Wolf – Tax Court of Canada finds that revenues earned by an individual through an LLC could be included in determining what were his business revenues for services-PE purposes

A U.S. engineer provided services to Bombardier in Canada over a 188-day period (straddling the 2011 and 2012 years). He would have been considered to have a services permanent establishment in Canada under the Canada-U.S. Treaty but for the requirement in Art. V, 9(a) of the Treaty that “more than 50 percent of the gross active business revenues of the enterprise consists of income derived from the services performed in [Canada] by that individual.”

The taxpayer derived most of his income through a New York LLC. Although Ouimet J recognized that the LLC was a separate taxpayer for Canadian purposes, he nonetheless found that the U.S.-source revenues received by the taxpayer as an LLC member qualified as active business revenues from the same enterprise as that for the earning of engineering fees from Bombardier. His reasoning appears to be that the LLC’s revenues (from U.S. manufacturing and licensing of a patent generated by the taxpayer) all arose from the same expertise and design work of the taxpayer respecting aircraft fuel lines as were also being exploited in the 2011/12 work for Bombardier – and that the LLC was merely a passive vehicle for divvying up the profits generated from this enterprise engaged in by the taxpayer in conjunction with a third party.

Thus, the taxpayer came close to establishing that he did not have a services PE. However, he lost on an evidentiary point. The figures that he had provided to Ouimet J for the active business revenues generated through the LLC were for calendar 2012, whereas the 50% test was to be applied to the 188 day period straddling the two years. As there was no evidence of what the U.S.-source business revenues were for that precise period, the taxpayer failed to meet the onus on him.

Neal Armstrong. Summary of Wolf v. The Queen, 2018 TCC 84 under Treaties, Art. 5.