5 October 2001 External T.I. 2000-0044865 - para 4 of article VII Canada US treaty

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Whether paragraph 4 of Article VII of the Canada-U.S. tax convention would afford an exclusion from the attribution of business profits to the permanent establishment?

Position: Likely no.

Reasons:

Where the managerial or executive services provided by the partnerships Canadian parent corporation (or a Canadian corporation related to its parent) resulted in a finding that the partnership was carrying business through a permanent establishment in Canada within the meaning of Article V of the Treaty, then provisions of paragraph 4 of Article VII would not prevent the attribution to the permanent establishment of the profits from these services.

		2000-004486
XXXXXXXXXX 	Karen Power, C.A.
(613) 957-8953
November 5, 2001

Dear XXXXXXXXXX:

Re: Article VII, Paragraph 4 of the Canada-U.S. Tax Convention (the "Treaty")

We are writing in reply to your letter of August 30, 2000 wherein you have requested a technical interpretation with respect to the scope of paragraph 4 of Article VII of the Treaty. That article reads as follows:

"No business profits shall be attributed to a permanent establishment of a resident of a Contracting State by reason of the use thereof for either the mere purchase of goods or merchandise or the mere provision of executive, managerial or administrative facilities or services for such resident."

Our Comments

Whether or not a non-resident is carrying on business in Canada or has a permanent establishment in Canada and the profits attributable to a permanent establishment are questions of fact that can only be determined based upon a full understanding of all relevant circumstances and generally only retrospectively after all such circumstances have been established.

The determination that a non-resident has a permanent establishment in Canada pursuant to Article 5 of the Treaty requires that the non-resident be carrying on business at a fixed place. All profits attributable to the business activities carried out at the permanent establishment are attributed to that permanent establishment.

Paragraph 4 of Article VII provides that business profits shall not be attributed to the permanent establishment by reason of the use thereof for the mere provision of executive, managerial or administrative facilities or services for such resident.

In the situation you describe, all of the general partner's responsibilities with respect to the partnership are, pursuant to a written agreement, carried out in Canada by the general partner's Canadian parent corporation (or a Canadian corporation related to its parent). The Canadian corporation is, therefore, performing all of the activities required to carry on the business of the partnership. In our opinion, the services provided by the Canadian corporation go beyond "mere provision of executive, managerial or administrative facilities or services for such resident". Paragraph 4 of Article VII would not apply to prevent the attribution of income to a Canadian permanent establishment of the general partner in respect of those activities.

Paragraph 4 of Article VII of the Treaty requires an analysis of the excluded activities carried on by the permanent establishment for the resident of the contracting state. Whether or not the Canadian permanent establishment provides similar services to other Canadian related entities would have no relevance to this analysis.

We trust our comments will be of assistance to you. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R4.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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