We are excited to introduce Tax Foresight’s latest classifier: Permanent Establishment.
The Permanent Establishment Classifier determines whether a United States resident has a “permanent establishment” in Canada pursuant to paragraph 1 or paragraph 5 of Article V of the Convention Between Canada and The United States of America With Respect to Taxes on Income and on Capital (“Canada-US Tax Treaty”)?
To explore the Classifier’s capabilities, we applied it to a leading case in this legal area, Knights of Columbus v. The Queen, 2008 TCC 307.
Knights of Columbus v. The Queen, 2008 TCC 307
The Knights of Columbus, a resident United States corporation and fraternal organization, provided life insurance to its Canadian members. The Knights of Columbus' insurance business was handled through agents. In Canada, there were approximately 220 Field Agents, 22 General Agents, one Field Director, and a Chief Agent.
The Government of Canada assessed the Knights of Columbus principally on the basis that it had a deemed permanent establishment in Canada arising from the application of Articles V(5) and (7) (the “dependent agent permanent establishment”). Additionally, on the basis that it had a fixed place of business permanent establishment in accordance with Article V(1) (the “fixed place of business permanent establishment”).
The court first considered the dependent agent permanent establishment question. It noted that the habitual exercise of an authority to conclude contracts is a requirement for a permanent establishment dependent contractor to be found. Since, none of the Knights of Columbus’ agents exercised this authority, the Knights of Columbus had no dependent agent permanent establishment in Canada.
Turning to the fixed place of business test, the Respondents only claimed the Field Agents’ permanent home offices as being the fixed place of business of the organization. The Knights of Columbus did not have any right of disposition over their home offices, paid for none of the expenses of the office, and had no Knights of Columbus signage on the property. The organization had no control over the premises and no officers, directors, or employees regularly visit the agents’ home office. The court concluded that the field agents home offices were not a fixed place of business.
Considering the above findings, the court could conclude that the Knights of Columbus had no permanent establishment in Canada.
Tax Foresight Case Analysis
- Tax Foresight correctly predicts with 90% confidence that The Knights of Columbus had no Permanent Establishment in Canada.
The following scenarios have been tested with the assistance of Tax Foresight’s “What If...feature”. The “What If...” feature allows users to easily scenario test their prediction on the driving factors behind a judge’s analysis.
- If Knights of Columbus had a legal right to the agent’s office, Tax Foresight predicts with 72% confidence that there is no permanent residence in Canada.
- If the insurance business was a core part of the Knights of Columbus business Tax Foresight predicts with 54% confidence that there is permanent residence in Canada.
Permanent Establishment Insights
The following insights have been drawn from Tax Foresight’s Case Analytics. Case Analytics provides insights on each individual factor, giving users the freedom to select only factors important to them. It also has click-on, click-off sensitivity, enabling users to instantly see the influence and importance of each factor on outcomes. With simple, responsive, interactive charts, the feature helps users quickly make sense of the data and click to see additional relevant cases.
- 46% of permanent establishment cases have resulted in a finding that there is a permanent establishment in Canada.
- 59% of permanent establishment cases where only fixed place of business permanent establishment is at issue have resulted in a finding that there is permanent establishment in Canada. In cases where only dependent agent permanent establishment is at issue, 100% have resulted in a finding that there is no permanent establishment in Canada.
- The Permanent Establishment Classifier completes two separate analyses when computing its final prediction. Both sections in the Classifier, Fixed Place of Business and Dependent Agent, have independent tests for the determination of Permanent Establishment or No Permanent Establishment.
- Questions are user-responsive, meaning they vary based on previous inputs.
- A comprehensive explanation with links to relevant resources supports the result computed in response to every unique scenario.
- Each time you run our Permanent Establishment Classifier, you apply the entire body of case law to your client’s situation.
- The Permanent Establishment Classifier reflects the newest case law and takes every case into account when providing its prediction.
Tax Foresight now covers 26 areas of tax law. To see our full suite of Classifiers, click here.