Date: 20000224
Docket: A-707-98
CORAM: STONE J.A.
NOËL J.A.
SHARLOW J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
WILLIAM A. DUDNEY
Respondent
Heard at Ottawa, Ontario, Thursday, January 20, 2000
Judgment delivered at Ottawa, Ontario, on February 24, 2000
REASONS FOR JUDGMENT BY: SHARLOW J.A.
CONCURRED IN BY: STONE J.A.
NOËL J.A.
Date: 20000224
Docket: A-707-98
CORAM: STONE J.A.
NOËL J.A.
SHARLOW J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
WILLIAM A. DUDNEY
Respondent
REASONS FOR JUDGMENT
SHARLOW J.A.
[1] William A. Dudney is a resident of the United States. In 1994 and 1995, he earned income by performing certain services in Canada as an independent contractor. In his Canadian tax returns for those years, he claimed that his income was exempt from Canadian tax. His claim for exemption was based on Article XIV of the Canada-United States Income Tax Convention (1980) (the "Convention"), enacted as Schedule I to the Canada-United States Convention Act, 1984 , S.C. 1984, c. 20.
[2] The Crown took the position that Article XIV of the Convention did not apply, and assessed tax on the income. Mr. Dudney appealed to the Tax Court of Canada. The Tax Court Judge allowed Mr. Dudney"s appeal and ordered the reassessments to be vacated. The Crown is now appealing the decision of the Tax Court Judge.
[3] Article XIV of the Convention reads as follows:
| Income derived by an individual who is a resident of a Contracting State in respect of independent personal services may be taxed in that state. Such income may also be taxed in the other Contracting State if the individual has or had a fixed base regularly available to him in that other State but only to the extent that the income is attributable to the fixed base. |
Les revenus qu"une personne physique qui est un résident d"un État contractant tire d"une profession indépendante sont imposables dans cet État. Ces revenus sont aussi imposables dans l"autre État contractant si la personne physique dispose, ou a disposé, de façon habituelle d"une base fixe dans cet autre État mais uniquement dans la mesure où les revenus sont imputables à la base fixe. |
[4] The only issue in this appeal is whether Mr. Dudney had "a fixed base regularly available to him in Canada" within the meaning of Article XIV of the Convention.
[5] The relevant facts are summarized in the reasons of the Tax Court Judge at paragraphs 2 to 7 of his reasons, which I reproduce for ease of reference:
| [2] The Appellant is a United States citizen. He has a degree in aerospace engineering from a university in the United States. In addition, largely through experience and self-training, he has acquired expertise in a discipline known as object oriented technology (OOT). For the purposes of this appeal, it is sufficient to say that OOT is a relatively new and sophisticated method by which computer systems may be developed. |
| [3] In February 1993, a company called Object Systems Group Corporation (OSG) was formed. Soon thereafter it entered into its first contract, which was a master services agreement under which it provided certain services to PanCanadian Petroleum Limited (PanCan). This was replaced in 1994 by another master services agreement, under which OSG contracted to provide training to employees of PanCan in the use of OOT to develop computer systems. By the terms of the contract, the OSG personnel were to work with certain of the PanCan personnel, training them in the use of OOT, and in the course of doing so, assisting them in creating a computer system which would reside on a PanCan computer, and which would be owned and used by PanCan. No specific time for completion of the training was spelled out, and either party was free to terminate the contract by giving 30 days' notice. |
| [4] OSG carried out the contract in part through its own employees, and in part through independent contractors hired for that purpose. The nature and the novelty of the technology was such that it was almost impossible to find qualified instructors in Canada. OSG therefore recruited contractors in the United States. Among those that it recruited was the Appellant, whose residence at that time was in Houston, Texas. It was his expectation when he was hired that he would work for OSG for approximately one year, at which time the project was expected to be completed. However, his contract with OSG provided for termination on 30 days' notice, mirroring that provision in the PanCan-OSG contract. He understood from the outset that he would be contracted to work at PanCan on the training of its employees. |
| [5] The work was done on the premises of PanCan in Calgary. The Appellant was at first provided with a small room from which to work. After three months he was moved to a larger room, which he shared with a number of other consultants. Later he was moved to another room in a different building, also occupied by PanCan. For the most part, the actual training, or mentoring, of the PanCan personnel took place in the offices of the people being trained, or in a conference room. Sometimes there would be meetings or consultations in the space provided to the trainers. Their use of that space was strictly limited, however. It was available to them for the purpose of the contract only. They could not conduct any other business from there, they could use the telephone only for business related to the PanCan contract, and their access to the building was controlled by a magnetic card system, and restricted to business hours, on week days only. |
| [6] The Appellant took no equipment of any kind with him when he went from Houston to Calgary. He had an office in his home in Houston, and from time to time he picked up voice-mail messages from there. He had no letterhead or business cards identifying him as working at PanCan, or elsewhere in Canada. He had no business licence in Calgary, and he was not identified as working in the PanCan premises, either on the directory in the lobby of the building or otherwise. He invoiced OSG on a regular basis for his hours of work. These invoices were prepared by him at home, either in Calgary or in Houston, and sent by fax to OSG. His cheques were sent to Houston to be deposited in his bank account there. He maintained a bank account in Calgary, which was used only for personal items related to daily living. |
| [7] The Appellant spent 300 days in Canada in 1994, and about 40 days in 1995. He terminated his contract by giving 30 days' notice to OSG, for personal reasons which made it desirable for him to return to Houston at that time. When he left the PanCan premises for the last time he took nothing with him, because he had nothing there to take. |
[6] The Tax Court Judge also points out, at paragraph 14:
| [14] The Appellant had no control over the premises in which he worked, nor was he identified with them in any way. [ . . . ] The Appellant had no freedom to come and go from the building where he worked except during normal business hours, and he could not do any work there, except that done under the contract for PanCan. Any other company wishing to use his services would not be able to find him there, as he was not identified anywhere as working at that location. He had no space in the building that was his exclusively, and in fact the location at which he did his work changed from time to time at the sole discretion of PanCan personnel. |
[7] The term "fixed base regularly available to him" is not defined in the Convention or in the Income Tax Act . The application of Article XIV must therefore be determined on a case by case basis, giving effect to the intention of the contracting states. A literal or legalistic interpretation that might defeat their intention is to be avoided: J.N. Gladden Estate v. The Queen, [1985] 1 C.T.C. 163 (F.C.T.D.) at 166-167, quoted with approval in Crown Forest Industries Ltd. v. Canada, [1995] 2 S.C.R. 802 at 822.
[8] The intention of the parties to the Convention is stated in the preamble, which reads as follows:
| Canada and the United States, desiring to conclude a Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital, have agreed as follows [...]. |
[9] In this case, the preamble is not helpful. It is not suggested that the facts of this case give rise to any issue of fiscal evasion, and the avoidance of double taxation is not an objective of Article XIV. On the contrary, Article XIV specifically contemplates the possibility that income from independent personal services may be taxed in both countries. For example, income from independent personal services provided in Canada by a resident of the United States may be taxed in both countries to the extent it is attributable to a fixed base in Canada. In such a case, the burden of double taxation is avoided by a tax credit as described in Article XXIV.
[10] To identify the factors that should be taken into account in determining the application of Article XIV, it is necessary to consider Article XIV in its context within the Convention. It is also appropriate to seek guidance in travaux préparatoires, including the OECD Model Conventions and commentaries, and the jurisprudence: Crown Forest, supra at 822. The weight to be given to any particular factor will depend on the circumstances of the case.
[11] A useful starting point for the interpretation of Article XIV of the Convention is the comparable Article 14 of the 1977 OECD Model Convention. For present purposes, the slight difference is wording is not significant. Article 14 of the Model reads as follows:
| Income derived by a resident of a Contracting State in respect of professional services or other independent activities of a similar character shall be taxable only in that State unless he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities. If he has such a fixed base, the income may be taxed in the other Contracting State but only so much of it as is attributable to that fixed base. |
[12] Reference should then be made to the commentary to Article 14, which notes that it is based on principles similar to those in Article 7, dealing with business profits. By virtue of Article 7, a contracting state generally is not entitled to tax the business profits of a resident of the other contracting state except to the extent the profits are attributed to a "permanent establishment" in the first mentioned state.
[13] As to why the term "fixed base" is used in Article 14 rather than the term "permanent establishment," the commentary says:
| 4. Even if Article 7 and 14 are based on the same principles, it was thought that the concept of permanent establishment should be reserved for commercial and industrial activities. The term "fixed base" has therefore been used. It has not been thought appropriate to try to define it, but it would cover, for instance, a physician"s consulting room or the offices of an architect or lawyer. A person performing independent personal services would probably not as a rule have premises of this kind in any other State than of his residence. But if there is in another State a centre of activity of a fixed or permanent character, then that State should be entitled to tax the person"s activities. |
[14] Consideration of Article 7 and its commentary leads to Article 5, which defines "permanent establishment". The general definition of "permanent establishment" is found in paragraph 1 of Article 5, which is identical to the corresponding paragraph in Article V of the Convention. It reads as follows:
| 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of a resident of a Contracting State is wholly or partly carried on. |
[15] The commentary to paragraph 1 of Article 5 includes the following:
| 2. Paragraph 1 gives a general definition of the term "permanent establishment" which brings out its essential characteristics of a permanent establishment in the sense of the Convention, i.e. a distinct "situs", a "fixed place of business". The paragraph defines the term "permanent establishment" as a fixed place of business, through which the business of an enterprise is wholly or partly carried on. This definition, therefore, contains the following conditions: |
| - the existence of a "place of business", i.e. a facility such as premises or, in certain instances, machinery or equipment; |
| - this place of business must be "fixed", i.e. it must be established at a distinct place with a certain degree of permanence; |
| - the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated. |
| [ . . . ] |
| 4. The term "place of business" covers any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. A place of business may also exist where no premises are available or required for carrying on the business and it simply has a certain amount of space at its disposal. It is immaterial whether the premises, facilities or installations are owed or rented by or are otherwise at the disposal of the enterprise. A place of business may thus be constituted by a pitch in the market place, or by a certain permanently used area in a Customs depot (e.g. for the storage of dutiable goods). Again the place of business may be situated in the business facilities of another enterprise. This may be the case, for instance where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise. |
| [ . . . ] |
| 6. Since the place of business must be fixed, it also follows that a permanent establishment can be deemed to exist only if the place of business has a certain degree of permanency, i.e. if it is not of a purely temporary nature. If the place of business was not set up merely for a temporary purpose, it can constitute a permanent establishment even though it existed, in practice, only for a very short period of time because of the special nature of the activity of the enterprise or because, as a consequence of special circumstances (e.g. death of the taxpayer, investment failure), it was prematurely liquidated. Where a place of business which was, at the outset, designed for a short temporary purpose only, is maintained for such a period that it cannot be considered as a temporary one, it becomes a fixed place of business and thus - retrospectively - a permanent establishment. |
[16] These commentaries indicate that an enterprise has a "permanent establishment" where it has a "fixed place of business," an identifiable location with a certain degree of permanence in which the business of the enterprise is being carried on. By analogy, a particular location is a "fixed base regularly available" to a person who provides independent personal services only if the business of that person is being carried on there.
[17] This is consistent with the reasoning in Sunbeam Corporation (Canada) Ltd. v. Minister of National Revenue, [1963] S.C.R. 45. The issue in that case was the interpretation of "permanent establishment" as that term is used in the Income Tax Act to allocate Canadian source income to a province for domestic income tax purposes. Sunbeam argued that it had a permanent establishment in Quebec because it had employees there who maintained offices in their own homes from which they did the paperwork involved in selling Sunbeam"s products in Quebec. The employees did not have authority to contract on behalf of Sunbeam and did not maintain a supply of Sunbeam"s products. At the time, "permanent establishment" was defined as follows in the regulations:
| 411(1) For the purposes of this Part, |
| (a) "permanent establishment" includes branches, mines, oil wells, farms, timber lands, factories, workshops, warehouses, offices, agencies and other fixed places of business [ . . .]. |
[18] Martland J., speaking for the Court, said this at page 50:
| [ . . . ] I am not prepared to hold that the appellant had a "permanent establishment" in the Province of Quebec in the years in question. Interpreting those words, apart from the provisions of s. 411(1)(a) of the Regulations, my opinion is that the word "establishment" contemplates a fixed place of business of the corporation, a local habitation of its own. The word "permanent" means that the establishment is a stable one, and not of a temporary or tentative character. |
[19] Thus, where a person is denied the benefit of Article XIV on the basis that he has a fixed base regularly available to him in Canada, the question to be asked is whether the person carried on his business at that location during the relevant period. The factors to be taken into account would include the actual use made of the premises that are alleged to be his fixed base, whether and by what legal right the person exercised or could exercise control over the premises, and the degree to which the premises were objectively identified with the person"s business. This is not intended to be an exhaustive list that would apply in all cases, but it is sufficient for this case.
[20] In this case, the Tax Court Judge was correct to consider these factors to be relevant and determinative. The evidence as a whole gives ample support for the conclusion that the premises of PanCan were not a location through which Mr. Dudney carried on his business. Although Mr. Dudney had access to the offices of PanCan and he had the right to use them, he could do so only during PanCan"s office hours and only for the purpose of performing services for PanCan that were required by his contract. He had no right to use PanCan"s offices as a base for the operation of his own business. He could not and did not use PanCan"s offices as his own.
[21] In support of the Crown"s position, it was argued that Mr. Dudney"s business by its nature required little by way of a fixed place of business, that his contract with OSG comprised all or substantially all of his business during the period in question, and that PanCan could not deny him access to its offices as long as he was performing his contract.
[22] Reference was made to the commentary relating to paragraph 1 of Article 5 of the 1977 Model OECD Convention, in particular the statement that an enterprise may have a place of business that is nothing more than space placed at its disposal, even within the premises of another enterprise. The Crown also relied on two cases from Norway in which that comment was apparently determinative.
[23] One of the Norwegian cases involved the tax agreement between Norway and Sweden (Mats Johansson v. Stavanger Municipality, a 1989 decision of the Stavanger City Court), and the other involved the tax agreement between Norway and the United States (Creole Production Services Inc. v. Stavanger Municipality, a 1981 decision of the Stavanger County Court). In each case, the taxpayer was providing contract services on an offshore oil platform owned by a Norwegian enterprise. The platform was held to be a fixed place of business of the taxpayer because there was an identifiable location on the platform that was put at the taxpayer"s disposal. It was considered irrelevant that the taxpayer had no right to exclusive use of the particular location. These cases could be seen as authority for the proposition that a contractor whose task requires no more than his mind and his physical presence in a place must necessarily have a fixed place of business in that place.
[24] I do not accept that this result was within the contemplation of the parties to the Convention on which Mr. Dudney seeks to rely. No doubt there are providers of independent personal services who, because of the nature of their skill or the services they provide, require very little in the way of a fixed place of business. Mr. Dudney may be one of those people. However, recognition of that fact does not justify the conclusion that Mr. Dudney must necessarily have a fixed place of business wherever his services are provided. The analogy suggested by counsel for Mr. Dudney is an apt one. A Canadian lawyer does not acquire a fixed place of business in the office of a client in the United States merely by attending to the client"s affairs there, even if the client insists on the lawyer"s personal presence.
[25] This interpretation of Article XIV is consistent with a decision of the Belgian Court of Appeal, S.F.W.I. v. Belgium (noted in Revue Génerale de Fiscalité, No. 10, October 1992 at 271). In that case, an Italian engineering corporation that had contracted to study, design and supervise the construction of a plant in Belgium was held not to have a permanent establishment in Belgium merely because it had non-exclusive and limited access to space at the Belgian construction site for the performance of those services.
[26] Counsel for the Crown made much of the long duration of Mr. Dudney"s contract. It subsisted for more than a year, although it was terminable by either party on short notice. In my view this point is relevant only to the question of permanence. If in fact the PanCan premises had been found to constitute Mr. Dudney"s place of business, the duration of the contract might have indicated that his place of business there was permanent. However, on the facts of this case, the question of permanence does not arise.
[27] I conclude that the Tax Court Judge was correct to find that Mr. Dudney did not have a fixed base available to him in Canada in 1994 and 1995, and that Article XIV of the Convention entitles him to the exemption he has claimed. For that reason I would dismiss the Crown"s appeal with costs.
Karen R. Sharlow
J.A.
"I agree
A.J. Stone J.A."
"I agree
Marc Noël J.A."
[28]