Wolf V Queen

There was recently an interesting case that came out of the TCC that can give some guidance on a US Resident/Entity providing contracting services to Canada, and whether or not that income is taxable in Canada, and also highlights just how important it is to keep good records. (Buzzword here is “Permanent Establishment” (PE) )

The Case

In Wolf V. The Queen (2018 TCC 84) the Court was asked to rule on whether or not Wolf’s contracting income of about $26,000 was taxable in Canada, due to Mr Wolf having a PE in Canada. Mr Wolf, a US Resident, was an aerospace engineer who designed aircraft fuel systems. He set up a NY LLC to act as a patent holder for the fuel systems he designed. Eventually Bombardier Inc asked Mr Wolf to do some consulting work for them.


One important detail to watch was that Mr Wolf himself was contracted to do the consulting – Not the LLC. Secondly, Mr Wolf was physically present in Canada for 188 days covering the period August 10, 2011 to August 10, 2012. Because of these points, the CRA felt that Wolf maintained a Permanent Establishment in Canada, and therefore CRA was owed taxes on the $26,000.


The interesting thing about this case is that while it covers about 16 pages, it can be summarised in two points, and gives a decent roadmap for any non-resident thinking of doing some contracting work in Canada:

· Entity Rule: Is the revenue in question part of a bigger “Entity/Enterprise”? The Court fortuntely agreed that the LLC and Mr Wolf were one and the same – His personal contracting income stemmed from the patents/expertise held by the LLC, and couldn’t be considered separate;

· 183-Day Rule: Was the Entity in Canada for more than 183 days over a twelve month period? Mr Wolf was in Canada for 188 days over a twelve-month period, and this opened the door to the Permanent Establishment argument;

Because Mr Wolf was in Canada for 188 days, he was considered to have met one of the PE tests set out by the Court that determined his income was taxable. However, there was a get-out-of-jail card in Article V of the Convention:

“More than 50% of the gross active business revenues of the enterprise consists of income derived from the services performed in that other State by that individual”

In normal-people talk, case this means that if a person earns more than 50% of their revenue during the period from a certain Country, that person could be considered to be taxable in that country. In Mr Wolf’s case, it became a question of did Mr Wolf earn over 50% of the Entity’s revenues (ie. Mr Wolf + LLC combined) in Canada during that 188-day period.

Bad Records = Crash and Burn

Mr Wolf caught a break when the Court ruled that his personal contracting income would be deemed to be treated as part of his “Entity” income. Where it went sideways was on something that shouldn’t have been an issue: record keeping. Mr Wolf could show that his “Entity” had revenues about $279,000 US in the 2012 taxation year. However, he couldn’t provide a breakdown of the monthly revenues for the 188 day period in question. The Court puts it best:

The Onus was on [Mr Wolf] to prove that the revenues in Canada did not represent more than 50% of the “gross active business revenues” of Mr Wolf’s enterprise, which he failed to do.”

So because of a bookkeeping issue, Mr Wolf was now on the hook for tax on his $26k.


There are a few lessons here in terms of avoiding unintentionally setting up a PE in Canada:

· Watch the 183 Day Rule;

· Structure your contracts so that the Entity/Enterprise is earning the income, not an individual;

· Keeping records that track US-source vs Canadian-source revenues is important;

Further Reading:


Usual Disclaimer: This isn’t tax advice. Tax is complicated. Don’t rely on this info to make tax decisions – Hire someone to help you.