Canada: 378 Days To Victory: The Conduct Of A Ground-Breaking Tax Treaty Case, Knights Of Columbus v. R.

On Friday June 13, 2008, multinational enterprises doing business in Canada finally received greater tax certainty in respect of their cross-border operations. On that day, the Crown informed the Knights of Columbus that the government would not appeal the Tax Court decision in Knights of Columbus v. R. (2008 D.T.C. 3648), a ground-breaking case that had established a precedent for the definition of "permanent establishment" under the Canada-U.S. tax treaty.

This was a significant victory for the Knights of Columbus for two reasons: first, the Tax Court found that the Knights did not have a "permanent establishment" under the treaty and was not taxable on its insurance operations in Canada; second, the Knights and its Fraser Milner Casgrain LLP (FMC) tax litigation counsel – Bill Innes, Chia-yi Chua, and Brendan Bissell – went from Notice of Appeal to court judgment in only 378 days.

In September 2006, the Canada Revenue Agency issued Notices of Reassessment in respect of the Knights' 1999-2002 taxation years. The CRA alleged the Knights was taxable on its Canadian insurance operations on the basis that it had a "permanent establishment" in Canada. In December 2006, the Knights filed Notices of Objection for those years. As with most objections, there was no indication that the Minister would issue a swift decision on the objections, and the Knights was prepared for a prolonged waiting period.

However, that changed on April 24, 2007 when the Knights discovered that the CRA was on the eve of commencing a hearing with another taxpayer, American Income Life Insurance Company ("AILIC"), on exactly the same point that was at issue in the Knights' objection. Recognizing the possible significance of a court decision in AILIC, FMC counsel filed a Notice of Appeal on May 4. Also on that date, FMC counsel made a motion to the Tax Court to have the AILIC and Knights appeals heard together, or alternatively for the Court to reserve judgment in AILIC pending the hearing of the Knights' appeal, at which the Knights intended to introduce expert evidence on the issue of the definition of "permanent establishment" under the Canada-U.S. tax treaty. 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 appeal, which was ordered to be heard commencing January 14, 2008 – a mere eight months in the future.

At this point, the Knights and FMC went into "real time" tax litigation. A matter that might normally require 24 months or more to successfully conclude was to be completed in approximately 240 days. The Knights and FMC counsel would require an airtight plan, the right team members, and the foresight and flexibility to respond quickly to the exigencies of the tax appeal process. Under normal circumstances, contingencies could be easily addressed because of the surplus time in the schedule; in the Knights appeal, there was no room for error.

Shortly after the May 2007 order, FMC counsel retained several internationally-renowned tax experts to participate in the hearing. On July 30, FMC counsel filed the Knights' List of Documents (partial disclosure), and examinations for discovery were conducted on October 2. In the meantime, FMC counsel had successfully prepared for and argued the appeal of Prévost Car Inc. v. R. (2008 D.T.C. 3080 (T.C.C.)) in the first week of September 2007.

On October 31, FMC counsel sent the Knights' answers to undertaking arising from examinations for discovery. In November, FMC commenced intensive trial preparation, which including interviewing the seven lay witnesses and three expert witnesses. On November 27, FMC counsel filed the expert reports to be used at trial. On December 11, FMC counsel filed a Request to Admit certain facts. On December 12, FMC counsel sent the Knights' answers to the Crown's questions arising from the answers to undertakings.

And over the December holidays, as much as was possible, FMC counsel rested.

On January 7, 2008, FMC counsel filed a Notice of Intention to read-in certain portions of the examination for discovery transcript. On January 8, FMC counsel sent the Knights' additional answers in response to the Crown's additional questions arising from the answers to undertakings.

And, finally, on Monday January 14, 2008 – exactly on schedule – FMC counsel rose in courtroom 6C and addressed the Tax Court: "What is novel about this case ...". On May 16, the Tax Court allowed the Knights appeal.

This decision is extremely important from both a Canadian and international perspective due to the significance of the term "permanent establishment" to the international taxation of multinational enterprises. In its decision, the Court provided clear guidance on the circumstances in which an agent may give rise to a taxable presence of a non-resident as well as the criteria that must be satisfied before a fixed place may be considered a geographical permanent establishment of a non-resident. Non-residents will undoubtedly benefit from these guidelines in structuring the administration and operation of their international business activities.

Additionally, another significant aspect of the case is the use of expert witnesses, which provided the Court with a wealth of relevant and necessary knowledge and background to the issues under consideration. It is anticipated that this type of evidence will become increasingly important in tax treaty litigation in the coming years.

The Knights, with FMC as counsel, successfully concluded this litigation in an extraordinarily compressed timetable. It is a good example of the remarkable 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 expedited basis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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