appellant's income can be found to be attributable to his permanent establishment in Regina, then the new percentage will be applied to the entire period for the years under appeal and new totals would emerge for penalties and instalment arrears interest as they are both based on the amount of taxable income involved in each taxation year.

If the appellant's position has merit, the Canada-United States Tax Convention, 1942 would apply for the 1977 to 1984 taxation years, inclusive. Then, the Canada-U.S. Income Tax Convention, 1980 would, if applicable, concern income earned after January 1, 1985.

The relevant portions of the 1942 Tax Convention are as follows:

Article I. Industrial and commercial profits.

An enterprise of one of the contracting States is not subject to taxation by the other contracting State in respect of its industrial and commercial profits except in respect of such profits allocable in accordance with the Articles of this Convention to its permanent establishment in the latter State.

No account shall be taken in determining the tax in one of the contracting States, of the mere purchase of merchandise effected therein by an enterprise of the other State.

Article II. Rentals, royalties, interest, dividends, management charges and capital gains net industrial and commercial profits.

For the purposes of this Convention, the term, “industrial and commercial profits" shall not include income in the form of rentals and royalties, interest, dividends, management charges, or gains derived from the sale or exchange of capital assets.

Subject to the provisions of this Convention such items of income shall be

taxed separately or together with industrial and commercial profits in accordance with the laws of the contracting States.

Article III. Allocation of profits.

1. If an enterprise of one of the contracting States has a permanent establishment in the other State, there shall be attributed to such permanent establishment the net industrial and commercial profit which it might be expected to derive if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions. Such net profit will, in principle, be determined on the basis of the separate accounts pertaining to such establishment.

In the determination of the net industrial and commercial profits of the permanent establishment there shall [be] allowed as deductions all expenses, wherever incurred, reasonably allocable to the permanent establishment, including executive and general administrative expenses so allocable.

2. The competent authority of the taxing State may, when necessary, in execution of paragraph 1 of this Article, rectify the accounts produced, notably to correct errors and omissions or to reestablish the prices or remunerations entered in the books at the value which would prevail between independent persons dealing at arm's length.

3. If (a) an establishment does not produce an accounting showing its own operations, or (b) the accounting produced does not correspond to the normal usages of the trade in the country where the establishment is situated, or (c) the rectifications provided for in paragraph 2 of this Article cannot be effected the competent authority of the taxing State may determine the net industrial and commercial profit by applying such methods or formulae to the operations of the establishment as may be fair and reasonable.

4. To facilitate the determination of industrial and commercial profits allocable to the permanent establishment, the competent authorities of the contracting States may consult together with a view to the adoption of uniform rules of allocation of such profits.

The relevant portions of the 1980 Tax Convention are as follows:

Article Vil—Business Profits.

1. The business profits of a resident of a Contracting State shall be taxable only in that State unless the resident carries on business in the other Contracting State through a permanent establishment situated herein. If the resident carries on, or has carried on, business as aforesaid, the business profits of the resident may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

2. Subject to the provisions of paragraph 3, where a resident of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the business profits which it might be expected to make if it were a distinct and separate person engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the resident and with any other person related to the resident (within the meaning of paragraph 2 of Article XI (Related Persons)).

3. In determining the business profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere. Nothing in this paragraph shall require a Contracting State to allow the deduction of any expenditure which, by reason of its nature, is not generally allowed as a deduction under the taxation laws of that State.

4. No business profits shall be attributed to a permanent establishment of a resident of a Contracting State by reason of the use thereof for either the mere purchase of goods or merchandise or the mere provision of executive, managerial or administrative facilities or services for such resident.

5. For the purposes of the preceding paragraphs, the business profits to be attributed to a permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.

6. Where business profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article.

7. For the purposes of the Convention, the business profits attributable to a permanent establishment shall include only those profits derived from the assets or activities of the permanent establishment.

The United States Treasury Department, on April 26, 1984, issued a commentary on the provisions of the 1980 Convention, entitled Revised Technical Explanation of the Convention, which was endorsed by the Canadian Department of Finance on August 26, 1984. Article VII dealing with the subject of business profits is as follows:

Article VII. Business Profits

Paragraph 1 provides that business profits of a resident of a Contracting State are taxable only in that State unless the resident carries on business in the other Contracting State through a permanent establishment situated in that other State. If the resident carries on, or has carried on, business through such a permanent establishment, the other State may tax such business profits but only so much of them as are attributable to the permanent establishment. The reference to a prior permanent establishment (“or has carried on") makes clear that a Contracting State in which a permanent establishment existed has the right to tax the business profits attributable to that permanent establishment, even if there is a delay in the receipt or accrual of such profits until after the permanent establishment has been terminated.

Any business profits received or accrued in taxable years in which the Convention has effect, in accordance with Article XXX (Entry Into Force), which are attributable to a permanent establishment that was previously terminated are subject to tax in the Contracting State in which such permanent establishment existed under the provisions of Article VII.

Paragraph 2 provides that where a resident of either Canada or the United States carries on business in the other Contracting State through a permanent establishment in that other State, both Canada and the United States shall attribute to that permanent establishment business profits which the permanent establishment might be expected to make if it were a distinct and separate person engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the resident and with any other person related to the resident. The term “related to the resident" is to be interpreted in accordance with paragraph 2 of Article IX (Related Persons). The reference to other related persons is intended to make clear that the test of paragraph 2 is not restricted to independence between a permanent establishment and a home office.

Paragraph 3 provides that, in determining business profits of a permanent establishment, there are to be allowed as deductions those expenses which are incurred for the purposes of the permanent establishment, including executive and administrative expenses, whether incurred in the State in which the permanent establishment is situated or in any other State. However, nothing in the paragraph requires Canada or the United States to allow a deduction for any expenditure which would not generally be allowed as a deduction under its taxation laws. The language of this provision differs from that of paragraph 1 of Article III of the 1942 Convention, which states that in the determination of net industrial and commercial profits of a permanent establishment there shall be allowed as deductions "all expenses, wherever incurred" as long as such expenses are reasonably allocable to the permanent establishment. Paragraph 3 of Article VII of the Convention is not intended to have any implications for interpretation of the 1942 Convention, but is intended to assure that under the Convention deductions are allowed by a Contracting State which are generally allowable by that State.

Paragraph 4 provides that no business profits are to be attributed to a permanent establishment of a resident of a Contracting State by reason of the use of the permanent establishment for merely purchasing goods or merchandise or merely providing executive, managerial, or administrative facilities or services for the resident. Thus, if a company resident in a Contracting State has a permanent establishment in the other State, and uses the permanent establishment for the mere performance of stewardship or other managerial services carried on for the benefit of the resident, this activity will not result in profits being attributed to the permanent establishment.

Paragraph 5 provides that business profits are to be attributed to a permanent establishment by the same method in every taxable period unless there is good and sufficient reason to change such method. In the United States, such a change may be a change in accounting method requiring the approval of the Internal Revenue Service.

Paragraph 6 explains the relationship between the provisions of Article VII and other provisions of the Convention. Where business profits include items of income which are dealt with separately in other Articles of the Convention, those other Articles are controlling.

Paragraph 7 provides a definition for the term” attributable to". Profits" attributable to” a permanent establishment are those derived from the assets or activities of the permanent establishment. Paragraph 7 does not preclude Canada or the United States from using appropriate domestic tax law rules of attribution. The “ attributable to” definition does not, for example, preclude a taxpayer from using the rules of section 1.864-4(c)(5) of the Treasury Regulations to assure for U.S. tax purposes that interest arising in the United States is attributable to a permanent establishment in the United States. (Interest arising outside the United States is attributable to a permanent establishment in the United States based on the principles of Regulations sections 1.864-5 and 1.864-6 and Revenue Ruling 75-253, C.B. 203.) Income that would be taxable under the Code and that is "attributable to" a permanent establishment under paragraph 7 is taxable pursuant to Article VII, however, even if such income might under the Code be treated as fixed or determinable annual or periodical gains or income not effectively connected with the conduct of a trade or business within the United States. The "attributable to” definition means that the limited "force-of-attraction" rule of Code section 864(c)(3) does not apply for U.S. tax purposes under the Convention.

The 1942 Convention used the term “industrial and commercial profits” while the 1980 Convention referred to "business profits.” For the purposes of the appellant's argument there is no material difference between the wording used in the two Conventions which would affect the outcome of the appeal.

There are apparently no reported cases in which the issue of allocation of profits under the treaties was considered. The published reports of litigation involving the treaties were mainly concerned with whether or not there existed a permanent establishment, a matter not in issue in this appeal. However, some assistance can be had from the judgment of the Privy Council in International Harvester Company of Canada Ltd. v. Provincial Tax Commission, [1948] C.T.C. 307; [1949] A.C. 36. In this case, the appellant, an Ontario corporation, having its head office in Hamilton, Ontario, was for income tax purposes resident outside of Saskatchewan. It was in the business of manufacturing and selling agricultural implements. The manufacturing operations were carried out exclusively outside of Saskatchewan while the selling operations occurred partly in that province and partly in other provinces and countries. The appellant had various branch offices in Saskatchewan and when sales were made the funds were deposited in separate bank accounts and remitted in full to the head office in Hamilton, Ontario. The head office then returned to the branch offices in Saskatchewan such funds as were required for operating and incidental expenses (not much has changed since 1936 in terms of Canadian east-west business practice). The Court held that any part of the appellant's net profit, which might fairly be attributed to its manufacturing operations outside of Saskatchewan, was not profit arising from the business of the appellant inside Saskatchewan within the meaning of the Income Tax Act, 1932, of Saskatchewan and must be excluded in determining the income of the appellant subject to taxation under section 21a of that Act. The judgment of their Lordships was delivered by Lord Morton of Henryton and at pages 319-20 (A.C. 50) His Lordship stated:

The first contention of counsel for the appellant has already been indicated and may be summarised as follows: Since the appellant is a non-resident company, the only income of the appellant liable to taxation in respect of the three periods in question was the net profit or gain arising from the business of the appellant in Saskatchewan. The commissioner did not ascertain that net profit or gain, but instead resorted to Regulation 2. By adopting the method already described, he taxed a percentage of the appellant's “ manufacturing profit,” all of which was earned outside Saskatchewan.

This is the argument which was accepted by the minority in the Supreme Court of Canada, and Sir Lyman Duff C.J. expressed himself as follows:

Nowhere does the statute authorize the province of Saskatchewan to tax a manufacturing company, situated as the appellant company is, in respect of the whole of the profits received by the company in Saskatchewan. It is not the profits received in Saskatchewan that are taxable; it is the profits arising from its business in Saskatchewan, not the profits arising from the company's manufacturing business in Ontario and from the company's operations in Saskatchewan taken together, but the profits arising from the company’s operations in Saskatchewan.

Their Lordships find themselves entirely in agreement with these observations. They think that there is to be found in sections 21 to 25 inclusive a scheme for dealing (inter alia) with the taxation of profits which are earned, or arise, or accrue or are derived—it matters not which phrase is used—from the activities of persons or corporations who carry on certain activities within the province of Saskatchewan and other activities outside that province. Section 21 applies both to resident and to non-resident corporations, and is plainly directed to preventing an artificial reduction of the net profit arising from the business of such corporations in Saskatchewan.

At pages 321-22 (A.C. 52) His Lordship continued as follows:

In their Lordships' view, the fallacy of regarding a profit as arising solely at the place of sale appears also in the arguments advanced on behalf of the respondents in the present case. Counsel on their behalf contended that when money was received by the appellant in Saskatchewan as a result of a sale in Saskatchewan the whole of the net profit on the sale "arose" from the business of the appellant in Saskatchewan, and no apportionment was necessary. They referred to certain cases in which various courts have found no reason for treating a profit as being earned or as arising partly within and partly without a particular country. In no one of these cases, however, was the relevant section accompanied by other sections contemplating such an apportionment of profits as is provided for by sections 23 and 24 in the present case.

The result is that, in their Lordships’ view, any part of the appellant's net profit which may fairly be attributed to its manufacturing operations outside the province of Saskatchewan, referred to throughout the argument as its "manufacturing profit,” is not profit arising from the business of the appellant Saskatchewan within the meaning of section 21a of the Act, and must be excluded ascertaining the income of the appellant liable to taxation under that section. It was suggested in argument that the proper method of ascertaining the ” manufacturing profit,” was to estimate the net profit which the appellant would have obtained if, instead of selling goods retail through its own selling organization in Saskatchewan, it had sold the same goods, direct from its factory, to a wholesaler. This method seems not unreasonable, but their Lordships do not desire to select any particular method as being the best, since this would appear to be a practical matter, not fully explored in argument. The assessments now in question have already been set aside and referred back to the commissioner for re-assessment, with instructions to reconsider the question of bad debt reserve. They must be further reconsidered in the light of this judgment.

Until the evidence was heard during this appeal, there was no system in place for segregating the billable time spent by the appellant working in Pittsburgh in relation to patients in Regina nor did he ever attempt, from an accounting standpoint, to keep records to that effect or to bill his Regina practice for professional work done while in Pittsburgh. It is useful to restate the relevant portion of paragraph 1 of Article III from the 1942 Canada-United States Tax Convention which reads:

If an enterprise of one of the contracting States has a permanent establishment in the other State, there shall be attributed to such permanent establishment the net industrial and commercial profit which it might be expected to derive if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions. Such net profit will in principle, be determined on the basis of the separate accounts pertaining to such establishment.

Paragraph 3 of the same article is also relevant and is as follows:

If (a) an establishment does not produce an accounting showing its own operations, or (b) the accounting produced does not correspond to the normal usages of the trade in the country where the establishment is situated, or (c) the rectifications provided for in paragraph 2 of this Article cannot be effected the competent authority of the taxing State may determine the net industrial and commercial profit by applying such methods or formulae to the operations of the establishment as may be fair and reasonable.

Paragraphs 1 and 2 of Article VII of the 1980 Canada-U.S. Income Tax Convention are as follows:

1. The business profits of a resident in the Contracting State shall be taxable only in that State unless the resident carries on business in the other Contracting State through a permanent establishment situated therein. If the resident carries on, or has carried on, business as aforesaid, the business profits of the resident may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

2. Subject to the provisions of paragraph 3, where a resident of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the business profits which it might be expected to make if it were a distinct and separate person engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the resident and with any other person related to the resident (within the meaning of paragraph 2 of Article IX (Related Persons).

At this point the evidence of the appellant and of the expert witness, Ellen Grady, together with the relevant documentary evidence must be reexamined in the context of pursuing the concept that the work performed by the appellant in the United States was done as though he were a distinct and separate person. In effect, to determine whether or not it can be said there were two Dr. Samuel Wusliches engaged in the practice of orthodontics on Regina patients—Dr. Wuslich of Regina and Dr. Wuslich of Pittsburgh. This concept is not dependent on a Dr. Jekyll/Mr. Hyde scenario, rather it is Dr. Wuslich/Dr. Wuslich. Also, it must not be confused by bringing into the analysis Dr. Wuslich of Pennsylvania, practicing through a professional corporation engaged in straightening the teeth of residents of the Commonwealth or the Dr. Wuslich who also provided his professional services to the residents of Marquette, Michigan. The only split personality in the sense of his professional practice that is relevant is the one pertaining solely to the treatment of patients who attended at his office in Regina and paid for treatment which was deposited into the bank account in that city.

According to the evidence of the appellant and Ellen Grady, once the patient has been examined in Regina and study models have been poured, x-rays and photos taken, these items and the patient records were taken by the appellant to Pittsburgh. He then spent a total of 28.5 minutes per typical patient reviewing the findings of the examination done in Regina, preparing a brief outline of the treatment plan and fee, writing to the patient's local dentist detailing any preliminary extractions or other work required to be done. In Pittsburgh, the appellant would prepare a complete diagnosis and treatment plan which involved a review of the prepared study models, labelling and organization of the photographs (eight per patient) and tracing of lateral ceph, tracing and recording of measurements. The complete treatment plan was then recorded on a treatment chart and on the patient's records. In the case of a Phase One patient under 12 years of age the same diagnostic work was required. The treatment plan consumed 94 minutes of the appellant's time and was done at his office in his home in Pittsburgh. During treatment, patient emergencies would arise when the appellant was not in Regina and when that occurred he would be contacted by the Regina staff and he would respond by telephoning the patient to determine the nature of the problem and the corrective action to be taken. This would necessitate a review of the patient's charts and records including the treatment chart prior to making the call and subsequently the records and charts would have to be updated to reflect the occurrence and treatment prescribed. The estimate of time spent by the appellant dealing with emergencies ranged from 30 minutes, in his opinion, while Ellen Grady's estimate was 28 minutes. A total of 76 minutes was spent by the appellant while in Pittsburgh sending letters to the patient and/or family during the course of treatment, reviewing patient records and charts prior to attending at the Regina office, updating records and refiling them. Between 90 minutes (appellant's estimate) and 96 minutes (Grady's estimate) was spent in Pittsburgh fabricating retainers for a patient. The appellant undertook this work personally which involved pouring stone models, carving the bracket and band impressions off the stone model, bending of retainer wire and fabrication/trimming of the retainer using the cold cure method. Each retainer fabrication would require 32 minutes and the typical patient had two retainers at the outset, one upper and one lower, but the average patient will lose or break at least one during the course of treatment and require a replacement to be made. In addition, Grady considered an average of eight minutes in Pittsburgh would be spent by the appellant in manufacturing one retainer for a Phase One patient. Other time spent by the appellant in Pittsburgh on his Regina patients involved 23 minutes for accounts receivable functions as he had in his office there the post-dated cheques from the payor together with the appropriate ledger cards. Deposits were prepared in Pittsburgh for those patients and then taken to Regina for deposit to the bank. There were problems arising with respect to cheques which did not clear the bank and letters had to be sent to rectify the problem. An accounts payable function performed in Pittsburgh occupied 24 minutes and involved writing about 35 cheques per month including payroll for his Regina staff, paying for supplies obtained in the United States and reconciling payments with invoices. Since many supplies were ordered and obtained in the U.S., inventory had to be controlled and counted, especially in the case of bands for retainers, and the necessary supplies would be taken to Regina as required. Grady estimates this function occupied 17 minutes of the appellant's time. The total time spent by the appellant performing professional services while in Pittsburgh for the typical patient of his Regina office was between 394.5 and 396.5 minutes or approximately 40 per cent of the total treatment time expended by the appellant per patient.

The Technical Explanation issued by the United States Treasury Department, adopted by Canada, contained this commentary on paragraph 4 of the 1980 treaty:

Paragraph 4 provides no business profits are to be attributed to a permanent establishment of a Contracting State by reason of the use of the permanent establishment for merely purchasing goods or merchandise or merely providing executive, managerial, or administrative facilities or services for the resident. Thus, if a company resident in a Contracting State has a permanent establishment in the other State, and uses the permanent establishment for the mere performance of stewardship or other managerial services carried on for the benefit of the resident, this activity will not result in profits being attributed to the permanent establishment.

Counsel for the respondent submitted that the administrative, executive or managerial functions carried out by the appellant in Pittsburgh would be the subject of the above comment. However, that commentary would only apply if the appellant, resident in the United States, set up his permanent establishment in Regina, Canada, for the mere purchase of goods, merchandise or providing the mere performance of the activities referred to therein. The converse, therefore, does not apply. The administrative, managerial or purchasing functions carried out the appellant in the United States were part of the practice of orthodontics in Regina and if the time allocation between Regina and Pittsburgh is not accepted it would not be on the basis of offending paragraph 4 of the 1980 treaty.

For the years under appeal the appellant carried on a professional practice in Regina, Saskatchewan, Pittsburgh, Pennsylvania and Marquette, Michigan. At present, he has four offices in Saskatchewan, including Regina. The very nature of the practice of orthodontics permits the establishment of offices in varying locations in that the treatment is spread out over nearly two years and involves patient visits scheduled at intervals of four to six weeks. Constant attendance at one office is not required nor would it be productive unless the practice was located in a large city which had enough patients to meet the full professional capabilities of the practitioner, which, it would seem, could depend on the amount of other practitioners available and the economy of the area. It was not unusual then nor at present for the appellant to be generating revenue at various locations. The respondent must take the taxpayer as he finds him, whether peculiar in terms of generating revenue, or an ordinary person subject to a T-4 slip. There is no doubt there is a difficulty in making an allocation of profit away from the permanent establishment in Regina even if conceptually valid. There were no separate accounts kept and the time estimates given in evidence by the appellant and Grady are reconstructions based on both the appellant's methods and standard practice throughout the industry. The fact that such a process is difficult does not mean that it cannot be done. It would be unusual, in the context of the appellant's tax affairs over the period under appeal, for this aspect to be any easier to follow than the general chaos which prevailed throughout. It is a classic example of a bad file getting worse with the passage of time, a phenomenon well-known to the legal profession.

There is an obvious difficulty in regarding a professional as a distinct and separate person in each of the Contracting States and the extent thereof will depend on the nature of the individual's professional discipline. If the universe and the Free Trade Agreement with the United States both enfold as they should, there may well be similar issues arising. It is dangerous to use any analogies for purposes of analysis except in a rough sense, but there is a difference between the exercise of intellectual or creative functions in another state and the performance of work that is more concrete and identifiable as a product, not in the sense of a widget, but the accomplishment of something in the context of the same or similar activities engaged in by the person in the other state. A non-resident writer of novels or screenplays or an advertising executive may well have a permanent establishment, in either Canada or the United States. A great deal of creative thinking, sometimes reduced to draft form, may occur in the other country which, if taken at the flood, might lead on to profit. It would be difficult, if not impossible, to undertake a process to allocate profits between the two countries. On the other hand, and assuming the existence of a two-part widget, a widget manufacturer, making one component in Canada and the other in the U.S. and selling it in one country would probably operate under a subsidiary or would keep adequate books and records to permit an accurate allocation of profits to be made.

Again, a quick review of some of the professional functions performed by the appellant in Pittsburgh with respect to the care of his Regina patients indicates differences in the services. It must be kept in mind that the appellant, like most medical/dental practitioners, provides services to patients which are an amalgam of science and art. In his office in Pittsburgh, he had a laboratory and the necessary tools, equipment and supplies to undertake the manufacture, fabrication and fine tuning of retainers preparatory to being transported to Regina for installation in the mouth of a specific patient in accordance with the special needs of that person as diagnosed earlier. That function could have been done by an outside laboratory, according to the evidence, and would have then been an expense item. The formulation of the treatment plan by the appellant, while in his office in Pittsburgh, was a complex process involving not only an intellectual pursuit but mechanical tracing of measurements and review of photographs, x-rays and the study model previously cast and trimmed only in rough back in Regina. While there was no separate billing to the patient or family for these functions they were part of the required overall treatment and would not have led to profit had they not been done. The first of the four cheques for payment was payable the day the braces were installed on the patient in the chair in Regina and this process would not have been possible without the complete diagnosis and treatment plan having been formulated in accordance with the scientific and other requirements. Once the braces were removed the use of retainers was necessary in order to prevent relapse. The appellant did the physical manufacture and had obtained the necessary supplies in the U.S. to undertake their fabrication. Although a separate bill was not sent to the patient for that specific cost, it is reasonable to assume that one of the three post-dated cheques issued by the patient earlier might well coincide with the beginning use or the retainers as a marked phase in the progress of the treatment plan. Any parent paying for the appellant's services on an ongoing basis might well be heartened by observable progress in the course of what could seem to be an eternal process. Since most of the necessary supplies were purchased in the U.S (mainly due to lower cost) for the retainers and braces, the appellant had to order them, maintain inventory control and do the necessary administration relating to their acquisition.

In looking at Dr. Wuslich, the Sub-Dividable Man, in two-parts at least for this appeal, there is a distinction between some services also provided and the ones dealt with earlier in these reasons. When he spent time in Pittsburgh responding to emergencies, notification of which came from his staff in Regina, he was Dr. Wuslich of Regina, temporarily away from his local office, in the same sense as being on holidays or a business trip and checking back in with the office or being available for contact. In the continuum of the treatment, this aspect of the overall treatment was localized in Regina and area from the standpoint of the patient, and was not dependent on his presence in his office in Pittsburgh except for the availability of patient records which were also duplicated and on hand in the Regina office. The time spent in correspondence with the patient or family had various components. Some of it was directed to a local dentist as part of the treatment plan and some had to do with advice on general care of teeth or relating to payments. A review of patient charts and records, in Pittsburgh prior to coming to Regina for a work period of eight days, was done in order to familiarize himself with the mouths of the scheduled patients so that no time would be lost in Regina carrying out that necessary work before seeing the patient in the chair. The use of this procedure was a personal choice of the appellant, not unlike reviewing a file during the course of a long flight on an aircraft, often not a great personal sacrifice when faced with the alternative of watching the scheduled in-flight movie. The time spent on the accounts receivable function pertaining to the Regina office and the making out of payroll for that office was a part of the operation of that office and may well have involved some duplication in any event having regard to his method of operation, places of business and residence in Pittsburgh. It would be reasonable to expect the appellant to review financial matters relating to the establishment in Regina while physically present in Pittsburgh. While administrative functions form an integral part of the overall process of generating the profits from the professional practice, it is more difficult to relate to them as a separate and distinct enterprise.

The evidence as to allocation of time between Regina and Pittsburgh is acceptable, although, as indicated earlier, different perspectives apply to the characteristics of certain time periods. However, as noted earlier, there was a process of reconstruction according to the best known information available and it remains the educated estimate of experts in the field.

All payments for patient treatment went into the bank account at Regina and, despite the attempt to report profits as corporate profits of a limited company wholly owned by the appellant for some years, it is common ground that all profits were earned by the appellant in his personal capacity, wherever they may arise or in what proportion as between Canada and the United States. The appellant's permanent establishment in Regina acquired all of the fruits of his labour without regard to the various processes that led to the harvest. Dr. Wuslich, the Regina practitioner, was not the person who undertook the formulation of the treatment plan, fabricated the retainers, ordered and maintained supplies, and performed other functions leading to the creation of profit in Regina. Those components of the profit-making process were provided by Dr. Wuslich, the non-resident, while in his office in Pittsburgh. The Regina part of Dr. Wuslich could not be expected to profit from these integral components when they were carried out by that part of Dr. Wuslich which provided professional services as a separate and distinct person engaged in the same activity in the United States and dealing wholly independently with his Saskatchewan persona.

The whole of the evidence for the reasons stated, does permit an allocation of profits with regard to the appellant's permanent establishment in Regina for the years under appeal. The method is not precise and to some extent is a product of weighing as best as possible, all of the evidence with a view to arriving at a reasonable allocation as required by the two Tax Conventions applicable to this appeal. The following processes undertaken by the appellant in the United States, forming an integral part of the profit which accumulated in Canada, are recognized as follows:

1. 16 minutes—correspondence to Patient/family and to local dentists at the commencement of treatment.

2. 94 minutes—complete diagnosis and formulation of overall treatment plan including Phase One patients.

3. 15 minutes—letters to patient/family and local dentists during course of treatment and pertaining to medical matters arising out of the course of treatment, preventative or otherwise.

4. 104 minutes—fabrication of retainers and all of the steps involved in that process, including Phase One patients.

5. 17 minutes—ordering of supplies in the United States, maintaining and controlling inventory.

6. 12 minutes—performing accounts payable function relating to the acquisition of supplies in the U.S., dealing with suppliers as to amounts and quality, and related matters.

Total: 258 minutes

The total time expended by the appellant in carrying out all necessary professions and administrative functions per typical patient was estimated by the appellant to have taken 734 minutes. While the more detailed estimate of Ellen Grady, based on her specific experience in the field of time studies in orthodontics and using industry averages and standards, was 996.5 minutes. The estimate of Grady is probably the more accurate one but the opinion of the appellant must be taken into account as he was the one providing the service and while his reconstruction of time was not done following specific data and statistics it still is his own best opinion of time spent per patient. The total time expended per patient for the purpose of this appeal, then is found to be 920 minutes, allowing for the differing opinions and factoring in the inherent uncertainties in arriving at these estimates and having regard to the whole of the evidence.

The calculation which flows then from this reasoning process is to take the total time spent by the appellant per patient—920 minutes—and to divide that amount by the allocable time found to have been spent by him in the United States (in accordance with these reasons)—258 minutes—arriving at a percentage of 28.04 per cent rounded off to 28 per cent. It follows that 28 per cent of the profits of the appellant must be allocated to his activities in the United States or to state it another way, only 72 per cent of his profits are allocable to his permanent establishment in Regina and not 100 per cent as was assessed by the respondent.

As noted at the beginning of these reasons for judgment, the appellant's appeal for his 1987 taxation year was not undertaken in compliance with the Income Tax Act and was dismissed. Therefore, the remaining years under appeal are for his 1977 to 1986 taxation years, both inclusive. The appeal for those years is allowed as follows: the respondent is ordered to reassess the appellant for the 1977 to 1986 taxation years, both inclusive, by calculating his professional income as being attributable to his permanent establishment in Regina only to the extent of 72 per cent and to calculate penalties and instalment arrears interest in accordance with this variation.

The parties were totally deadlocked on the issue of allocation of profits with the respondent maintaining throughout that 100 per cent of the appellant's profits were attributable to the permanent establishment in Canada. In that sense, the appellant achieved success although not to the extent sought. The penalties for late filing and the instalment arrears interest were properly imposed and/or assessed by the respondent and were then only subject to whatever variation would occur should an allocation of profits have resulted, which it did, between Canada and the United States. The success achieved by the appellant, having regard to the complexity of the matter over a substantial period of time and the issue involved, was substantial and as a result he is entitled to costs on a party-to-party basis.

Appeals allowed in part.