Words and Phrases - "active business revenue"

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.