Cudd Pressure Control Inc. v. Canada
A-369-95
Robertson, McDonald JJ.A.
19/10/98
22 pp.
Appeal from T.C.C. Judge finding $2,516,690 of notional "rent" could not be deducted by appellant in computing net industrial and commercial profit attributable to its permanent establishment in Canada, as required by Canada-United States Reciprocal Tax Convention (1942 Convention), for taxation year ending June 30, 1985-T.C.C. Judge concluded appellant could only have claimed capital cost allowance for use of snubbing units (piece of hydraulic equipment used to remove drill pipe casings or similar equipment from, or force them into, oil or gas well) against income from its permanent establishment, based on Income Tax Conventions Interpretation Act, s. 4(b), as such expense allowed under Canada's internal law, Income Tax Act-T.C.C. Judge added that 4(b) intended to ensure that permanent establishments taxed on profits under 1942 Convention could not deduct amounts unavailable to Canadian taxpayers in calculating their business income-Appeal dismissed-Per Robertson J.A.: T.C.C. Judge fully considered factual and legal background surrounding appellant's provision of snubbing units to Mobil and trite law that appellate court cannot substitute its own conclusions pertaining to factual matters for that of trier of fact, unless clear error appearing on record-Assuming, without deciding, that notional amounts may be deducted in computing profits attributable to permanent establishment for purposes of Canadian taxation, pursuant to 1942 Convention, T.C.C. Judge did not commit reviewable error in refusing to allow appellant to deduct amount for notional rent in circumstances of this case-No basis for interfering with his finding of fact that appellant's permanent establishment, treated as independent enterprise, would have rented snubbing units from head office-Not necessary to deal with issue of whether notional expenses deductible as matter of law in light of factual findings made by T.C.C. Judge-Per McDonald J.A.: Issue whether corporation incorporated outside Canada but doing business in Canada can deduct amount for notional rent pursuant to 1942 Convention when corresponding deduction disallowed under Income Tax Act for Canadian company doing same or similar business in Canada-Appellant providing technical services to oil industry, principally through delivery of equipment and well control services on site-Appellant and Mobil Oil Canada Ltd. (Mobil) entered into oral agreement for appellant to provide snubbing services for US$15,000 per day with respect to exploratory gas well off coast of Nova Scotia which experienced underground blowout-Appellant sent from United States two snubbing units with pulling capacities of 600,000 pounds and 150,000 pounds respectively (600 unit and 150 unit), which it owned, and other equipment which it rented from third parties-Deduction for notional rent charged by head office derived from daily rental rates quoted to its customers for unmanned, standby use of each piece of equipment, namely US$4,800 per day for 600 unit and US$2,400 per day for 150 unit, adjusted to US$5,000 and US$1,700 per day considering use of equipment, danger of situation and emergency nature of job-Obiter: in appropriate case, amount for notional rent may be deducted by corporation incorporated outside Canada in computing industrial and commercial profits attributable to its permanent establishment in Canada, notwithstanding that resident in Canada cannot benefit from similar deduction-However, on facts of this case, deduction not appropriate given that amount of notional rent never included as income at appellant's head office-To allow deduction in this circumstance would mean that appellant has avoided being taxed on rental amount both in Canada and in United States-Furthermore, facts do not establish that in normal course of business, snubbing equipment would have been rented to appellant's permanent establishment in Canada-More likely that head office would have contracted directly to take on this contract given that it was only one to have had equipment of this kind during relevant period-Application of basic principles found in Vienna Convention on the Law of Treaties, art. 31 and 32-Model Double Taxation Convention on Income and on Capital (OECD Convention), art. 3(2) and Vienna Convention, art. 31 and 32 establish that where term not defined in bilateral tax treaty, definitions from domestic income tax law should be applied unless context indicates otherwise-As language of 1942 Convention, Art. III(I) allowing for deduction of notional expenses, recourse to domestic Canadian Income Tax law principles not essential-Thus, Art. III(I) setting out fiction that permanent establishment to calculate its profits as if it were independent enterprise-Further allowing for deduction of expenses, which may also be fictional, reasonably allocable to permanent establishment-Follows that deduction for notional rent may be allowed because if permanent establishment is independent enterprise, would be necessary to rent or purchase equipment in question-Fact that similar deduction not provided for Canadian businesses not relevant as provisions of 1942 Convention apply-Canada member of OECD which adopted OECD Convention in 1977-Test proposed in Commentary thereof whether internal transfer of property or services between foreign corporation and its permanent establishment in Canada of same nature as transaction in which companies, in normal course of business, would have charged third party price which included appropriate profit-Another approach: to inquire where risk of ownership lies: with head office or permanent establishment-Upon review of evidence, under either test, deduction could not be allowed in circumstances of this case-Appeal should also be dismissed on ground purpose of 1942 Convention to prevent double taxation and tax evasion-Since notional rent never included as income in head office records, permanent establishment may not derive corresponding benefit of deduction for rent-To allow deduction would lead to avoidance of tax on rental income attributed to parent-Must be included as income in parent corporation's return-Claim would be contrary to purpose of 1942 Convention to allow foreign corporation's permanent establishment in Canada to deduct notional expenses as this would grant permanent establishment more favourable tax treatment than its Canadian competitors in same industry not providing legal basis for disallowing these types of deductions-If 1942 Convention language allows for deduction of expense, that language should be followed-Income Tax Act, R.S.C., 1985 (5th Supp), c. 1-Convention and Protocol between Canada and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion in the case of Income Taxes, being Schedule of The Canada-United States of America Tax Convention Act, 1943, S.C. 1943-44, c. 21, Art. III(I)-Income Tax Conventions Interpretation Act, R.S.C., 1985, c. I-4, s. 4(b)-Vienna Convention on the Law of Treaties, May 23, 1969, [1980] Can. T.S. No. 37, Art. 31 and 32-Model Double Taxation Convention on Income and on Capital (OECD Convention) in 1977.