Article by David Spiro, ©2005 Blake, Cassels & Graydon LLP
This article was originally published in Blakes Bulletin on Cross Border Taxation - March 2005
In Toronto Blue Jays Baseball Club and Maple Leaf Sports and Entertainment Ltd. v. Minister of Finance, the Ontario Court of Appeal has considered the implications of the Federal Court of Appeal’s judgment in Dudney v. The Queen and has come out in favour of an interpretation of "permanent establishment" that will be welcomed by non-residents who carry on business in Canada. The reasons for judgment, released on February 15, 2005, strongly support the view that a non-resident will not be considered to carry on business in Canada through a "permanent establishment" unless the non-resident is able to exercise, and does in fact exercise, the attributes of ownership over the premises situated in Canada.
The facts of the Toronto Blue Jays case are quite simple. The Toronto Blue Jays (baseball), the Toronto Maple Leafs (hockey) and the Toronto Raptors (basketball) play one-half of their games at home. They play the other half on the road. While visiting other stadiums, they enjoy the use of a designated area. The designated area generally consists of a main dressing room for the players, a coaches’ room and a training room. Access to the designated area is limited to authorized personnel. The rights of a visiting team to use that space are broadly analogous to the rights of a guest to use a hotel room.
The issue was whether, for purposes of the Employer Health Tax Act (Ontario), those designated areas in away stadiums constitute "permanent establishments" through which each of those Toronto-based professional sports teams (the Teams) carry on business. Ontario Employer Health Tax (EHT) is a graduated tax capped at 1.95% of "total Ontario remuneration" paid by an employer. The litigation proceeded on the basis that the remuneration of players and staff attributable to the games played at those away stadiums (about one-half of their total remuneration) would not be subject to EHT if those designated areas were "permanent establishments" of the Teams as argued by the Teams.
In the first instance, the Superior Court of Justice found that the designated areas were, indeed, "permanent establishments" of the Teams. The Ontario Minister of Finance appealed to the Ontario Court of Appeal. Although the Toronto Blue Jays case was not an income tax appeal, the reasoning used by the Ontario Court of Appeal will be relevant to any court’s consideration of the meaning of "permanent establishment" in the income tax context.
The Teams argued that the inherently transitory nature of their away games need not detract from the character of the designated areas as their "permanent establishments" away from home. In response, the Court invoked the reasoning of the Supreme Court of Canada in Sunbeam Corp. (Canada) v. Canada (Minister of National Revenue) where the Court held that the word "permanent" requires that the establishment be a stable one – not one of a temporary or tentative character. The Court also relied on the 1979 OECD model tax treaty which suggests that a place of business must have a "certain degree of permanency" and not be of a "purely temporary nature" if it is to be characterized as a permanent establishment.
In deciding that the designated areas of away stadiums were not "permanent establishments" of the Teams, the Ontario Court of Appeal emphasized the following facts: (a) the head offices and home arenas of the Teams are located in Toronto, (b) the general manager, equipment manager, the individual responsible for sponsors and supplies are located in Toronto, and (c) the payroll departments of the Teams are located in Toronto. Indeed, the CEO of the Toronto Blue Jays acknowledged that Toronto is the "home" and "headquarters" of the team. The Court found the centrality of the Teams’ Toronto home base to be compelling in the context of their overall business activities:
Fundamental to any professional sports business are the contracts entered into with its players, the selling of tickets, the licensing of concessions, the negotiations of sponsorships and advertising, television and radio broadcasting rights … these business activities were conducted in the home venue of the Teams.
More importantly, the Court noted the following: There is no … basis upon which the Teams assert any ability to use the away stadiums for any … use or at any … time other than as permitted by the playing schedule and the applicable governing agreement and the rules of each league.
The latter finding reflects the Court’s strong endorsement of the test for "permanent establishment" as described by the Federal Court of Appeal in Dudney v. The Queen. In that case, the Canada Revenue Agency (the CRA) argued that access to, and the use of, a client’s premises during business hours by a non-resident consultant should suffice to constitute those premises as the consultant’s "permanent establishment" in Canada. Had the CRA succeeded, Mr. Dudney’s income attributable to that permanent establishment would have been taxable in Canada under Article XIV of the Canada-U.S. tax treaty as income from a "fixed base regularly available to him" in Canada. The Federal Court of Appeal disagreed with the CRA and held that there is no permanent establishment where the non-resident "could not and did not use" the premises "as his own". On the facts, Mr. Dudney did not have unrestricted access to the premises. He could not come and go as he pleased nor could he carry on any business at those offices other than the particular consulting assignment in which he was then engaged.
In the Toronto Blue Jays case, the Ontario Court of Appeal has elaborated on Dudney v. The Queen and has provided additional guidance, namely, that permanent establishments must have the characteristics of a "place of management", a "branch of the whole operation" or an "office" and that the use of the premises by the non-resident must have "the element of ownership, management and authority over the establishment". In the result, the Ontario Court of Appeal agreed with the Ontario Minister of Finance that: … the Teams connections with non-Ontario venues and the control of these venues is relatively so transitory that they cannot be considered to be fixed places of business.
There were two ancillary issues. First, if the Teams used "substantial machinery or equipment" at the away stadiums, a deeming provision in the Employer Health Tax Act would have characterized the designated areas as "permanent establishments" by virtue of that fact alone. The Court did not find that the kind of equipment carried by the Teams on the road was sufficiently "substantial" to qualify. Second, there was some debate about the weight to be assigned to Information Bulletins issued by the Ontario Minister of Finance which suggested a less rigorous test for the finding of "permanent establishment" than that reflected in Dudney v. The Queen. On that point, the Court noted that Information Bulletins cannot prevail over clear pronouncement of the law from the Supreme Court of Canada (e.g., the Sunbeam decision).
Although the Toronto Blue Jays case represents a victory for the Ontario Minister of Finance, it effectively is a defeat for the Canada Revenue Agency as it so closely follows, and elaborates on, the reasoning of the Federal Court of Appeal in Dudney v. The Queen. The decision is, therefore, welcome news for non-resident taxpayers carrying on business in Canada. It strongly supports the view that non-residents will not be held to carry on business in Canada through a "permanent establishment" unless they have, and make use of, the attributes of ownership in respect of premises in Canada.
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