Insights and Commentary from Dentons

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1 dentons.com Insights and Commentary from Dentons On March 31, 2013, three pre-eminent law firms Salans, Fraser Milner Casgrain, and SNR Denton combined to form Dentons, a Top 10 global law firm with more than 2,500 lawyers and professionals worldwide. This document was authored by representatives of one of the founding firms prior to our combination launch, and it continues to be Growing with offered to provide our clients with the information they need to do business in an increasingly complex, interconnected and competitive marketplace. The role of government has never been more critical

2 Volume 51, Number 13 September 29, Days to Victory: Conducting a Successful Canadian Tax Appeal by Timothy Fitzsimmons and Matthew Peters Reprinted from Tax Notes Int l, September 29, 2008, p. 1103

3 378 Days to Victory: Conducting a Successful Canadian Tax Appeal by Timothy Fitzsimmons and Matthew Peters Timothy Fitzsimmons and Matthew Peters are tax lawyers with Fraser Milner Casgrain LLP in Toronto. On June 13 multinational enterprises finally received greater tax certainty regarding their Canadian operations, when the Canadian government announced that it would not appeal the Tax Court of Canada decisions in Knights of Columbus v. R. 1 and American Income Life Insurance Company v. R., 2 two significant decisions that established a precedent for the definition of permanent establishment under the Canada-U.S. income tax treaty. 3 Knights of Columbus was particularly significant for two reasons: First, the Tax Court concluded that the Knights of Columbus organization, a nonresident under the Income Tax Act (Canada), 4 did not have a permanent establishment under the treaty and was not taxable on the profits from its Canadian insurance operations under the ITA; 5 and second, the Knights of Columbus conducted the entire tax appeal from notice of appeal to court judgment in only 378 days, a surprisingly compressed timetable for litigation that would typically require at least three years to conduct. Facts The Knights of Columbus is a U.S.-based Roman Catholic fraternal organization that was established in New Haven, Conn., in Its founding purpose was to bring together practicing Roman Catholics in the New Haven area and, through its fundraising activities, to aid the widows and orphans of deceased members. Today the Knights of Columbus continues its fundraising, but its aid activities have evolved into a more formal insurance program. At all times relevant to the appeal, the Knights of Columbus s Canadian insurance sales activities in Canada were carried out by approximately 220 field agents, 22 general agents, 1 field director, and a chief agent. The Knights of Columbus maintained no physical premises or space for its insurance operations in Canada. Its entire insurance operation was carried out by the collection of agents that act on behalf of the Knights of Columbus D.T.C (T.C.C.) [Knights of Columbus] D.T.C (T.C.C.) [AILIC]. 3 Canada-U.S. income tax treaty (Sept. 26, 1980, as amended by the protocols on June 14, 1983; Mar. 28, 1984; Mar. 17, 1995; July 29, 1997; and Sept. 21, 2007). 4 R.S.C (5th Supp.) c. 1 [ITA]. 5 For a discussion of the Tax Court of Canada s findings regarding the definition of permanent establishment under the treaty, see Glenn Ernst, Nonresident Insurers Win Separate PE Cases in Canada, Tax Notes Int l, July 21, 2008, p. 213, Doc , or2008 WTD The Knights of Columbus began using the field agent sales structure in the 1940s, and it remains unchanged today. The insurance operations in the United States and Canada are identical. In the United States, the Knights of Columbus is generally not subject to income tax on its insurance activities under the Internal Revenue Code, 6 but there is no similar exemption under Canada s ITA U.S.C. section 501(c)(8). TAX NOTES INTERNATIONAL SEPTEMBER 29,

4 PRACTITIONERS CORNER Procedural History of Knights of Columbus The Canadian tax assessment history of the Knights of Columbus is unique. For the tax years, the Canada Revenue Agency assessed the Knights of Columbus on the basis that it had a PE in Canada. The CRA claimed the organization had a fixed-base PE under paragraph 1, article 5 of the treaty. However, on further audit and consultation with its appeals division, the CRA vacated those assessments and found that the Knights of Columbus had no PE in Canada. Nevertheless, in September 2006 the CRA issued notices of reassessment regarding the Knights of Columbus s tax years. The CRA again alleged that the Knights of Columbus was taxable on its Canadian insurance operations because it had a PE in Canada. These reassessments were issued even though the Knights of Columbus had not changed its insurance business structure or practices in any significant way from the prior tax years. The CRA never offered an explanation of this conflicting assessing practice. In December 2006 the Knights of Columbus filed notices of objection for those years. As with most objections, there was no indication that the CRA would issue a swift decision to confirm or vacate the assessments, and the Knights of Columbus was prepared for a prolonged waiting period. However, on April 24, 2007, the Knights of Columbus discovered that the CRA was preparing to begin a trial with another taxpayer, American Income Life Insurance Co. (AILIC), on the same points that were at issue in the Knights of Columbus s objection. The quandary: AILIC did not intend to adduce expert evidence at its appeal hearing on the proper interpretation of the treaty evidence that the Knights of Columbus believed was crucial to successfully appealing the assessments. Recognizing the possible significance of a court decision in AILIC, the Knights of Columbus filed a notice of appeal under paragraph 169(1)(b) of the ITA on May 4. On the same day, the Knights of Columbus made a motion to the Tax Court for an order granting it leave to intervene in the AILIC appeal and to adduce expert evidence at the appeal. 7 Alternatively, the Knights of Columbus asked for an order adjourning the AILIC appeal until the appeal initiated by the Knights of Columbus was ready to be heard by the Tax Court. 8 7 Rule 28 of the Tax Court of Canada Rules (General Procedure) (SOR/90-688a). 8 Rule 26 of the Tax Court of Canada Rules, id. The motion was argued on May 9, and the Tax Court granted the requested relief. The Tax Court would hear the AILIC appeal but would reserve judgment pending the completion of the Knights of Columbus appeal, which was ordered to be heard eight months later, beginning January 14, At this point, the Knights of Columbus went into real time tax litigation to radically expedite the preparation for and completion of its complex tax appeal. A matter that might normally require at least 24 months to conclude was to be completed in approximately 240 days. Shortly after the May 2007 order, the Knights of Columbus retained several international tax experts to participate in the hearing, including David Rosenbloom, Brian Arnold, Richard Vann, and Kees van Raad. On July 30 the Knights of Columbus filed its list of documents, and examinations for discovery (similar to depositions in the United States) were conducted October 2. In the meantime, counsel for the Knights of Columbus, Fraser Milner Casgrain LLP, had prepared for and argued the appeal of Prévost Car Inc. v. R. 9 in the first week of September. On October 31 the Knights of Columbus sent its answers to undertakings arising from examinations for discovery. In November the Knights of Columbus began intensive trial preparation, which included interviewing seven lay witnesses and three expert witnesses. On November 27 the expert reports to be used at trial were filed with the Tax Court. On December 11 the Knights of Columbus filed a request to admit certain facts. On December 12 the Knights of Columbus sent answers to questions arising from the answers to undertakings. On January 7, 2008, the Knights of Columbus filed a notice of intention to read in specific portions of the examination for discovery transcript. On January 8 the Knights of Columbus sent more answers in response to other questions arising from the answers to undertakings. And on January 14 exactly on schedule the trial started. On May 16 the Tax Court allowed the Knights of Columbus appeal, holding that the organization had no PE under the treaty and accordingly was D.T.C (T.C.C.). In this case, the Tax Court considered the taxation of cross-border dividend payments within a multinational corporate group. The CRA had assessed a Canadian resident company on the basis that it should have withheld and remitted amounts at a higher withholding tax rate on dividends paid to its nonresident parent company because it was not the beneficial owner of the dividends under the Canada- Netherlands tax treaty. The Tax Court allowed the appeal and held that the lower withholding rate applied because the parent company was the beneficial owner of the dividends the recipient parent company received the dividends for its own use and enjoyment and assumed the risk and control of the dividend received. The government has appealed the decision to the Federal Court of Appeal SEPTEMBER 29, 2008 TAX NOTES INTERNATIONAL

5 not taxable on the profits from its insurance operations in Canada. The taxpayer s appeal was also allowed in AILIC. Conclusion The Knights of Columbus and AILIC decisions are important from both a Canadian and international perspective because of the significance of the term permanent establishment in the area of international taxation of multinational enterprises. In its decisions, the Tax Court provided clear guidance on the circumstances in which an agent may give rise to a taxable PRACTITIONERS CORNER presence of a nonresident and on the criteria that must be satisfied before a fixed place may be considered a geographical PE of a nonresident. Nonresidents will benefit from these guidelines in structuring the administration and operation of their Canadian business activities. The CRA did not appeal these decisions. The Knights of Columbus concluded its tax appeal in an extremely compressed timetable. This is a prime example of the results that can be achieved in the Canadian tax appeal system when a taxpayer and counsel work together to move a matter forward on an innovative and expedited basis. TAX NOTES INTERNATIONAL SEPTEMBER 29,