On May 16, 2008, the Tax Court of Canada released its judgments in American Income Life Insurance Company v. The Queen and Knights of Columbus v. The Queen. In both cases, the Court held that two U.S. insurers were not subject to Canadian income tax on their business profits associated with sales of insurance policies to Canadian insureds because neither of the insurers had a permanent establishment (“PE”) in Canada within the meaning of the Canada-U.S. Income Tax Convention (the “Treaty”). Under the Treaty, a resident of one treaty country is not taxable on its business profits arising in the other treaty country unless the resident has a PE in the other treaty country. If the resident does have a PE in the other treaty country, the resident is taxable on its business profits in the other treaty country only to the extent that the business profits are attributable to the PE. In both of the judgments, the Court held that the U.S. insurers had neither a “fixed base” PE in Canada, nor a “dependent agent” PE in Canada. In both cases, there were large sales forces of Canadian-resident individuals who solicited sales of the U.S. resident’s insurance products in Canada.
The American Income Life Insurance Company and Knights of Columbus cases provide critical insight regarding the judicial meaning of the PE concept. Moreover, because the PE concept is contained in tax treaties throughout the world, the cases are of great international significance. The cases provide extremely useful guidance on how treaties should be interpreted (including guidance on the use of expert witnesses in tax treaty cases) and on the specific factors that are relevant in determining when a resident of a treaty country has a PE in the other treaty country.
The Crown has chosen not to appeal either case. We were counsel on the American Income Life Insurance Company case.
The American Income Life Insurance Company case is available at: http://decision.tcc-cci.gc.ca/en/2008/2008tcc306/2008tcc306.html
The Knights of Columbus case is available at: http://decision.tcc-cci.gc.ca/en/2008/2008tcc307/2008tcc307.html