Words and Phrases - "enterprise"

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Wolf v. The Queen, 2018 TCC 84, aff'd on evidentiary grounds 2019 FCA 283

revenues earned by an individual through an LLC could be included in determining what were his business revenues for services-PE purposes

The taxpayer, an aerospace engineer and a U.S. resident, was hired as an independent contractor for TDM Technical Services, a temporary employment agency, to assist Bombardier Inc. in the designing of fuel lines. In order to do the work, he worked on a part-time basis and was present in Canada for 188 days between August 10, 2011 and August 10, 2012.

In 2005, the taxpayer had licensed his patent respecting fuel line systems (the “Patent”) to an arm’s length company (“Davis Aircraft Inc.”). They earned profits through the sale of fuel lines designed and manufactured using the Patent and through the sublicensing of the Patent to U.S. aircraft manufacturers based in the U.S.. A New York LLC (“Wolfbend”) was established for the purpose of collecting profits earned under the Manufacturing & License Agreement between the taxpayer and Davis Aircraft Inc. and allocating those profits to its members, being the taxpayer, his brother and Davis family members. During the 2012 taxation year, the taxpayer earned CAD$26,244 of income in Canada from the provision of services to Bombardier Inc. through TDM and, through his membership interest in Wolfbend earned U.S.$233,197 of business income and U.S.$46,143 of royalty income.

At issue was whether the CAD$26,244 of income was excluded from Canadian taxation on the basis that the taxpayer did not have a permanent establishment in Canada, which turned principally on whether what otherwise would be a services PE under Art. V, 9(a) of the Canada-U.S. Treaty did not arise because “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.”

Before turning to the principal issue, Ouimet J found (at para. 30):

[A]n “enterprise” for the purpose of the application of the Convention must be understood as the “carrying on of any business”.

He went on to find that as “business” was defined in ITA s. 248(1) to include a profession and “Without doubt, engineering qualifies as a profession” (para. 31), the taxpayer had a business and enterprise in Canada of providing engineering services. However, Wolfbend did not constitute an “enterprise” because it did not carry on a “business” (para. 35).

Nonetheless, the revenues received by the taxpayer from Wolfbend were revenues from his enterprise given that the profits generated from the manufacturing and licensing activities in questions were those of the taxpayer and Davis Aircraft Inc., who were the parties to the Manufacturing & License Agreement and not Wolfbend. Furthermore, such revenues of the taxpayer (including from licensing the Patent) were from a single enterprise consisting of providing engineering services for the design of aircraft fuel lines, given that all such revenues arose out of the commercialization of his expertise in designing fuel systems.

Similarly, such revenues (a term which in the context of the Treaty “should be understood as meaning gross income or gross receipts from any sources” (para. 55) were from “active” commercial activity. Ouimet J stated (at paras 59, 60-61):

…[P]roviding engineering services is a business and, therefore, the income of CAD$26,244 earned in Canada was generated by an “active” commercial activity. … [T]he income generated by manufacturing activity is also from an “active” business.

As for the income generated by the licensing and sublicensing activity, royalties prima facie qualify as passive income.

... Mr. Wolf’s enterprise, through the action of Mr. Wolf, was sufficiently active in earning licensing and sublicensing income. With respect to the licensing activities, Mr. Wolf’s responsibilities included designing, in accordance with the Patent, the fuel lines ordered and their customization for the client’s particular aircraft. With respect to the sublicensing, Mr. Wolf was required to seek potential sublicensees. Therefore … the revenues from all three sources qualify as “active business” revenues.

Nonetheless, the taxpayer’s appeal was dismissed, given the absence of evidence as to the manufacturing and licensing revenues generated through Wolfbend during the 188-day period, given that the only evidence of revenues from those activities was the payments received during calendar 2012. Ouimet J stated (at para. 64):

The evidence is that they represent the “gross active business revenues” of Mr. Wolf’s enterprise during the 2012 taxation year, not that they represent the “gross active business revenues” of Mr. Wolf’s enterprise during the 188-day period. Therefore, the Court cannot determine whether 50 percent or less of the gross active business revenues of the enterprise consisted of revenues derived from the services performed in Canada during the periods totalling 188 days.

Resource Capital Fund IV LP v Commissioner of Taxation, [2018] FCA 41 (Federal Court of Australia), rev'd on various grounds [2019] FCAFC 51

each U.S.-resident partner of a Caymans PE LP carried on a U.S. “enterprise”

Two Caymans investment LPs (“RCF IV” and RCF V”) whose limited partners were mostly U.S. residents, realized gains from the disposal of significant shareholdings in an Australian TSX-listed corporation (Talison Lithium) which, through a grandchild corporation held mining leases in Australia and carried out an operation there of mining lithium ores and processing them. Before finding that the U.S.-resident partners’ share of the partnership gains from selling the shares of Talison Lithium was not exempt under Art. 7 of the Australia-U.S. Convention because of the exclusion in Art. 13 for dispositions of (deemed) real property situated in Australia, Pagone J found that such gains were from “entreprises of” the U.S. limited partners, stating (at para. 57) that this expression encompassed “a passive investment activity" of the U.S.-resident partners, and stating further (at para. 57) that:

…in Thiel, their Honours said that “no element of repetition or system should be attributed to [the] expression” “enterprise of one of the Contracting States” by reference to the use of the words “carried on”… . Neither the RCF IV partnership nor the RCF V partnership is a separate taxable entity to be taxed separately from the partners and their agents. The taxable activity in each case was an investment in … Talison Lithium which was carried out on their behalf by their respective General Partners.

Words and Phrases
enterprise
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Shares private equity fund LP with 5-year holding objective realized share gain on income account 175
Tax Topics - Income Tax Act - Section 115 - Subsection 115(1) - Paragraph 115(1)(a) - Subparagraph 115(1)(a)(ii) gains of a NR PE fund from disposals of Australian share investments that were managed in part in Australia were derived from Australia 427
Tax Topics - Treaties - Income Tax Conventions - Article 13 exclusion in Art. 13 of Aust.-U.S. Treaty for real property dispositions extended to shares of Australian holding company holding mining leases through grandchild 420
Tax Topics - General Concepts - Stare Decisis lower court not bound by a point of law that was assumed rather than examined by a higher court 292
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) assessment of partnership was assessment of partners 89
Tax Topics - Treaties - Income Tax Conventions - Article 6 Art. 6 extends common law meaning of real property 198
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Taxable Canadian Property - Paragraph (d) shares of lithium mining and processing company were derived principally from the processing rather than mining operation and, thus, were not taxable Australian real property 514
Tax Topics - Income Tax Act - Section 218.3 - Subsection 218.3(1) - Canadian Property Mutual Fund Investment shares of Australian mining company were primarily attributable to the processing rather than mining operations 142
Tax Topics - General Concepts - Fair Market Value - Other processing assets of mining company were more valuable than its mining assets 238

14 December 2015 Internal T.I. 2014-0558661I7 - Application of Article V(9) to a partnership

services PE of U.S. partnership based on collective Canadian activities of all partners

Mr. A and Mr. B, both U.S. resident individuals, are partners of a U.S. partnership (which is fiscally transparent in the U.S.) that provides consulting services in Canada to customers resident in Canada.

Example 1

A and B are present in Canada only throughout the January to May (151 days) and August to December periods (153 days), respectively, representing 216 days in aggregate.

Example 2

A is present in Canada only throughout the January to July period (212 days, including 152 work days), whereas Mr. B does not provide services in Canada. A’s services in Canada generate $200,000 of income, and the partnership’s gross active business revenue during those 212 days is $350,000.

In finding that in both examples, A and B are considered to carry on business in Canada through a permanent establishment as defined in Art. V(9) of the Canada-U.S. Treaty (assuming under Example 2 that the work relates to connected projects), Headquarters stated (footnotes omitted):

“[E]nterprise”… refers to a business carried on by each partner through the partnership. …[T] he determination whether such business is carried on through a permanent establishment is made at the partnership level. If a partnership is found to have a permanent establishment in Canada, each partner will also be found to have a permanent establishment in Canada.

The OECD takes the same approach to applying the duration test involving partnerships under paragraph 3 of Article 5….

Example 1

Subparagraph 9(a) of Article V would not deem the partnership to provide services through a permanent establishment in Canada because no one individual is present in Canada for 183 days or more in any twelve-month period.

Since the partnership has provided services in Canada for 216 days in a twelve-month period, subparagraph 9(b) of Article V will deem the partnership to provide services through a permanent establishment in Canada if they are provided with respect to the same or connected projects. In that case, both Mr. A and Mr. B would be taxable in Canada on the profit attributable to the partnership’s permanent establishment and allocated to them in accordance with the terms of the partnership agreement. …

Example 2

… Mr. A is present in Canada for 212 days in 2015, and the income of the partnership derived from his services is more than 50% of the gross active business revenue of the partnership ($200,000 / $350,000 = 57.14%) during those 212 days.

Subparagraph 9(b) of Article V will not deem the partnership to provide services through a permanent establishment in Canada since the partnership has provided services in Canada for only 152 days in a twelve-month period.

Since the thresholds in subparagraph 9(a) of Article V have been met, the partnership has a permanent establishment in Canada and the profit attributable to the permanent establishment will be allocated to the partners.

Words and Phrases
enterprise

Thiel v. Federal Commissioner of Taxation, 90 A.TC 4717 (HC of A.)

"enterprise" includes an isolated adventure

In January and May 1984 the taxpayer, who was a resident of Switzerland, paid $150,000 to acquire six units in the Energy Research Group Unit Trust, in November 1984 he sold his six units to Energy Research Group Australia Ltd. for $300,000 to be satisfied by the issuance to him of 600,000 ordinary shares of that company, and in 1985, following a listing of the shares on the Australian Stock Exchange, he sold 252,000 of his shares for $566,307. The majority found that the taxpayer's activities constituted an "enterprise" for purposes of Article 7 of the Australia-Switzerland Convention regardless whether they constitued an isolated adventure or the recurring conduct of a business. Accordingly, the profits of this enterprise were exempt from taxation under the Income Tax Assessment Act 1936 (Australia).

Words and Phrases
enterprise carry on
Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions 83