Canada: Case Comment: Toronto Blue Jays Baseball Club et al v. Ontario (Minister of Finance) - Meaning of "Permanent Establishment" for Ontario Employer Health Tax and Beyond

Toronto Blue Jays Baseball Club v. Ontario (Minister of Finance) (February 15, 2005), docket no. 041861

For the purpose of funding health care in Ontario, the Employer Health Tax Act¹ taxes Ontario employers on specified percentages of the remuneration paid to their employees. The employer health tax (EHT) is calculated on "total Ontario remuneration" ² paid to employees.³ Prior to recent amendments, to the extent that employees report to their employer's "permanent establishment" outside Ontario, that proportion of the remuneration is excluded from the employer's taxable "total Ontario remuneration" paid. In Toronto Bhie Jays Baseball Club v. Ontario (Minister of Finance), three Ontario professional sports teams ("the teams") sought to exclude the proportion of remuneration paid to their professional athletes and other employees earned from "away games" played outside Ontario on the basis that the employees reported to permanent establishments outside Ontario. The "away venues" consisted of designated dressing rooms for the players, a coaches' room, and a training room at die sports stadium. The teams shared facilities with the host teams, such as training room equipment, playing fields or surfaces, and other common areas. The Ontario Court of Appeal's consideration of the jurisprudence regarding the meaning of "permanent establishment" and the application of the term to the particular facts has far-reaching tax implications beyond the EHT Act, which the Canadian and provincial taxing authorities might ultimately come to regret.

The Ontario Superior Court of Justice allowed the teams' application for a declaration that each of the away venues constituted a permanent establishment for the purpose of the EHT Act.⁴ As a result, remuneration relating to employees' services rendered at those permanent establishments was excluded from the definition of total Ontario remuneration and was exempt from EHT. The EHT Act defines "permanent establishment" as including any fixed place of business. A "fixed place of business" includes "an agency, a branch, a factory, a farm, a gas well, a mine, an office, an oil well, timberland, a warehouse and a workshop."⁵ The definition then lists a number of specific circumstances in which an employer is deemed to have a permanent establishment. The one specifically considered in this case is the situation where an "employer uses substantial machinery or equipment."⁶

In determining that the sports, medical, and training equipment at away venues did not constitute "substantial machinery or equipment," the lower court reluctantly followed the Supreme Court of Canada decision in Sunbeam Corpn. (Canada) Ltd. v. Minister of National Revenue.⁷ In that case, the Supreme Court dismissed Sunbeam Corporation's ("Sunbeam's") appeal to claim income tax deductions that depended on Sunbeam's having a permanent establishment in Quebec. Sunbeam's head office and manufacturing plant were in Ontario. At issue was whether Sunbeam's sales representatives in Quebec maintained "substantial machinery or equipment" at their home offices. They maintained sales demonstration equipment at their premises varying in value from $4,000 to $11,000. The Supreme Court found that such equipment was not "substantial," "such as is used by contractors or builders in the course of their operations." In addition, the equipment was used merely for demonstration purposes.

In Toronto Blue Jays, however, the lower court did find that the teams had a fixed place of business at their away venues, notwithstanding the apparently transitory nature of the business activities conducted at those venues. In so finding, the court relied on the Tax Court of Canada precedent in Fowler v. MM?.⁸ In that case, the Tax Court had to determine whether James Fowler, a US resident, had a permanent establishment under article V of the Canada-US income tax convention (1980)⁹ and was therefore subject to Canadian income taxation on business profits earned through that permanent establishment pursuant to article VII of the treaty. For 15 consecutive years leading up to the assessment period, Mr. Fowler travelled to Vancouver, British Columbia to spend three weeks at the Pacific National Exhibition (PNE) to sell knives, car wash mitts, and kitchen devices. Mr. Fowler used a trailer and a collapsible booth to sell his wares. Given his consistent and continuing presence at the PNE each year and the fact that he derived a significant proportion of his income from his business enterprise there, the Tax Court found that he had a permanent establishment in Canada and would be subject to Canadian income tax.

The Court of Appeal reversed the lower court's decision in concluding that the teams did not have any permanent establishment outside Ontario under the EHT Act. As a result, the teams' taxable total Ontario remuneration included remuneration earned by employees from away games.

Like the lower court, the Court of Appeal purported to follow the Supreme Court precedent in Sunbeam, stating that the " 'machinery and equipment' must be very much more substantial than equipment transported by the teams to the out of Ontario playing venues."¹⁰ Furthermore, the court noted that "the use of sports equipment and sport related machinery is only incidental to the raising of revenue by the playing of games between the teams and their opponents."¹¹ The teams argued that the Court of Appeal should apply the decision in Club de Baseball de Montreal Ltee c. Quebec (Sous-Ministre du Revenu).¹² In that case, a Quebec court agreed with the Montreal Expos that the Quebec health tax should be calculated on players' salaries only to the extent that they were earned in Quebec, because the players' activities outside Quebec were attributable to the team's places of business at those locations. The Montreal Expos were deemed to have places of business outside Quebec because of their use of a significant amount of machinery or material there.

In Toronto Blue Jays, the Court of Appeal found that the teams did not have a fixed place of business outside Ontario. In reaching this conclusion, the court considered Sunbeam, Syntex Ltd. c. Sous-Ministre du revenu du Quebec,¹³ Dudney v. The Queen¹⁴ and Fowler.

In Sunbeam, the Supreme Court found that the home offices of Sunbeam's Quebec employee and representatives were not Sunbeam's fixed places of business on the basis, among other reasons, that Sunbeam did not exercise sufficient control over, and was not sufficiently identified with, those premises.

Relying on Sunbeam, the Quebec Court of Appeal in Syntex upheld a lower court decision overturning Quebec health tax assessed against an employer's payroll. The court found in that case that the use of an office by an employer does not necessarily mean that the office constitutes a permanent establishment of the employer. The employer must also demonstrate a sufficient degree of management and authority over the office for it to constitute a permanent establishment.

In Dudney, the Tax Court of Canada considered whether a non-resident individual had a "fixed base regularly available to him" to carry on business in Canada. Under article XTV of the Canada-US treaty, Canada can tax a non-resident individual in respect of independent personal services, but only to the extent of his income attributable to "a fixed base regularly available to him" in Canada. This case is relevant to the meaning of permanent establishment since the Tax Court found that there was little, if any, real difference in meaning between the expressions "fixed base" and "permanent establishment." Mr. Dudney, a US resident, was an independent subcontractor performing computer-training services at the premises of the main contractor's customer in Calgary, Alberta. Although he spent substantial time at the customer's premises during the course of two consecutive calendar years, the Tax Court found that Mr. Dudney had no fixed base available to him because he "had no control over the premises in which he worked, nor was he identified with them in any way."¹⁵ The Federal Court of Appeal agreed and dismissed the Crown's appeal.

In Toronto Blue Jays, die teams relied on Fowler for the proposition that a permanent establishment can exist even if only for an extremely short duration. Chief Justice McMurtry, writing for the Court of Appeal, distinguished Fowler from the case at bar:

Chief Justice McMurtry concluded that the facts did not support the finding of a fixed place of business at the away venues. The relevant business activities included entering into contracts with players, selling tickets, licensing concessions, and negotiating sponsorships, advertising, and television and radio broadcasting rights to games. All of these activities were performed at the teams' home locations in Ontario. The Court of Appeal went even further and called into question Fowler itself.¹⁷

To address the lower court decision in Toronto Blue Jays, Ontario amended the EHT Act by legislation that came into force on December 16, 2004, expanding the definition of "total Ontario remuneration."¹⁸ The amendments generally apply retroactively to January 1, 1990. Where at any time during a year an employee reports for work at a permanent establishment in Ontario and also at a permanent establishment outside Ontario, the total remuneration paid to the employee during the year is included in the definition of "total Ontario remuneration."¹⁹ There are a couple of exceptions to this general rule. First, no remuneration is included in the employer's total Ontario remuneration paid where "the Minister is satisfied that the employee reported for work at a permanent establishment of the employer outside Ontario for all or substantially all of the year."²⁰ Second, the general rule does not apply to any parties affected by the Toronto Blue Jays lower court decision—that is, the teams—for any year before 2002.²¹ This second exception is irrelevant unless the Court of Appeal decision is appealed to the Supreme Court of Canada and overturned,²²

The position taken by the Ontario minister of finance in Toronto Blue Jays runs counter to that typically taken by taxing authorities. In Toronto Blue Jays, die minister argued for a narrow construction of "permanent establishment" in order to expand the EHT base. Canadian and provincial taxing authorities usually argue for an expansive definition of "permanent establishment" or "fixed base," as in Fowler and Dudney, in order to capiture as much income or capital as possible in the tax net. The Ontario Court of Appeal has called into question whether the expansive definition of permanent establishment enunciated in Fowler is good law and has suggested that it should not be followed as a precedent. For premises to constitute a permanent establishment, it now appears that a person must not only use the premises, but also exercise some degree of control or management over them or have them identified as its own. Furthermore, "substantial machinery or equipment" is interpreted in a restrictive manner, such that the machinery or equipment used by a person must not only be large, but also used for a purpose essential to the person's business, in order to constitute a permanent establishment. While not binding on federal courts and provincial courts outside Ontario, the Ontario Court of Appeal's thorough consideration of the jurisprudence on permanent establishment may cement the trend toward interpreting this concept in a restrictive manner.

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