Taxation – Canada-U.S. Tax Treaty – Permanent Establishment – Agents – Authority
Salvatore Mirandola for American Life Insurance Company

American Income Life Insurance Company (“AIL”) appealed tax assessments and consequent penalties for the years 1996-1999. In order to justify imposition of tax pursuant to the Canada-U.S. Tax Treaty (the “Treaty”) (which all parties agreed applied to AIL) AIL must have had an actual or deemed “permanent establishment” in Canada. AIL was an American company that carried on an insurance business in the U.S., New Zealand and Canada. AIL did business in Canada through a network of commissioned Provincial General Agents, which were the top level of a hierarchy of agents operating in a given territory. However, the product was developed and the underwriting performed in the U.S. AIL argued it did not have a permanent establishment in Canada since it did not have a fixed place of business in Canada, and that there was no deemed permanent establishment under the Treaty since: (1) there was no person in Canada habitually exercising the authority to conclude contracts on AIL's behalf, and (2) if there were such persons, they were agents of an independent status.

The court assessed the meaning of “permanent establishment” in the Treaty, which involved a two-pronged analysis: the fixed place of business analysis and the dependent agent analysis. It noted the key factors of the fixed place of business analysis are the existence of a place of business, the permanence of such place, and the nature of carrying on of business through such place. The key factors of the dependent agent analysis are the agent's ability to contract on the part of the taxed entity, whether the agent is independent, legally and economically, and whether the agent was acting in the ordinary course of business. Both analyses involve asking whose business is being carried on: the taxed entity's or some other party's. AIL argued that two businesses were being carried on – that of AIL and that of the agents soliciting business for AIL products. The court found that all levels of AIL agents worked out of a permanent establishment of some sort but concluded that the agents were carrying out their own business through these locations rather than AIL's. The court also found there was no deemed permanent establishment in this case on the basis that the agents did not have the requisite authority to bind AIL to contracts, and the agents were independent in any event.